When we have a view on something in the world then we are getting attached to that view. So that when we get any dis-confirming evidence against our view then also many a time, we hesitant to accept it. We are overconfident on their own view that we do not accept any opposing view.
Majority of people love to share their success but not their failure. People intend to hide their failure. We love to share our success because it gives us a social recognition and self-esteem. We feel guilty for our failure and stop ourselves from sharing it with people. Also, we feel fearful about the mistake or meeting the failure.
Bill Ackman had started a hedge fund with the name of Gotham in the year 1993 and he turnouts the $3 million to the $568 million at the peak of the year 2000. He becomes more confident and started taking positions to the illiquid investment as concentrated bets at a wrong time; such behavior has affected him with the closure of Gotham hedge fund.
In the year 2004, Mr.Ackman has started another fund with the name of Pershing Square Capital Management and become one of the most activist investors. He acquires large enough shares of the company and asks to the management to become more shareholder-friendly and if management fails then Mr.Ackman get on to the board.
Few of the companies where of Mr.Ackman was done an activist investment such as Wendy, McDonald, MBIA Inc., Target, Sears, Valeant, J. C. Penney, and Herbalife.
Above mentioned companies earn a gross margin of around 42-46% whereas Herbalife earns around 80%. Mr.Ackman shows that top-selling product of Herbalife is Formula 1 shake which is not much known. And they sell this product 10-20 times compared to the competitor brand such as Oreos, Charmin, Crest, Gerber, Palmolive, Betty Crocker, Listerine, and Clorox which is manufactured by GNC, Unilever, and Abbot Labs. Herbalife is not selling products to the consumer but they sell products to the distributors, their distributor is all over the globe.
Mr.Ackman has read all available information, he gets into the science of products, R&D for the product, read annual reports, SEC filing, etc.
Mr.Ackman has given a three-hour presentation to people, interview to CNBC, CNN, and Bloomberg, etc. Now, how Mr.Ackman can admit defeat after telling everybody about the Herbalife. And also stock had declined by around 35% after his presentation. But during that panic selling movement, Dan Loeb, founder of the hedge fund Third Point LLC has bought 8.24% of the Herbalife and becomes a second largest shareholder. Herbalife stock price rose by 20% in five days. After that filing shows that activist investor Carl Icahn took a 12.98% stake in Herbalife.
Mr.Ackman has made a public commitment regarding his investment idea which has mentally created pressure on him and this pressure has to stop him by making a proper decision.
Due to the public commitment and also a fear of losing a reputation, he faced difficult to cover his wrong position. If we keep on making our moves commitment to the public then we may face difficult to change moves when we may go wrong. We should focus on not making a commitment in public which helps us to change our move and saved our capital. When our odds go against us, it will cost us mentally, emotionally and financially. Mr.Ackman was on short after three years also. We will go wrong, we can meet failure but such kind of public commitment can stop us from accepting our failure and saved our remaining capital to restart again.
Read for more detail: Big Mistakes: The Best Investors and Their Worst Investments by Michael Batnick