Bill Ackman Says To Think Twice About These 5 Investments

Even billionaire investors make expensive mistakes. Bill Ackman, founder of Pershing Square Capital Management, has publicly dissected several of his own, offering useful lessons for anyone looking to start investing. His current strategy favors high-quality businesses with predictable cash flow, limited downside, and durable long-term prospects.

However, what he avoids can be just as revealing. Ackman's warnings aren't a list of assets that will automatically lose money. Instead, they highlight situations where leverage, management dependence, outside risks, or an unpredictable business model can make it much harder to estimate what an investment is actually worth.

Here are five situations his experience suggests deserve extra scrutiny.

Highly leveraged companies

Heavy debt can make a bad situation much worse. After Pershing Square's painful investment in Valeant Pharmaceuticals, Ackman explained that the company's leverage and exposure to regulatory and political risks meant the firm should have made a smaller investment or preserved more flexibility.

He also indicated that Pershing generally avoids using margin leverage in its own strategy because borrowed money can magnify losses when prices move against an investor.

The same logic applies to companies carrying large debt loads. Debt can work when business is strong, but falling profits, higher interest costs, or tighter credit conditions can quickly reduce a company's options. For long-term investors, balance-sheet strength can provide a cushion that heavily leveraged businesses simply don't have.

Companies that rely too heavily on management execution

Valeant also taught Ackman another lesson: Be cautious when the investment thesis depends on management continuing to make nearly flawless decisions. In Pershing Square's 2016 annual letter, Ackman said Valeant's acquisition-heavy model required exceptional operating execution and capital allocation, creating an unusually high degree of dependence on management. He later acknowledged that Pershing had misjudged the company's prior leadership.

Strong executives can create enormous value, but investors can get into trouble when too much of a stock's worth depends on future deals or decisions that haven't happened yet. Ackman's lesson was that a management team's past success at deploying capital isn't necessarily a durable asset you can confidently build into a valuation.

Oversized positions exposed to outside risks

Ackman has also warned about putting too much money into a company whose fate can be heavily influenced by forces management can't control. Looking back at Valeant, he said that regulatory changes, politics, and other external factors can dramatically alter a company's intrinsic value, and that those risks should influence how large a position becomes.

That matters because even a strong business can be vulnerable to a policy change, lawsuit, regulatory crackdown, or other event outside its control. So diversification and position sizing can really matter just as much as finding a company you believe in.

Businesses whose future becomes too hard to predict

Ackman's short-lived Netflix investment offers another example. Pershing sold its stake in April 2022 after subscriber trends and proposed business-model changes made the range of possible outcomes much harder to forecast. Ackman wrote that Pershing requires a high degree of predictability because it runs a concentrated portfolio, and that Netflix no longer met that standard.

Importantly, he didn't necessarily say Netflix had become a bad company. Instead, he highlighted that Pershing had lost enough confidence in its ability to predict future revenues, subscriber growth, margins, and capital needs that the investment no longer fit. That distinction offers a useful lesson: A good company isn't automatically a good investment if you can't reasonably estimate its future economics.

Activist short positions

Ackman became famous for highly publicized short bets, including his multiyear campaign against Herbalife. But in Pershing Square's 2021 annual report, he said the firm had "permanently retired" from activist short selling after only a handful of these types of campaigns generated significant attention and controversy.

Short selling carries a different risk profile from simply buying a stock because losses can theoretically keep growing as the stock rises. Activist shorts can add another layer of uncertainty through litigation, public battles, regulatory questions, and prolonged holding periods. Overall, Ackman's decision to leave the strategy behind suggests that even a potentially correct thesis may not be worth the complexity surrounding it.

Bottom line

Does an investment still look attractive after you consider its debt, management dependence, outside risks, predictability, and position size? Ackman's biggest lessons suggest those questions can matter more than whether a company has an exciting story or a famous CEO. His own costly mistakes pushed Pershing toward businesses it considers simpler, more durable, and easier to value.

You don't need to copy Ackman's concentrated investing style to use the same principles. Checking the balance sheet, understanding what assumptions have to go right, and avoiding risks you can't comfortably explain can help you grow your wealth without depending on one speculative bet to carry your portfolio.

This article is for informational purposes only and should not be considered investment advice.

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