There are not many investors who played this year’s stock market crash better than hedge fund manager Bill Ackman.
Earlier this year, Ackman, who runs the FTSE 250-listed investment trust Pershing Square Holdings, turned $27m into a massive $2.6bn. He did this by insuring his hedge fund against corporate defaults shortly before the market crash.
He then put some of this money into beaten up stocks during the crash and made further gains. The trade – which has been described as the ‘single best trade of all time’ – made him a fortune.
Recently, Ackman has made another major trade. Below, I’ll look at the move he’s made and what it means for investors like me.
Ackman: “We’re in a treacherous time”
The trade Ackman has made recently is very similar to the portfolio insurance trade he made in the lead up to the coronavirus stock market crash. The hedge fund manager has bought credit-default swaps (which insure the buyer against an issuer defaulting) on investment-grade and high-yield bonds, as he did in February. He placed the trade on the day that Pfizer released positive trial data on its Covid-19 vaccine, which triggered a surge in stock prices.
“We’re in a treacherous time generally and what’s fascinating is the same bet we put on eight months ago is available on the same terms as if there had never been a fire and on the probability that the world is going to be fine,” Ackman said.
He added that he saw the vaccine news as “bearish for the next few months.” He thinks it’s likely to make people more careless about wearing masks and less likely to fear the virus.
The takeaway from this trade
This recent trade suggests Ackman is expecting the coronavirus to continue to hurt businesses in the near term. Now, Ackman doesn’t always get things right, of course. However, given his success in the last stock market crash, I think investors should take note of this trade.
The takeaway for me is that it’s worth continuing to be selective about my investments. A Covid-19 vaccine is likely to benefit a wide range of industries. However, it’s unlikely to be a magic bullet. It could take a while to roll out. And it may take years for the world to return to normal. In the short term, a lot of the companies that have been hit hard by Covid-19, such as airlines, cruise ship operators, and cinema operators, could continue to face challenges.
Right now, many investors are piling into beaten up stocks such as easyJet, IAG, Carnival, and Cineworld (many of which look extremely vulnerable financially). However, this isn’t an approach I’m going to take.
Instead, I’m going to stick to investing in high-quality companies that are financially strong and have fantastic growth prospects irrespective of what happens with Covid-19. Microsoft, Unilever, and Diageo are some examples of the kinds of stocks I’m going to continue investing in.
These kinds of stocks may not deliver explosive returns going forward. However, they’re also unlikely to lose me a lot of money if the stock market crashes again. And what’s Warren Buffett’s number one rule? Never lose money.
Edward Sheldon owns shares in Microsoft, Diageo, and Unilever. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Microsoft. The Motley Fool UK has recommended Diageo and Unilever and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.