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Summary Even the famous investors sometimes get it wrong. Pershing Square and Herbalife and Valeant Pharmaceuticals. Greenlight Capital and CONSOL Energy. Casablanca and Cliffs Natural Resources. Icahn Capital and Chesapeake Energy and Transocean. Introduction Diversifying an investment portfolio is more than just buying stocks in unrelated industries. It can also mean portioning a portfolio between multiple asset types such as equities, bonds, real estate, currencies, etc. And then, there is another layer of diversifying within each asset type. Bonds can be diversified many ways: government versus corporate, investment grade versus high yield (otherwise known as junk), Treasuries versus municipals, and domestic versus foreign. On top of that, investors need to consider holding a variety of maturities that will meet income needs today and in the future. Think of laddering the bond portion of a portfolio as a key element to be considered. The point of this article is to encourage investors to consider diversifying to reduce the risk inherent in holding too large a percentage of any on assets. The secondary theme is that every investor needs to do some due diligence on their own to satisfy themselves that each investment made is appropriate for that investor. Some investors like to follow the investing decisions of high-profile investors that have successful track records. But even then, diversifying against risk is important. Even the famous investors sometimes get it wrong Some of the best-known and most knowledgeable investors can be wrong or way too early. Sometimes even the smartest investors outsmart themselves by taking a large position that they believe in and holding onto it well beyond a reasonable period of loss, unwilling to admit a mistake. It can be a matter of pride and ego. Those are terrible reasons to hold onto an investment. Here are a few examples of mistakes made recently by some high-profile investors in the hedge fund arena. Pershing Square ( OTCPK:PSHZF ) and Herbalife (NYSE: HLF ) and Valeant Pharmaceuticals (NYSE: VRX ) Pershing Square is led by Bill Ackman and has recorded some excellent returns in the past. Lately, though, things have not been going Mr. Ackman’s way. I wrote an article about another multi-level marketing (MLM) company and got slammed by some of Ackman’s disciples. Here is an example comment: “Do you even own a passport? BTW they are not but are receptive to good skin care products. MLM is scrutinized in China. Have you ever studied Amway and AVP? When the Ackman atom bomb burns HLF to ashes NUS USANA and the likes will be part of the inferno.” – LeMarJackson. The article was written in May 2014. HLF’s shares have not fully recovered from the public frontal assaults by Ackman, but the shares also have not tumbled. In the end, the Pershing Square hedge fund investors (and Mr. Ackman) have lost money; a lot of money being short in a concentrated bet. Valeant has also been a losing position for Ackman. Thus far, Pershing Square has lost about $2 billion on this one investment alone according to this Wall Street Journal article. That one investment accounted for nearly 20 percent of the fund’s assets at one point, and the stock fell in value by 65 percent. These are just two examples of why we need to keep our emotions out of our investment decision-making process, why we need to diversify our holdings, so that we do not risk losing too much on any one position, and why we all need to do some research to confirm the investment thesis of those whose leads we like to follow. Greenlight Capital (NASDAQ: GLRE ) and CONSOL Energy (NYSE: CNX ) Greenlight Capital is managed by David Einhorn, another admired billionaire hedge fund investor. He has also been right a lot, and made his investors a lot of money (but probably not as much as himself). According to this article from money.cnn.com, Greenlight Capital is down about 12 percent this year, primarily due to investments in energy. One of his large position, CNX, is down about 65 percent this year. Just another reason not to follow blindly and to not concentrate too much into one position. The effects can be devastating. Casablanca and Cliffs Natural Resources (NYSE: CLF ) Another activist investor who had done a lot of homework was Donald Drapkin, a former protégé of Ron Perelman and head of Casablanca. Casablanca purchased about 5.2 percent of CLF’s shares outstanding for an average price of about $25 per share. The plan was to oust senior management and replace the CEO with a veteran who had managed turnarounds before, cut costs and close unprofitable mines to improve margins. CLF’s stock now trades at about $2.34 per share. That is a loss of more than 90 percent so far. I am glad I did not follow Casablanca into this mess. Icahn Capital (NASDAQ: IEP ) and Chesapeake Energy (NYSE: CHK ) and Transocean (NYSE: RIG ) Carl Icahn has a net worth of over $20 billion the last time I checked. So, he must be doing something right. He also has a long enough time horizon and the wherewithal to withstand temporary setbacks. He has made significant investments in the energy sector. He may be right in the end, but so far, some of his large positions in that sector are sucking wind. CHK is down almost 70 percent this year while RIG is down only 21 percent since January 1st, but off more than 43 percent in the last 12 months. IEP is down in value over 24 percent since the beginning of the year. It has made some good investments that partially offset the blunders. This is the case with all of the above investors/funds. They did a lot of homework/analysis before making these investment, and still got it wrong. Conclusion Diversification may have saved the respective bacon of these outstanding investors keeping them alive to fight/invest another day. We may not all be able to avoid making mistakes over our investing lifetimes, but we can take precautions to minimize the risk when we are wrong. For those who might be interested, I published a series on Seeking Alpha recently that explains ” How I Created My Own Portfolio Over A Lifetime ” by that same name. I take a rather unique approach to investing that those who have already stumbled onto the series seemed to really like. Likewise, I also use an approach to hedging that is different but keeps costs low. It is not for everyone, but so far my experience has proven very favorable. I have captured gains of 600 to over 2,700 percent on some positions to help defray the cost and protect my core holding through the recent turbulence. As always, I welcome comments and will try to address any concerns or questions either in the comments section or in a future article as soon as I can. The great thing about Seeking Alpha is that we can agree to disagree and, through respectful discussion, learn from each other’s experience and knowledge. Scalper1 News
Scalper1 News