Bill Ackman's Pershing Square Annual Report

The benefits of Bill Ackman's strategy are relatively clear. 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.

Auto Economics, Eddie, and the Microsoft Founder

Here's an odd couple:

http://biz.yahoo.com/ap/081218/autonation_shareholders.html?.v=1

With all the opportunities available, across every market, it is interesting that Lampert and Gates chose used cars. AutoNation is selling for less than book value, but this is hardly rare in hard-hit sectors. What they might see, aside from undervaluation, is a shift in consumer decision-making.

Here is a basic observation on auto economics: Given the tremendous depreciation that occurs over the first few years of owning a car, and the fact that late-model used cars are essentially the same as new cars, there is no financially-logical reason ever to buy a new car.

Moreover, with Americans' household wealth eroding at a historic rate and real incomes declining over the past decade, the sticker prices on new vehicles look ridiculous – $30,000? $40,000? Forget your existing debt burden, maybe you want to finance it?

Despite the woes of the automobile sector, Americans will always need cars – they just don't have to be new cars. In fact, if the demand for used cars picks up over the coming decade, there is an obvious supply constraint – if new car sales are down, the existing stock of used cars becomes more valuable. This could give a greater degree of pricing power to dominant dealers like AutoNation.

Indeed, Berkshire Hathaway recently reported a large stake in CarMax, which is a competitor of AutoNation. This may well be a new play on a deeply distressed sector, similar to the overtures into auto components companies by financiers like Wilbur Ross.

For some reason, I just never pictured Warren Buffett, Eddie Lampert and Bill Gates as used car dealers. But evidently the times have changed...