SUNDAY, DECEMBER 21, 2008 - VOL. CCLII NO. 140

Archive for the ‘Bill Ackman’ Category

Pershing Square Q3 2008 Investor Letter

In Bill Ackman, Insurance, Security Analysis on November 15, 2008 at 11:44 pm

These are extraordinary times particularly for active participants in the capital markets.  While I do not normally choose to write about macro and regulatory events, I thought it would be useful for you to understand how we think about recent events and their impact on our portfolio.

We are currently witnessing the greatest deleveraging event in history.  What began as a credit bubble bursting has now spread to the equity markets as banks, investment banks, hedge funds, structured products, mutual funds, pension funds, endowments and other leveraged and unleveraged market participants have been forced to liquidate assets by their counterparties, leverage providers, redeeming clients, and as a result of downgrades, other debts or other commitments that need to be funded.

These actions have led to forced and indiscriminate selling in security markets around the world, which in turn has caused other investors to panic or simply to sell, to get out of the way of other forced sellers.

As a fund which is generally substantially more long than short, we have also suffered large mark-to-market declines in our long investments.  Year to date, however, our performance has substantially exceeded that of the broader equity markets, which at this writing have seen a more than 34% decline.  Our outperformance is largely due to large gains on our investments in Longs Drugs and Wachovia Corporation as well as profits on our credit default swap and other short exposures.  Our market losses have been further mitigated because we operate unleveraged and have substantial cash balances.  Currently, we have cash and near-cash (Longs Drugs and Wachovia/Wells Fargo long/short) equal to approximately 39% of our capital.

When, you might ask, will the selling end?  While I don’t proclaim to be a market prognosticator, I will make a few observations.  Unlike the deleveraging that takes place when banks and other financial institutions sell assets to meet regulatory requirements, which is typically a longer term process, the forced deleveraging that is now taking place in the equity markets is being implemented largely by the prime brokerage firms and margin account managers at broker dealers around the world.  Prime brokers are not known to be laggardly in their approach to liquidating an account that no longer meets margin requirements.  This is likely to be even more true in the current environment.  As such, it may be reasonable to conclude that the forced liquidation that is now taking place may not be a prolonged process.

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Target Corporation (TGT): Deep Value Case Study

In Bill Ackman, Security Analysis on October 31, 2008 at 12:37 am

Deep Throat: I don’t really like Target, which Derek said to look into. Retail’s gonna be hit the hardest during the recession, and I don’t know that Target enjoys the same economic or brand advantages Walmart has.

Cogitator: The problem with your reasoning is that (1) recessionary effects may already be accounted for in the stock price and (2) Walmart has no smart activist investor to push the price toward intrinsic value. I have explained the first point many times. A company is worth the sum of its cash flows from now until the end of the world discounted to the present—thus value neither declines in a recession nor increases in a boom. The public’s constant exposure to the news (with all of its poor reasoning) assures that they will never understand this simple principle. [REDACTED], your employment with [REDACTED] may put you in an even worse position.

Target was recently selling below its real estate value, let alone its earning power. It is essentially in the same situation as Sears Holdings, except that the earning power is more predictable.

Ultimately the problem with your comments is that they are all qualitative. It is surprising to hear this from someone with a quantitative bent. You can take it as an axiom that the most salient thoughts (as most qualitative thoughts are) tend to be factored into the stock price.

http://www.valueinvestingcongress.com/landing/p09/pershing/target.php

Mathematical Expectation of Securities

In Arbitrage, Benjamin Graham, Bill Ackman, Charlie Munger, Joel Greenblatt, Martin Whitman, Net Current Asset Value, Security Analysis, Seth Klarman, Warren Buffett on June 22, 2008 at 3:44 am

My observation has been that analysts, money managers, OPMIs, bloggers, etc., cannot consistently select issues with above-market returns. I believe this is due to a feature inherent to all parimutuel systems, viz., calculations of expectancy should vary only slightly from one person to another—with any major difference resulting from some unknowable factor. The selection of securities is often akin to a shell game.

We should not conclude from this that securities markets are strong-form efficient. On the contrary, investors with access to material non-public information have earned high returns without bearing commensurately high risk. In 1925 Ben Graham learned that Northern Pipeline—selling at only $65 per share—had “$95 in cash assets for each share, nearly all of which it could distribute to stockholders without the slightest inconvenience to its operations.” Major brokerage firms were never aware of this information; Graham found it at the Interstate Commerce Commission in Washington, D.C. A more recent example is Bill Ackman’s MBIA short position, which is predicated on special knowledge of reserve adequacy, unusual insurance transactions, etc. (Ackman supposedly went through 140,000 pages of internal documents.)

Allied to the foregoing are situations involving neglect of public information. This has been especially persistent in the field of distressed debt, where vulture investors profit from claimholders unwilling to interpret bankruptcy documents. (Seth Klarman, Michael Price and Marty Whitman owe a great portion of their returns to this activity—and not to common stock investments exclusively.) Many of the opportunities mentioned on stableboyselections.com tend to be neglected because they fall outside the scope of traditional equity investment.

I do not believe that passive “value investors” as a class will yield above-average returns by focusing on large U.S.-based companies. The investment community has wised up to the extent that apparent bargains now involve greater risk. This is a natural consequence of the increasing popularity of “value investing,” which seems to have reached an historical peak over the past few years. (Most worrisome is the crowding in such stocks as USG, SHLD, FMD and Mortgage Originator X, Y, Z.) You can take it as an axiom that strategies become less effective as they become more popular.

The really spectacular returns will come from investors who discover unpublicized or underpublicized inefficiencies. At present, auction-rate securities, distressed debt, arbitrage and certain Chinese stocks seem to offer the most favorable mathematical expectation.

“If the reader interjects that there must surely be large profits to be gained from the other players in the long run by a skilled individual who, unperturbed by the prevailing pastime, continues to purchase investments on the best genuine long-term expectations he can frame, he must be answered that there are, indeed, such serious-minded individuals. But we must also add that… investment based on genuine long-term expectation is so difficult today as to be scarcely practicable. He who attempts it must surely lead much more laborious days and run greater risks than he who tries to guess better than the crowd how the crowd will behave; and, given equal intelligence, he may make more disastrous mistakes.”
- J. M. Keynes