Learn From My Fail: Bill Ackman and Valeant Pharmaceutical

 If you haven’t heard of Bill Ackman before then good for you! You’re out living your life and are not too plugged into CNBC.  Bill Ackman is a hedge fund manager, he is a really smart guy and made a lot of money for his investors…until recently.  His big bet on pharmaceutical company Valeant has become an epic fail, with the stock price cratering from a high of $261 in August of 2015 to around $34 per share less than a year later. That is shedding over 85% of the company’s value.

So how can such a smart guy turn so wrong so fast? And, what can individual investors learn from Mr. Ackman’s fail?

1) Don’t own enough of any one thing that you can make a killing or be killed by it.  Diversification is the investor’s best friend.  You do not have to be a stock picking genius like Bill Ackman to grow your wealth, you just need to have a properly diversified portfolio that you can stick with through thick and thin.  The magic of compound interest and the inexorable march of the stock market will do the rest.

2) Don’t announce to the world that you own stock in a company that you see as a big winner. Bill Ackman was often in the financial media, talking up the positives of Valeant.  Maybe it started by Ackman being a little greedy and talking up a holding, but over time it seems to have morphed into a story he believed.  If you publicly say XYZ is the best thing since sliced bread, you will paint yourself into a corner of having to admit you were wrong if things don’t work out, and people hate to admit they were wrong about anything!  So Bill sees that Valiant stock is cratering, but rather than admit to being wrong he stubbornly refused to sell until most of his money has disappeared.  From here it will take a gain of over 600% for him to get back to a valuation equal to the August of 2015 level.  How many years of stellar returns does it take to gain over 600%?  Not even Bill Ackman is that good.

3) Don’t invest in companies that are built on shady dealings.  Like the banks that derive too much of their profit from the fees they charge their small customers, Valeant Pharmaceuticals didn’t have a legitimate economic model.  They bought companies and drug rights with the sole intent of price gouging their customers. If they would do that are you really surprised they would cook their books too? Companies that understand they are also citizens of the places they do business tend to build the best business model for the long run.  Companies that are shady like the Pharma Bro i.e. Enron, Lehman Brothers, Arthur Anderson, eventually are rewarded appropriately for their behavior.  There are too many good companies available to choose one built on cheating.

Sorry, Bill Ackman.  We are only human.