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Alpha Theory Blog - News and Insights

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February 1, 2009

Bill Ackman-Style Investing: Know that you can't know the unknowable

The 3Q08 Pershing Square letter, written by portfolio manager Bill Ackman, is a great example of the salient decision making that good fundamental managers employ.  They strive to eliminate unanswerable questions as not to distract the firm from their ultimate goal; profiting from fundamental research.

“We spend little time trying to outguess market prognosticators about the short-term future of the markets or the economy for the purpose of deciding whether or not to invest.  Since we believe that short-term market and economic prognostication is largely a fool’s errand, we invest according to a strategy that makes the need to rely on short-term market or economic assessments largely irrelevant.” – Bill Ackman, Pershing Square

 

Market and economic direction are multi-variable equations with thousands of inputs.  You can find two Nobel Laureate economist with well-defended theses for divergent directions of the US economy.  If they cannot figure it out, why should you try?  Mental capacity is a precious commodity and should be focused on reasonable prognostication, not on knowing the unknowable.

 

I also found it interesting that Bill Ackman employs risk-adjusted return (expected return) to focus on the important elements of investment decision making:  potential profit, potential loss and the probability of each (http://changealley.blogspot.com/2009/01/bill-ackmans-great-expectations.html). 

Firms that utilize risk-adjusted return to manage research and determine position size dramatically outperform firms that manage the portfolio through instinct and mental calculation.

 

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