“The guy is a major loser”. That’s what Carl Icahn called fellow billionaire investor Bill Ackman in Wall Street’s most famous fight. Few get tempers tetchier than Ackman: his contrarian approach to investing has attracted plenty of enemies. But if you can get past his “sanctimonious” demeanor (Icahn again), there’s a lot to be learned from Bill: you don't become a self-made billionaire without doing something right.
Who is Bill Ackman? He’s the 53-year-old founder and CEO of Pershing Square Capital Management, a $9 billion investment firm. Over the past twenty years he’s made a name for himself as one of the most outspoken and headstrong investors around, making one risky bet after another. And while those haven’t all worked out, Ackman’s done pretty well overall: delivering his investors a 635% return since 2004.
How did he manage that? Ackman’s investment philosophy isn’t too different from Warren Buffett’s – no surprise, as both of them describe Ben Graham’s book The Intelligent Investor as having had a big influence on their way of operating.
Ackman’s a “value investor”: he looks for good, hard-to-compete-with companies that he thinks the market’s underestimating. He then holds on to investments in those firms while they grow in value. Ackman doesn’t like the term “hedge fund”; he prefers to refer to Pershing as an “investment holding company”, to highlight this lack of short-term flips.
"I'm not a trader."
- Bill Ackman
Ackman puts his own spin on the Buffett approach, however: he’s an “activist investor”.
What is activist investing? It’s not about placards, sit-ins, and protest marches (although sometimes there can be a bit of all three). Ackman doesn’t just buy a couple of shares of the companies he invests in – he looks to buy up big meaty chunks, often becoming a business’s largest shareholder. That gives him a lot of influence over his investments: he’s able to get board seats, steer management in a certain direction, and generally use his financial clout to bend companies to his will. If that activist vision improves business performance, he adds value to his investments – and everyone’s happy.
Why should I care? Learning how masters of the craft work can be a great way to improve your own investing – as readers of our Warren Buffett Pack will already know.
Bill Ackman is a particularly good person to learn from: he’s super transparent about what he does and how he does it. And even when he messes up, he explains what he’s learned and how he’ll change. Better to learn from his mistakes than your own, right?
On top of that, you can actually buy a stake in Bill – his main fund, Pershing Square Holdings, is publicly listed on the Amsterdam and London stock markets, so if you like what you hear, you can share in his success. (The fund is straightforwardly invested in just nine stocks, and Restaurant Brands, Starbucks, Chipotle, Hilton and Lowe’s account for 75% of its assets.) As with anything, if you’re interested in investing in Ackman it’s sensible to learn how he thinks first – and the best way to do so is to look at his track record.
In this Pack we’ll take a good look at some of Ackman’s biggest hits and misses, picking out the nuggets of investment wisdom they hold. With any luck, you’ll be a better investor by the time we’re done. Who knows – like Bill, you might even be able to make a fortune from predicting the next financial crisis…
The takeaway: Bill Ackman is an activist value investor, who uses his influence to (try to) make companies better.
Did you say Bill Ackman predicted the last recession? Sort of. In the early 2000s, Ackman started investing in a company called MBIA. It was one of the titans of Wall Street: an unimpeachable firm with a top-notch credit rating. MBIA was in the insurance business: when banks wanted to buy bonds that were at risk of default, they’d go to MBIA, which would promise to cover the bonds in case they stopped paying out.
MBIA’s rubber stamp was worth its weight in gold: it could turn dodgy bonds into “safe” ones just like that. And the company claimed that it only insured bonds that looked risky – and that in reality, there was little chance of anything going catastrophically wrong...
But Bill wasn’t so sure. He started researching MBIA, reportedly reading a whopping 140,000 pages of information about the company. He found that it held just $1 in the bank for every $140 of debt it insured – meaning that a wave of defaults and payouts could destroy the company. If just 0.2% of its insured bonds required payments, MBIA would lose its top credit rating, putting its whole business in jeopardy. And according to Ackman, some of those bonds weren’t as watertight as they seemed.
So in 2002, Ackman bet on the company going bankrupt. And then he waged an awareness campaign, shouting the unseen risks at MBIA to the rooftops in an attempt to make sure it did go bankrupt. It wasn’t an easy battle: Ackman was mocked by his peers and even investigated by the authorities for manipulating stock prices (although nothing came of it).
After a six-year slog, however, he was proved right. When the financial crisis hit and MBIA’s dodgy loans started to default, the company’s stock price tanked and its AAA credit rating vanished. In 2007 shares were trading for $70 a share; come 2009, they were as low as $2.50. Ackman walked away with around $1.1 billion.
What can I learn from this? Going against the crowd can be scary – Ackman was like a modern-day Galileo with his MBIA bet. But when those bets pay off, they can pay off big. You've just got to be able to withstand the derision and self-doubt that invariably comes with being a contrarian.
“Investing is a business where you can look very silly for a meaningful period of time before you're proven right.”
- Bill Ackman
The best way to have that confidence is to do your research, Ackman says. All that reading he did for MBIA might sound OTT, but it was clearly the right move: by the end of it, Ackman was so confident that he understood MBIA better than other investors that he felt secure in ignoring the criticism coming his way. And while no one expects you to read thousands of pages of financial statements, even a few hours of research can empower you to spot the opportunities that others are missing.
That doesn’t always work out, mind you… it certainly didn’t for Bill.
The takeaway: If you do your research and aren't afraid to go against the crowd, you can win big.
Remember how Carl Icahn called Bill a loser? That insult was in the context of a major battle about the massive nutritional supplement company Herbalife. Herbalife is a “multi-level marketing company”: it recruits sellers (paid only through commissions), who in turn recruit sellers to pay them commissions, who in turn recruit sellers… with the theory being that eventually someone down the line will buy and use the product.
If that sounds a bit like an Ancient Egyptian construction scheme to you, you’re not the only one: Bill Ackman was convinced of its geometric properties. So much so that he bet the authorities would crack down on Herbalife, sending the value of the company plummeting. Icahn, meanwhile, thanks to a previous (and messy) grudge with Ackman, started buying up Herbalife’s stock instead, eventually becoming its biggest investor.
What happened? Just like with MBIA, Ackman tried to raise public awareness of Herbalife’s model – even prompting a government investigation into the company. But while regulators shared many of Ackman’s concerns, they stopped short of calling the company a pyramid scheme. That meant Herbalife could keep operating – destroying Ackman’s chances of a win. In 2018, he admitted defeat and exited his position with massive losses – perhaps over $700 million worth.
Why are you telling me about a failure? Because it's a good case study for what not to do when making an investment.
Ackman’s bet on Herbalife was really a bet on regulators shutting the company down. But gambling on government decisions is extremely risky – you never know for sure what officials are going to do. Modern crypto and cannabis investors hoping for regulatory acceptance should take note...
The debacle is also a lesson in making sure you fully understand the risks of any given investment. Ackman admits he underestimated Herbalife’s financial capacity to keep itself going and increase its share price. Unlike him, you should always try to keep a cool head and properly assess your chance of success.
You can also do a better job of accepting when you’re wrong. The regulatory ruling on Herbalife came in 2016, but Ackman maintained his bet for another two years, convinced he’d be proved right in the end. Quitting earlier might have saved him some pain: his losses kept increasing until he finally gave up.
Did he do anything right? It’s not for us to pass judgment on Herbalife’s merits as a company. But Ackman believes it did and does exploit some of the most vulnerable people in society. And with that in mind, he doesn't actually think of his Herbalife bet as a total failure.
“I view Herbalife as an enormous success because we’ve surfaced the harm the company has caused.”
- Bill Ackman
Investing doesn’t have to be just about money – it can be about making a difference, too. If you commit yourself to investing for a moral cause, you might be able to stomach a financial loss when society has seen positive returns instead.
Herbalife wasn’t Bill’s only disaster, though. In the next session, we’ll look at how he bounced back from his worst one yet.
The takeaway: Betting on government decisions and underestimating risks is a recipe for disaster – but there's more to life than money.
You know what’s not a great feeling? Losing money. You know what’s really not a great feeling? Losing $4 billion – yup, four billion big ones – on a single investment.
“Clearly, our investment in Valeant was a huge mistake,'' said Ackman after selling his shares in 2017 – and if anything he’s understating just how bad his bet on the pharmaceutical company was. Ackman, convinced Valeant’s management team were just the tonic, clung on to his shares through PR disasters, dodgy accounting, and a stock price crash in the hope that he could turn the company around. But he was wrong.
There were some silver linings. Bill says he now knows that companies can’t always come back from a huge stock crash, thanks to the devastating effect on morale and reputation; and he’s learned that even a talented team of suits with a strong track record can make poor decisions.
But after Herbalife and Valeant, Ackman’s record was looking pretty shaky. A 0.7% loss over 2018, while market-beating, meant that his firm had failed to turn a profit for four years in a row. Performance like that started to scare off Ackman’s investors – by the end of the year, he was managing just 30% of the cash he had been three years before.
So his career’s over, right? Does Bill really seem like the kind of guy to give up that easily? The first half of 2019 saw Ackman mount the most impressive comeback since Michael Jordan: between January and July, his fund increased in value by a whopping 45%, versus the US stock market’s comparatively middling 17%. And not a Space Jam in sight...
How did Ackman bounce back? When faced with a tough basket, Ackman took a step back. He realized that he’d lost focus: he was spending too much time trying to keep investors happy and stop them from leaving, instead of concentrating on actually making investment decisions.
“Little breaks over the course of the day really interfere with your ability to dig in.”
- Bill Ackman
Restructuring and streamlining the company has “freed up substantial time and renewed focus”. The lesson here? When things are getting overwhelming, cut back and spend all your energy on what really matters.️
Ackman’s other big change was to stop raising money for his private funds, instead concentrating on his publicly traded pot. Investors can’t take money out of this fund – when they want to cash out, they just sell their stake on to someone else – so Ackman doesn’t have to worry about withdrawals anymore.
That allows him to focus on investing for the long term: his first love. To give one example, he can act as a buyer when the market’s crashing – snapping up stocks at a discount and then waiting years for things to recover. If, like Bill and Warren Buffett, you too can afford to invest without getting rattled by short-term price swings, then you could find yourself doing nicely.
A perfect example of this is one of Ackman’s most recent stock picks: Starbucks. It’s not a particularly sexy company, and nor is it a contrarian bet – but he thinks his $1 billion stake could more than double in value over the next three years. Although the chain’s facing more competition, Ackman reckons its ultra-strong brand will see it grow fast in an increasingly bean-buzzed China.️
The takeaway: Focus and patience are key when investing.
Bill’s a real giver – not only has he pledged to donate more than half his wealth to good causes, but he’s also more than willing to share advice. We’ve combed through his speeches and writings to find some of his top tips for investors: here’s a selection of the best.
Diversify your portfolio – but not too much. “For an individual investor you want to own at least 10 and probably 15 and as many as 20 different securities. Many people would consider that to be a relatively highly concentrated portfolio.” Putting all your cash in one company is risky, but you shouldn’t spread yourself too thin: if you do, it’s hard to research and understand all your portfolio companies.
Look for businesses with “moats”. “You want to buy a business that is going to exist forever, that has barriers to entry, where it’s going to be difficult for people to compete with you… You want a business where it’s hard for someone tomorrow to set up a new company to compete with you and put you out of business.” If you’ve managed to find a company that’s not selling a commodity, but something truly unique, then it’s much more likely to be successful: simply because it’s harder for others to compete with it and drive its prices down. Coca-Cola, a favorite of both Ackman and Buffett, is a great example of this.
Seek unappreciated value. “You want to invest at a reasonable price.” It’s not just about finding a good company – it also has to be valued sensibly. Ideally, you want “high-quality businesses at a price that is not reflective of the intrinsic value of the business as it is, and certainly not reflective of what the intrinsic value would be if it were run better.” Finding a company with potential that others aren’t recognizing could be a golden ticket.
Stay strong. “You've gotta just accept the fact that what you own can go meaningfully down in value after you buy it, that doesn't actually mean you've made an investment mistake – it's just the nature of the volatility of the stock market.” Ackman’s all about ignoring short-term stock market fluctuations, instead preferring to focus on the long run – in the end, he thinks every company gets valued fairly. As for how to stay strong: “do your own research” and you might be able to ignore the haters.
Ackman’s also given a bunch of advice for how to choose an investment manager – as one himself, he knows what to look out for. Here are his tips:
“You want someone who has an investment strategy that makes sense to you. You want to understand what they do and how they do it.” It’s never good to not know what’s going on with your hard-earned cash – if you don’t, you can’t measure success.
“You want someone with a reputation for integrity.” Would you lend five bucks to someone you didn’t trust? If not, why would you give them thousands to manage?
“You want to invest in someone who has a long-term track record… who has a consistent approach.” Past performance isn’t a guarantee of future success, but it can be a helpful indicator that the manager knows what they’re doing. And a consistent approach, rather than constantly jumping to what’s in vogue, means they can improve over time and better ignore market irrationality.
“You want someone who's investing the substantial majority of their own money alongside yours. You want someone whose interests are aligned with yours.”
Ackman’s best piece of advice, though?
"In the investing business, you need a high degree of confidence, but you also need a high degree of humbleness... humbleness comes from mistakes."
- Bill Ackman
We’re pretty sure the word Bill’s looking for is “humility” – which just goes to show that even the best investors always have more to learn.
🔹Bill Ackman is an activist value investor who looks for cheap companies and then tries to use his influence to improve them. His main fund is publicly traded
🔹Contrarian bets can be hugely valuable – as long as you fully assess the risks
🔹Be wary of any investments that rely on political willpower: it’s an unpredictable world out there
🔹Focusing on investing for the long term, without unnecessary distractions, is key
🔹Don’t diversify too much, look for defensible businesses, and find a money manager who’s consistent and has your back
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