Bill Ackman Finally Pukes: Beware Of False Narratives

A year ago we wrote about why Bill Ackman should learn a bit of technical analysis. We weren’t suggesting he become an Elliott Wave nut or anything, but that he should adopt the risk management philosophy of a technician. TA clearly defines when to exit a trade. And with this clarity comes superb risk control — our number one job as traders.

But of course our advice fell on deaf ears. Ackman continued to ignore all the technical sell signals in his very public Valeant position. From that time, the stock has dropped another 65%…  

Fundamental investing relies on narratives. This is both a feature and a bug. Without a compelling narrative, other investors won’t flock to your stock and bid up prices.

But narratives aren’t cut and dry like an MA crossover or trend line. This reality makes it’s hard for a portfolio manager to cut risk at the right time. Before he realizes the narrative has departed from reality, the stock could’ve already made a nasty drawdown.

The key is to use narratives to initiate trades. But after the trade is on the book, let technical analysis take over and manage the risk. That’s why we’re proponents of combining different styles of investment analysis. Fundies and techs can add value.

In Valeant’s case, the dominant narrative during its rise was how its CEO Michael Pearson created a new, highly profitable way to run a drug company. Instead of using gobs of money to research new drugs, just acquire old drugs and jack up their prices. This practice slashed costs, boosted revenues, and made Wall Street happy. Ackman and many other hedge funds bought into this narrative and created one of the largest hedge fund hotels of all time.

But eventually the narrative started to turn bearish. Skeptics argued that Valeant’s “growth” was achieved through price gouging. Then more news came out that a speciality pharmacy was in cahoots with Valeant — changing codes on doctors’ prescriptions to Valeant’s brand even when much cheaper generics were available. Valeant was basically ripping off insurance companies to juice their own sales numbers.

By the Fall of 2015 the stock had already fallen 70% from its highs. Here’s where technical analysis could’ve come in handy for Ackman. Technicals clearly signaled that the narrative had changed. It would’ve been easy to observe a trend break on the chart and exit.

But Ackman didn’t have this risk control method in his toolbox. He was instead forced to reassess the narrative and evaluate whether or not his original thesis was still intact. This is an impossible task that requires advanced mental gymnastics. It’s too easy to get emotionally attached to a narrative and succumb to things like confirmation bias and the sunk cost fallacy. Ackman did just that as he continued to buy more Valeant.

That’s why investment narratives should be used to initiate trades, not manage them.

Compelling narratives create large trends which are what you need for huge gains. But technical analysis is what you need to manage your trades. It lets you objectively define your exit. If you’re relying on your interpretation of a complex narrative as an exit strategy, you’re exposing your portfolio to huge drawdowns.

The reality of the market is that no matter how rich or how smart you are, you’ll eventually be wrong. The best in the business call it right a little over 50% of the time. It’s crucial to have a reliable and objective risk management process for when things go south. Without it, you’re setting yourself up to follow in Ackman’s shameful footsteps.

If you want to learn how our team at Macro Ops successfully manages risk, then check out our Trading Instructional Guide here.

 

 

Bill Ackman Finally Pukes Beware Of False Narratives

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Brandon Beylo

Value Investor

Brandon has been a professional investor focusing on value for over 13 years, spending his time in small to micro-cap companies, spin-offs, SPACs, and deep value liquidation situations. Over time, he’s developed a deeper understanding for what deep-value investing actually means, and refined his philosophy to include any business trading at a wild discount to what he thinks its worth in 3-5 years.

Brandon has a tenacious passion for investing, broad-based learning, and business. He previously worked for several leading investment firms before joining the team at Macro Ops. He lives by the famous Munger mantra of trying to get a little smarter each day.

AK

Investing & Personal Finance

AK is the founder of Macro Ops and the host of Fallible.

He started out in corporate economics for a Fortune 50 company before moving to a long/short equity investment firm.

With Macro Ops focused primarily on institutional clients, AK moved to servicing new investors just starting their journey. He takes the professional research and education produced at Macro Ops and breaks it down for beginners. The goal is to help clients find the best solution for their investing needs through effective education.

Tyler Kling

Volatility & Options Trader

Former trade desk manager at $100+ million family office where he oversaw multiple traders and helped develop cutting edge quantitative strategies in the derivatives market.

He worked as a consultant to the family office’s in-house fund of funds in the areas of portfolio manager evaluation and capital allocation.

Certified in Quantitative Finance from the Fitch Learning Center in London, England where he studied under famous quants such as Paul Wilmott.

Alex Barrow

Macro Trader

Founder and head macro trader at Macro Ops. Alex joined the US Marine Corps on his 18th birthday just one month after the 9/11 terrorist attacks. He subsequently spent a decade in the military. Serving in various capacities from scout sniper to interrogator and counterintelligence specialist. Following his military service, he worked as a contract intelligence professional for a number of US agencies (from the DIA to FBI) with a focus on counterintelligence and terrorist financing. He also spent time consulting for a tech company that specialized in building analytic software for finance and intelligence analysis.

After leaving the field of intelligence he went to work at a global macro hedge fund. He’s been professionally involved in markets since 2005, has consulted with a number of the leading names in the hedge fund space, and now manages his own family office while running Macro Ops. He’s published over 300 white papers on complex financial and macroeconomic topics, writes regularly about investment/market trends, and frequently speaks at conferences on trading and investing.

Macro Ops is a market research firm geared toward professional and experienced retail traders and investors. Macro Ops’ research has been featured in Forbes, Marketwatch, Business Insider, and Real Vision as well as a number of other leading publications.

You can find out more about Alex on his LinkedIn account here and also find him on Twitter where he frequently shares his market research.