When the Facts Change

“When the facts change, I change my mind. What do you do, sir?

Years ago, I read Christine Richard’s book, Confidence Game: How Hedge Fund Manager Bill Ackman Called Wall Street’s Bluff.” The book told the story of how Bill Ackman and Gotham Partners went about shorting MBIA – a mismanaged and undercapitalized bond insurer.  Ackman recognized the shortcomings of the firm’s underwriting and then published his findings for all to see on the web (you can still read the paper and his critique of MBIA here: Is MBIA Triple A? (briem.com) )

Ackman withstood countless ad hominem attacks and investigations by the SEC and then NYAG, Eliot Spitzer. He stood his ground, kept to the facts and was ultimately proven right. I’ve been a fan since. How can you not be?

These days, Ackman and his team manage a few hedge funds at Pershing Square. Their portfolios are highly focused and concentrated. Countless hours of due diligence and research are completed prior to the firm committing client’s capital. Netflix was one of the names on their roster.

On Tuesday, Netflix announced lacklustre quarterly results. Most noteworthy, was the drop in the number of subscribers (-200K). Then, yesterday, Ackman announced he was selling their Pershing Square’s stake (see letter) and realizing a $400 million loss.

Because of his public profile, Ackman is an easy target. He was criticized for his positions in Herbal Life, JC Penney, Valiant and now Netflix. Detractors find easy fodder in his failings while overlooking his many successes – MBIA, CP Rail, General Growth Properties and the greatest trade of all time See: Bill Ackman’s ‘single best trade of all time’ turned $27 million into $2.6 billion — now he’s trying it again

My respect for Ackman is steady. Do the detractors really believe he should have stayed the course? I’m reminded of those words often attributed to John Maynard Keynes “when the facts change, I change my mind. What do you do sir?”

I won’t be selling my stake in Pershing Square anytime soon.