All the Talk Is of Ackman and Valeant

 | Mar 14, 2017 | 1:01 PM EDT
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A bounce in oil helped the indices to finally bounce, but it has been a tough day. The bounce fizzled, and now we will see if the morning lows will be retested. Breadth is still worse than 3 to 1 negative, and there is no place to hide today. I'm doing very little, as the technical deterioration is building.

There is lots of talk in the media today about Bill Ackman's Pershing Square hedge fund dumping the last of his stock in Valeant Pharmaceuticals (VRX) and taking a loss of about $2.8 billion, overall. Some of the talk is just Schandenfreude -- taking pleasure in the pain of others -- but it really is remarkable to see a high-profile hedge fund manager handle a position like a rookie.

Ackman is lucky that he had sufficient capital to handle this loss, but for most folks it would have been a death knell. When smaller traders blow up their accounts, they almost always do it in the same manner that Ackman handled this investment.

The first mistake he made was becoming emotionally attached to the stock. Once you do this, then you tend to overlook issues that you shouldn't. Ackman said he knew there were problems once he became a Board member, but he ignored them. You have to wonder if that same emotional attachment occurred in the short of Herbalife (HLF) .

The second mistake he made is averaging down into a losing investment. That can work well when you have a predetermined plan to build a position, but that was not the case here. As the stock continued to fall, Ackman was anxious to show his confidence in the company -- and continued to buy more. It wasn't the plan initially, and he ended up putting more capital at risk than was prudent.

Ackman's third mistake was that there was no clear risk control. Even if you are a pure fundamental investor that believes in the stock you are buying, there has to be a point where you take into account the price action.

Perhaps the market is irrational or wrong, but there needs to be a tipping point where you say "enough is enough" and move on. You don't wait until you lose 90% of your investment before dumping a position that isn't working. Your sales may not be optimal and may feel downright wrong, but your first job is to always protect capital -- regardless of how much you might believe in a stock.

This is a great illustration of what not to do. What I find most interesting about it is that a big shot hedge fund manager fell into the same sort of emotional thinking that plagues novice traders. It shows how difficult it is to be consistently disciplined.

For Real Money chartist Bruce Kamich's take on VRX, see here.

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