When hedge fund manager Bill Ackman warned his shareholders Tuesday that 2015 would likely be his worst ever, most investors probably had the same reaction: "I'm glad I don't have any money with that guy."
But celebrity investors like Bill Ackman - who has built a reputation as one of the top activist investors - tend to have a following. A lot of investors derive inspiration from such celebrity investors, following their every move.
For a select few celebrity investors, such as Warren Buffett, that strategy can work. Buffett in particular, with a buy-and-hold philosophy that focuses on large, stable companies, is an excellent role model for investors.
But most of the well-known hedge fund managers and activist investors take the kind of big risks that average investors should avoid. While they may have stunning successes, they also have spectacular failures.
Bill Ackman's past two years are the perfect illustration of this.
In his letter to his Pershing Square shareholders, Ackman confessed that the fund was down 20.8% through November.
"If the year finishes with our portfolio holdings at or around current values, 2015 will be the worst performance year in Pershing Square's history, even worse than 2008 during the financial crisis," Ackman wrote.
Pershing Square fell more than 12% in 2008.
One reason Bill Ackman had such a lousy year was his big bet on a single stock: Valeant Pharmaceuticals International Inc. (NYSE: VRX). Ackman has a 9.9% stake in Valeant, which comprises about a quarter of his holdings.
Valeant stock is down 19.3% on the year, despite a recent rebound.
The next two largest holdings, Air Products & Chemicals Inc. (NYSE: APD) and Canadian Pacific Railway Ltd. (NYSE: CP), are also down for the year. Air Products is off 8.78%, while Canadian Pacific has slumped 33.98%.
Those three stocks together make up 58% of Bill Ackman's Pershing Square portfolio.
That lean line-up - Bill Ackman's hedge fund currently holds just eight stocks - means investors can easily mimic his moves. But as we've seen, doing so would have been costly.
And yet 2014 was a banner year for Bill Ackman.
The Pershing Square fund enjoyed an impressive 40% gain last year, fueled mainly by a big payoff on his stake in drugmaker Allergan Plc. (NYSE: AGN). Allergan agreed to a $70.5 billion merger with Actavis Plc. in November 2014.
But several of Bill Ackman's other holdings also performed well in 2014. Platform Specialty Products Corp. (NYSE: PAH), which made up about 7% of Ackman's portfolio, rose 61% in 2014. He was rewarded with a 40% gain for holding Burger King Worldwide when news of its acquisition by Tim Hortons owner Restaurant Brands International Inc. (NYSE: QSR) broke that August.
That's the sort of performance that makes imitation of a hedge fund manager like Bill Ackman so tempting.
Investors often fall into the trap of chasing performance, but don't forget the axiom, "Past performance is no guarantee of future results." It's worth remembering when tracking celebrity investors.
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