There’s a famous story about Ernest Hemingway and F. Scott Fitzgerald. They were standing next to one another after dining in an elegant restaurant. Fitzgerald asked what made the rich so successful. Hemingway, according to the story, said, “Fitz, the rich are different from us. They have more money.”
I would have to guess that there’s admiration for some billionaires like the late Steve Jobs or Warren Buffett, but a grudging fascination for others who don’t seem to have done it the hard way. Some of us may even enjoy it when these financial supermen who made their fortunes by manipulating money get hammered after making a bad bet.
I have to confess that I’m in the latter category, experiencing “schadenfreude” – the German word that means pleasure in the pain of others.
Well, we had a big winner, or rather loser, in that category recently.
It was hedge fund manager William Ackman, who placed two very bad bets that cost him and his investors – get this – $2 billion. Prior to taking these positions, Ackman’s fund, Pershing Square Capital Management, had a monstrous $13.2 billion under its investment umbrella.
So what were those bad bets that Ackman studied carefully before making them?
One of them was on Herbalife, on which he bet a billion dollars that the nutritional supplement would drop sharply. Betting that a stock will fall is known as a “short sale.” You make money if the stock drops, but you lose as it goes up. Well, Herbalife has gone up like a rocket, costing Ackman and his fund many hundreds of millions of dollars.
The other bet that turned sour for Ackman and his friends was buying shares of J.C. Penney – a lot of shares. As the stock kept dropping, Ackman’s loss grew to $600 million.
You don’t have to be a professional investment analyst to have a feeling that J.C. Penney was having problems. The stock has dropped from the mid-20s to its current $7.80. It should be said that prior to these two disasters, Mr. Ackman made a lot of money for himself and his investors.
One thing that tripped up Ackman was his predilection for placing very large bets using a staggering percentage of his assets under management. We used to be cautioned against falling in love with a stock, because if your love is not reciprocated you could be in serious trouble.
Many years ago I liked a stock so much that I put virtually every client into it. It was called Applied Devices, and it was chosen to run the California lottery. I would guess my average purchase price was about $12 a share. Needless to say, clients were not happy when the company went bankrupt. Lesson learned!
Bud Stevenson, a retired stockbroker, lives in Fairfield. Reach him at Bsteven254@aol.com.