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Next, I'll share the story of Bill Ackman, the US hedge fund manager who, during this coronavirus crisis, by investing just $27 million, managed to earn over $2.7 billion. Please stay until the end because this strategy is spectacular and can put into context many things that are happening right now.
Hello, how are you? Greetings, this is Angelo Rico speaking, and welcome to a new video on our YouTube channel, Investing by Learning. Before we begin, remember that if you find these types of videos valuable, if you 're learning and they're offering you the kind of inspiration and knowledge that you can integrate into your trading and that can offer you better results in decision-making, if we're achieving these goals, give us a thumbs up, share our posts on your social networks, and subscribe to our channel.
If you have n't already, Bill Ackman is the director of the investment management company Bersin Capital Square Management, a company that is used on the stock exchange. It's a James Bond or alternative investment fund that, in general terms, is dedicated to carrying out investment operations on stocks.
The performance of its The performance of this asset manager's capital fund isn't very different from that of most investment funds around the world. They've been severely punished by the sharp drop in stock market prices, and we all know that the main driver of this stock market decline is the coronavirus.
So how did Bill Ackman manage to turn $27 million into $2.7 billion? This strategy is truly fascinating to me because it brings to mind the events of 2008 and everything that precipitated the collapse of the US subprime mortgage market. As I mentioned at the beginning, Bill Ackman manages an investment fund with a current value of approximately $6 billion.
What he says, and what can be deduced from his interviews throughout January and February of this year, is that at the beginning of January he encountered the coronavirus problem. He began to study it and understood that this could potentially trigger a new global stock market crisis. He started to monitor everything that What was happening in China was how the spread of this virus was accelerating, and what the consequences would be when the only way to contain it was to quarantine the entire population and therefore all industries, thus brutally punishing economies.
It was understood very early on that what was only affecting China in January 2020 would eventually spread to the major Western economies, including the US, and that when this began to materialize, one of the first things to be punished would be the stock market indices and the value of shares of publicly traded companies.
So pay attention to the following: Bill Ackman has an investment fund worth 6 billion dollars. What he thought, and the strategy he designed, was the following: I have this investment fund; surely we are going to lose significant value as a consequence of the coronavirus, but what we could do is protect, shield our investments through insurance.
What does this mean? That from that moment on, he began to buy insurance for his investments. In case the value of the investments fell, he could collect the insurance, and the insurance profits would offset the potential losses. This is exactly what Bill Ackman did. Starting in January, he began carrying out credit protection operations worth approximately $27 million.
None of the financial institutions, especially in the US, considered the coronavirus a real danger to the financial markets, and it was for this reason that they agreed to sell him derivatives called credit default swaps, also known as CDS. CDS became famous following the collapse of the financial system in the US, but mainly after the fall of American International Group in 2008.
At that time, it was the largest insurer in the world, and its bankruptcy was caused precisely by the sale of this type of mortgage insurance to various financial institutions and individuals. So, what are CDS, and what was their specific role in this highly profitable operation for Bill Ackman, which also played a crucial role during the financial crisis of that year?
In 2008, credit default swaps (CDS) were bilateral contracts that transfer credit risk between two counterparties: one that buys protection and pays a periodic premium, and another that sells protection and receives a payment in the event of a credit default swap. I also suggest you check out a video we recently published telling the story of Michael Barry and how he discovered a potentially catastrophic event with subprime mortgages very early on.
Because he discovered it early, he designed the derivative instruments called CDS. He designed them and then began buying them from various financial institutions. Check out this video because I'm absolutely sure it will make what I'm explaining much clearer. People of Lugo, we should understand this as if we discovered that a neighborhood was built on a riverbed and that the worst storm in 30 or 50 years is approaching.
This storm will cause the river, which is currently dry and allowed the construction of those houses and that neighborhood, to dry up. The storm will cause that river to come back to life, and when this happens, it will sweep away this neighborhood and all its houses. In this scenario, let's imagine that we don't own any of those houses built in that neighborhood on the riverbed.
But even though we don't own them, we start buying all-risk insurance for each of these houses: insurance against weather events, insurance against earthquakes, insurance against the collapse of those houses, etc. Then, when this event occurs and the river sweeps away the houses, we collect on all the insurance policies we've purchased.
In this case, what Bill Ackman did was buy insurance for all his investments, and he did own those houses. So, even though his houses were also destroyed, like the rest of the investments of the other investors in the market, he did have insurance to protect his investments. When his investments fell, he activated credit protection operations through these derivative instruments called credit default swaps, or CDs.
And in this way, these insurance policies, which only cost him around $27 million, allowed him to generate profits of approximately $2.6 billion. What Bill Ackman says is that his portfolio has been hurt by the current stock market downturn, just like the rest of the investors, but that the profits generated in his holdings compensated for the losses.
What he's doing now is using this liquidity to buy stocks that, from his point of view, represent a great opportunity in terms of price, and he expects them to generate significant appreciation in the future. This is what Bill Ackman did; many operators and traders also did it during the 2008 financial crisis, buying mortgage insurance that, after analysis, turned out to be worthless.
Then, when time puts everyone in their place and the price of these mortgages approaches zero, all they have to do is collect on their insurance, and that's how they lined their pockets. Bill Ackman comments that lately he has received a lot of criticism because people say he has benefited while others have been harmed, but the reality is that he is not to blame, nor was he the one who caused the coronavirus.
Furthermore, he has publicly stated, every time he has had the opportunity, that the only The way to attack this virus is by closing the economy, which means putting everyone in quarantine to prevent infections and stop the situation from getting worse. He's always said this, but according to him, he didn't do it to create chaos or panic; it was simply his perception as a citizen.
From an investment trading perspective, he did what I, and I think anyone else in his position, would have done if you discover a phenomenon that could potentially harm you and your clients. The normal thing to do is to do everything necessary to protect your investments and your clients' investments.
In this case, what he did was buy insurance for his investments. I hope this video has been understandable because, in truth, it tries to explain a type of operation in a very simple way. Essentially, it's complex because credit default swaps are more complex than, for example, stock options, which would have been another instrument that Bill Ackman, and any of us, could have used to protect ourselves if the price of our investments fell and caused us significant losses.
Anyway, I hope this has been understood. I hope this helps you understand a little more about how markets work, what the drivers are that cause upward and downward movements at any given time. For those interested, you can find Bill Ackman's company or the Bill Ackman Investment Fund, as it's a publicly traded company.
As you can see, its stock price has also been heavily affected by the coronavirus. However, after that, with the strong profits generated by his bets, the market has rewarded him. This is a rapid, vertical upward movement, and of course, any of us can buy his shares on the stock market. As always, if you find this video valuable, if you're learning, if I'm contributing to your knowledge, remember to give us a thumbs up, share this information on your social networks, and subscribe to our channel if you haven't already.
I also suggest that if you want to further improve your knowledge, you enhance the way you make decisions and how you calculate risks when making these decisions. If this is your situation and you think you can learn more with me, then I invite you to take our seminar, "How to Invest in the Stock Market for Non-Experts." I 've left a link below this video with all the details.
If you have any questions, write to us at [email protected]. Thank you very much for your attention. See you in the next chapter. Until next time.
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