Every week at our firm we sit down with clients who 1) Have made speculative investment bets and lost, or 2) Want to make speculative investment bets because they have yet to lose. For those who want to play this game, you might be interested in reading about Bill Ackman, a New York hedge fund manager who recently lost, and lost big. I love the way the authors of The New York Times piece begin their story:
A little over two years ago, William A. Ackman, one of Wall Street’s brashest and most self-assured hedge fund managers, was on top of the world. A billionaire before he hit 50, he was generating double-digit gains for his investors and raking in hundreds of millions in fees for his firm and himself.
Hailed as a master investor, he clinched his highflier status in the fall of 2014 by paying $90 million with some friends to buy the penthouse at One57, a 13,500-square-foot aerie in Midtown Manhattan overlooking Central Park. He didn’t plan to live there — it was an investment property — but until he sold it, the apartment would make a good party space, he told The New York Times.
I think it might be this image—that of one sitting on top of the world and enjoying the perks of one’s investment brilliance—that often leads one to such speculative investing in the first place.
The story goes on, however, and it’s a clear example of what we regularly tell our clients: For every speculative investment success story you hear, there are at least ten more failures about which you likely didn’t hear. Granted, in the case of Ackman, everyone heard about it. And, as you might imagine, things look for very different for Mr. Ackman right now:
His company’s performance is way down, he is in the midst of an expensive divorce, and on March 13, he and investors in funds run by Pershing Square Capital Management swallowed a $4 billion loss on Valeant Pharmaceuticals International, a beleaguered drug company. […]
One reason so many on Wall Street have been riveted by Mr. Ackman’s wrong-way Valeant bet is that it seems to confirm an age-old investing truth: Karma has everyone’s address.
Yes, friends, Karma does indeed have everyone’s address. This is why speculative investing is not appropriate for the vast majority of people’s investment portfolios. If the so-called “Hedge Fund Titan” can go down, so can the rest of us. This is why it’s always better to stick with what’s tried and true, and to follow a disciplined investment strategy that is centered on one’s broader financial objectives. Leave the speculation to the so-called “experts”.