#82 Bill Ackman: Getting Back Up
Bill Ackman, CEO of Perishing Square Capital Management, discusses lessons from failure, the importance of health and relationships, his investment philosophy focusing on predictable businesses and long-term capital, and his views on market dynamics, governance, and the COVID-19 pandemic.
Deep Dive Analysis
18 Topic Outline
The Role of Persistence and Dealing with Failure
Parental Lessons: Persistence, Hard Work, Philanthropy
Personal Drivers: Independence and Overcoming Adversity
Strategies for Dealing with Business Reversals
Importance of Health: Sleep, Exercise, and Nutrition
Information Consumption and Investment Idea Sourcing
Pershing Square's Investment Process and Edge
Starbucks Investment: Identifying Value in Uncertainty
Impact of ETFs and Index Funds on Markets
Public vs. Private Company Governance and Discipline
The Role and Ethics of Short Selling
Navigating Public Criticism: The Herbalife Example
COVID-19 Hedge: Strategy, Timing, and Market Impact
Economic Outlook and Pandemic Recovery
Real Estate and Small Business Resilience Post-COVID
Post-Pandemic Financial Prudence and Leverage
Understanding Berkshire Hathaway's Structure and Value
Lessons from Warren Buffett and Charlie Munger
4 Key Concepts
Veil of Ignorance
A mental model, referenced from John Rawls' Theory of Justice, suggesting that society should be organized from the perspective of not knowing one's own position in the genetic or geographic lottery. This encourages designing a world that is fair and beneficial to all, especially the least advantaged.
Time Arbitrage (in investing)
A competitive advantage for investors like Pershing Square, where having long-duration capital (e.g., from a public company structure) allows them to make long-term investment decisions without being pressured by short-term quarterly or yearly results, unlike many other market participants.
Return on Invested Brain Damage
A term coined by Bill Ackman to describe the disproportionately high mental and emotional cost associated with public short selling. Despite potential financial returns, the personal toll from public criticism, legal battles, and general animosity makes it a challenging endeavor.
Credit Default Swaps (CDS)
A financial contract where the buyer makes regular payments to the seller and, in return, receives a payout if a specified credit event (like a default) occurs. Pershing Square used CDS contracts as a hedge against credit risk, allowing them to bet on credit spreads widening.
13 Questions Answered
The world should be organized from the perspective of not knowing where you will end up in the genetic or geographic lottery, a concept known as the 'veil of ignorance.' This approach encourages designing systems that are fair regardless of individual circumstances.
A primary driver for Bill Ackman from a young age has been independence – financial independence, the independence to speak his mind, and the independence to live the life he desires.
Dealing with failure involves persistence, making a little progress every day, focusing on one step at a time rather than the daunting 'peak,' and maintaining a strong support system of friends, family, and a healthy lifestyle (exercise, good nutrition, sleep).
He believes in minimizing sugar consumption, following a higher fat, higher protein, lower carbohydrate diet, and eating real, unprocessed foods. He also practices intermittent fasting, generally not eating before noon.
While Bill Ackman initially generated most ideas, the team now sources many. Bill sets the framework, and two-person subsets of the investment team do 80% of the work, including expert conversations, with Bill contributing 20% and the full team discussing final inclusion.
They seek simple, predictable, free cash flow generative businesses with high quality and durability, where they can predict cash flows many years out. They look for a wide gap between the current market price and the intrinsic value of the business.
Index funds can reduce the liquidity of securities because they hold a large percentage of shares, making the marginal trader more impactful and potentially increasing market volatility. They also exert significant influence on corporate governance through their voting power.
Short selling is an essential and generally positive function, particularly for identifying fraud, as short sellers have a strong economic incentive to uncover problematic businesses. However, it crosses a line when short sellers actively try to harm a company.
He was gravely concerned the government wasn't taking the virus seriously enough and wanted to make a public case for a countrywide shutdown to protect the economy and public health, believing markets would recover once the virus was addressed.
The current shutdown is an intended, temporary measure driven by health reasons, not economic ones, with governments providing economic support as a bridge. A depression, like the 1930s, is an unending economic decline.
While there will be temporary disruptions like rent holidays, real estate, especially street retail and malls, is expected to recover. People will still desire human connection and gathering places, leading to innovation in tenant offerings and potential restructurings of properties.
Yes, Bill Ackman believes this period will be a 'depression era moment' psychologically, leading to greater financial prudence and less corporate over-leveraging, as companies will learn the importance of retaining capital for 'rainy days.'
Buffett taught him that success comes from adopting admirable qualities like hard work, discipline, honesty, and fairness, which are within anyone's control. He also learned about investing in the stock market through Buffett's reinterpretation of Ben Graham's principles and the value of permanent capital.
15 Actionable Insights
1. Embrace Failure, Cultivate Persistence
View success as a function of how you deal with failure, as every successful person encounters hardship. Persist through challenges, as making a little progress every day compounds to help you overcome difficulties and achieve success.
2. Focus on Incremental Progress
When facing daunting challenges, avoid focusing on the overwhelming ‘peak’ of where you want to be. Instead, concentrate on taking one step at a time, making a series of smart, thoughtful decisions daily to gradually climb out of any hole.
3. Prioritize Health for Resilience
Maintain physical and mental health through exercise, good nutrition, and adequate sleep to effectively deal with stress and maintain sanity and balance. This foundation helps you navigate difficult periods and make clear judgments.
4. Build Strong Support Systems
Cultivate good friends, a loving relationship, and a supportive family to help you deal with stress and business reversals. Having people who are looking out for you and want you to succeed provides crucial perspective and emotional grounding.
5. Adopt a Low-Carb, Real Food Diet
Minimize sugar consumption, viewing it as ‘poison,’ and adopt a higher fat, higher protein, lower carbohydrate diet. Focus on eating ‘real foods’ and avoiding processed items to feel better, think clearer, and manage weight more effectively.
6. Practice Intermittent Fasting
Consider becoming an intermittent faster by generally not eating before noon and finishing dinner by around 8 PM. This routine can help manage weight and improve how you feel and think.
7. Cultivate Desirable Character Traits
Identify qualities you admire in successful people, such as hard work, discipline, honesty, and fairness, and consciously decide to adopt them. These character traits are within your control and significantly increase your chances of success.
8. Invest in Simple, Predictable Businesses
Focus investment on high-quality businesses that are simple, predictable, and free cash flow generative, allowing you to confidently predict cash flows over many years. Avoid investments that require extensive time to understand, as they are likely not good opportunities.
9. Ignore Short-Term Market Noise
Do not focus on predicting next quarter’s earnings or short-term stock movements, as markets often overreact to noise. Instead, concentrate on a business’s long-term value over its entire life to capitalize on market inefficiencies.
10. Diversify Information Sources
Read a variety of traditional media sources and use platforms like Twitter as a news feed for early insights. Also, engage in conversations with respected business leaders for additional perspectives on economic and industry trends.
11. Prioritize Financial Independence
Strive for independence, both financial and intellectual, to live the life you want and express your thoughts freely. This drive can be a significant motivator for personal and professional achievement.
12. Commit to Philanthropy Early
View philanthropy as a learned trait and commit to ‘returning the favor’ if you become very successful. Consider organizing your perspective on the world from a ‘veil of ignorance,’ not knowing your own starting position in life.
13. Maintain Prudent Corporate Leverage
For businesses, learn from economic downturns by rethinking super aggressive capital structures and putting capital aside for ‘rainy days.’ This approach prevents over-leveraging and protects against future crises, benefiting all stakeholders.
14. Utilize Short Selling for Fraud Detection
Recognize short selling as an essential and positive market function, particularly for identifying fraudulent companies due to the strong economic incentive. Regulators should leverage short sellers’ insights to uncover illegal activities more efficiently.
15. Teach Kids Core Values and Nutrition
Instill in children the importance of hard work, education, treating others well, persistence, and the value of money. Also, educate them about good nutrition, despite it being a ‘high-risk subject,’ for their long-term health.
7 Key Quotes
How successful you are is really a function of how you deal with failure.
Bill Ackman
Experience is making mistakes and learning from them.
Bill Ackman
Sugar is poison.
Bill Ackman
The value of a financial asset is the present value of the cash that you can take out of it over its life.
Bill Ackman
Capitalism without failure is religion without hell.
Charlie Munger (quoted by Shane Parrish)
The return on invested brain damage for short selling is quite challenging.
Bill Ackman
If you want to be successful, all you need to do is look around the room and think about the classmate or classmates you most admire and what qualities they have and just decide to adopt those qualities.
Warren Buffett (quoted by Bill Ackman)
3 Protocols
Dealing with Stress and Maintaining Balance
Bill Ackman- Stay sane and balanced.
- Prioritize health through exercise, good nutrition, and sleep.
- Gain perspective by spending time with people you love.
- Seek support from good friends.
Bill Ackman's Nutrition and Eating Routine
Bill Ackman- Minimize sugar consumption.
- Follow a higher fat, higher protein, lower carbohydrate diet.
- Eat real foods, generally avoiding anything processed or packaged.
- Practice intermittent fasting, typically not eating before noon and finishing dinner by around 8 PM.
- Occasionally have nuts for snacks.
Dealing with Business Failure
Bill Ackman- Plot one step at a time, making a little progress every day.
- Focus on incremental progress rather than the daunting 'peak' of recovery.
- Make a series of smart, thoughtful decisions.
- Use good judgment.
- Stay healthy.
- Rely on good friends, loving relationships, and supportive family.