How Bill Ackman's Pershing Square Proved Less Can Be More

Conventional wisdom often preaches the gospel of diversification. But for some of the most successful investors, this mantra falls on deaf ears. One such contrarian is Bill Ackman, whose Pershing Square Capital Management has demonstrated that sometimes, less truly is more, echoing Philip Fisher's sage advice: "Don't overstress diversification."

Ackman's approach to investing is akin to a master chef who focuses on perfecting a handful of signature dishes rather than offering an extensive menu of mediocre options. In 2014, Pershing Square held just seven stocks, a portfolio so concentrated it would make most financial advisors break out in a cold sweat. But this laser-focused strategy paid off handsomely, with the fund returning a staggering 40.4% that year, compared to the S&P 500's 13.7%.

The crown jewel of Ackman's 2014 portfolio was his bet on Allergan, the maker of Botox. This single investment accounted for nearly 30% of Pershing Square's capital. When Valeant Pharmaceuticals attempted a hostile takeover of Allergan, Ackman's deep understanding of the company and its value allowed him to navigate the situation masterfully, ultimately netting his fund a profit of $2.6 billion.

By concentrating his bets, Ackman was able to dive deep into each company, understanding its business model, competitive advantages, and potential pitfalls in a way that would be impossible with a broadly diversified portfolio. It's like the difference between knowing a few close friends intimately versus having a passing acquaintance with hundreds of people.

Ackman's approach embodies the philosophy that it's better to be an expert in a few areas than a jack of all trades, master of none. In investing, this translates to having a few high-conviction ideas rather than spreading your bets too thin. It's like putting all your eggs in a few baskets – but watching those baskets very, very carefully.

However, this strategy is not without risks. In 2015, Pershing Square's concentrated bet on Valeant Pharmaceuticals backfired spectacularly, leading to significant losses. But even this setback demonstrates the power of concentration – both for good and ill. When you're not overly diversified, you have the potential for outsized returns, but also for outsized losses.

That’s true wealth creation often comes from making a few big, well-researched bets rather than spreading your investments too thin. It's about quality over quantity, depth over breadth.

This doesn't mean you should put all your life savings into a single stock. For most investors, some level of diversification is prudent. But Ackman's success suggests that there's a sweet spot – a level of concentration that allows for deep understanding and conviction without putting all your eggs in one basket.

In investing, as in life, it's not about how many shots you take, but how well you take them. By focusing on a select few high-quality investments, you give yourself the opportunity to truly understand what you own and why you own it. And that, more than any amount of diversification, is the real key to long-term investing success.

So next time you're tempted to add another stock to your portfolio just for the sake of diversification, remember Bill Ackman and his concentrated bets. Sometimes, the path to extraordinary returns is paved with fewer, but better, choices.