Cadence Opportunities Fund

Dirty Money – S01 E03 Drug Short

This documentary featured on Netflix deals with the amazing rise and the amazing fall of Valeant Pharmaceuticals.

Once the ‘darling’ of the investment community Valeant has fallen into disrepute with that same investment community. Again we have Bill Ackman, Billionaire hedge fund manager, as a proponent of Valeant Pharmaceuticals with a large long position and Australia’s very own Bronte Capital as a proponent of short selling the stock. Anyone who looks at the stock price chart for Valeant will learn that the ‘Longs’ made a lot of money on the way up and lost a lot of money on the way down and that the ‘Shorts’ made a lot of money on the way down.

From a Cadence Capital investment process Valeant was a ‘roll up’ story on the way up and the mergers and acquisitions hid a lot of ‘dirty activity’ which proved the ‘shorts’ correct on the way down. Generally speaking a roll up or acquisition strategy can hide a lot of wrongs and mistakes on the way up as earnings growth is strong and business and accounting ‘abnormalities’ can be more easily overlooked. However, when ‘the music stops’ the reverse is also true and ‘roll up’ stories can untangle relatively quickly. Bill Ackman had accumulated a large profit from his position and even orchestrated a potential takeover that delivered him extra profits. In the end however his ‘love’ of the stock caused him to add to the position on the way down and he end up losing around approximately $2 billion. As the Bronte Capital founder described it he ‘fell in love with the stock’.

Post the current reporting season we have witnessed two of our very own roll up stories, Retail Food Group and Domino’s Pizza Group, stocks that the investment community once ‘loved’, stall and begin falling. To date Retail Food Group has fallen around two thirds in value whilst Domino’s Pizza has fallen fifty per cent.

The overriding rule with all stocks is that it is fine to own them when they are going up but when the trend changes and they start to experience substantial falls you want to be selling and you definitely don’t want to be adding to falling positions.

This excellent documentary follows on from the equally good ‘Betting on Zero’ and provides excellent insights for investors. Not only in terms of the science of investing, but both documentaries illustrate what can happen when your emotions get the better of you. Thoroughly recommended!