Activist investors are one who acquire significant stake in a company and ask for changes in management or management style. This includes representing themselves in the board or influencing many decisions made by the board.
Why do Activist investors do that?
Believe it or not, most companies are run by people who do not have a lot of knowledge in other areas. Please see my article on the essential skills of CEO. The management may be great product developers or even great sales folks, but if they don’t do proper capital allocation, shareholders lose.
Activist investors jump in buying somewhere between 1 to 10% of the company and make the management to do things differently so that shareholders are rewarded better. Most of the time these changes produce better results which makes the share price go up and we all stay happy.
Famous Activist Investors
- Carl Icahn
- Bill Ackman
- Daniel Leob
- Ralph Whitworth
- Boone Pickens
The list can go on. I have invested along with them time and time again and have reaped very good results. I have lost money along with them too when I got blind sided by overconfidence and not looking at the numbers properly.
Some of my recent string of success include Apple along with Carl Icahn. A a big win for me was with Ralph Whitworth on HP. I still have investments tagged along with Bill Ackman, Dan Leob and Boone Pickens. They are up but not up yet to their intrinsic value and hence I do not want to discuss them now as I am buying more of them.
My biggest loss was that of JC Penney with Bill Ackman. I had underestimated the customer switching behaviors when it comes to retail. Warren Buffett had written in length about his failures in retail and I still invested looking up on a charming CEO in Ron Johnson. But retailing is hard and one needs to be scrubby to become a successful retailer. Even if one works hard, it is not that you can retain that title for long. Look how Walmart is doing today compared to their results 20 years ago. Amazon is the king of the day, but I do not know how will they sustain 20 years from now. The most important mistake I did in JC Penney investment was that I ignored the financials trusting Ron Johnson would make the turnaround. Although I didn’t lose all of my money, JC Penney was a good lesson learnt for me.
Why am I talking in length about JC Penney?
- Tagging along with an Activist investor does not guarantee you a successful return.
- The numbers will have to add up in your head. In JCP’s case my numbers didn’t add up but I still invested ignoring my rules.
- Have a 3-5 year horizon. I had to quickly cut my JC Penney investment because things changed and I had to dilute my holdings.
Please read Icahn’s write up on his investing over the years including at Apple.
Activist investors get 80 % success rate compared to most people. An average investor gets less than 30%. Now that is a huge difference. Most value investors get 66% success rate and that alone is good enough for somebody to make wonderful money.
So tagging along with Activist investors is great as long as you are sure about the financials and the theory behind the turnaround story. Most of the time all the activist investor asks is to make some small changes to make good returns. These are the types of investments that will guarantee success.
I will tag along with them in the future and will keep posting information as I close any investment.
For people who do not want to invest in individual stocks, Icahn, Leob and recently Bill Ackman have started publicly listing their funds. You could buy some shares and make an amazing return.
These are the words of Icahn in the above article –
If you had purchased stock of IEP, our flagship company, at the start of 2000 you would have had an annualised return of 21.5% compared with the s&p500’s 3.8%; and if you had bought IEP on April 1st 2009 you would have had 33.8% compared with the s&p500’s 20.4% (counting in each case up until September 30th 2014). Even more telling is the return of a person who invested in 23 companies whose boards our appointees joined between January 1st 2009 and June 30th 2014; if the person invested in each company on the date that the nominee joined the board and sold on the date that the nominee left, they would have obtained an annualised return of 27%.
Disclosure: I actually follow a list of about 15 activist investors and at this point do not want to list them all here.