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We have been long critical of Billy Ackman, primarily for his thesis on Target. And more generally negative on long only levered activist funds. On 12/10/2008, we wrote:

“Back in the market mania highs of 2005/2006, these strategies worked. Unfortunately, the cheap money, private equity bubble has popped, like all bubbles inevitably do, and with it so has the long only levered activist model.”

A primary reason we are negative on activist investing is that it typically includes an inability to sell easily due to large, and thus illiquid, positions in a Company’s stock. Additionally, being a “successful” activist often means becoming an insider by way of a Board seat. The problem with this “success” is that it does not allow an investor to change their view, by way of selling stock, when the investment’s prospects change. The net result is what we call thesis drift, which occurs when your original thesis is no longer intact and you invent a new thesis to justify your investment.

We are hardly infallible when it comes to picking stocks, so we are not beating up Ackman for the fun of it, but rather want to highlight the risks involved in concentrated activist investing. The chart below of Border’s Group probably makes the argument better than we could.

Undoubtedly Ackman had a great thesis on the stock, yet the thesis proved to be wrong and due to his size he could not easily exit the position. He then lent the Company money to alleviate their liquidity concerns. Ostensibly, due to an inability to repay these funds, Ackman has installed a former lieutenant of his, thirty-two year old Richard McGuire, as Chairman of Border’s Group.

Be careful not to get burned by lack of liquidity . . .

Daryl G. Jones
Managing Director