Valeant: Traders Vs. Portfolio Managers

Valeant Pharmaceuticals Intl Inc VRX plummeted 11 percent Tuesday after notable hedge fund manager Bill Ackman exited his large position of the pharmaceutical company at a loss that could be in the billions of dollars.

Valeant's stock peaked north of $250 per share in 2015 and on Tuesday traded as low as $10.50, which marks its lowest level since May 2009.

"The Reformed Broker" Josh Brown provided some interesting insight as to when traders and portfolio each dumped their Valeant positions. While this post is actually from October 2015, it still provides a good lesson on trading versus investing.

Traders

According to Brown, most traders likely sold Valeant in 2015 at around the $210 level. Specifically, traders likely realized the bullish party is over in Valeant's stock when the stock gave up around $40 per share and was trading at the 200-day moving average of $208.74.

Brown said traders are in the "capital preservation business" and the most important rule is that when a stock stops going up, it's time for traders to get out.

Portfolio Managers

Portfolio managers aren't traders, but perhaps in this case they should think like them. Portfolio managers conducted their own research on Valeant, spoke with management and likely other industry experts.

"When a stock they've learned about goes down, they buy even more," Brown argued. "They stick to their guns and make some phone calls. They get the 'reason' why the stock is down and decide it's overblown. They talk to their own investors about the 'opportunity' the market has created."

The problem is that while traders have moved on from Valeant, portfolio managers need to maintain the appearance that their original thesis was right. Otherwise, their investors and clients might start thinking the "magic man has lost his touch."

Related Link:

A Brief Timeline Of The Bill Ackman-Valeant Relationship

How Much Money Did Bill Ackman Lose In Valeant?