Lex Fridman PodcastBill Ackman: Investing, Financial Battles, Harvard, DEI, X & Free Speech | Lex Fridman Podcast #413
EVERY SPOKEN WORD
150 min read · 30,232 words- 0:00 – 0:47
Introduction
- BABill Ackman
The only person who could cause you more harm than a thief with a dagger is a journalist with a pen.
- LFLex Fridman
The following is a conversation with Bill Ackman, a legendary activist investor who has been part of some of the biggest, and at times, controversial trades in history. Also, he is fearlessly vocal on X, FKA Twitter, and uses the platform to fight for ideas he believes in. For example, he was a central figure in the resignation of the President of Harvard University, Claudine Gay, the saga of which we discuss in this episode. This is the Lex Fridman podcast. To support it, please check out our sponsors in the description. And now, dear friends, here's Bill Ackman.
- 0:47 – 5:39
Investing basics
- LFLex Fridman
In your lecture on the basics of finance and investing, you, uh, mentioned a book, Intelligent Investor by Benjamin Graham, as being formative in your life. What key lesson do you take away from that book that informs your own investing?
- BABill Ackman
Sure. Actually, it was the first investment book I read. And, uh, as such, it was, kind of, the inspiration for my career and a lot of my life. So, important book. You know, bear in mind, this is, sort of, after the Great Depression, people lost confidence investing in markets, World War II, and then he writes this book, and it's for, like, the average man. And basically, he says that you have to understand the difference between price and value, right? Price is what you pay, value is what you get. And he said the stock market is here to serve you, right? And it's a bit like the neighbor that comes by every day and makes you an offer for your house. Makes you a stupid offer, you ignore it. Uh, makes you a great offer, you can take it. And that's the stock market. And the key is to figure out what something's worth, and you have to, kind of, weigh it. He talked about the difference between... You know, he said the stock market in the short term is a voting machine. It represents speculative interests, you know, supply and demand of people, uh, in the short term. But in the long term, it's, the stock market's a weighing machine, you know, much more accurate. It's gonna tell you what something is worth. And so if you can divine what something's worth, then you can really take advantage of the market, because it's really here to, to help you. And that's, kind of, the message of the book.
- LFLex Fridman
In that same way, there's a, kind of, difference between speculation and investing.
- BABill Ackman
Yeah. Speculation is just, it's a bit like buying, trading, uh, crypto, right? You're-
- LFLex Fridman
Strong words.
- BABill Ackman
(laughs) Well, uh, short-term trading crypto. Maybe in the long run, there's intrinsic value. But, uh, the, you know, it's, uh, many investors, you know, in a bubble going into the, you know, the, the crash, uh, were really just pure speculators. They didn't know what things were worth, they just knew they were going up, right? That's speculation. Um, and investing, uh, is, you know, doing your homework, uh, digging down, understanding a business, understanding the competitive dynamics of an industry, understanding what management's gonna do, understanding what price you're gonna pay. You know, the value of anything, I would say, uh, other than love, let's say, uh, is the present value of the cash you can take out of it over its life. Now, some people think about love that way, (laughs) but it's not, it's not the right way to think about love. But it's, um, yeah, so investing is about basically building a, uh, a model of what this business is gonna produce over its lifetime.
- LFLex Fridman
So, how do you get to that, this idea of, called value investing? How do you get to the value of a thing? Even, like, philosophically, value of anything really, but we can just talk about the things that are on the stock market-
- BABill Ackman
Sure.
- LFLex Fridman
... companies.
- BABill Ackman
The value of a, a security, the value, uh, is the present value of the cash you can take out of it over its life. So, if you think about a bond, a bond, you know, pays a 5% coupon interest rate. You get that, let's say, every year or twice a year, split in half. And it's very predictable. And if it's a US government bond, you know you're gonna get it. So, that's a pretty easy thing to value. A stock is an interest in a business. It's like owning a piece of a company. And a business, a profitable one, is like a bond in that it generates these coupons or these earnings or cash flow, you know, every year. The difference with, uh, a stock and a bond is that, uh, the bond, it's a contract. You know what you're gonna get as long as they don't go bankrupt and default. With a stock, you have to make predictions about the business. You know, how many widgets are they gonna sell this year? How many are they gonna sell next year? Uh, what are the costs gonna be? How much of the money that they generate do they need to reinvest in the business to keep the business going? Um, and that's more complicated. Um, but, you know, what we do is we try to find businesses where, with a very high degree of confidence, we know what those cash flows are gonna be for a very long time. And there are very few businesses that you can have really high degree of certainty about. And as a result, you know, many investments are speculations, 'cause it's really very difficult to predict the future. So, we, what I do for a living, what I do for a living is find those rare companies that you can, kind of, predict what they're gonna look like over a very long period of time.
- LFLex Fridman
So, what are the factors that indicate that a company is something, is going to be something that's going to make a lot of money, is gonna have a lot of value, and is going to be reliable over a long period of time? And what is your process of figuring out whether a company is or isn't that?
- BABill Ackman
So, every consumer has a view on different brands and different companies. And, you know, what we look for are, sort of, these non-disruptible businesses, a business where you can, kind of, close your eyes, stock market shuts for a decade, and you know that 10 years from now, it's gonna be a more valuable, more profitable company.
- 5:39 – 14:00
Investing in music
- BABill Ackman
So, we own a business called Universal Music Group. Uh, it's in the business of helping artists become global artists, uh, sort of, recorded music business. Uh, and it's in the business of, you know, owning rights, uh, to, sort of, the music publishing rights of songwriters. And, you know, I think music is forever, right? Music is a many thousand year old, uh, hu- part of the human experience, and I think it will be, you know, thousands of years from now.And so that's a pretty good backdrop to invest, uh, in a company. And the company basically owns a third of the global recorded music. That's, you know, the most dominant sort of market share in the business. They're the best at taking an artist who's 18 years old, who's got a great voice and has, has started to get a presence on, uh, YouTube and, uh, Instagram, and helping that artist become a superstar. And that's a unique talent, and the, and the result is the best artists in the world wanna come work for them. But they also have this incredible library of, you know, The Beatles, Rolling Stones, uh, U2, et cetera. So, and then if you think about, um, what music has become, it used to be about records and CDs and, you know, eight-track tapes for those with whom... and it was about a new format and that's how they drive sales. And it's become a business which is like the podcast business, about streaming. And you can... Streaming is a lot more predictable than what, than selling records, right? You can sort of say, "Okay, how many people have smartphones? How many people are gonna have smartphones next year?" There's a kind of global penetration over time of smartphones. You pay, call it 10, 11 bucks a month for a subscription or less for a family plan, and you can kinda build a model of what the world looks like and predict, you know, the growth of the streaming business. You predict what kind of market share Universal is gonna have over time. And you, you can't get to a precise view of value. You can get to an approximation. And the key is to buy at a price that represents a big discount to that approximation, and that gets back to Ben Graham. Ben Graham was about what he called, uh, he invented this concept of margin of safety, right? You wanna buy a company at a price that if you're wrong about what you think it's worth and it turns out to be worth 30% less, you paid a deep enough discount to your estimate that you're still okay. It's about investing, a big part of investing is not losing money. If you can avoid losing money and then have a few great hits, you can do very, very well over time.
- LFLex Fridman
Well, music is interesting 'cause, uh, yes, music's been around for a very long time, but the way to make money from music has been evolving. Like you mentioned streaming, there's a big transition initiated by I guess Napster then created Spotify-
- BABill Ackman
Mm-hmm.
- LFLex Fridman
... of how you make money on music, with, with Apple and with all of this. And the question is, how well are companies like UMG able to adjust to such transformations? One, I could ask you about the future, which is, uh, artificial intelligence being able to generate music, for example-
- BABill Ackman
Sure.
- LFLex Fridman
... which there have been a lot of amazing advancements with. So, do you have to also think about that? Like, when you close your eyes, all the things you think about, are you imagining the possible ways that the, the future's completely different from the c- the present, and how well this company will be able to like surf the wave of that?
- BABill Ackman
Sure. And they've had to surf a lot of waves. And actually, the music business peaked the last time in like the late '90s, 2000 timeframe. And that really innovation, Napster, the digitization of music almost killed the industry. And Universal really led an effort to save the industry and actually made an early deal with, uh, Spotify that enabled, you know, the, uh, the industry to really recover. And so by virtue of their market position and their credibility and their willingness to kind of adopt new technologies, they've kept their position. Now they've, of course, had this huge advantage because I think The Beatles are forever. I think U2 is forever. I think Rolling Stones are forever. Um, so they had a nice base of, of assets that were important and I think will forever be. Uh, forever's a long time, but, you know, the... Uh, again, there's enormous, there are all kinds of risks in every business. This is one that I think has a very high degree of persistence, and I can't envision a world where beyond streaming, in a sense. Now you may have a Neuralink chip in your head that, instead of a phone, but the music's gonna come in a digitized, you know, kind of format. You're gonna wanna have an infinite library that you can walk around in your pocket or in your brain. It's not gonna matter that much of the form factor. You know, the device changes. Um, it's not really that important whether it's Spotify or Apple or Amazon, uh, that are the so-called, uh, DSPs or the, or the providers. Uh, I think the value's really kinda, uh, reside in the, in the content owners, and that's really the artists, uh, and the label.
- LFLex Fridman
And I actually think AI is not going to be the primary creator of music. I think we're going to actually face the reality that it's not that music has been around for th- thousands of years, but musicians and music has been around.
- BABill Ackman
Mm-hmm.
- LFLex Fridman
Like, we actually care to know who's the musician that created it, just like we wanna know that who's the artist, human artist that created a piece of art.
- BABill Ackman
I totally agree. And I think if you think about it, there's other, lots of other technologies, uh, and computers that have been used to generate music over time. But no one wants to, no one falls in love with a computer-generated track, right? Um, and, you know, Taylor Swift, you know, y- you know, incredible music, but it's also about the artist and her story and her physical presence and, you know, the, uh, the live experience. I don't think you're gonna sit there, uh, and someone's gonna put a computer up on stage and, and then, and it's gonna play and people are gonna get excited around it. So I think AI is really gonna be a tool to make artists better artists. Um, and, and, uh, you know, the, I think, uh, like a synthesizer, right, uh, really created the opportunity for, you know, one man to have an orchestra. Um, maybe a bit of a threat to, uh, percussionists, um, but maybe not. Maybe it drove even more demand for, for, for the live experience.
- LFLex Fridman
Unless that computer has human-like sentience, which I believe is a real possibility. But then it's really, from a business perspective, no different than a human. If it has an identity, that's basically fame and influence, and there'd be a robot Taylor Swift, and it doesn't really matter-
- BABill Ackman
And that's a copyrightable asset, I would think.
- LFLex Fridman
Mm-hmm.
- BABill Ackman
Right?Yeah.
- LFLex Fridman
And then they'll be-
- BABill Ackman
Not sure that's the world I want (laughs) excited about.
- LFLex Fridman
That's a different discussion.
- BABill Ackman
(laughs) Sorry.
- LFLex Fridman
Um, the world is not gonna ask your permission to become what it's becoming, so. Uh, but you can still make money on it. Uh, presumably there'd be a capital system, and there'd be some laws under which AI, which I believe AI systems will have rights that are akin to human rights. And we're gonna have to contend with what that means.
- BABill Ackman
Well, there's sort of name and likeness rights-
- LFLex Fridman
Yes.
- BABill Ackman
... right, that have to be protected. Now, can a name be attributed to a, uh, Tesla robot? I don't know.
- LFLex Fridman
I think so. I think it's quite obvious to me.
- BABill Ackman
Okay, so there's more, more potential artists for us to represent at Universal.
- LFLex Fridman
Exactly. Exactly.
- BABill Ackman
All right.
- LFLex Fridman
(laughs)
- BABill Ackman
That's sort of one example. Another example could be-
- LFLex Fridman
Yes.
- 14:00 – 18:39
Process of researching companies
- LFLex Fridman
Uh, what's the actual process you go through, like, literally, like, the process of figuring out what the value of a company is? Like, how do you do the research?
- BABill Ackman
Mm-hmm.
- LFLex Fridman
Is it reading documents? Is it talking to people? Is it... How do you do it?
- BABill Ackman
It's all of the above. So Chipotle, what attracted us initially is the stock price dropped by about 50%. Uh, great company, great concept, um, cons- you know, every, athletes love it. Consumers love it. Healthy, sustainable, uh, fresh food made in front of your eyes. And, uh, you know, great Steve Ells, the founder, did an amazing job. But ultimately, the company's lacking some of the systems and had a food safety issue. Consumers got sick, almost killed the brand. Uh, but the reality of the fast food quick service industry is almost every fast food company has had a food safety issue over time. And the vast majority have survived. Uh, and we said, "Look, it's such a great concept," but they, you know, they, their approach was not, it was far from ideal. But, but we start with usually reading the SEC filings. So the companies file a 10-K or an annual report. They file these quarterly reports called 10-Qs. They have a proxy statement which describes kind of the governance, the board structure. Um, conference call transcripts are publicly available. It's kind of very helpful to go back five years and kind of learn the story. You know, here's how management describes their business. Here's what they say they're gonna do, and you can follow along to see what they do. Uh, it's like a historical record of, you know, of how competent and, uh, truthful they are. You know, it's a very useful device. And then, of course, looking at competitors, uh, and thinking about, you know, who could, what could dislodge this company? Um, uh, you know, and then we'll talk to, if it's an industry we don't know well, we know the restaurant industry really well, music industry, you know, we'll talk to people in the industry. We'll try to understand, you know, the difference between publishing and recorded music. We'll look at the competitors. Um, we'll talk to, we'll read books. You know, I read a book about the m- music industry or a couple books about the industry. Um, so it's, it's a bit like a big research project. Uh, and, you know, there are these so-called expert networks now. And you can get pretty much anyone on the phone, uh, and they'll talk to you about an aspect of the industry that you don't understand and want to learn more about. Uh, try to get a sense, you know, public filings of companies generally give you a lot of information, but not everything you wanna know, and you can learn more by talking to experts about some of the industry dynamics, the personalities. You wanna get a sense of management. Uh, I like watching, you know, podcasts, if the CEO were to do a podcast or a YouTube interview, you get a sense of the people.
- LFLex Fridman
So in the case of Chipotle, for example... By the way, I could talk about Chipotle all day. I just love it. I- I love it. I wish there was a sponsor. Uh... (laughs)
- BABill Ackman
(laughs) I'll mention it to the CEO.
- LFLex Fridman
Don't make promises you can't keep, Bill.
- BABill Ackman
I'm not making... I can't.
- LFLex Fridman
All right. (laughs)
- BABill Ackman
Brian Niccol is a fantastic CEO. He's not gonna spend one dollar that he doesn't think is in the company's best interest.
- LFLex Fridman
All right. All I want is free Chipotle. Come on, now. Uh, what was I saying? Oh, and so you look at a company like Chipotle, and then you see there's a difficult moment in, in its history, like you said, that, uh, there was a food safety issue, and then you say, "Okay, well, I see a path where we can fix this."
- BABill Ackman
Mm-hmm.
- LFLex Fridman
"And therefore, even though the price is low, we can get it to where the price goes up to its value."
- BABill Ackman
Mm-hmm. So the kind of business we're looking for is sort of the kind of business everyone should be looking for, right? A great business that's got a long term trajectory of growth out into the fore- you know, even beyond the foreseeable distance, right? Those are the kind of businesses you want to own. You want businesses that generate a lot of cash. You want businesses you can easily understand. You want businesses with these sort of huge barriers to entry where it's difficult for others to compete. You want companies that don't have to constantly raise capital. Um, and these are some of the great businesses of the world, but people have figured out that those are the great businesses. So the problem is those companies tend to have very high stock prices, and the f- value is generally built into the price you have to pay for the business. So we, we can't earn the kind of returns we want to earn for investors by paying a really high price. Price matters a lot. You can buy the best business in the world, and if you overpay, you're not gonna earn particularly attractive returns. So we get involved in cases where a great business has kind of-... made a big mistake, or they've, or you have a company that's kind of lost its way, but it's recoverable. And that's, we buy from shareholders who are disappointed, who've lost confidence, selling at a low price relative to what it's worth, if fixed, and then we try to be helpful in fixing the company.
- 18:39 – 24:08
Investing in restaurants
- LFLex Fridman
You said that, uh, barriers to entry... You, you said a lot of really interesting qualities of companies very quickly in a sequence of statements that took, like, less than 10 seconds to say, but some of them were fascina- all of them were fascinating. So you said barriers to entry.
- BABill Ackman
Mm-hmm.
- LFLex Fridman
How do you know if there's a type of moat protecting, uh, the, the competitors from stepping up to the plate?
- BABill Ackman
I mean, the most difficult analysis to do as an investor is that, is kind of figuring out how wide is the moat.
- LFLex Fridman
Mm-hmm.
- BABill Ackman
How, you know, h- how much at risk is the business to disruption? And we're in, I would say, a period, the greatest period of di- disruptibility in history, right?
- LFLex Fridman
Mm-hmm.
- BABill Ackman
Technology, you know, a couple of 19-year-olds can, you know, leave whatever university, or maybe they didn't even go in the first place. Uh, they can raise, you know, w- millions of dollars. Uh, they can get access to infinite, uh, bandwidth storage. Uh, they can contract with, uh, engineers in low cost, uh, markets around the world. They can build a virtual company, and they can disrupt businesses that seem super established over time. And then on top of that, you have major companies with multi-trillion dollar market caps working to find profits wherever they can. And so that's a dangerous world, in a way, to be an investor. And so you wanna... You have to find businesses that it's hard to foresee a world in which they get disrupted. And the beauty of the restaurant business, and we've actually, our best track record is in restaurants. We've never lost money. Uh, we've only made a fortune, interestingly, investing in restaurants. A big part of it's a really simple business. And if you, you know, get Chipotle right, and you're at 100 stores, you know, it's not so hard to envision getting to 200 stores, and then getting to 500 stores.
- LFLex Fridman
Right.
- BABill Ackman
And the key is maintaining the brand image, growing intelligently, having the right systems. Uh, you know, now, when you go from 100 stores to 3,500 stores, you have to know what you're doing. There's a lot of complexity, right? You know, if you think about your local restaurant, uh, you know, the family's working in the business. They're, they're watching the cash register. And you can probably open another restaurant, you know, across town. But there are very few restaurant operators that own more than a few restaurants and operate them successfully. And the, and the quick service business is about systems and building a model that, uh, a stranger who doesn't know the restaurant industry can come in and enter the business and build a successful, uh, successful franchise. Now, Chipotle is not a franchise company. They actually own all their own stores. But many of the most successful restaurant companies are franchise models, like a Burger King, a McDonald's, Tim Hortons, you know, all these various brands, Popeyes. And there, it's about systems. But the same systems apply whether you own all the stores and it's run by a big corporation, or whether the owners of the restaurants are, are sort of franchisees, you know, local entrepreneurs.
- LFLex Fridman
So if the restaurant has scaled to a certain number, that means they've figured out some kind of system that works.
- BABill Ackman
Yeah.
- LFLex Fridman
And it's very difficult to develop that kind of system. So that's a moat?
- BABill Ackman
A moat is, you get to a certain scale and you do it successfully, and the brand is now in the, in the, understood by the consumer. And what's interesting about Chipotle is what they've achieved is difficult, right? They're not buying frozen hamburgers getting shipped in. They're buying fresh, you know, sustainably sourced ingredients. They're preparing food in the store. That was a first, right? The quality of the product at Chipotle is incredible. It's the highest quality food you can get for... You can get a, a serious dinner for under 20 bucks-
- LFLex Fridman
Mm-hmm.
- BABill Ackman
... uh, and eat really health- uh, you know, healthfully and very high quality ingredients. And that's just not available anywhere else. And it's very hard to replicate and to build those relationships with, you know, farmers around the country. It's a lot easier to make a deal with one of the big, you know, massive food producers and buy your pork from them, uh, than to buy from a whole bunch of farmers around the country. And so it's... That is a big moat for Chipotle, very difficult to replicate.
- LFLex Fridman
And by the way, another company I think you have a stake is, is McDonald's?
- BABill Ackman
No, we own a company called Restaurant Brands. Restaurant Brands owns a number of quick service companies, one of which is Burger King.
- LFLex Fridman
Burger King.
- BABill Ackman
Yeah.
- LFLex Fridman
Okay. Well, um, it's been a meme for a while, but I've... Burger King is great too, Wendy's, whatever. But usually, I go McDonald's. I'll just eat burger patties. I don't know if you, you knew you could do this, but a burger patty at, uh, Burger King can do this, McDonald's. It's actually way cheaper.
- BABill Ackman
They'll just sell you the patty.
- LFLex Fridman
The patty, and it's cheap. It's like a $1.50 or $2.00 for, per patty, and it's about 250 calories, and it's just meat. And despite, like, the criticism and memes out there, that's...
- BABill Ackman
Pretty healthy stuff.
- LFLex Fridman
It's healthy stuff. And so when I do, when I go, my... The healthiest I feel is when I do carnivore. It doesn't sound healthy, but if I eat only meat, I feel really good. I lose weight. I have all this energy. It's crazy. And the, when I'm traveling, the easiest way to get meat is that.
- BABill Ackman
So you go to McDonald's, you order six patties?
- LFLex Fridman
(laughs) Exactly. So there's this sad meme of me just sitting alone in a car when I'm traveling, just eating beef patties at McDonald's. But I love it. And you gotta do what, what you love, what makes you happy, and that's what makes me happy.
- BABill Ackman
I think we should, maybe we'll have Burger King featuring in... What about flame broiled? What, what's with these fried burgers? We gotta get you to Burger King, you know, grilled burgers.
- LFLex Fridman
Wait, is this like (laughs) a fast food trash... I didn't know, I don't know the details of how they're made. I'm not-
- BABill Ackman
Ah, you should.
- 24:08 – 29:50
Investing in Google
- LFLex Fridman
You were talking about moats, and this kind of remind me of, um, Alphabet, the parent company.
- BABill Ackman
Mm-hmm. Sure. We're made, we're as... It's a big position for us.
- LFLex Fridman
So it's interesting that your, uh, think that maybe Alphabet fits some of these characteristics.It's tricky to know with everything that's happening in, in AI, and I'm interviewing Sundar Pichai soon. It's interesting that you think that there's a moat. And it's also interesting to analyze it 'cause the consumer is just a fan of technology. Why is Google still around? Like-
- BABill Ackman
Mm-hmm.
- LFLex Fridman
... they've been... It's not just a search engine, it's doing it all, the basics of the business of search really well, but they're doing all these other stuff. So, what, what's your analysis of Alphabet? Why are you still positive about it?
- BABill Ackman
Sure. So it's a business we've admired as a firm for, you know, whatever, 15 years, um, but rarely got to a price that we felt we could own it, because, again, the expectations were so high and price really matters. Really, the sort of AI scare, I would call it. You know, Microsoft comes out with ChatGPT. Uh, they do an amazing demonstration. People like this most incredible product. And Google, which had been working on AI even earlier... Obviously, the Microsoft- Microsoft was behind in AI. That was really their ChatGPT deal that gave them a kind of a, a market presence. Um, and then Google does this fairly disastrous, uh, demonstration of Bard, and the world says, "Oh my God. Google's fallen behind in AI. AI is the future." Stock gets crushed. Google gets to a price around 15 times earnings, uh, which for a business of this quality, is an extremely, extremely low price. And our view on Google... One way to think about it, when a business becomes a verb-
- LFLex Fridman
Mm-hmm.
- BABill Ackman
... that's usually a pretty good sign about the moat around the business. So, you know, you'd open your computer and you open your search, and very high percentage of the world starts with a Google, you know, page in one line, uh, when you type in your, your search. You know, the Google advertising search YouTube franchise is one of the most dominant, uh, franchises in the world. Very difficult to disrupt. Uh, extremely profitable. Uh, the world is moving from offline advertising to online advertising. And that trend, I think, continues. Why? Because you can actually see whether your ads work. You know, they used to say about advertising, you know, uh, you, you spend a fortune and you just don't know which 50% of it works but you just sort of spend the money 'cause you know, ultimately, that's gonna bring in the customer. And now with online advertising, you can see with granularity which dollars I'm spending, you know, when people click on the search term and end up buying something and I pay, you know, the... It's a very high return on investment for the advertiser. And they really dominate that business. Now, AI, of course, is a risk. If all of a sudden people start searching or asking questions of ChatGPT and, and don't start with the Google search bar, that's a risk to the company. And so our view, based on work we had done and talked to industry experts, is that Google, if anything had a, a, uh... By virtue of the, the investment they've made, their time, the energy that people put into it, we felt their AI capabilities were, if anything, potentially greater than, uh, Microsoft ChatGPT, and that the market had overreacted. And I... Because Google, you know, is a big company, uh, global business, regulators, uh, scrutinize it incredibly carefully. They couldn't take some of the same liberties a startup like OpenAI did in releasing a product. And I think Google took a more cautious approach in releasing an early version of Bard in terms of its capabilities. And that let them ar- the world to believe that, uh, they were behind. And we ultimately concluded, if any- they're tied or ahead and you're paying nothing, uh, for the, that potential business. And they're gonna... And they also have huge advantages by vir-... If you think of all the data Google has, like the search data, um, all the various app- you know, applications, you know, email and otherwise, and the kind of the Google suite of, of products, it's an incredible data set. So they have m- more training data than pretty much any company in the world. They have incredible engineers. They have enormous financial resources. Uh, so that was kind of the bet. And, um, and we still think it's probably the cheapest of the big seven companies in terms of price you're paying for the business relative to its current earnings. It also is a business, uh, that has a lot of potential for efficiency. You know, sometimes when you have this enormously profitable dominant company... You know, all of the technology companies in the post-March '20 world, uh, grew enormously in terms of their teams, and they probably over-hired. And so you've seen some, you know, the Facebooks of the world, and now even Google, starting to get a little more efficient in terms of their operations. So we paid a low multiple for their, the business. Um, one way to think about the value of the business is the price you pay for the earnings, or alternatively, what's the yield? If you flip over the price over the earnings, it gives you kind of the yield of the business. So a 15 multiple is about a, almost a 7.5% yield, and that earnings yield is growing over time as the business grows. That's a, you know... Compared to, uh, wha- what you can earn lending your money to the government, you know, 4%, that's a very attractive going-in yield. And then there's all kinds of what we call optionality in all the various businesses and investments they've made that are losing money. They've got a cloud business that's growing very rapidly, but they're investing basically 100% of the profits from that business in growth. So you're... In that earnings number, you're not seeing any earnings from the cloud business and, you know, they're one of the top cloud players. So very interesting, generally well-managed, uh, company with incredible assets and resources and dominance. And, you know, and it has no debt, it's got a ton of cash. And so pretty good story.
- 29:50 – 35:05
AI
- BABill Ackman
- LFLex Fridman
Is there something fundamentally different about AI that makes all this more complicated? Which is the sort of the exponential possibilities of the kinds of products and impact that AI could create when you're looking at Meta, Microsoft, Alphabet, Google, all these companies, xAI, or maybe startups. Like, is it... Is there some more risk introduced by the possibilities of AI?
- BABill Ackman
Absolutely. That's a great question. Um, you know, business investing is about finding companies that can't be disrupted. AI is the ultimate disruptable asset, uh, or technology. And-... it, that's what makes investing treacherous is that you own a business that's enormously profitable, management gets, if you will, fat and happy, and then a new technology emerges that just takes away all the profitability. And AI is this incredibly powerful tool, which is why every business is saying, "How can I use AI in, in my business to make us more profitable, more successful, grow faster, and also disrupt or protect ourself from the, you know, the incomings?" You know, it's a, it's a bit like, you know, Buffet talks about, um, a great business like a castle surrounded by this really wide moat, but you have all these barbarians trying to get in and, uh, steal the, uh, princess. And, uh, it happens. You know, Kodak, for example, was an amazing, incredibly dominant company until it disappeared. Polaroid, you know, this incredible technology. A- and that's why we have tended to stay away from companies that are technology companies because technology companies generally, the world is such a dynamic place that someone's always working on a better version. And, you know, Kodak was caught up in the analog film world, and then the world changed.
- LFLex Fridman
Well, Google was pretty fat and happy until ChatGPT came out.
- BABill Ackman
Yes.
- LFLex Fridman
How would you rate their ability to wake up, lose weight, and be, uh, less happy and aggressively rediscover their search for happiness?
- BABill Ackman
I think you've seen a lot of that in the last year. Uh, and, uh, I would say some combination of embarrassment and pride are huge motivators, uh, for everyone from Sergey Brin, you know, to the management of the company. Um-
- LFLex Fridman
And Demis Hassabis thrown in- into the picture and all of DeepMind teams and the unification of teams and, like, all the shakeups. It was interesting to watch-
- BABill Ackman
Yeah.
- LFLex Fridman
... the chaos. I love it. I love it when, uh, everybody freaks out, like you said, partly embarrassment and partly that competitive drive that drives engineers. It was great. I can't wait to see what, um... There've been just a lot of improvement in the product. Let's see, let's see where it goes. You mentioned management. How do you analyze the governance structure and the individual humans that are the managers of a company?
- BABill Ackman
So as I like to say, incentives drive all human behavior, uh, and that certainly applies in the business world. So understanding the people and what drives them and what the actual financial and other incentives of a business are very important, uh, part of the analysis for investing in a company. And you can learn a lot. You know, I mentioned before, one great way to learn about a business is go back a decade and read everything that management has written about the business and see what they've done over time, see what they've said. You know, conference calls are actually, you know, relatively recent. Uh, when I started in the business, there weren't conference call transcripts. Now you have, you know, a, a written record of everything management has said in response to questions from analysts at conferences and otherwise. And so just, you learn a lot about people by listening to what they say, how they answer questions, and ultimately their track record for doing what they say they're gonna do. Are, do they under-promise and over-deliver? Do they over-promise and under-deliver? Um, do they say what they're gonna do? Do they admit mistakes? Um, do they build great teams? Do people want to come work for them or are they able to retain their talent? Um, you know, and then part of it is do they... How much are they running the business for the benefit of the business? How much are they running the business for the benefit of themselves? Um, and, uh, you know, that's kind of the analysis you do.
- LFLex Fridman
Are we, uh, talking about CEO, COO? What, what, what does management mean? Oh, go- how deep does it go?
- BABill Ackman
Sure. So this very senior management matters enormously. You know, we use the Chipotle example. Uh, Steve Ells, great entrepreneur, business got to a scale he really couldn't, uh, run it. We recruited a guy named Brian... Helped the company recruit a guy named Brian Niccol, uh, and he was considered the best person in the quick service industry. He came in and completely rebuilt the company. Actually, we moved the company. Chipotle was moved to California. And sometimes one way to redo the culture of a company is just to move it geographically, and then you can kind of reboot the business. But a great leader has great followership, you know. Over the course of their career, they'll have a team they've built that will come follow them into the next opportunity. Uh, but the key is, you know, really the top person matters enormously, uh, because... and then it's who they recruit. Uh, you know, you recruit an A+ leader and they're gonna recruit other A-type people. You recruit a B leader, you're not gonna recruit any great talent beneath them.
- 35:05 – 37:14
Warren Buffet
- BABill Ackman
- LFLex Fridman
Uh, you mentioned Warren Buffett. You said you admire him as an investor. What do you find most interesting and powerful about his approach? What, what aspects of his approach to investing do you also practice?
- BABill Ackman
Sure. So most of what I've learned in the investment business, I've learned from Warren Buffett. He's been my great professor, uh, of this business. I, my first book I read in the business was the Ben Graham Intelligent Investor. But fairly quickly, you get to learn about Warren Buffett. And I started by reading the, the Berkshire Hathaway annual reports. Uh, and then I eventually got the Buffett partnership letters that you could see, uh, which are an amazing read to go back to the 19- mid 1950s and read what he wrote to his limited partners when he first started out and just follow that trajectory over a long period of time. So what's remarkable about him is, one, duration, right? He's still at it at 93. Uh, you know, two, uh, you know, takes a very long-term view. Um, but a big thing that you learn from him, investing requires this incredible dispassionate, uh, unemotional quality. You have to be extremely economically rational, uh, which is not, uh, a basic... It's not something you learn in the jungle, you know. I don't think it's something that (laughs) , you know... If you think about the, the, um, the, you know, surviving the jungle, uh, you know, the lion shows up, uh, you know, you, and everyone starts running, you run with them. Uh, that does not work well, uh, in markets. In fact, you generally have to do the opposite, right? When the lemmings are running over the cliff, that's the time where you're facing the other direction and you're running the other direction, i.e., you're stepping in, you're buying stocks at really low prices. Um-You know, Buffett's been great at that, and great at teaching about what he calls temperament, which is this sort of emotional, kind of, or unemotional, uh, quality that you need, uh, to be able to dispassionately look at the world and say, "Okay. Is this a real risk? Are people overreacting?" Um, people tend to get excited about investments when stocks are going up, and they get depressed when they're going down, and that, I think that's just inherently human. You have to reverse that. You have to get excited when things get cheaper, and you gotta get concerned when things get more expensive.
- 37:14 – 46:45
Psychology of investing
- BABill Ackman
- LFLex Fridman
You've been a part of some big battles, some big losses, some big wins. This has been a rollercoaster.
- BABill Ackman
Mm-hmm.
- LFLex Fridman
So in terms of temperament, psychologically, how do you not let that break you? How do you maintain a calm, uh, demeanor and avoid running with the lemmings?
- BABill Ackman
I think it's something you kinda learn over time. Uh, a key success factor is you wanna have enough money in the bank that you're gonna survive, uh, you know, (laughs) regardless of what's going on with volatility in markets. You know, people who, uh... One, you shouldn't borrow money. So if you borrow money, you own stocks on margin, markets are going down, and you have your livelihood at risk, it's very difficult to be rational. So key is getting sh- yourself to a place where you're financially secure, you're not gonna lose your house, right? That's a, kind of a key thing. And then also doing your homework. You know, stock prices, stocks can trade at any price in the short term. And y- if you know what a business is worth, and you understand the management, and you know it extremely well, it's not nearly as, uh, it doesn't bother you when a stock price goes down.
- LFLex Fridman
Mm-hmm.
- BABill Ackman
Or it has much less impact on you because you know, you know, again, as, uh, Mr. Graham said, in the short term, the market's a voting machine. You have a bunch of lemmings voting one direction, that's concerning. But if it's a great business, doesn't have a lot of debt, and people are gonna just listen to more music next year than this year, you know you're gonna do well. Uh, so it's a bit, some combination of being personally secure and also just knowing what you own, uh, and over time, you build, uh, uh, calluses, I would say.
- LFLex Fridman
So psychologically, just as a human being, speaking of lions and gazelles, and all this kinda stuff-
- BABill Ackman
Yeah.
- LFLex Fridman
... is there some... Is it as simple as just being financially secure? Uh, is there some just human qualities that you have to be born with/develop?
- BABill Ackman
I think so. I think, uh... Now, I'm a pretty emotional person, I would say. Or I feel pretty strong emotions. But not in investing. I'm remarkably immune to, kind of, volatility. And that's a big advantage, and it took some time for me to develop that.
- LFLex Fridman
So you weren't born with that you think?
- BABill Ackman
No.
- LFLex Fridman
So being emotional, do you want to respond to volatility?
- BABill Ackman
Yeah. And you just, uh, it's a bit, again, I, uh, you can learn a lot from other people's experience. It's one of the, the few businesses where you can learn an enormous amount by reading about other periods in history, uh, you know, w- watch, you know, following Buffett's career, the mistakes he made. If you're investing a lot of capital, every one of your mistakes can be big.
- LFLex Fridman
Mm-hmm.
- BABill Ackman
Right? So we've made big mistakes. Uh, the good news is that the vast majority of things we've done have worked out really well. And so that also gives you, you know, confidence over time. But because we make very few investments, you know, we own eight things today, or seven companies of that matter, um, if we get one wrong, it's gonna be big news. And so the other nature of our business you have to be comfortable with is a lot of public scrutiny, a lot of public criticism, and that requires some, uh, experience (laughs) . Call it that.
- LFLex Fridman
I think we'll talk about some of that.
- BABill Ackman
Yeah.
- LFLex Fridman
Uh, financially secure is something you, I believe, also recommend for even just everyday investors. Is there some general advice from the things you've been talking about that applies to everyday investors?
- BABill Ackman
Sure. So never invest money you can't afford to lose, where it would... If you'd lost this, uh, this money and, you know, you'd lose your house, et cetera. So having, being in a place where, uh, you're investing money that you don't care about the price in the short term, you know, it's money for your retirement, and you take a really long-term view. I think that's key. Uh, never investing where you borrow money against your securities. You know, the, the markets offer you the opportunity to leverage your investment, and in most worlds, you'll be okay. Except if, you know, there's a financial crisis or, you know, a nuclear device gets detonated, God forbid, somewhere in the world. Or there's a unexpected war, or s- you know, someone kills a leader unexpectedly. You know, things happen that can change the course of history, and markets react very negatively to those kinds of events. And you can own the greatest business in the world trading for $100 a share, and next moment, it could be 50. So as long as you don't borrow against securities, you own really high-quality businesses, and it's not money that you need in the short term-
- LFLex Fridman
Mm-hmm.
- BABill Ackman
... uh, then you can, you can actually be thoughtful about it, and that is a huge advantage. The vast majority of investors, it seems, tend to be the ones that panic in the downturns, get over elated in when markets are doing well.
- LFLex Fridman
So be able to think long term and be sufficiently financially secure such that you can afford to think long term.
- BABill Ackman
Yeah. Buffet is the ultimate long-term thinker, and just the decisions he makes, uh, the consistency of the decisions he's made over time, and fitting into that sort of long-term framework i- is a very, uh, very educational, let's put it that way, for the, for learning about this business.
- LFLex Fridman
So you mentioned eight.... companies. But what do you think about mutual funds that are for everyday investors that diversify across a larger number of companies?
- BABill Ackman
I think there are very few mutual funds, uh, there are thousands and thousands of mutual funds. There are very few that earn their keep in terms of the fees they charge. Uh, they tend to be too diversified, um, and, uh, you know, too short term, and you're often much better off just buying an- an index fund. And many of them perform... They- they look... If you look carefully at their portfolios, they're not so different from the underlying index itself, and you tend to pay a much higher fee. Uh, now all of that being said, there's some very talented mutual fund, uh, managers. A guy named Will Danoff at Fidelity has had a great record over a long period of time. You know, the famous Peter Lynch, uh, Ron Baron, another great long-term growth stock investor. So there's some great, uh, mutual funds, but I put them in the handful versus the thousands. And if you're in, you know, the thousands, I'd- I'd rather someone bought just an- an index fund basically.
- LFLex Fridman
Yeah, index funds, but what, uh, what would be the leap for an everyday investor to go to investing in a small number of companies, like two, three, four, or five companies?
- BABill Ackman
I even recommend for individual investors to invest in, you know, a dozen companies. You don't get that much more benefit of diversification going from a dozen to 25 or even 50, you know. Most of the benefits of diversification come in the first, you know, call it 10 or 12. Uh, and if you're investing in businesses that don't have a lot of debt, they're businesses that you can understand yourself, you understand... You know, actually, individual investors did a much better job analyzing Tesla than the so-called professional investors or analysts, the vast majority of them. So if it's a business you understand, you un... If you bought a Tesla, you understand the product and its appeal to consumers, you know, it's a good place to start when you're analyzing a company. Um, so I would invest in things you can understand. That's kind of a key. Uh, you know, you like Chipotle, you- you understand why they're successful. You can, you know, go there every week and you can monitor, you know, is anything changing? How these new, uh, kind of... How's chicken al pastor? Is that- is that a good upgrade from the basic chicken? (laughs) You know, are the drink offerings improving? Are the stores clean? I think you should invest in companies you really understand. Simple businesses where you can predict with a high degree of confidence what it's gonna look like over time. And if you do that in a not particularly concentrated fashion and you don't borrow money against your securities, you'll probably do much better than your typical mutual fund.
- LFLex Fridman
Yeah, it's interesting, consumers that love a thing are actually good analysts of that thing, or I guess a good starting point.
- 46:45 – 56:33
Activist investing
- BABill Ackman
- LFLex Fridman
Can you explain what activist investing is? You've been talking about investing and then looking at companies when they're struggling, stepping in and reconfiguring things within that company and helping it become great. Uh, so that's part of it, but let's just zoom out. What- what's this idea of activist investing?
- BABill Ackman
I think recently, in the last couple of days, I read an article saying that more than 50% of the capital in the world today that's in- invested in the stock market is passive indexed money, and that's the most passive form, right? So if you think about an index fund, a machine buys a fixed set of securities in certain proportion. Uh, there's no human judgment at all, and there's no real person behind it in a way. Um, they never take steps to improve a business. They just quietly own securities. What we do is we invest our capital in a handful of things. We get to know them really, really well because you're gonna put 20% of your assets in something, you need to know it really well. But once you become a big holder, and if you've got a... some thoughts on how to make a business more valuable, you can do more than just be a passive investor. So our- our strategy is built upon, uh, finding great companies, in some cases, that have lost their way, and then helping them succeed. And we can do that with ideas from outside the boardroom. Sometimes we take a seat at- on a board or- or more than one. Um, and we work with the best management teams in the world to help these businesses succeed. So when I first went into this business, no one knew who we were, and we didn't have that much money. And so to influence what was to us a big company, uh, we had to make a fair bit more noise, right? So we would buy a stake, we'd announce it publicly. We'd attempt to engage with management. The first activist investment we made at Pershing Square was Wendy's. I couldn't get the CEO to ever return my call. (laughs) He didn't return my call. So we... Actually, in that case, uh, our idea was Wendy's owned a company called Tim Hortons, which was this coffee and donut chain.... and you could buy Wendy's for basically $5 billion, and they owned 100% of Tim Hortons, which itself was worth more than five billion. So you could literally buy Wendy's, separate Tim Hortons, and get Wendy's for negative value. That seemed like a pretty good opportunity, even though the business wasn't doing that well. Uh, so we bought the stake, called the CEO, couldn't get a meeting, nothing. So we hired actually Blackstone, which was, at that time had a, had a investment bank, and we hired them to do what's called a fairness opinion of what Wendy's would be worth if they followed our advice. And they agreed to do it. Paid them a fee for it, and then we mailed in a letter with a copy of the fairness opinion saying Wendy's would basically be worth 80% more if they did what we said, and six weeks later, they did what we said. So that's activism, at least an early form of activism. With that kind of under our belt, we had a little more credibility, and now we started to take things and stakes in companies. Uh, the media would pay attention, so the media became a, kind of an important partner. And, uh, you know, some combination of shame, embarrassment, and opportunity, uh, motivated management teams to do the right thing. And then, you know, beyond that, uh, there's certain steps you can take if management's recalcitrant and the shareholders are on your side. But it's a bit like running for office. You've got to get all the constituents to support you and your ideas, and if they support you and your ideas, you can overthrow, if you will, the board of a company. Uh, you bring in new talent and then take over the management of, of a business. And that's the most extreme form of activism. So that's kind of the early days, uh, what we did. And a lot of the early things that we did were, um, you know, call it, uh, we called sort of, like, investment banking activism, where we'd go in and recommend something a good investment bank would have recommended, and if they do it, we make a bunch of money, and then we moved onto the next one. And then we realized an investment, a company called General Growth, uh, was the first time we took a board seat on a company. And there was some financial restructuring and also an opportunity to improve the operations of the business, sit on the board of a company, and that was one of the best investments we ever made. And we said, "Okay. We can do more than just be an outside, the boardroom investor, and we can get involved in helping select the right management teams and helping guide the right management teams." And then we've done that over years. Uh, and then I would say the last seven years, we haven't had to be an activist. An activist is generally someone who's outside banging on the door trying to get in. We've sort of built enough credibility that they open the door and they say, "Hey, Bill, what ideas do you have?" (laughs) "So welcome. Would you like to join the board?" We're treated differently today than we were in the beginning, and that, uh, um, is, I would say, some people might just call it being an engaged owner. And that, by the way, that's the way investing was done in the Andrew Carnegie, JPMorgan days, you know, 150 years ago. Right? You had these iconic business leaders that would own 20% of US Steel, and when things would go wrong, they'd replace the board and the management and fix them. And over time, we went to a world where mutual funds were created like in the 1920s, '30s, index funds, uh, with Vanguard and others, and that all these controlling shareholders would, you know, kind of gave their stock to society or their children in multiple generations, and there were no longer kind of controlling owners of businesses or very few. And that led to underperformance and the opportunity for, for activists over time. And what activism has done, I think we've helped lead this movement, is it restored kind of the balance of power between the owners of the business and the managements of the company. And that's been a very good thing for the performance of the, of the US stock market, actually.
- LFLex Fridman
So the owners, meaning the shareholders?
- BABill Ackman
Yes.
- LFLex Fridman
And so there's a more direct channel of communication with, with activist investing between the shareholders and the people running the company?
- BABill Ackman
Yes. So activists generally never own more than 5 or 10% of a business, so they don't have control. So the way they get influence is they have to convince the other, you know, me- they have to get to a sort of majority of the other shareholders to support them. And if they can get that kind of support, they can behave almost like a controlling shareholder. And that's how it works.
- LFLex Fridman
So the running of a company is, uh, according to Bill Ackman, is more democratic now?
- BABill Ackman
It is. It is. But you need some thought leaders. So activists are kind of thought leaders, 'cause they can spend the time and the money. Uh, you know, a retail investor that owns a thousand shares doesn't, doesn't have the, the, the resources or the time. They got a day job. Whereas an activist's day job is finding the handful of things where there are opportunities.
- LFLex Fridman
So on average, is it good to have such an engaged, powerful, influential investor helping control, direct the direction of a company?
- BABill Ackman
It depends who that investor is, but generally, I think it's a good thing. Uh, and that's why, you know, if... One of the problems with being CEO of a company today and having a very diversified shareholder base is the kind of short-term, long-term balance.
- LFLex Fridman
Mm-hmm.
- BABill Ackman
And you have investors who have all different interests in terms of what they want to achieve and when they want it achieved. And a CEO of a new company hasn't had, or a new CEO of an old company, let's say, hasn't had the chance to develop the credibility, uh, to make, uh, the kind of longer term decisions and can be stuck in a cycle of being judged on a quarterly basis. And a business, the best businesses are forever assets, and decisions you make now have impact three, four, or five years from now. In order to make... And sometimes there are decisions we make that have the effect of re- of reducing the earnings of a company in the short term, because in the long term, it's gonna make the business much more valuable. Uh, but it's, sometimes it's hard to have that kind of credibility when you're a new CEO of a company. So when you have a major owner, uh, that's respected by other shareholders sitting on the board saying, "Hey, the CEO is doing the right thing in making this expensive investment in a new factory. We're spending more money on R&D, uh, because we're developing something that's gonna pay off over time."... that large owner on the board, uh, can help buy the time necessary for management to behave in a longer term way. And that's, I think, good for all the shareholders.
- LFLex Fridman
So, that's the good story, but can it get bad? Can you have a, a CEO who is a visionary and sees the long-term future of a company, and an investor come in and have very selfish interest in just making more money in the short term, and therefore destroy and, and manipulate the opinions of the shareholders and other people on the board in order to sink the company, um, maybe increase the, increase the price, but, uh, destroy the possibility of long-term value?
- BABill Ackman
It could theoretically happen. But again, the, the activist in your example generally doesn't own a lot of stock. Uh, the shareholder bases today, the biggest shareholders are these index funds that are forever, right? The BlackRock, Vanguard, State Street, their ownership stakes are just, at this point, only growing because of the inflows of capital they have from shareholders. So, they have to think or they should think very long term, and they're gonna be very skeptical of someone coming in with a short-term idea that drives the stock price up, you know, in the next six months, but impairs the company's long-term ability to compete. And basically, that ownership group, uh, prevents this kind of activity from really happening.
- LFLex Fridman
So, people are generally skeptical of short-term activist investors?
- BABill Ackman
Yes. Uh, they're ve- and they're very few. I don't really know any short-term activist investors.
- LFLex Fridman
That's a hopeful - not, not ones with credibility.
- 56:33 – 1:12:49
General Growth Properties
- LFLex Fridman
You mentioned, uh, General Growth. I read somewhere it called arguably one of the best hedge fund trades of all time. So, uh, I guess it went from $60 million to over three billion.
- BABill Ackman
Uh, it was, it was a good one.
- LFLex Fridman
All right. (laughs)
- BABill Ackman
But it wasn't a trade. I wouldn't describe it as a trade. A trade is something you buy and you just flip. This is something where we made the investment initially in November of 2008, uh, and, uh, we still own a company we spun off of General Growth, and it's now 15 years later.
- LFLex Fridman
So, can, can you describe what went into making that decision to actually increase the value of the company?
- BABill Ackman
Sure. So, this was at the time of the financial crisis, uh, circa November 2008. What... Real estate's always been a kind of sector that I've been interested in. I began my career in the real estate business working for my dad actually, uh, arranging mortgages for real estate developers. So, I, I have, uh, kind of deep, deep ties and interest in the business. And General Growth was the second-largest shopping mall co- company in the country. Uh, Simon Properties many people have heard of. General Growth was number two. They own some of the best malls in the country. And at that time, people thought of shopping malls as these non-disruptible things.
- LFLex Fridman
Mm-hmm.
- BABill Ackman
Again, we talk about disruption. Malls have been disrupted in many ways. Uh, and General Growth stock, uh, the... General Growth the company, the CFO in particular was very aggressive in, in the way that he borrowed money. And he borrowed money from a kind of Wall Street, uh, not long-term, uh, m- mortgages, but generally relatively short-term mortgages. He was pretty aggressive. As the value went up, he would borrow more and more against the assets, and that helped the short-term results of the business. The problem was during the financial crisis, the, the market for what's called CMBS, commercial mortgage-backed securities basically shut.
- LFLex Fridman
Mm-hmm.
- BABill Ackman
And the company, 'cause its debt was relatively short term, had a lot of big maturities coming up that they had no ability to refinance. And the market said, "Oh my God, the lenders are gonna foreclose and the shareholders are gonna get wiped. The company's gonna go bankrupt, they're gonna get wiped out." The stock went from $63 a share to 34 cents. So... And the... there was a family, the Buxbaum family-owned, I think about 25% of the company. And the... they had a $5 billion, 5 billion of stock that was worth 25 billion or something by the time we bought a stake in the business. And what interested me was, uh, I thought the assets were worth substantially more than the liabilities. The company had 27 billion of debt and had a $100 million value of the equity down from like 20 billion. Okay? (laughs) And one that, you know, sort of an interesting place to start with a stock down-
- LFLex Fridman
Mm-hmm.
- BABill Ackman
... 99%. But the fundamental drivers of the mall business are occupancy, how occupied are the malls? Occupancy was up year on year between '07 and '08, interestingly. Net operating income, which is kind of a measure of cash flow from the malls, that was up year on year. So, kind of the underlying fundamentals were doing fine. The only problem they had is they had billions of dollars of debt that they had to repay, they couldn't repay. And if you kind of examine the bankruptcy code, um, that it's precisely designed for s- a situation like this, where it's kind of this resting place you can go, uh, to kind of re- re-, uh, restructure your business. Now, the problem was that every other company that had gone bankrupt, the shareholders got wiped out. And so the market's seeing every previous example, the shareholders get wiped out, the assumption is the stock's gonna go to zero. But that's not what the bankruptcy code says. What the bankruptcy, bankruptcy code says is that the value gets apportioned based on value. And if you could prove to a judge that there was... the asset's worth more than the liabilities, then the shareholders actually get to keep their investment in the company.
- LFLex Fridman
Mm-hmm.
- BABill Ackman
And that was the bet we made. And so we stepped into the market and we bought 25% of the co- company in the open market for... We had to pay up. It started out at 34 cents. I think there were 300 million shares. So, it was at $100 million value. By the time we were done, we paid an average of... we paid 60 million for 25% of the business. So, about $240 million for the equity of the company. And then we had to get on the board to convince the director it was the right thing to do, and the board was in complete panic, didn't know what to do, spending a ton of money on advisors. And, you know, I was a shareholder activist, you know, four years into Pershing Square, and no one had any idea what we were doing. They thought we were crazy. Every day stock... Every day we'd go into the market and we'd buy this penny stock, and we'd file what's called a 13D at every 1% increase in our stake.... and people just thought we were crazy. "We're buying stock in a company that's going to go bankrupt. Bill, you're gonna lose all your money."
- LFLex Fridman
Mm-hmm.
- BABill Ackman
You know, "Run." (laughs) Okay? And I said, "Well, wait, you know, bankruptcy code says that if it's more asset value than liabilities, we should be fine." And the key moment, if you're looking for, uh, fun moments, is there's a woman named Maddy Buxbaum, uh, who was from the Buxbaum family, and, uh, her cousin John, who was the chairman of the board, CEO of the company. And I said, as she calls me, after we disclosed our stake in the company, she's like, "Billy Ackman, I'm really glad to see you here." And I met her, like ... I don't think it was a date, but I kinda met her in a social context when I was, like, 25 or something. And she said, "Look, I'm really glad to see you here, and if there's anything I can do to help you, call me." I said, "Sure." Uh, we kept trying to get on the board of the company. They wouldn't invite us on. We couldn't really run a proxy contest, uh, you know, not with the company going bankrupt. And their advisors actually were Goldman Sachs, and they're like, "You don't want the fox in the henhouse."
- LFLex Fridman
Mm-hmm.
- BABill Ackman
And they were listening to their advisors. So I called Maddy up, and I said, "Maddy, I need to get on the board of the company to help."
- LFLex Fridman
Mm-hmm.
- BABill Ackman
And she says, "You know what? I will call my cousin, and I will f- get it done."
- LFLex Fridman
Mm-hmm.
- BABill Ackman
Uh, like, you know, she calls back a few hours later, "You'll be going onto the board." I don't know what she said (laughs) to, to her cousin.
- LFLex Fridman
(laughs) But she was convincing.
- BABill Ackman
Next thing you know, I'm invited to on the board of the company, and the board is talking about e- o- the old equity of General Growth. Old equity is what you talk about, the shareholders are getting wiped out. I said, "No, no, no. This board represents the current equity of the company."
- LFLex Fridman
Mm-hmm.
- BABill Ackman
"And I'm a major shareholder. John's a major f- shareholder. There's plenty of asset value here. This company should be able to restruc- be restructured for the benefit of shareholders." And we led a restructuring for the benefit of shareholders. And it took, let's say, uh, eight months, and the company emerged from Chapter 11. We made an incremental investment into the company, and the shareholders kept the vast majority of their investment. Uh, all the creditors got their, you know, face amount of their investment, par plus accued- accrued interest, and it was a great outcome. All the employees kept their jobs. The mall stayed open. There was no liquidation. It ... The bankruptcy system worked the way it should. Uh, you know, I was in court, you know, all the time, and the first, uh, meeting with the judge, the judge was like, "Look, this would never have happened were it not for a financial crisis." And once the judge said that, I knew we were gonna be fine, because the company had really not done anything fundamentally wrong. Maybe a little too aggressive in how they borrowed money. And, uh, stock went from 34 cents to $31 a share. And actually, fun little anecdote, um, we made a lot of people a lot of money who followed us into it. Uh, I got a lot of nice thank you notes, which you get on occasion in this business, believe it or not. And then one day I get a voicemail, this is when there was something called voicemail-
- LFLex Fridman
Mm-hmm.
- BABill Ackman
... probably a few years l- later, and it's a guy with a very thick Jamaican accent leaving a message for Bill Ackman. So, I mean, you know, I return all my calls. I call the guy back, and he's like, "Hi, it's Bill Ackman. I was just returning your call." And he says, "Oh, Mr. Ackman, uh, thank you so much for calling me." And I said, "Oh, how can I help?" He says, "I wanted to thank you." I said, "What do you mean?" He said, "I saw you on CNBC, you know, a couple years ago, and you were talking about this General Growth. And the stock ..." I said, "Where was the stock at the time?" He said, "It's 60 cents," or something like this. And he s- ... "And I bought a lot of stock."
- LFLex Fridman
(laughs)
- BABill Ackman
And I'm like, "Well, how much did you invest?" "Oh, I invest all of my money (laughs) in the company." And he was a New York City taxi driver, and he invested, like, $50,000, or something like this, at 60 cents a share, and he was still holding it, and he went into retirement, and he made, you know, 50 times his money. And, uh, you know, those are the moments that you feel pretty good about investing.
- 1:12:49 – 1:20:13
Canadian Pacific Railway
- BABill Ackman
- LFLex Fridman
What was the most dramatic battle for the board that you have been a part of?
- BABill Ackman
Uh, the Canadian Pacific, uh, proxy contest. So Canadian Pacific was like, considered the most iconic company in Canada. It literally built the country because the, the rail that got built over the, over Canada is what united the various provinces into a country. And, uh, and then over time, because the railroad business was pretty good business, they built a ton of hotels, they owned a lot of real estate, and it became this massive conglomerate, but it was horribly mismanaged for decades.... by the time we got involved, it was by far the worst run railroad in North America. They had the lowest profit margins, they had the lowest growth rate, um, the- every quarter management would make excuses, generally about the weather as to why they under-performed versus ... And there, there's a direct competitor, company called Canadian National, has a rail that goes right across the country. And Canadian Pacific would constantly be complaining about the weather and basically, you know, same country, same regions, tracks weren't that far apart. Um, and, uh, but it was a really important company and being on this board was like an honorary thing, and everyone on the board was an icon of Canada. You know, the chairman of the Royal Bank of Canada, you know, the head of the most important grain, privately held grain company, the, you know, sort of an important collection of, um, you know, big time Canadian executives. Here we were, you know, this is probably, uh, about 13 years ago and, uh, you know, still a maybe 44 year old, uh, from New York, not Canadian, uh, basically saying this is the w- worst run railroad in North America. And, uh, we bought 12% of the railroad at a really low price and we, we brought with us to our first meeting the greatest railroader ever, a guy named Hunter Harrison who had turned around Canadian National. So we'd like, "Okay, we've got a great asset, we've got the greatest railroad CEO of all time, he's come out of retirement to step in and run the railroad." And we brought him to the first meeting and they wouldn't even meet with him and, uh, they wouldn't, certainly weren't gonna consider hiring him, and that led us to a proxy contest.
- LFLex Fridman
And this is where the, the engine starts churning to s- to figure out how this contest can be won. So what, what, what's involved in, uh-
- BABill Ackman
Well, the thing is, we had to one, come up with a group of directors who would be willing to step into a battle.
- LFLex Fridman
Mm-hmm.
- BABill Ackman
And we didn't want a bunch of New York directors or even American directors. We wanted Canadians. The problem was this was the most iconic company in Canada and we wanted high profile people, so we talked to all the high profile people in Canada. Every one of them would say, "Bill, you're entirely right. This thing is the worst run (laughs) railroad. It needs to be fixed." But, you know, I see John at the club, you know, I see him at the Toronto Club, you know, I can't, you know, I can't do this, but you're totally right.
- LFLex Fridman
Mm-hmm.
- BABill Ackman
And, uh, we had to... And that was the concern because, you know, you have to file your materials by a certain day, you've got to put together a slate, we needed a big slate because we knew we had to replace basically all the directors. Uh, and then one, I spoke to, uh, a guy who was one of the wealthiest guys in Canada who was on the board at one point in time and he said, uh, "Bill, I have an idea for you. There's this woman, Rebecca McDonald, why don't you give her a call?" And I called Rebecca and she was the first woman to take a company public in Canada as CEO, and she was a kind of anti-establishment, not afraid to take on anything kind of person, and I called her, we had a great conversation and she, she was in the Dominican Republic at her house and I flew down to see her and she said, "Yeah, I'm all in." And actually once we got her, that enabled us to get others and then we put together our slate and, uh, we had some pretty interesting dialogue with the company. They tried to embarrass us all the time.
- LFLex Fridman
In the press, publicly, what, what are we talking about?
- BABill Ackman
The press, publicly. You know, at one point I wrote an email saying, "Look, let's just come to peace on this thing, um, but if we don't, you're f- you're really forcing my hand and we're gonna have to rent the largest hall in Toronto and invite all the shareholders and it's gonna be e- embarrassing for management." And I made reference to some nuclear winter, "Let's not have it be a nuclear winter." And they thought they'd embarrass me by releasing the email, but it only inspired us. And we rented the largest hall in Canada and we put up a presentation walking through, you know, here's Canadian National, here's Canadian Pacific. Here's what they said, here's what they did. And then we had Hunter get up, who's this incredibly charismatic guy from Tennessee-
Episode duration: 3:32:43
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