What Is The Best Stock Market Trade of All Time?

Bill Ackman's COVID Trade is the Greatest of All Time

When you take a step back and think about how much money can be made in the stock market, it's actually staggering. Every day, companies are vying for your attention and dollars in order to drive their share prices higher and higher. There are also private companies, like hedge funds, that try to convince you that they know the game better than you do so you'd better hand over your cash to them now. Yet, most individual investors lose to the market year over year, meaning you're better off just investing in index funds.

However, there are some investors out there that have struck gold. Some of the most famous examples include hedge fund legend Jim Simons, who used his Ph.D in math to obliterate the market year over year and is now worth north of $25 billion, as well as Scion Capital's founder, Dr. Michael Burry, who called the 2008 housing crash and made an immense profit while everyone else collapsed (and then was the subject of one of the greatest movies of all time).

The Big Short - part comedy, part real life horror movie

Despite these incredible traders, and the trades that came later, they still pale in comparison to the greatest individual trade of all time, which happened more recently than you'd think.

Who Is Bill Ackman?

William (Bill) Ackman is a hedge fund manager, currently serving as the CEO of Pershing Square Capital Management. His investment style is "activist," meaning he purchases large percentages of currently distressed companies in order to institute practices to turn the company around. Essentially, his goal is to purchase companies for pennies on the dollar and then build them back up to the full dollar. This approach has mostly worked for Ackman, despite some high profile issues that publicly tanked his company and his image.

Bill Ackman, CEO of Pershing Square Capital Management

In 2010, many in investment media blamed Ackman for pressuring Wendy's International to sell-off its most promising arm of the business, Tim Horton's, which resulted in a stock price collapse. Also in 2010, Ackman's Pershing Square purchased 18% of J.C. Penney's to attempt a turnaround plan, only for Ackman to step down in 2013 after reported in-fighting with other J.C. Penney's board members.

In 2012, he had his highest profile misstep when he publicly announced that his company shorted nutrition company Herbalife. Along with the short announcement, Pershing Square released a video from a decade prior which included internal Herbalife employees doubting the business model and calling the company "unsustainable." This led to a federal investigation by the U.S Attorney's Office of Manhattan and the FBI into fraud claims around the video, as well as public condemnation by Herbalife shareholder and fellow old, rich man, Carl Icahn. Following the investigation and Herbalife's share price increase throughout 2017, Ackman told financial media that he had closed his short-position, insinuating that he had lost "between $400-$500 million" on the play.

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Bill Ackman's Previous Big Winner - Chipotle

However, Ackman has also had some big, big wins in the market, most notably of which was his investment in Chipotle. Opening their position in 2016, Pershing Square purchased 10.2% of the quick-service Tex-Mex chain not long after they had their salmonella scare and were forced to close their restaurants for an extended period of time. The chain had lost so much consumer trust that Telsey Advisory Group's Bob Derrington said "hope is fleeting" in the company. Ackman was derided for the decision, with Business Insider even publishing a headline that "Wall Street 'cannot fathom' why Bill Ackman invested in Chipotle," which is hilarious because I'm writing this as I'm eating a burrito bowl with an extra $3 guacamole addition.

Ackman came in and cleared house. Brian Niccol, the former CEO of every millennial's favorite 2am hammered restaurant Taco Bell, came in as the new CEO. They established new menu items, streamlined production, added drive-thru's and added delivery, as well as a rewards program. And it worked.

Chipotle returned over 37% through their earnings call in early February, skyrocketing from their $434 purchase price that Ackman had jumped in at. Where is it at today, February 2022? Right around $1,500, giving Ackman more than a 3x return on capital.

Net returns from Pershing Square's 2019 London Investor Meeting

So that's awesome, right? But what if I told you that Ackman's greatest trade was still to come, and that it netted a literal 100x return in one month?

The Greatest Trade of All Time

An investing idea can come from anywhere. Maybe you or your partner use a product you really like, or you saw someone make $1 million on YOLO Tesla call options. For Ackman, it came from watching a movie.

I didn't think we'd hit two movie references in this one, but here we are

In early 2020, a new pneumonia was sweeping through China's province of Wuhan, and it was beginning to move internationally. Upon news of the new virus, SARS COV-2, Ackman stated in a later interview that he recalled "the Matt Damon 'Contagion' film," and he began to panic.

He took $27 million of Pershing Square's cash allocation and opened a position in credit swaps on investment-grade and high-yield bond funds, and is usually used as a hedge. This technique isn't often used, but does come in handy if you think hell is about to open up and swallow the country, much like it did in 2008 when the housing market collapsed. Essentially, it's a bet against credit markets: the more the credit markets tank, the higher your asset prices rise. Well, we all know what comes next.

An illustration of Ackman's timing on the hedge (via MarketWatch)

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Ackman opened this position in early-March 2020, while life was still pretty normal. However, Ackman hopped on CNBC on March 18 to let the world know that hell is coming, and something has to be done in an emotional plea to then-President Donald Trump:

His plea did not fall on deaf ears. The Trump Administration moved to lockdown Americans for a period of time to "flatten the curve," and keep all essential operations open. During this time, everything tanked. Consumer spending stopped dead in its tracks, the stock market cratered and bond markets collapsed.

During the collapse, Ackman and Pershing Square made out like bandits. The credit hedge he enacted skyrocketed in value from $27 million to $2.7 billion, returning a 100x profit in less than a month. This helped offset the losses from the other Pershing Square portfolio companies (heavily leveraged in hotels and travel), which resulted in a net gain of 7.9% for the quarter for Ackman's fund.

The Controversy Around the Trade

You can probably see where I'm going with this, but questions were raised after the fact around the timing of the trade and Ackman's appearance on CNBC giving his impassioned plea. Critics accused Ackman of intentionally fearmongering in order to benefit his position, including YouTube real estate mogul Grant Cardone:

Ackman himself penned a six page letter in defense of the hedge, as well as his speech on CNBC, and then boiled that down into a Twitter thread because we collectively have the attention span of a lemon and who has time to read six pages?

The Bottom Line

Morale dubiousness of the trade aside, this was genius. Ackman saw an opportunity and seized it, which is the goal of investing, right? And on the moral front, this really wasn't as bad as trades we've seen in the past. Ackman himself has the Herbalife example I went over earlier, George Soros almost single-handedly bankrupted the entire country of England and Jim Chanos used stock shorting to shut down an energy company in the early 2000's called "Enron."

What Ackman, and the other investors I just outlined, did was find an edge. They identified a weakness and they hammered it like Donny Creed on The Russian until it broke and they won. And that's the goal of any investor, right?