Understanding the investment style of one of the most renowned activist investors of the modern era
30-May-2023 •Hemkesh Khattar
Ever heard of activist investors? They are investors who purchase a significant stake in publicly traded companies to influence their operation and management. And Bill Ackman is one of the best-known activist investors in the world.
He is the founder and CEO of Pershing Square Capital Management (a hedge fund) and is renowned for his bold and aggressive investment style.
As of December 2022, his fund had assets under management of over $18 billion.
Recently, we came across a podcast that explored his investing style and how he picks his companies. Here are a few snippets from the podcast.
Importance of business quality and cash flows
Ackman believes in investing in high-quality, simple, predictable, free cash flow generative businesses. He argues that if a business is too complex, it is near impossible to predict its cash flows. Thus, determining the intrinsic value of such a business becomes highly difficult.
In his own words, "the value of a financial asset is the present value of cash you can take out of it over its life. In a low-interest rate environment, you need to predict the cash flows for many years in order to figure out approximately what the business is worth. For many companies with complex businesses, we have no idea what the cash flows of the business would be three years out, let alone in years four through fifteen, which matters in terms of determining what the business is worth".
Perks of running a concentrated portfolio
Ackman is a true believer in quality over quantity when it comes to investing. He believes that a concentrated portfolio allows investors to narrow their focus on select stocks and conduct rigorous research on each company. However, he believes that a good investment does not require months of research.
He says, "We only want to do the work that is necessary to determine whether an investment makes sense in the portfolio. We don't have the view that we have to inexhaustibly spend six months in order to make a decision. In fact, if we have to spend a large amount of time and it's not obvious, then it's probably not a good investment".
In for the long haul
Like every successful long-term investor, Ackman dismisses short-term noise and bases his buys and sells on fundamentals.
He says, "We focus on what this business is worth over its life. The market generally overreacts to short-term information and noise because many stocks are traded on the basis of marginal buyers and sellers or short-term investors trying to predict whether a stock will go up or down in a quarter. We don't spend any time trying to figure that out."
Lessons learned from Warren Buffett
Warren Buffett has influenced investors worldwide and Ackman is no different.
He says, "A big part of my education as an investor came from reading everything Buffett wrote and watching him speak. He came to Harvard School when I was a student there, and one of the most influential things he said was, 'If you want to be successful, all you need to do is look around the room and think about the classmates you most admire and what qualities they have and just decide to adopt those qualities. And if you do that, your chances at success go up enormously".
Apart from the above, the podcast had many other interesting lessons for investors. You can hear the entire podcast here.
Also read: Seven investing sins