So who is this person, Bill Ackman, who is leading the reorganization of our favorite speculation General Growth Partners, the recently bankrupt commercial real estate developer and manager.  He is a 43 year old investment superstar, well regarded on Wall Street as a hedge fund manager.  He received a Bachelor of Arts degree from Harvard graduating Magna Cum Laude with an MBA from the same college.  He manages several billion dollars through several separate hedge funds, set up as limited partnerships. 

The prominent investments under Pershing Square’s and Bill Ackman’s management include a 10% plus control in Target Corp. (TGT) both through ownership of common shares and long dated call options.   His investment decision in Target went badly the past year.  He started investing in TGT in April 2007 right before the credit crisis began in earnest.  Target was greatly affected by the crisis and the resultant deep recession and its stock lost a large percentage, reportedly up to 90% of the IV fund, though Target only declined by 50% during this time.  So, it is likely this figure includes the losses in partnership IV which was comprised of the call options, which are inherently leveraged. But the more dominant III fund lost much less as a percent.  

Pershing has more recently taken a 23% stake in General Growth Partners and assisted that company, the second largest mall development and management REIT, into bankruptcy last week (April 14).  Pershing Square secured the Debtor-in-Possession financing arrangement in that bankruptcy to oversee the interests of common shareholders, most prominently his own shares, plus the 25% plus percentage owned by the founding Bucksbaum family.

Smaller deals are his stake in Longs Drugs and Borders books.  Bill Ackman, in my opinion, is filling the void left by Michael Price when he sold out of his position in Mutual Shares fund company to Franklin Templeton in the late 1990s.  Since that time, there has been no real activist investor to uncover the value still held in busted companies.  At this time of global economic crisis, we could use many more Bill Ackman’s who would use their intellectual gifts and financial resources to help companies recover from their problems.

Yes, there are others who have used hedge funds to acquire businesses and put pressure on entrenched managements.  But too often, the others have used their power for personal gain, without regard to what is best for the companies they control and their stockholders, the companies’ employees and society as a whole.  In the recent past, many of the companies bought out on leverage caused more pain than they alleviated, making the same ego driven mistakes as those they sought to replace.  In Bill Ackman, we have a corporate raider with a heart as well as a head.  This is a rare combination and may only come along every one or two decades.  I won’t put the Warren Buffett label on Bill Ackman.  But in a couple more decades, who knows?

Tonight, Bill Ackman appeared on CNBC in a guest appearance while at an event called “Echoing Green”, an environmental cause.  His honor there was our honor to listen to him candidly, and a chance to get to know him better as a person, not just a talking head on the morning show, Squawkbox.

Link to Bill Ackman appearance on CNBC, April 23, 2009

Today’s missive will detail my portfolio management approach going forward in 2009 and my forecast for the next 18 months. As an intense student of investing, I am always working to improve my technique and my investing psychology. It is these two conditions that cost me most from the middle of 2007 to the market lows in early March. I did not have a good investing discipline (when to get in and when to get out) to go with my development of fundamental analysis and sector allocation. Even though my contrarian streak allowed me to see the mortgage / RE and bank stock disintegration as early as 2005, the lack of appropriate investing psychology and technique cost me dearly in the face of the biggest market meltdown in my lifetime.

In self-examination, the one good quality I have as an investor is very thick skin / the ability to deal with risk. I have heard many pundits say that most “retail” investors don’t have the stomach for this market and have by this time bailed out. Though I have made mistakes of omission (not selling when I should in 2007/08), I am not compounding that serious mistake by the commission of selling low. I have stood by my portfolio through thick and thin.

What lessons have I learned? First and most important, it is not enough to be a contrarian at the bottom, which I am and have been in the past (1988, 1992 and 2003 good examples), but I also must learn to be more contrarian on the way up and at the top (I did not get out in 2000 or in 2007). This means selling when everyone else is buying. Because I am inherently a “skeptical optimist”, I have to condition myself to be less optimistic and not get carried away with the crowd’s enthusiasm. This brings us to the second lesson: it is very important to have investing disciplines that force action against one’s nature. I am developing a selling discipline based on unemotional technical indicators. I have never believed in using fundamentals to sell, because by the time it is obvious there is something fundamentally wrong with a company’s or market’s outlook, it is too late to take action. The “insiders” have already moved out and taken the price down.

My discipline will be to divide every investment into four parts in unequal portions: 30%, 30%, 30%, and 10%. I will buy and sell based upon price signals that are generated by an “Exponential Moving Average” of 30 days, 70 days and 250 days. These are different than the more typical 20, 50, 100 or 200 day EMAs which create crowded trading points by their popularity. I will look to volume indicators to confirm the action point, primarily MACD and a price indicator, primarily RSI. From my study, I have learned that there is no magic in the actual buy/sell discipline (any will do), so much as to have totally objective points at which to take action to eliminate emotion from entering the equation. This is how master contrarians Doug Kass and Jeremy Grantham make investment decisions. You can do worse than to mimic these two who both called the top at DOW 14,150 and recently the bottom at 6600 and have made appropriate investments along the way (more on these two in separate posts).

Using the above simple methodology, I will sell 30% of any stock or fund that breaks down below its 70 day or 30 day average (nothing that I own is above its 250 day average right now). I will sell 30% at the cross of the 70 day and 30% at the cross of the 30 day EMA. I will always hold 10% of any stock or fund that I want to hold long term, as a marker for the performance of my buy / sell discipline. Because I went through this meltdown almost fully invested (at least since DOW 11,000), I have not had the opportunity to buy at the bottom, other than my monthly dividend reinvestments (thankfully) in my dividend-heavy portfolio.

I will report my portfolio performance and the stocks I bought and sold using my newfound discipline, at the end of each quarter (next Wednesday).  I will say that as of March 27 I am down 7.3% on my total portfolio year-to-date. I am closely watching the current bullish market move and expect to have to act as the market has moved quite far and fast going from oversold to overbought in a matter of two weeks. I am looking at a target of 870 on the SP500. We have just passed (March 26) the 70 day EMA at 822. I expect the market to find resistance at the widely followed 100 day EMA (837), but hope that it punches through up to 870 by the end of April. At this level, I will be looking to sell 30% as it goes through 822 and then another 30% as it goes through the 30 day EMA currently at 760. This will leave me with a portfolio of 40% equity invested down to the next bottom which I expect to be a retest of the SP500 at around 700 (it was intraday at 666 on March 9).

If we follow the market price pattern of 1938-39, as I expect we will (and thanks to Doug Kass for validating this opinion), a short term top in April at 900 will be followed by a 4-5 month correction, conveniently during the seasonally weak summer (May to October). This will be followed by a 35—50% bullish leg from around SP500 700 to SP500 1000 (approximately DOW 9500) in the seasonally strong November 2009 to February 2010 period. Then we should see another pullback to SP500 800 followed by a run at SP500 1400 which will get us back to the late 2007 levels in the markets. See the graph below of the 1938 to 1939 period with the 2009-2010 projections overlaid, again, thanks to Doug Kass for the idea for this chart:

(Note: thanks to commentor Linda for her observations about the precise EMA on March 27. I had estimated from a chart with trend lines, but will now use the Yahoo Finance charts which show the exact EMA for a given date. I changed this post accordingly.)

There have been plenty of times recently, where Warren Buffett and I have been at odds. He doesn’t know this, of course, but I have debated Warren long and hard in the comfort of my living room on the one-way medium of my TV.

I have no issue with Buffett’s investing style or results. In fact, I do everything I can to mimick his style and his picks. My disagreements with Warren are political in nature. He was an unabashed supporter of Barak Obama for the past two years. I had great reservations about our then “President-to-be” based on what I perceived was a commitment to an ideology that was unfriendly to our economic system. Those reservations are being borne out. Warren Buffett wrong, at least on the narrow (but very important) point of Obama’s capability of caring for our economy in a time of crisis.

Today, I am vindicated. He came out this morning on a series of interviews on CNBC and indirectly criticized the Administration and the Congress for a lack of focus and cooperation on the most important issue of our time: the Financial Crisis and resultant Depression.

Listening to Warren is more interesting than reading me. So I will use the rest of this post to link the most interesting of his interview segments. There was almost three hours of segments done by Buffett, so if you like hearing what he has to say, you can go to CNBC.com and view them all.

Warren says that no one is immune from the effects of a financial meltdown. Even the wealthy and powerful are frightened at a time like this.

Warren says: “The banks should get back to banking”. I have been beating this drum for months now. We need to reinstate “Glass-Steagall” or something similar, that regulates the banks and separates them from riskier investing businesses. Getting rid of mark-to-market would be a good short term fix.

Warren also talks about what he did wrong the past few months, the mistakes he made. Buffett is always straight up about his errors and that it is part of being an investor. If he can make mistakes, we all should expect and accept them.

Even the best of investors can have a bad year, though I would trade Warren Buffett’s year in 2008 for mine in a heartbeat (my total portfolio return did not even match my benchmark as I was down over 40% overall last year. The S&P500 was down 37%). Mr. Buffett was down 9.6% in 2008, recording a rare loss. Still, since 1965 the Berkshire Hathaway fund is up over 20% a year on average. Not bad, and maybe the best of any fund manager alive (though George Soros may have put up better numbers during the same time). Read on for the entire Buffett Annual Letter and see what he has to say about his Good, his Bad and his Ugly.

http://www.berkshirehathaway.com/letters/2008ltr.pdf

For commentary on my own returns and mistakes in 2008, see my post “Projections for 2009″