Bill Ackman's Critics Had "Extreme Skepticism" About These 3 Investments, but He Still Made Billions on Them

"A contrarian approach is just as foolish as a follow-the-crowd strategy. What's required is thinking rather than polling."

-- Warren Buffett

If you're going to be a successful investor, you'll have to get used to choosing a path that others disagree with. As investing great Warren Buffett reminds us, being contrarian for contrarian's sake isn't the goal. But being willing to blaze your own trail when the facts demand it is crucial.

Billionaire Bill Ackman manages hedge fund Pershing Square Capital Management, and he's comfortable with the idea of contrarian investing. On June 18, Ackman used his Twitter account to talk about his three best investments ever. These investments, he says, were met with "extreme skepticism." 

These investments may have had critics. But Ackman made billions of dollars by pressing forward anyway. Here are his top three investments according to him and how much he made on each.

1. Investing in General Growth Properties: $1.6 billion

In late 2008, commercial real estate company General Growth Properties was spiraling toward bankruptcy. That's when Ackman decided it was time to buy. Then in April 2019, the company indeed filed for Chapter 11 bankruptcy protection, making it the largest bankruptcy ever in the real estate sector.

In 2014, Ackman reportedly told Bloomberg that he had invested $60 million in General Growth Properties -- both in the company's unsecured debt and in the stock itself. Having invested so much, Ackman joined the board of directors after it declared bankruptcy, according to The Bankruptcy of General Growth Properties by NYU Stern.

To summarize the situation, General Growth Properties ran into liquidity problems after Lehman Brothers' bankruptcy in 2008. But Ackman believed the company still had valuable assets. 

By advocating for the value of the assets, Ackman was able to contribute to a bidding war for General Growth Properties. It eventually emerged from bankruptcy in the second half of 2010. When he finally exited his stake in 2014, Ackman says he made $1.6 billion.

I'd be remiss to mention that this isn't a common outcome with bankruptcy -- investors in the common stock can lose everything. Hence, you'd be forgiven if you had "extreme skepticism" regarding Ackman's investment in the company as it headed toward bankruptcy.

2. Betting on the downfall of MBIA: Over $1 billion

In 2002, bond insurer MBIA had an AAA credit rating. According to credit rating company Fitch, an AAA rating is "assigned only in cases of exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events." 

Ackman decided to take the other side of that bet. Running Gotham Partners Management at the time, he published a huge short report on MBIA in December 2002. Among the problems that Ackman saw was an enormous amount of leverage. He said the company's liabilities-to-equity ratio was 139 to 1. Just a simple credit downgrade would be catastrophic with that much leverage.

While Wall Street largely scoffed, Ackman was eventually proven right. But here's the catch: It would take a whopping six years before the circumstances of the Great Recession brought down MBIA's house of cards.

This is a reminder of one of the big risks of shorting a stock. You can be completely right about why a stock will go down, but the timing of a drop is unpredictable. That said, it still worked out quite well in Ackman's case. He reportedly covered his short position in January 2009, profiting over $1 billion.

3. Hedging against the 2020 market crash: $2.6 billion

Finally, Ackman expected the outbreak of the COVID-19 pandemic to crash the stock market, so he invested $27 million hedging against this and wound up profiting $2.6 billion a mere 20 days later -- an incredible 96 times his investment.

It's fair to note that, early on, not everyone believed COVID-19 would spread like it did. Ackman took the stance that he did believe it because he's a health expert. Rather, his general approach to investing it to listen to arguments and counterarguments from experts. This allows him to make informed decisions.

As Ackman wrote on Twitter, "From my experience, knowledge is advanced, and insights are gleaned by studying alternative points of view from conventional and unconventional sources of information."

My favorite part of this story is that Ackman used his windfall gains to buy and hold some of his favorite stocks, including Berkshire Hathaway, Lowe's, Starbucks, and Restaurant Brands International.

You see, extremely asymmetric investing opportunities are exciting -- who wouldn't want to 96x their money? But as author Morgan Housel reminds investors in his book The Psychology of Money, "Good investing isn't necessarily about earning the highest returns, because the highest returns tend to be one-off hits that can't be repeated."

It's like when investor Charlie Munger talked about a time he earned 100x on one of his investments: "The trouble with that story is that it only happened once."

Ackman's greatest investments were incredible. But opportunities like that are rare, and they don't substitute for a long-term approach to investing. Even for investors like Ackman who hit monster home runs by betting against conventional wisdom, it's still important to be identifying great companies to patiently buy and hold for the long term, allowing the power of compounding to work in your favor.