What Investors Can Learn From Ackman's Herbalife Debacle and Trump's Election

 | Mar 01, 2018 | 12:00 PM EST
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It's finally over. Bill Ackman's quest to ride a short position in nutritional supplement company Herbalife (HLF) into the ground has officially ended, as the stock exploded to an all-time high Wednesday.

There are lessons here for all of us. I'm not going to indulge in schadenfreude as so many others are doing at Ackman's expense, because we're all vulnerable. Any of us could make the same mistakes that Bill Ackman made. What can we learn from this event, and how can we avoid making the same mistakes in the future? Here are the takeaways:

Lesson One: The Price Is Always Right

Ackman weaved a convincing story about Herbalife and its legitimacy. He gathered significant and compelling evidence, and I'm certain that he believed every word of it. After all, he put his money, and the money of his investors, on the line.

However, none of us is smarter than the market. When the price began to move against Ackman, he should've cut his losses. That's a common rule followed by disciplined investors, and Ackman broke that rule.

What if Ackman had just walked away from Herbalife years ago? In December 2012, when he initiated his short positon, Herbalife reached a low of $24. By December 2013, the stock had climbed above $80.

I don't care if you think you're right, in fact, I don't care if you're sure of it. If you're short at $24 and the stock goes to $80, you're wrong, end of story. The price dictates who is wrong and who is right, and only fools argue with the price. Ackman's Herbalife trade should've ended years ago.

Lesson Two: Maintain Objectivity

When investing becomes intertwined with personal issues, we become distracted, and our decision-making process suffers. A good recent example of this is the 2016 U.S. presidential election.

Some investors, having a strong distaste for President Trump, sold everything after the election. That was an emotional decision, one that likely resulted in regret. An objective individual insulates their investment decisions from their personal feelings.

Did Ackman maintain objectivity, or was he distracted by the circus he helped create surrounding Herbalife? Look at his returns and judge for yourself.

Last year, despite a roaring market that saw the S&P 500 gain 20%, Ackman's Pershing Square fund lost 4%. His fund lost 13.5% in 2016, and in 2015, Pershing Square lost a whopping 20.5%.

During that stretch, Ackman battled publicly with fund manager Carl Icahn, a feud that became very personal at times. He lost money on the Herbalife trade, and on other large bets as well. In the process, Pershing Square's assets under management (AUM) fell from $18.3 billion in 2015 to just $8.77 billion at the end of last year. It'll take a lot of work for Ackman to rebuild both his fund and his reputation.

This profession requires that we know when to walk away. Any time we feel that we are personally involved in a trade, meaning that we can't remain 100% objective about the outcome, we should close it immediately. I'm sure Ackman wishes he'd done exactly that, but it's too late now.

This commentary originally appeared on Real Money Pro on March 1. Click here to learn about this dynamic market information service for active traders.

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