Plug Earnings play
In September of 2016, I was introduced to Billionaire Bill Ackman, an experience that changed my life forever. My name is Chris Stanford. I am a 25 year old in the process of starting a hedge fund in Singapore with $15 million in pre-committed AUM. Without the help & guidance of Ackman, I wouldn’t have even a fraction of the knowledge/success that I have now. I wanted to share some of the major principles I learned from meeting him. A large portion of these concepts I observed about him from afar.
1.)The importance of activist investing: One of Ackman’s first big moves after starting Pershing capital was to buy significant ownership in Wendy’s with the idea to restructure the company. At the time Wendy’s owned the food chain Tim Hortons. He wanted them to spin off Tim Hortons and have them IPO as a separate entity. Wendy’s was struggling at the time, and it had a negative return on shareholder equity So He got a significant stake and rallied other shareholders to vote on a restructuring. They were able to pull that off. He had some disputes with the managers after that and decided to sell his stake. That was a big contributor to his early returns. To this day he remains in an activist role. By being an activist investor we can create more certainty around our returns by being able to change either the management or the management’s plans or use of capital.
2.)Hedging with derivatives: During the collapse of 08 and the recent coronavirus recession, Ackman was hedged very similarly. He used credit default swaps as the main instrument. This is a highly leveraged form of derivative. Essentially you are buying insurance against a bond. So if the underlying entity that makes up that bond has a default risk. So in 08, the mortgage payers stopped paying, and that caused widespread default. The difference between 08 and the coronavirus is that he bought insurance against corporate bonds. That $20 million bet he made was worth 2.7 Billion in just a few months. What people don’t understand is that despite the great year the fund had I believe they were down slightly overall as a fund. He was still long in the markets at the time through his long-term positions. This bet was just to hedge a lot of the exposure the fund already had to the markets. That’s much easier than liquidating a portfolio as large as his and deciding to either go completely cash or completely bearish. Nobody can know for sure when the markets are going to collapse. The best way is to have more cash than normal and to stay invested but with less capital and offset with hedges. The most inexpensive way to hedge is by using derivatives. So I learned from that and a significant portion of my capital is S&P options trades.
3.)Concentrated Investing: One of the things I[‘ve indirectly learned from Ackman is to have concentrated risk in the names you believe in. For every investor that means something different. Me I could have anywhere from 20-30 investments working at once. Sometimes a bit more or less. For me, that’s concentrated, but Ackman only has 7 holdings in his portfolio. I’ve studied thousands of different fund managers of all sizes. One of the things I pay the most amount of attention to is position sizing. I’ve noticed that the best performers have been the more concentrated funds. Now the reason has that few s because to be an activist investor one must own a certain percentage of the company to have any weight in a proxy battle. So for us, those few positions are not ideal. For a nonactivist fund, I’ve seen the best-performing funds generally have around the same amount of positions as me.
4.) Bet on unpopular names: It’s funny because Ackman is most famous for his General Growth Properties investment. Which was a super unpopular name the company filed for Bankruptcy. They were a failed mall operator. They had to restructure. Ackman had a stake and wanted them to sell the whole company to Pershing Square Capital. They continually refused and eventually indirectly another investor funded the companies repurchasing his shares for over 70 times what he paid for them.
5.)All the money is in the boring shit: In 2002 Ackman was looking into the Mortgage-backed security market. Essentially these are housing bonds. The housing market was famous for collapsing in 08. He saw something was wrong with housing and the inflating of the Credit default swap market. The man went through 725,000 copies of investment documents. He combed through an insane amount of detail to uncover the real credit quality of these housing loans. He started buying Credit default swaps himself in the early 2000s. He started making his bet years before Michael J. Burry and all of the other characters from the big short. He held onto his swaps for years and finally, his bet paid off in 08. The staggering thing is he’s been right about a lot of things in the long run. He’s just so detail-oriented that he sees things long before the rest of the investors in the market. People laughed at him for his Herbalife short. He ended up being right, but he wasn’t vindicated until last year when the justice department fined the company. You guys should watch the documentary Betting on Zero. It’s about him, and I think you can find it on Netflix.
Plug Earnings play
Here are 2 of our best long/short earnings plays for July 27th.
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