One way to get investment ideas is to follow an activist investor to see what they’re doing.
But what exactly is an activist investor? And does paying attention to what one is doing really help your investments?
Let’s take a look at these types of investors and how they can impact the stock market and investing. That way, you can decide if following activist investors is a good strategy for you.
What is an activist investor?
In general, an activist investor is someone who buys into a public company with the intent of forcing change. Perhaps the investor is upset with how the management team handles the company and the strategy involved. Or they may have an issue with the company’s corporate governance and want to create accountability or transparency.
Typically, an activist investor feels that there is a way to make the company more profitable and wants to force that opportunity — usually because their own bottom line improves. Some people believe that knowing what these activist investors are up to is a beneficial strategy when it comes to investing money.
There are three main types of activist investor:
- Individuals who buy enough shares to control a large voting bloc.
- Hedge funds that add a company’s shares to their portfolios and hope to drive profits, even if those profits are short-term and come at the expense of long-term corporate growth.
- Private equity firms also hope to make a profit, sometimes by “raiding” the company’s value before selling off the company.
On occasion, these activist shareholders force a hostile takeover, which takes place by leveraging shareholder votes over the objections of the existing board of directors. In some cases, it’s possible to force a hostile takeover by using proxy voting.
This situation is known as a proxy fight or proxy contest. This is when a shareholder uses their vote to force a change in the members of the company’s board, making it easier for an outside party to take over the company. The activist investor would convince shareholders to direct those acting on their behalf (their proxies) to essentially overthrow the board.
Examples of activist investors
It can be easier to fully understand the impact of shareholder activism by knowing who to follow and some of the strategic actions they have taken in the past. Here are six well-known investors and some of the activist campaigns they are known for:
David Einhorn is closely watched because he often makes many interesting investment calls. He is the founder and president of the hedge fund Greenlight Capital. This hedge fund features more than $7 billion in assets and has returned about 15.4% net return since it was founded in May 1996. He was one of the foremost people questioning Lehman Brothers during the financial crisis in 2008.
Today, he talks about a “bubble basket” of internet stocks that he shorts, including Tesla (TSLA), Amazon (AMZN), and Netflix (NFLX). Currently, Einhorn is losing money on these bets, but there are some who believe he will cash in during the next crash.
Pro-tip: You can learn how to invest in Tesla or how to buy Amazon Stock even if you only have a few dollars.
Carl Icahn is one of the most infamous of corporate raiders and has been working on deals for decades. He is the founder of Icahn Capital Management, and he invests through Icahn Enterprises (IEP) and runs an investment fund.
Some of his activist investor moves in recent years have included buying a large stake in Family Dollar and then convincing the company to sell itself to Dollar Tree (DLTR) and famously pressuring Apple (AAPL) to execute stock buybacks and issue a dividend.
Pro-tip: Here’s how you can buy Apple stock.
Bill Ackman is the founder and SEO of Pershing Square Capital Management, which has been in existence since 2004. His most notable activist successes include Fortune Brands, Allergen, and Canadian Pacific. However, his attempted merger of Allergen and Valeant didn’t meet with success as expected.
Currently, Ackman is expected to announce a deal related to the Pershing Capital SPAC. Additionally, Ackman has been talking about Persing’s 6% stake in Domino’s pizza chain.
Dan Loeb is the founder and CEO of Third Point, a hedge fund that manages about $16 billion in assets. He’s a notable activist investor who claims his activism has resulted in a 300% return since 2011. Many of his battles include impacting corporate board composition by getting seats for his chosen board members.
Some of the notable campaigns run by Loeb include those against Campbell Soup (CPB) and Nestle (NSRGY). Additionally, Loeb has pressured United Technologies (UTX) to split into different companies.
Nelson Peltz founded Trian Fund Management, which manages about $8.5 billion in assets. The company had a notable stake in DuPont (DD) and has recently purchased a large stake in Comcast (CMCSA). He and Trian are part of a group of activist investors who use “constructivism,” which is a less contentious approach to takeovers.
However, he isn’t above the battle. He pursued a board seat with Proctor & Gamble (PG) in 2017 and ultimately got what he wanted.
Jeff Ubben founded the hedge fund ValueAct Capital, which manages $16 billion in assets. However, he stepped down in 2020 to launch Inclusive Capital Partners. Now his investor activism takes aim at solving different world problems like education and food scarcity.
Some of the target companies Ubben has gone after in the past include Halliburton (HAL), Microsoft (MSFT), and 21st Century Fox (FOX). He was known on Wall Street as a “nice guy” activist investor, although he still thinks there isn’t much difference in outcomes.
What activist investors mean for your investment
Depending on the situation, investor and hedge fund activism can actually help your portfolio. It all comes down to how activists are trying to make a difference and which changes they make. Sometimes the goals of the high-profile activist are different from the goals of the company or the average retail investor.
For example, if an activist forces changes to a company’s management that ultimately result in long-term profitability, that can be good for the value of the shares you own and help you make more money in your portfolio.
On the other hand, the activist’s goal might not be long-term profitability. Some investors hope to see large short-term gains, and the actions they take can be detrimental to you if you have invested with a buy-and-hold outlook.
Some people follow activist investors. There is an entire subReddit for Ackman that discusses his deals and speculates on what his actions might mean for the future. Depending on your goals, it could make some sense to follow these activist hedge funds and investors and take your cues from them. Following Icahn before 2012 and investing substantially in Apple could have made a difference since dividends first became a part of the picture at that time. So, that might have been a benefit if you were someone focused on investing in dividend stocks.
In the end, it’s up to you to determine whether following an activist investor can work for your portfolio and figure out if you think their approach is in line with your own portfolio goals.
Is Warren Buffett an activist investor?
Today, people rarely see Warren Buffett as an activist investor. His long-time approach of buy and hold doesn’t encourage much in the way of activism. However, he did engage in some activist investing moves in the past, most notably his takeover of Berkshire Hathaway (BRK.A), whose class A shares are worth more than $400,000 apiece (as of May 17, 2021).
Can you make money following activist investors?
While it’s possible to make money following activist investors, it’s never guaranteed. Even though they are institutional investors, activist investors can still be wrong, and their takeover attempts can fail. However, depending on your goals, you might make money by taking cues from these investors. Carefully consider your own investing goals before deciding to follow an activist investor.
Are activist investors good or bad?
Activist investors are neither good nor bad. In the end, it’s about the objective, whether it aligns with yours — or is likely to result in long-term value. There remains a debate over the long-term utility of activists in the investing world. However, if an activist investor prompts long-term changes that increase value in a company over time, it could benefit your portfolio. On the other hand, if the investor just wants to harvest short-term gains, it could be detrimental to the long-term health of a company and long-term shareholder value.
An activist investor or hedge fund manager can impact the trajectory of a company as well as its stock price. Following these types of investors could potentially provide you with clues to getting more profit from your portfolio. However, there is no guarantee that you’ll benefit or even be able to successfully interpret the activist’s insights behind what’s happening.
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