Monday, January 12, 2009

A Black Eye for Bill

Bill Ackman's overture into bookselling turned out to be nothing but a flop. He built positions in both Barnes & Noble (ticker: BKS) and Borders Group (ticker: BGP) during fall of 2006, essentially at the peak of the stock market.

Ackman's motivation was relatively clear: very thin spreads between price and value prevailed during this time, and he was overly aggressive in seeking excess returns, with the idea of forcing a merger to create a dominant player in a struggling industry. Here's how it turned out:

Last Friday, Ackman disclosed that he liquidated all of his 11.3% stake in Barnes & Noble, which had made him the second-largest shareholder. Borders, which now trades for only a few dimes, isn't even worth selling. Granted, Bill Ackman's Barnes & Noble sale might be motivated by a "sell cheap, buy cheaper" reasoning.

But with the benefit of hindsight, it is clear that he would have been better served by remaining patient with cash, as opposed to rushing into the retail sector, only to be dealt huge blows in these booksellers, as well as Sears and Target, with the latter position down 68% according to Bloomberg News.

How do you lose 68% of your money with a staid investment like Target? When the stock itself is down only about 40%? This highlights the danger of using call options (and, in Ackman's case, total return swaps) to structure one's investments.

Would Warren Buffett recommend or pursue a similar investment strategy? Or would he remain patient, build up a cash pile, and simply hold Treasuries? Only to deploy capital as stocks plunge?

While this illustrates the short-term orientation that is inherent in the hedge fund business, leading to an intense pressure for lots of action and yearly results, I also believe it tarnishes Ackman's reputation.

The fact is that Bill Ackman's plan for Target was nothing more than a sophisticated attempt to lift the stock price. And his ultra-aggressive attacks on MBIA, while right-on about the company's weaknesses, were motivated by an attempt to beat down the stock within an expedited time frame (thus making his short-dated put options and credit default swaps worth a fortune). Would Warren Buffett make these moves?

In sum, it is difficult to classify Bill Ackman as a Buffett-style investor, which many people have over the past few years. There is no doubt that Ackman is a very smart and shrewd moneymaker. But his aggressive style is closer to a Nelson Peltz or Carl Icahn than an investor with a gold-standard reputation like Warren Buffett.

While this may be rewarding for investors in Pershing Square, individual investors who follow Ackman's moves should remain cognizant of the distinction.
Returns might not accrue equally; Bill Ackman's actions may favor Bill Ackman over the common shareholder.

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This work by Nicholas E. Radice is licensed under a Creative Commons Attribution-No Derivative Works 3.0 United States License.