Friday, June 10, 2016

Bill Ackman losing position at Valeant could come back to haunt him

Concerning what has happened of late to Pershing Square and Mr. Ackman, we had a discussion with a friend in the hedge fund industry yesterday… a “rival” of Mr. Ackman’s… whose “take” on this question was most interesting. 

Our friend is convinced that Mr. Ackman’s effect upon the hedge fund industry may in the end by more dismaying than the effect that Mr. Madoff had upon it, for Madoff was a  matter of criminality that should have been discovered but was hidden for a long while from view, while Ackman’s actions have been long standing, inexorable and perhaps repeatable by others, creating fear amongst institutional investors who will, in the future, be unwilling and/or unable to put money at risk in these same manners. Money will not, in the future, allow itself to be gated, and in response the entire hedge fund industry will be diminished.

Here we have one of the true giants of the hedge fund industry; a gentleman once worth billions who ran billions more; a leader in the performance race for many years and now rather obviously a gentleman, who like Icarus of Greek mythology fame, flew too close to the sun and is now falling into oblivion"

When one averages down into a long position… or averages “up” into a short position… only one thing can be happening to the equity in one’s account: it must, by definition, be falling. If you buy a company’s stock at $25/share and it goes to $20/share, you are worth less than you were before. It cannot be otherwise. It is simple arithmetic. On the other hand, if you buy a company’s shares at $25/share and they go to $30/share your equity can only be larger. Why, we ask, would you wish for the former?"

We watched as US Airways’ stock fell from $125/share all the way to zero, with some of the great minds in the business having owned it… and having bought it… all the way down into oblivion. We watched as sugar prices in the early 70’s fell from $1.25/lb. to $0.03/lb., with buyers all the way down, and over the past three decades we’ve watched as the coupon on the long bond here in the US has gone from 14.25% to where it is today in single digits

Once again, averaging down into long positions while averaging up into short positions and continuing to do so even as the trend is clearly against one... is what we have referred to as the sole “carcinogen” in the investment/trading business. The demise of Nick Leeson; the collapse of Sumitomo Metals; the problem caused by Mr. Kerviel at SocGen… all came about by adding to losing positions and by disregarding risk. It is our duty to avoid such nonsense. Hopefully we shall continue to do so.