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The Invaluable Lesson Warren Buffett, Bill Ackman, and Carl Icahn Can Teach Investors

By Sean Williams – Mar 31, 2016 at 9:21AM

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Buffett, Ackman, and Icahn are among Wall Street's winningest investors, but it's their losses that provide the most teachable lessons.

Image source: Flickr user Sebastiaan ter Burg.

Warren Buffett, Bill Ackman, and Carl Icahn are among the most well-respected and followed investors on Wall Street -- and with good reason.

Buffett, also known as the Oracle of Omaha, has transformed a nest egg worth less than $10,000 approximately six decades ago into a net worth that now surpasses $60 billion. His strategy of picking out solid businesses and holding them for exceptionally long periods of time, allowing time and compounding to work in his favor, has become iconic.

By contrast, Bill Ackman and Carl Icahn have forged their own paths as business entrepreneurs and more recently as activist investors who seek to improve or unlock the value of companies they hold substantial stakes in. According to recent data from Forbes, Icahn was sporting a net worth of $17.9 billion as of the now-passed long holiday weekend, while Bill Ackman seems like a veritable pauper next to these two Wall Street stalwarts with a net worth of only $1.6 billion.

When these three Wall Street giants speak, investors listen.

One invaluable lesson these Wall Street mavens can teach investors
But Buffett, Ackman, and Icahn can also teach investors a valuable lesson: humility.

Despite being renowned investors who have created billions in value, they're still wrong from time to time.

Warren Buffett, the head honcho of conglomerate Berkshire Hathaway (BRK.A -0.82%) (BRK.B -0.90%), violated his No. 1 rule of investing when he took a mammoth $444 million loss on U.K.-based grocer Tesco (TSCO -0.48%) after a turnaround he and his management team expected to occur never materialized. Tesco ultimately issued four profit warnings and announced a possible accounting scandal, and this was all before Buffett took the plunge. Ultimately, Buffett blamed "dawdling" on clear red flags for the loss in his 50th annual letter to shareholders:

"An attentive investor, I'm embarrassed to report, would have sold Tesco shares earlier. I made a big mistake with this investment by dawdling."

Of course, we also know that Buffett's not alone in making investment boo-boos.

Image source: Flickr user Insider Monkey.

Bill Ackman, the man behind hedge fund Pershing Square, is taking all sorts of heat at the moment for drugmaker Valeant Pharmaceuticals' (BHC -1.59%) nearly 90% implosion since last summer. Ackman's hedge fund owns a sizable stake in Valeant, and his personal net worth has taken a roughly $1 billion hit since the year began.

Valeant, which predominantly acquires drugs and, from time-to-time, raises the price of the therapies it acquires, is having its drug-pricing practices scrutinized by U.S. lawmakers. Furthermore, an internal audit uncovered a $58 million revenue accounting error with a drug distributor that it no longer has a relationship with, causing the company to delay its annual report filing. This delay could cause its nearly $31 billion in debt to move into a covenant default status, which may necessitate quicker repayment to its lenders. In short, Ackman has been way off on Valeant thus far.

Even Carl Icahn has had his slip-ups. Icahn has been a major investor in commodities lately, and commodities absolutely thrashed the billionaire in 2015. Two of Icahn's largest holdings, Freeport McMoRan (FCX -1.03%), a copper giant where Icahn has about a 9% stake, and natural gas giant Chesapeake Energy (CHKA.Q), a company where Icahn owns about 73 million shares, have been pounded. Natural gas prices earlier this year hit lows not seen in 17 years, and copper prices dipped briefly below $2 a pound. Not surprisingly, these commodity-pegged holdings have been crushed over the last year, with Chesapeake Energy down 70% and Freeport-McMoRan off nearly 50%.

The importance of humility
Buffett's, Ackman's, and Icahn's flaws serve as the perfect teaching tool for assessing the value of humility.

Image source: Flickr user Sebastiaan ter Burg.

To begin with, humble investors fully understand that they're not going to be right every time. Even the best stock pickers in the world are only going to be right perhaps two out of every three times. It's important that investors understand when the time is right to move on from an investment rather than stubbornly hanging onto a position just because you don't want to suffer the indignity of selling at a loss. If you're a long-term investor in the stock market, you're going to lose money on an investment, or a number of investments, at some point. Period!

Also, it's important to realize that we're lifetime students of the stock market. Take Buffett as a good example. The man could be a compendium of all human investing knowledge when it comes to fundamentally assessing the value of a business. And guess what? He still loses money from time to time. Why? Because there are "X factors" and scenarios that we simply can't foresee coming. There are no guarantees when it comes to investing, but we can certainly use the tools available to us (financial reports, conference calls, key metrics and comparisons) to help pick out businesses that have what appear to be the best long-term prospects.

You don't have to beat Warren Buffett, Bill Ackman, or Carl Icahn on a return basis to be a successful investor. You simply have to find a way to outperform inflation over the long-term while ensuring your winners keep producing and your losers don't become a drag. Investing with humility in mind can go a long way to helping make this happen.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of and recommends Berkshire Hathaway and Valeant Pharmaceuticals. It also owns shares of Freeport-McMoRan. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Stocks Mentioned

Berkshire Hathaway Stock Quote
Berkshire Hathaway
$464,837.50 (-0.82%) $-3,862.50
Berkshire Hathaway Stock Quote
Berkshire Hathaway
$307.78 (-0.90%) $-2.79
Bausch Health Companies Stock Quote
Bausch Health Companies
$7.43 (-1.59%) $0.12
Freeport-McMoRan Stock Quote
$38.46 (-1.03%) $0.40
Chesapeake Energy Stock Quote
Chesapeake Energy
Tesco Stock Quote
$229.00 (-0.48%) $-1.10

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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