The Billion Dollar Mistake:
Learning the Art of Investing Through the Missteps of Legendary Investors
by Stephen L. Weiss
Wiley, January 2010
The Billion Dollar Mistake offers an up-close account of the career-defining mistakes that some of the world's most brilliant billionaire investors have made -- and a revealing look at what average investors can learn from these mistakes. While these missteps are spectacularly large, their causes are often simple in practice, and often identical to the errors in investment judgment made by everyday investors. Drawing on author Stephen Weiss's nearly twenty-five years of experience at some of Wall Street's most prestigious firms, this book is based upon original research and interviews with legendary investors who discuss the most significant trade or investment that went against them, the magnitude of the loss, and its effect on their businesses -- and their personal lives.
Page by page, this intriguing, fast paced book skillfully examines the causal relationship between the quirks of each investor's personality and the mistakes they have committed. Along the way, Weiss provides a series of compelling narrative accounts of each individual’s road to success, the particular mistakes they made, the investing flaws that led to them, and the lessons learned. While some investors made errors of judgment, others made errors of perception. Engaging and informative, The Billion Dollar Mistake is a unique investment book. Each chapter entertains while imparting the wisdom that will help you become a better investor. Weiss explains, “the mistakes I've described have been made by some of the smartest and savviest investors around. Understand what they did wrong, and you improve your chances of not falling into the same trap."
BILLION DOLLAR LESSONS
Discipline means discipline - Bill Ackman and his firm, Pershing Square, had a very profitable experience with Barnes & Noble, the world's largest bookseller. Ackman believed he could replicate that success with Borders Group, a competing chain of bookstores with many similarities, but in order to make that investment he had to violate his discipline. The result was far from what he had hoped.
ALWAYS do your due diligence - The Managing Partner of TPG, is a very careful, extremely successful private equity investor. He had a long personal and professional history with the CEO of Washington Mutual and saw opportunity in the popular banking institution. With only a week or so in which to round out his due diligence, Bonderman and his firm invested $2 billion in the troubled company. Only five months later, the FDIC seized the bank's assets, making it the biggest bank failure ever.
Emerging Markets are risky business - Leon Cooperman was the top investment strategist on Wall Street and a senior partner at Goldman Sachs before forming Omega Advisors, a hedge fund. Presented with the opportunity to invest in the privatization of Azerbaijan's state oil company, Cooperman took the chance but would soon regret it, a victim of fraud by a well-paid employee and an unregulated emerging market.
Don't own what you don't know - In 2005, Chris Davis significantly increased the Davis Financial Fund's investment in AIG, a company the $60 billion Davis portfolio had owned for more than thirty years. Between the initial investment and the time he added to the position, the AIG in which Chris Davis chose to go "all in" had become a fundamentally different entity - much more complex and murky than a traditional insurance company. When AIG stock plummeted, the loss took a significant toll on the fund's total value.
Don't be blinded by outsized returns - Geoff Grant's Peloton Partners found extraordinary success - rising 87 percent in 2007 - with the trading of asset-backed securities (ABS), a departure from the hedge fund’s core strengths. But with the onset of the global credit crunch, other ABS investors ran for the exits while Peloton stayed put - ultimately wiping out the firm and $2 billion. Weiss counsels caution in chasing hyper-returns, particularly when your style has to drift to get there.
Passion is not an investment strategy - Kirk Kerkorian's passion for the American auto industry drove four attempts, three realized, to buy into the Big Three automakers. That passion, combined with early investment successes in the industry, ultimately led to a loss of nearly $800 million when Kerkorian took a large position in Ford. In the world of investing, emotion is the antithesis of discipline. Passion cannot override objectivity.
Bernie Madoff's Investors
Be skeptical - Investors who lost billions to Bernie Madoff seemed to have found a deal that was too good to be true - consistent returns at a discount (no fees!). But if something appears too good to be true, it probably is. Investing demands a healthy dose of skepticism. Weiss details the lessons to be learned and followed when temptation presents itself.
Understand risk - Nick Maounis and his Amaranth hedge fund found phenomenal success in energy trading before losing more than $6 billion in less time than it takes a half-moon to complete its cycle. Although Amaranth had a highly developed risk management function designed to avert such disasters, the reality is that risk management offers no guarantees. If risk can be the downfall of brilliant and experienced traders, where does that leave the individual investor? Weiss provides the answer to this important question and the lessons for navigating individual risk.
Leverage is a double-edged sword - Aubrey McClendon leveraged himself to the hilt to buy millions of shares of his own company, Chesapeake Energy. It was a strategy that created a $4 billion fortune. But when gas prices slid, margin calls wiped out nearly all his holdings in the company he had started with just $50,000. Buying on margin - that is, with borrowed money - allows investors to increase the size of their investments, but the penalty for being wrong can be severe.
Short selling: Proceed with caution - Adolf Merckle was one of the wealthiest people in Germany when he risked a fortune "shorting" Volkswagen stock. His several hundred million dollar wager that the stock price would decline proved a risk he couldn't afford to take, particularly with the rest of his business empire crumbling. With more than a little help from Porsche, VW stock skyrocketed and Merckle - after being forced to sell off assets and beg for loans - hurled himself in front of an oncoming train. Short selling can yield great returns but comes with much higher risk. Weiss advises the best strategies for betting on declining stock prices.
Declining stock prices may not equal opportunity - He saw the collapse in residential mortgages and the tanking of financial stocks in late 2007 and early 2008 as a once-in-a-generation opportunity to pay bargain basement prices for Citigroup, Fannie Mae and Freddie Mac. Less than a year later, and with financial stocks comprising 40 percent of Pzena's portfolio, Fannie and Freddie were nationalized - essentially wiping out their equity value. Stocks are rarely inefficiently priced, Weiss warns, offering insights on finding opportunity in potential calamity - and avoiding the reverse.