Thursday, February 5, 2009
The benefits of Bill Ackman's strategy are relatively obvious and outlined in the following report. But to address the opposite, the downsides, a few of my criticisms are how shortsighted – meaning short-term – and market-obsessed this approach is.
I have explained some of these criticisms before, and the charts included in the presentation show how Pershing is essentially pursuing a classic trading strategy, as opposed to a value investing strategy of intense patience and being unconcerned with whether the stock exchange is open or closed.
Mr. Ackman and Mr. Market appear to take each other very seriously. And this approach works – just look at George Soros or Steven A. Cohen or whichever successful trading operation. But it probably isn't replicable by individual investors, even if they're attempting to buy the same securities.
One example is Borders Group, where Pershing intervened in a potential liquidity crisis and became a creditor, obtained valuable warrants, as well as an agreement to potentially buy Borders' high-quality Paperchase business at an undervalued price. This delivered substantial value to Pershing at the expense of common shareholders. (Why would shareholders benefit from selling Paperchase to Pershing for half price? Would Warren Buffett make this move?)
That said, Ackman makes it clear that Borders is exactly as I noted – a very cheap call option – and also makes clear that a mere 1% of his portfolio is at risk. Yet, another distinction between Pershing and common shareholders is that the former began accumulating Borders shares at above $20 each, whereas the latter can now accumulate them for about 50 cents.
I strongly believe that shareholders are best served by owner-operators, who make disciplined decisions – often unpopular decisions, when short-term fixes are available – to deliver excess returns over the long term, and to build great businesses.
By this standard, I believe that the business Bill Ackman sold this year – Sears Holdings – has a superior operating philosophy. And while Ackman might be able to extort a small profit through his Sears Canada stake, my view is that Eddie Lampert is a vastly superior investor, and will create more value for all stakeholders over the long term.
Pershing Square 2008 Annual Report