On March 31, I told you how hedge fund manager Bill Ackman had just pulled off the “trade of the century” by turning a $27 million bet into $2.1 billion in less than a month.
Ackman hit that grand slam by making a bet before COVID-19 hit the United States… a bet that the financial markets would crash.
By the time we learned about his trade, the financial world was falling apart.
And today, Ackman just placed another big bet on a major financial market meltdown happening in the coming months.
But this time, we saw it coming…
Ackman Trade 2.0
Ackman revealed his new bet against the markets at a recent conference.
He said that while his new bearish bet isn’t as big as the wager he placed back in March, the terms of the trade are identical.
Specifically, he believes that the corporate bond market will crash.
So he holds credit default swaps, which are essentially insurance that an investor can purchase for protection against a bond issuer defaulting.
Ackman said there are three reasons he is putting this trade on again…
- Despite COVID-19 surging and economies everywhere struggling, financial markets have soared to all-time highs. Ackman believes this sets us up for a huge correction as investors realize everything is far from hunky-dory.
- He is also concerned that positive news about the effectiveness of multiple vaccines could lead the public to let their guard down too early and ignite an even bigger increase in cases.The rate that COVID-19 is spreading now is bad, but Ackman thinks it could get a lot worse.
- Ackman was able to purchase his credit default swaps at the same prices he bought them at back in early March before the pandemic even started. To him, this is like being able to buy homeowners insurance at normal rates when your house is already on fire.
This allows Ackman to make a very small bet that can pay off huge… His specific bet is against the credit markets, but if he is right and the credit markets crash, you can bet that stocks will be falling hard too.
Should We Be Worried?
When I first wrote to you about the Ackman windfall trade, I suggested that his investment vehicle Pershing Square Holdings (OTC: PSHZF) was a terrific bargain.
I couldn’t be happier with how that has played out…
On March 31, 2020, Pershing Square Holdings was trading at $18. Today, shares are at $30 – a 66% increase from when I mentioned them less than eight months ago.
Pershing Square Holdings has outperformed because Ackman tends to make good investing decisions. He isn’t right 100% of the time, but his long-term performance commands respect.
The big question today is whether Ackman will be right about the market crashing again before the pandemic is finally over…
For months now, I’ve been warning about the valuations of certain sectors and companies. The most popular stocks of today are extremely expensive.
In other words, they are ripe for a major correction.
Most concerning are the Big Tech stocks that now dominate the S&P 500…
The electric vehicle companies that are all promise and no profit…
The stay-at-home stocks that have been bid up to astronomical levels…
And the empty-shell special purpose acquisition companies (SPACs) that are all the rage.
Investors need to avoid buying overvalued stocks like these. Overvalued stocks perform the worst in a market correction because their share prices aren’t supported by fundamental valuations.
Instead, investors should look for value in opportunities like Pershing Square Holdings, which still trades at a huge discount to the value of its assets.
It also gives you the chance to profit from Ackman’s new bet against the markets.
And always remember… Even if Ackman is right and the markets do have a big correction or even a crash, they always recover.
Over the long term, the stock market is rigged in our favor. Despite bumps in the road, the market just keeps churning higher on average by roughly 10% per year.
We don’t win this game by timing the market. We win it through time in the market.