In 2014, Bill Ackman (Trades, Portfolio) made one of the biggest mistakes of his career. He started buying shares in the healthcare company Valeant (now named Bausch Health Companies Inc. (BHC)).
The investor and manager was incredibly enthusiastic about the group's business model and CEO, Michael Pearson. Pearson, it seemed, had managed to pioneer the perfect business model. Valeant would acquire pharmaceutical businesses with vast amounts of debt and then slash costs and research and development spending to maximize cash flow after the deal.
The big mistake
Initially, the strategy worked, but then the company came under fire for its aggressive drug pricing strategy and reliance on debt.
Just as quickly as the stock had become a darling of Wall Street, it became a pariah. Pershing Square's leading hedge fund reported losses of 16.7% in 2015 and 10.2% in 2016 as the stock plunged.
The losses themselves were bad enough, but Ackman also stood behind the business until 2017. This decision to stand by a company that was clearly struggling dented his reputation.
Assets under management at Pershing Square dropped from more than $20 billion in the summer of 2015 to $11 billion by 2017. When Ackman eventually sold the position at the beginning of March 2017, Pershing Square had lost nearly $4 billion on its Valeant Pharmaceuticals investment over two years.
The investor later admitted that this was a significant mistake, and he went back to the drawing board. In 2017 and 2018, Ackman revisited and redeveloped his investment strategy. He wanted to get back to his roots and re-build his reputation on Wall Street by doing what he does best: finding undervalued companies and pushing for change.
Rethinking the strategy
This strategy seems to have worked out well. Ackman scored one of his best years ever in 2020. His Pershing Square fund netted a 70.2% return last year after a 4.6% gain in December. That followed a gain of 58.1% in 2019.
The hedge fund's most considerable profit last year came from a derivative trade on portfolio protection. Pershing Square bought far out of the money protection against investment-grade and high-yield bond indexes just before the Coronavirus pandemic started to spread worldwide. The hedges were designed to protect the fund against an explosion of risk and volatility.
They worked perfectly. The strategy netted a $2.6 billion windfall for the hedge fund and its manager right at the height of the market uncertainty. Ackman didn't waste any time putting this money back into the market, buying more of his favorite positions, as well as re-building a holding in Starbucks (NASDAQ:SBUX).
According to the hedge fund's latest 13F, at the end of December 2020, the most significant position in the portfolio was Lowe's Cos. (NYSE:LOW). The hedge fund had an investment of around $2 billion in this company, giving it a 20% portfolio weight. The second-largest holding was Chipotle Mexican Grill (NYSE:CMG) with a 16% portfolio weight. The third-largest holding was Restaurant Brands International (NYSE:QSR) with 15%.
Together, these top three holdings made up around 50% of assets under management at the end of last year. Although 13Fs detail equity positions, they don't tell us about any credit derivative holdings or cash, so these figures may be inaccurate when other assets are included.
Still, what the data shows us is that Ackman has doubled down on the companies he knows best over the past two years. This strategy seems to have paid off handsomely for the investor, and other investors can learn a lot from his journey over the past five years.
All investors will make mistakes, but persistence is vital. If you make a mistake, quitting or trying to take revenge on the market is the worst mistake you can make. Ackman's strategy of doubling down on what he knew best has paid off handsomely.