While Bill Ackman has had some big winners for investors in his multi-billion-dollar hedge fund, Pershing Square, he also has cost his clients a ton of money over the years due to his high-risk bets on stocks.
Ackman's strategy is extremely risky. He takes a large bet on just a few stocks, believing that concentrated positions give him the biggest upside. It also gives him the biggest downside.
"Although Pershing Square's overall performance has been quite good since its inception in 2004, Ackman's track record is littered with huge bets that went bad," noted Joe Nocera recently in Bloomberg View.
Ackman's recent, spectacular loss on Valeant Pharmaceuticals International, Inc. (NYSE:VRX) - $4 billion! - is a cautionary tale for all investors who seek to get rich by holding just a few large concentrated stock positions.
Ackman recently threw in the towel on Valeant, losing 95% of his bet when the stock fell from its August 2015 high of $262 per share to $11 per share last week. Valeant was a company that some deemed a "house of cards" because of its unsustainable business model of rapid mergers and drug price hiking.
In addition to Valeant, Ackman has had some other losers. In 2007, he raised $2 billion for his fund to invest in retailer Target Corp. (NYSE:TGT) and lost 90% of the money in two years. "It crashed spectacularly," opined Nocera.
His 2010 bet on J.C. Penney Co., Inc. (NYSE:JCP) resulted in his investors losing over $600 million.
And Ackman's "short" of Herbalife Ltd. (NYSE:HLF), meaning he bet the company's share price would decline in value, is likely to cost his investors hundreds of millions of dollars.
Meanwhile, Pershing Square has charged clients an annual management fee of 1.5% of assets and performance fees of up to 16%, according to Nocera.
Many investors are pitched high-risk strategies similar to Ackman's. Brokers appeal to investors' greed and pitch strategies that concentrate their clients' money in a handful of risky securities like gold ETFs or high-yield bonds. Investors should run for the hills when they hear such a pitch.
Experience has taught investors that the only way to make realistic gains while capping losses is to have a diversified portfolio, with asset allocation as a cardinal principle.
Mom and pop investors should learn from Ackman's colossal mistake and spread their wealth around. If you have all your eggs in one basket, and the basket falls, you end up with scrambled eggs.
By the way, don't worry about Ackman. "To sum up, Ackman and his team have paid themselves $700 million in fees in the last two years, while his investors have lost billions," Nocera wrote. "Nice work if you can get it."
In his column, Nocera referenced a 1955 investment book titled "Where Are the Customers' Yachts?"
"One of the classics of investment literature was written in 1955 by a man named Fred Schwed Jr., a disillusioned former Wall Street trade turned children's book author," Nocera wrote. "Drawing on his Wall Street experience, Schwed wrote a scathing indictment of the ways investment advisers separated clients from their money."
"Is Bill Ackman the worst offender in his industry," Nocera asked. "No. Nonetheless, his travails with Valeant illustrate one of Wall Street's basic laws: If a hedge fund is big enough, the manager will earn millions - nay, hundreds of millions - no matter how poorly his investments do. That hasn't changed since Fred Schwed's days."
It's been over 60 years since "Where Are the Customer's Yachts?" was published, and we're still asking the same question. Bill Ackman and the recent story of his Pershing Square hedge fund is only the latest example of customers failing to profit while an investment broker or manager is paid handsomely.
Is stock market history repeating itself? We certainly hope not. But mom and pop investors need to fight the urge to invest heavily at the top of the market. They may get crushed again.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.