In a previous post on Bill Ackman’s rationale for Wendy’s, I included Pershing Square’s 2008 Annual Investor presentation published by Deal Breaker and I wanted to share their investing strategy and see whether I can learn anything from it.
In the presentation they have notes on their holdings which is also a good read.
Pershing Square Investing Strategy
The points of their investing strategy which I found useful are as follows with my comments in ():
- Investment selection process
- Mid – large cap companies (small investors can include small caps as well)
- Typically not controlled (if the company is controlled and refuses to unlock shareholder value even with an activist, what hope do we have?)
- Low financial leverage and modest economic sensitivity (No startup software or tech companies as many are extremely leveraged)
- Catalyst for value creation (there should be a catalyst. A cheap price is not a catalyst because there is a reason why it got there in the beginning)
- Invest in best ideas. Approximately 8-12 (I lost far too many opportunities because I was going after too many mediocre opportunities rather than the best one)
- Willing to replace existing holding for a better idea (willing to sell even at a loss in order to capitalize on better ideas?)
- Generally, no margin leverage (if you don’t have the cash, don’t play the game)
- Not worried about sitting on cash (I chased too many mediocre opportunities and was fully vested. Missed out on my truly best ideas)
And the following table sums up why Wall Street should rarely be trusted.
Lessons Learned in 2008
Towards the end there is a section going over their mistakes. Not surprisingly I too am guilty of some.
- Avoid controlled companies
- Own high quality businesses at attractive prices
- Few exceptions unless extraordinarily cheap
The important point is that even special situation companies in distress should have a free cash flow generative business with valuable assets, moats and a high barrier of entry.
A mistake I tend to make regularly is going after too many opportunities with a finite cash base and high broker fee. In 2008 my expense ratio was a disatrous 4.3%! Although everything seems cheap out there, I will maintain a cash position until I get that “best idea”. I’ve sold PSD and hopefully EMAG will close on schedule which will leave me with around 40% of my portfolio in cash.