Review of Confidence Game: How Hedge Fund Manager Bill Ackman Called Wall Street's Bluff by Christine S. Richard
"A closed mouth gathers no foot." - Bill Ackman's high school yearbook
Confidence Game is the Bill Ackman equivalent of David Einhorn's Fooling Some of the People, except that Einhorn wrote his book and this one is written by a reporter who followed bond insurers and to whom Ackman gave full access to his notes and correspondence about this investment.
My conclusion about Einhorn's book was that going on a crusade against Allied Capital was a mistake for a number of reasons. In the very same ways, Ackman's crusade against MBIA seems like a mistake, even though he was right.
Life is too short to chase after the fraudulent stock shorts. The more crooked the management, the longer the fraud can last. As long as a company (whether fraudulent or just a bad business model) can attract investors fooled by some kind of Batesian mimicry it can persist. But if a company is unprofitable and it owes more money than it can repay, the creditors can be the catalyst for the short.
The activist shortselling campaigns take a tremendous amount of time and also create a public commitment that is hard to modify or back down from if circumstances change. It seems like Einhorn has perhaps learned this lesson, but Ackman has not. His latest crusade, which seemed extremely misguided, was Herbalife. What if the distraction from the Herbalife campaign contributed to Ackman's debacle in Valeant?
Both Einhorn and Ackman had drawdowns in 2008. It's particularly amazing in Ackman's case because he was more right about MBIA than Einhorn was about Allied, and 2008 was the year that his trade paid off, and his credit default swaps that he bought for (as low as) tens of basis points per year were much higher returning (50x?) than Einhorn's Allied stock short.
As Alice Schroeder said at the time about Ackman's MBIA idea, "If the idea isn't strong enough to move the market, that's a sign its time has not come yet." When I wrote my review of the Einhorn book, a reader commented,
"Look at Ackman and Herbalife. (I think Hempton is right and Ackman is wrong, btw.) A gigantic, public position becomes something from which you can't back down."An investment idea may be good, but not actionable. Too early means not actionable. I believe that there will be a bear market in U.S. bonds, but probably not yet. Remember the point that one astute investor made in Inside the House of Money:
"A really important lesson in investing is that being either too far in front or too far behind is when you get hurt, whereas being right at the edge of the wave is where the money is made."Another good point from the same book, from Scott Bessent, who left Chanos to work for Soros in 1991:
"[Y]ou don't have to be skeptical about everything. Maybe the guys at Starbucks really are good managers and it really is one of the greatest concepts ever. Maybe eBay is the perfect business model. Short sellers can't think that way."I wonder whether Ackman will survive the next bear market? Also, questions for audience: is it possible to be a good investor and not be humble? Is it possible to survive for 50 years as a professional investor and not be humble?