2015: when heroes fall from grace

By | December 11, 2015

The year is coming close to an end and one of the emerging themes of this year is the many blow-ups that fund managers experienced in the face of a market that is broadly flat year-to-date. Usually, those blow-ups happen at times of turmoil, panic and bear markets. To use Buffett’s lingo, it usually happens when the tide goes down but this year the water is almost at the same level it was 12 months ago. Let’s see what we’ve had so far and hope that the list won’t get longer by December 31st.

Valeant

As I wrote earlier this year, the Valeant episode had a severe impact on the Sequoia Fund (it had 30% of the assets invested in Valeant’s stock) but Sequoia wasn’t the only victim. Bill Ackman’s Pershing Square was also there, big time, with 25% of his fund. Other big names on the victim list are:

ValueAct (Jeff Ubben) ~15% of the fund

Paulson & Co.

Lone Pine Capital (Steve Mandel)

Viking Global (Andeas Halvorsen)

Lou Simpson (ex Berkshire Hathaway) ~ 10% of his fund

That’s what the ride looked look for these guys:

Valeant Chart

Greenlight Capital (David Einhorn)

David Einhorn have had a year to forget in 2015. One of his longs, Sun Edison dropped pretty steeply on some bad news and what right now seems like fundamental issues with the way the company does business. This is what Einhorn’s ride on SunEdison look like this year:

SunEdison Chart

 

Those who remember the GAAP-uccino presentation from 2011 know that David Einhorn took an unsuccessful short position in Green Mountain Coffee Roasters, covered at a loss and then, later, sold it short again for about $102/share. In the end of the third quarter, while the fund was down -17.3% YTD the short position on GMCR seemed to be working well and it’s price was around $55/share, nice gain! That gain proved to be short lived as an acquisition of GMCR was recently announced and that’s what happened:

GMCR

Yup, a 73% pop in one day on a stock he was short. Ouch! I can go on and write about his long position in Micron and put a chart below but you can probably already guess what it’s going to look like, so I’ll pass.

Third Avenue (Marty Whitman)

This morning I received an email from a friend with a link to that Bloomberg article. This time it’s the fixed income market and another legendary fund manager who took a serious hit. Instead of me blabbing about it, just go and read the article in the link above. Seems like my friend’s pessimism over the fixed income markets starts to look more like realism. On his email he added the following line: “A single case or the first of more to come?” To reply to that, I will abuse the Buffett lingo once again because it really fits well here: “In the world of business, bad news often surfaces serially: you see a cockroach in your kitchen; as the days go by, you meet his relatives, never is there just one cockroach in the kitchen.”

Don’t say “it won’t happen to me”

The purpose of this post, then, isn’t to put these managers to shame but rather to make us all aware that such things can happen to any of us, no matter how strong our conviction in our investment ideas is. These are good times for each one of us to look into our portfolios and see if we have any Valeants or SunEdisons lurking inside. Also, a common thread for both Valeant and SunEdison is that these two businesses are extremely complex. I looked into each of these companies more than once. “If all those brilliant people invest in it, there must be something there” I thought. But, after a while I just gave up because it was too complicated for me. Seems like I wasn’t the only one to whom it was too complicated, but I’m one of the few who admitted it. If something looks complicated to you and the people who run it seem to be bright and enjoy a few years of superb returns, my advice is to stay away. If you don’t understand it, it doesn’t mean that it’s smart. There are always other investment ideas out there and if there aren’t, then cash is always an option.

Good luck in the final days of 2015!

My next post is going to be a book review, this time a book that is out of the realm of investing so stay tuned. I guess the post after next will be about Eden’s results for 2015…

2 thoughts on “2015: when heroes fall from grace

  1. Daniel

    The real lesson from this:

    1. There are great investors and then there are those who are just famous.
    2. Small investors and funds should not even bother to look at billion dollar companies. They should do their own work, take the risk and go for superior returns. Investing in multi billion dollar companies might be just a false sense of security and a guarantee for long term mediocrity at best.

    Reply

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