Bill Ackman is like the New York Yankees, a team that many love to see lose. Ackman is a star fund manager with an outstanding long term track record. He has also been the star in an interesting theater over the past year thanks to two very public investments that did not go his way. I’ve been somewhat surprised by the way that Ackman is portrayed in the public. He has developed into a sort of “hedge fund public enemy number 1”.
I’m not sure why this is the case… While I can certainly understand that people don’t feel sorry for Ackman, I’m not sure why so many are rejoicing in what they seem to hope to be his demise.
I’m not trying to write a post that attempts to defend Ackman or change people’s opinion of him. I’m simply pointing out that a fairly large number of people have completely misinterpreted Ackman’s recent results as some sort of harbinger for what will be his eventual downfall.
Ackman’s Outstanding Results
Like him or not, Ackman isn’t going anywhere. He has established himself as one of the best investment managers in the last decade. It is fairly easy to locate his investment letters, and from them you’ll notice that not only has he produced compounded returns of 26% per year (before fees) since he started Pershing nearly a decade ago, but you’ll also notice how surprisingly small the effect of his recent JC Penney and Herbalife investments have had on his overall results. His results have certainly been affected by them, but the last time I checked at the end of Q2, his funds were positive for 2013, despite the wide public implications to the contrary.
If he were a stock, his stock chart would look something like BP’s in 2010 right after the oil spill, or JP Morgan’s last year right after the London Whale trade. It would be down, the headlines would look bad, the gross amount of dollars lost would look large and significant, collateral damage would be extreme, but relative to the overall capital at the firm, it would be clear that they would survive. If Ackman were a stock, he would likely be on sale and it would be an incredible buying opportunity.
What Can We Learn?
Here is my point in laying all of this out: it often helps to come to your own conclusions. I saw Carl Icahn every other day on CNBC, I saw Loeb’s remarks, and I saw the never-ending headlines in the papers regarding Ackman, JCP, and HLF. But I thought it would be good to take a look at the bigger picture and tune out all the back and forth nonsense.
The first thing I noticed when I started researching more details on Ackman is how good an investor he really is. In fact, although there are a few, it is difficult to find a verifiable record better than Ackman’s starting 1/1/04 (the inception of Pershing). And the few that have better results have a fraction of the capital that Ackman has. It’s not easy to produce those returns when you have $10 billion or so to move around.
It doesn’t matter if you like him or not–just like the Yankees–he has an outstanding record. Not only has he produced the large returns I mentioned above, but he’s made 24 or 25 successful investments to only 2 or 3 poor investments. The latter is quite remarkable.
So it has historically worked out very poorly to bet against Ackman.
So although I was somewhat aware of his record, I didn’t realize how good it actually was. That was the first takeaway from doing some quick research. The second is that there are some things we can learn from his recent mistakes. Since they are very public, and since his thesis was so clearly laid out in the beginning, it is possible to reverse engineer his process to determine if there are some things we take away. Also, now that he is publicly discussing JCP and his own opinions of what went wrong, it makes it even easier for us to put together a case study.
I recently watched the video below of Ackman discussing both of these investments, as well as some interesting comments on some of his successful investments. He mentions his successful role in helping select a CEO that helped turn around a major Canadian railroad, taking it from one of the industry’s least profitable railroads to one of the most profitable in a very short time frame.
He also made some interesting general comments on activism, and how shareholders used to be much more active than they are now, and how management was more accountable in the days of Carnegie, Morgan, and others (not sure this was the case, but something to think about).
But JC Penney is the one thing on everyone’s mind when it comes to Ackman…
Most Turnarounds Don’t Turn
It is interesting to listen to him discuss JC Penney. Some generalities that are fairly obvious but good to keep in mind:
- Turnarounds are difficult
- Operating leverage works both ways
- Operating leverage means time is not always on your side
- Management decisions don’t have a lot of room for error in turnarounds
He mentions operating leverage as one major risk to keep in mind when investing in retailers. He talks about how JCP was one of the more challenging investments he has ever participated in because of the fact that it was a business in decline (he mentions it likely peaked in the 1970’s after the founder left). Despite the inherent risk of operating leverage and the declining brand, Ackman saw value in the assets the firm had–specifically the value in the real estate the firm owned and leased.
Some of the most interesting comments he made were on Ron Johnson, and some of the successes he had, and of course his glaring misstep, which was to abolish the beloved coupons.
The JCP case shows us how fragile a struggling retailer can be, how crucial it is to consider the risk of operating leverage, and how important management is in the course of a turnaround.
Check out the video below for some of Ackman’s thoughts on his mistakes as well as a few successes: