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 ( 

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.

About Cameron Hight

Cameron Hight, CFA, is an investment industry veteran with experience from both buy and sell-side firms, including CIBC, DLJ, Lehman Brothers and Afton Capital. He is currently the Founder and President of Alpha Theory™, a Portfolio Management Platform designed to give fundamental money managers the ability to create their own repeatable discipline to organize the complex process of portfolio management.
This entry was posted in Hedge Fund Commentary and tagged , , . Bookmark the permalink.

Leave a Reply