Investing Lessons From The New Howard Hughes

Howard Hughes was among the wealthiest men on the planet for a number of years.  His playboy style lifestyle still rivals the wildest modern-day bon vivants.  Despite all his partying and pushing the edge type life, he was an extremely astute investor.  Successful forays into Hollywood movie making and aircraft building via Hughes Aircraft Company built an empire of real estate and corporations.

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His estate was $2.5 billion by the time of his death in 1975.  Despite his vast wealth, Hughes did not meet a kind demise.  Obsessive compulsive disorder, drug abuse, and other ailments sent the billionaire to a long suffering death.  His life was chronicled in the movie “The Aviator” starring Leonardo DiCaprio which I recommend to anyone interested in this interesting characters story.

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While little correlation can be drawn between Hughes’ wild lifestyle and today’s “Captains of Industry” hedge fund managers who are often low-key and soft-spoken, there is a new Howard Hughes investment style money manager surfacing in the hedge fund ranks.

I am referencing well known activist investor, Bill Ackman.   While best known for his huge activist bets against company’s such as Herbalife, Ackman is changing into a Hughes/Buffett empire building giant.

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Despite Ackman’s well-publicized missteps over the years, his fund returned 37% in 2014.  When compared to the 2% average hedge fund gains, his investing acumen becomes quite obvious.  These gains give him a personal net worth of $2.5 billion.

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Ackman is in the process of morphing his ultra-successful hedge fund, Pershing Square from an activist slanted operation into a corporate kingdom.  He plans on using Hughes real estate focused corporation as Pershing’s holding company.

Ackman is at the point in his life that he is concerned about his legacy.  Rather than being remembered as a fast buck corporate raider, he seeks to emulate Buffett via Howard Hughes’ former company.

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Just like Buffett used the little known textile company named Berkshire Hathaway into a corporate holding dynasty, Ackman has plans to do similar with the Hughes Corporation.

You see, Pershing Square offers quarterly redemptions which does not work with long term managed assets.  This is why he needs a holding company, like Buffett, to handle his empire building assets.  Along with Hughes Corporation, Ackman also issued shares in an Amsterdam based firm known as Pershing Square Holdings.  Funded with $6.5 billion of new permanent capital, this company focuses on off-shore investors

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Ackman acquired the Hughes company when he purchased the Sumerlin real estate project.  Sumerlin is a huge Nevada based development that stretches to 35 square miles.  This is just one of four master planned communities and 30 other trophy properties owned by Hughes Corporation.  These assets include 45 million square feet of retail, wide swaths of residential, and New York’s iconic South Street Seaport which is being rebuilt.

Ackman explained to Forbes, “Howard Hughes is the only company that I am, in effect, an executive of” He added,  “is the one we have the most control and influence over, and the most amount of reputational equity invested.”

This leads us to investing lesson number one from Ackman.  It is build a core position to trade around.  Certainly most of us don’t need a holding company to hold our long-term assets but the idea is the same.  When trading it is best to have a solid core position built from long term stocks or other assets.  Rolling your trading profits into this core position is a smart way to build wealth.   Your core position can be blue chip dividend paying stocks, Index ETFs, REITS or even physical assets like gold or real estate.  Remember, quick liquidity is not a must for your core position, longevity and steady gains are what your core position should be built upon.

One of Ackman’s advisors and Harvard Professor Michael Porter cemented the core position idea when he told Forbes, “If you are in a situation where capital can walk and you have investors that can be rattled, having a good anchor of permanent capital is very important.”  Simply substitute “volatile trading account” for “capital can walk” and this become a very smart lesson for all investors.

The next lesson from Bill Ackman is to invest in what you know.  This mantra is heard across the investment landscape with perhaps Peter Lynch from Fidelity being its most vocal adherent.

This is particularly true for your core position.  You see, Ackman’s father owned a successful New York City Real Estate firm.  Ackman became a top producer in the rough and tumble New York City real estate jungle upon graduating from college.  Therefore, his building of the core position out of real estate holdings makes great sense.  Building your core out of what you know, whether that is real estate or a particular stock market sector or even precious metals is the way to go.

The third investing lesson from Bill Ackman is to diversify.  Ackman holds domestic stocks both long and short, international stocks, real estate, and even unique assets like air-rights over the huge Fashion Mall on the Vegas strip.   There is even talk about him opening up a Vegas casino.  This diversification allows for certain sectors to be losers while other sectors provide giant winners, thereby lowering risk but allowing for large upside gains.

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Finally, Ackman is a poster child for sticking with your investment conviction.  Certainly, you need to cut your losses when an investment moves against you enough to become a drag on your returns.  However, proper position sizing will allow large adverse moves without causing irreversible portfolio harm when waiting for a positive move.  Ackman’s Herbalife short trade is a classic example of sticking to your guns when you have strong convictions.

Heck, even the mighty Carl Icahn vehemently trashed Ackman’s short position.  Not to mention, putting his money to work supporting the company.  Despite taking early losses and massive public outcry against his short position, Ackman stuck to his huge bet against the company.  He has stated that he is 100% confident in the short position.  In addition to making clear that he has never done better research on a company.   As you know, the shares soared higher after he announced the short in 2012.

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Heck, even the mighty Carl Icahn vehemently trashed Ackman’s short position.  Not to mention, putting his money to work supporting the company.  Despite taking early losses and massive public outcry against his short position, Ackman stuck to his huge bet against the company.  He has stated that he is 100% confident in the short position.  In addition to making clear that he has never done better research on a company.   As you know, the shares soared higher after he announced the short in 2012.  However,

Heck, even the mighty Carl Icahn vehemently trashed Ackman’s short position.  Not to mention, putting his money to work supporting the company.  Despite taking early losses and massive public outcry against his short position, Ackman stuck to his huge bet against the company.  He has stated that he is 100% confident in the short position.  In addition to making clear that he has never done better research on a company.   As you know, the shares soared higher after he announced the short in 2012.  However, price has fallen 30% over the past 12 months.  The verdict is still out about what will happen to the company Ackman calls a “Ponzi Scheme” but suffice to say, it is likely Ackman will be proven right once again.

The Key Takeaways

Bill Ackman is in the process of building a core position of long term assets via the Howard Hughes Corporation and Pershing Square Holdings in Europe.  No longer wanting to known as an activist investor, Ackman is following Warren Buffett’s lead in creating holding companies.  There are multiple lessons to be learned from Bill Ackman.  The primary ones discussed in the article are:

  1. Build a core position to trade around
  2. Invest in what you know
  3. Diversify across asset classes and demographically
  4. Stick to your investment convictions (within reason!)