“There are many worthwhile candidates on Wall Street for the Greatest Trade of All Time. There’s Jesse Livermore’s bet that the stock market would fall in 1929. He pocketed something like $100 million in profit, akin to $1.5 billion today. There is George Soros’ 1992 bet that the British pound would fall against a basket of other currencies. When it did, the Hungarian-American investor made $1 billion. Then, of course, there is John Paulson’s extraordinary bet in the years leading up to, and through, the 2008 financial crisis that the market for mortgage-related securities would collapse. He made a profit on the order of $20 billion for his hedge fund investors and himself, as chronicled in Wall Street Journal reporter Greg Zuckerman’s bestselling book, The Greatest Trade Ever.
Then there is what Bill Ackman did in March 2020. In the space of three weeks, as the Covid-19 pandemic was engulfing the globe, Ackman turned a $27 million premium paid to buy credit default swaps into a profit of $2.6 billion. He then reinvested a chunk of that windfall in the long positions he wanted to protect by buying the insurance in the first place. In the ensuing dramatic stock market recovery, Ackman made another $1 billion. In short, Ackman’s $27 million bet has netted him and his investors $3.6 billion. The trade might not rank up there with Paulson’s on an absolute basis—$3.6 billion is not $20 billion, after all. But on an internal rate-of-return basis, which accounts for the time value of money and is one of the most important measures of performance in finance, what Ackman did earlier this year may well rank as the Greatest Trade of All Time. No one had ever made 100 times his money in 10 days. And the scale was big enough to matter.” See Barrons.
Why is this interesting? It’s interesting not for the reasons you may think.
Every investor looks for outperformance. Every fund management group looks to achieve it. This example shows exceptional outperformance, which clearly shows it is possible to deliver outperformance. But…
Is this investing? Is it speculation? Is it gambling? Bill Ackman has failed often. This time he made a winning bet. If you are investor, how do you know when a winning bet is on the cards? You don’t. Which means if you invested with Bill Ackman, you would have times of failure. Often. Which means you are relying more on luck than you may appreciate. That is no way to reliably invest.
Could Bill Ackman have changed your life financially? If you had invested all your net worth before the trade and you made 100x your money, that would change your life. But would you back Bill Ackman with all your net worth? Unlikely. Even allocating 10% of your net worth is a big bet. So changing your life financially is not going to happen, especially as investing in March when everyone would be telling you not to do so.
These stories of success are financial porn. The ultimate winner is Bill Ackman. Not his investors. Even if Bill Ackman was the best investment guru ever, no investor will allocate their total net worth with one person and in one fund. People diversify. And if you diversify, you risk lower returns from alternative managers. Which means your chances of outperformance shrink.
The story is to be very careful of success stories. The final comment goes to a readers comment “I too occasionally get lucky with a big bet. It happens once every 7-8 yrs and my wife tells me that I am a great investor. Seriously – Ackman. I would never place a $1 with this guy.”