Friday, Mar 27th 2020

Invert, always invert


Activist hedge fund manager Bill Ackman has been in the headlines a lot this past month.

In early March, just as the severity of the COVID-19 situation in the United States became more broadly understood throughout the nation, Ackman disclosed that he had purchased a large portfolio hedge in anticipation of worsening market conditions.

Timed just as the market was experiencing a sharp near-term rebound, many in the investing community described it as a foolish bet based solely on trailing two-day performance - a sure sign that "the bottom was in."

After a few more weeks of continued market volatility, the hedge position began to look a lot more prescient.  In fact, the $26 million Ackman initially invested in his bearish bet had skyrocketed more than 100x in value to $2.7 billion.

But instead of pressing it forward, Ackman changed his mind.  In an interview with CNBC, he declared that he had now turned bullish. 

His reasoning?  Essentially: the outlook was so bearish in the near-term, it's actually bullish for the long-term. 

Put differently, he basically believed that conditions were on pace to get so severe that the U.S. would have no reasonable choice other than to take dramatic measures to contain the outbreak. 

That, in turn, is what the market actually needs to improve its outlook (in Ackman's view), and would thus represent a bullish turning point for stocks.

It remains to be seen whether Ackman is correct in his assessment, but we think this sequence of events highlights an important characteristic of all successful investors: the ability to invert one's thinking.

The ability to invert on a single viewpoint (in this case - from bullish, to bearish, back to bullish) in a short period of time is not easy, and for good reason.  More often than not, it can suggest low conviction or flawed underlying analysis.

For this reason, many people have a natural psychological tendency to avoid this behavior.  Once they go out on a limb, they tend to try to avoid having to walk their prior viewpoints back.

But for seasoned investors, this ability to quickly invert one's thinking and incorporate the latest data without bias is often what winds up separating the very best from the rest of the pack. 

In the words of Carl Jacobi (and as often repeated by Buffett's right hand man, Charlie Munger): "Invert, always invert."

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