From Minimalism To Tech

Valeant Effort

Posted in Trading on March 15th, 2017

The following article covers trading financial securities, such as stocks. The world of trading often comes with rises and declines of securities, and most things do not rise or fall in a straight line. By the time this article is published, circumstances involving what we mention may have changed. Often, changes in securities can be to the detriment to the traders – seldom is it beneficial. A person should only trade with money that they’re willing to lose because losses are guaranteed. By reading this post, you agree that you’ve read our disclosure.


Valeant Pharmaceuticals International used to be a high flying stock in 2015 before its eventual downfall. Even Pershing Square, a hedge fund led by Bill Ackman, has divested out of Valeant this past Monday. It is estimated they may have lost $2.8B dollars, yet only represents less than 3% of their assets under management (AUM). Yes, hindsight is 20/20. However, stories seem to repeat themselves of companies behaving badly. Amongst the exciting stories of profits and acquisitions, hidden are the financial manipulation, larger risk-taking, and scandalous behaviors. We are seeing these stories more often. We can read often how these public companies imploded, and some even had to be bailed out. With defunct companies like Enron, WorldCom, Lehman Brothers, and possibly Valeant, we can learn several lessons about investing in public companies.

Valeant Chart of Doom

I tend to follow trends (and sometimes I don’t, which teaches me expensive lessons). Looking at the weekly chart, again hindsight is 20/20. You can clearly see a break near the end of 2015, and eventual decline through 2016 until today. The stock price was flying above $240 per share, but now it is little above $12 per share. This would represent over 95% decline (or drawdown) from the stock highs. Those who were smart and lucky enough, they could have sold any shares owned around $200, near the 50 week moving average line (blue). Whatever the sell signal, it would have been fortuitous for them to sell in September. For those brave enough, they could have shorted the stock and skied down the slope through 2016 and gain more than 90% return on their short position, depending upon the shorted price. Of course there were other ways to make money using leverage and options, but the gist is that a lot of headaches could have been avoided for people owning shares of Valeant in 2015.

Death and Taxes

As the old adage goes, “but in this world nothing can be said to be certain, except death and taxes.” This may apply mainly to humans, but I also believe this applies to corporations. The Dow Jones Industrial Average originally contained 12 companies. Only one remain in the average, albeit GE was dropped and added again. Other companies became bankrupt, merged with other companies, split up to smaller companies, or have evolved into different companies. Competition will continue to be fierce. Evolution of technology and social trends will guide corporate profits and losses. A thousand years from now, it will be hard to see if there will be corporations existed from today.

Voting with Dollars

It has been said that the stock market is a voting machine in the short term. My interpretation is that people will generally buy into a stock (vote) when the company seems favorable. People will not vote (sell shares), when the company seems unfavorable. No matter what headlines and marketing materials may say, the price will eventually tell the truth. One must be vote wisely, or be at risk to ruin.

Lessons to be Learned

There are lessons to be learned:

  • The first lesson to be learned is that positive news about the company is not necessarily positive. News releases given by the company tends to be biased on the positive side. Either they put a positive spin on negative news, or become overly optimistic on positive results.
  • The second lesson is that an activist hedge fund investor is not always positive for the company. This may be different for a turnaround specialist that buys bankrupt companies through leveraged buyouts (LBO). However, I have become skeptical of activism, where an outsider with no experience in the industry comes into a company, proclaiming greater knowledge of how to run the business. I would be less skeptical if the founder of the company has decided to return and lead the company with new focus.
  • Hedge funds have way too much money. More money than you or me. They can invest large sums into companies and influence many decisions. In this example, it seems that no amount of money could reverse the decline in stock price. The stock price reflects the stock and it could not be manipulated to back up to $200 per share. I concur that some stocks, like penny stocks, can be easily manipulated. However, even with best intentions, gravity cannot be opposed.
  • Even the best investors become too attached to their investments. One should not become too attached to companies, because it will lead to bad investment decisions. It will cloud judgement and may influence one to break trading rules. This may lead to large losses, and possibly unrecoverable losses. This is called risk to ruin. Risking too much, that it ruins you. Even the famous Jesse Livermore was ruined through huge losses, by risking too much.
  • Pershing Square was able to manage their risk and not affect their overall AUM too much. If they had risked more than the 3%, they may have actually ruined their reputation and possibly their fund. Here, the lesson to be learned is that when the stock or company does not behave as expected, it is best to cut your losses and get out.

I hope you did not lose any money on Valeant. It is sometimes very tempting to invest in what the financial news cover, or follow along a popular fund manager. But, the best way to invest is to learn your style of investing and follow your own rules. Everyone’s situation is different, and individual psychology plays an important role in successful trading.

Follow On Us Social Media:

© Copyright 2016-2017. All Rights Reserved. Direction Return Design by FinTek Development.