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, formerly 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. And now, a quick few second mention of each sponsor. Check them out in the description. It's the best way to support this podcast. We got Element for delicious electrolytes, Policy Genius for insurance, AG1 for overall delicious health, a sleep for naps, and BetterHelp for mental health. Choose wisely, my friends. Also, if you want to work with our amazing team or just want to get in touch with me, go to lexfridman.com/contact.
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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.
In your lecture on the basics of finance and investing, you 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?
Sure. Actually, it was the first investment book I read and 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. 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. 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 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 going to tell you what something is worth. And so, if you can define what something's worth, then you can really take advantage of the market because it's really here to help you. And that's kind of the message of the book. In that same way, there's a kind of difference between speculation and investing.
Speculation is just a bit like buying trading crypto, right? You're trying to words. Well, short-term trading crypto. Maybe in the long run there's intrinsic value, but many investors, you know, in a bubble going into the crash were really just pure speculators. They didn't know what things were worth. They just knew they were going up, right? That's speculation. And investing is, you know, doing your homework. Digging down, understanding a business, understanding the competitive dynamics of an industry, understanding what management's going to do, understanding what price you're going to pay. You know, the value of anything I would say, other than love, let's say, is the present value of the cash you can take out of it over its life. Now some people think about love that way but it's not the right way to think about love. So investing is about basically building a model of what this business is going to produce over its lifetime.
So how do you get to this idea 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.
Sure. Companies, the value of a security, the value 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 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 going to 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 a stock and a bond is that the bond, it's a contract. You know what you're going to 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 going to sell this year? How many going to sell next year? What are their costs going to be? How much of the money that they generate do they need to reinvest in the business to keep the business going? And that's more complicated. But what we do is we try to find businesses where with a very high degree of confidence we know what those cash flows are going to be for a very long time and very few businesses that you can have really high degree of certainty about and as a result many investments are speculations because it's really very difficult to predict the future. So what we do for a living, what I do for a living, is find those rare companies that you can kind of predict what they're going to look like over a very long period of time.
So what are the factors that indicate that a company is going to be something that's going to make a lot of money, it's going to have a lot of value, and it's 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?
Every consumer has a view on different brands and different companies. And 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 going to be a more valuable more profitable company. So we own a business called Universal Music Group. It's in the business of helping artists become global artists, the recorded music business, and it's in the business of owning rights to sort of the music publishing rights of songwriters. And I think music is forever, right? Music is a many thousand-year-old part of the human experience and I think it will be thousands of years from now and so that's a pretty good backdrop to invest 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 started to get a presence on YouTube and Instagram and helping that artist become a superstar. And that's a unique talent. And the result is the best artists in the world want to come work for them. But they also have this incredible library of the Beatles, the Rolling Stones, YouTube etc.
And then if you think about what music has become, it used to be about records and CDs and eight-track tapes for those of 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 streaming is a lot more predictable than selling records, right? You can sort of say okay how many people have smartphones, how many people are going to 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 kind of build a model of what the world looks like and predict the growth of the streaming business. You predict what kind of market share Universal is going to have over time and 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, invented this concept of margin of safety, right? You want to 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. 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.
Well, music is interesting because 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, of how you make money on music 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 artificial intelligence being able to generate music for example, you said 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 future is completely different from the present and how well this company will be able to like surf the wave of that?
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 or 2000 time frame and that really innovation, Napster, digitization of music almost killed the industry and Universal really led an effort to save the industry and actually made an early deal with Spotify that enabled 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 of course had this huge advantage because I think the Beatles are forever, I think YouTube is forever, I think Rolling Stones are forever. So they had a nice base of assets that were important and I think will forever be and forever is a long time. But 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 neural link chip in your head that instead of a phone, but the music is going to come in a digitized, kind of format. You're going to want to have an infinite library that you can walk around in your pocket or in your brain. It's not going to matter that much if the form factor, the device changes. It's not really that important whether it's Spotify or Apple or Amazon that are the so-called DSPs or the providers. I think the value is really going to reside in the content owners and that's really the artists and the label.
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 thousands of years, but musicians and music has been around. Like we actually care to know who's the musician that created it, just like we want to know who's the artist, human artist that created a piece of art. I totally agree and I think if you think about it there's lots of other technologies and computers that have been used to generate music over time but no one falls in love with a computer-generated track, right? And Taylor Swift, you know, incredible music but it's also about the artist and her story and her physical presence and the live experience. I don't think you're going to sit there and someone's going to put a computer up on stage and it's going to play and people are going to get excited around it. So I think AI is really going to be a tool to make artists better artists. And like a synthesizer, right? Really created the opportunity for one man to have an orchestra. Maybe a bit of a threat to a percussionist. Unless that computer has humanlike 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'll be a robot Taylor Swift.
It's a copyrightable asset I would think.
Right. Yeah.
I'm not sure that's the world I'm excited about. That's a different discussion. The world is not going to ask your permission to become what it's becoming. But you can still make money on it. Presumably there'd be a capital system and there'll be some laws under which AI, which I believe AI systems will have rights that are akin to human rights and we're going to have to contend with what that means.
Well, there's sort of name and likeness rights, right? That have to be protected. Now, can a name be attributed to a Tesla robot? I don't know.
I think so. I think it's quite obvious to me.
Okay. So, those are more potential artists for us to represent at universities.
Exactly. Exactly. All right. That's sort of one example. Another example could be just, you know, the restaurant industry, right? If you look at businesses like McDonald's, right? It's a 1950 vintage business and here we are, it's 75 years later and you can kind of predict what it's going to look like over time. And the menu is gonna adjust over time to consumer tastes but I think the hamburger and fries is probably forever. The Beatles, the Rolling Stones, the hamburger and fries are forever. I was eating at Chipotle last night as I was preparing these notes.
And yeah, it is one of my favorite places to eat.
You said it is a place that you eat. You obviously also invest in it. What do you get at Chipotle?
I tend to get a double chicken.
I like the burrito, but I generally try to order the bowl. Cut the carbs for health reasons. And you know, double chicken, guac, lettuce, black beans.
And I'm more of a steak guy. Just putting that on the record. What's the actual process you go through? Like literally the process of figuring out what the value of a company is? Like how do you do the research? Is it reading documents? Is it talking to people? How do you do it?
It's all of the above. So Chipotle, what attracted us initially is the stock price dropped by about 50%. Great company, great concept. Athletes love it, consumers love it, healthy, sustainable, fresh food made in front of your eyes and Steve is 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. 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. And we said look, such a great concept but their approach was not, it was far from ideal. But we start with usually reading the SEC filings. So companies file a 10K 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. Conference call transcripts are publicly available. It's kind of very helpful to go back 5 years and kind of learn the story. Here's how management describes their business. Here's what they say they're going to do. And then you can follow along to see what they do. It's like a historical record of how competent and truthful they are. It's a very useful device.
And then, of course, looking at competitors and thinking about what could dislodge this company. 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, we'll talk to people in the industry, we'll try to understand the difference between publishing and recorded music, we'll look at the competitors, we'll talk to, we'll read books, I read a book about the music industry or a couple books about the industry. So it's a bit like a big research project. And there are these so-called expert networks now and you can get pretty much anyone on the phone and they'll talk to you about an aspect of the industry that you don't understand, want to learn more about. Try to get a sense, public filings of companies generally give you a lot of information, but not everything you want to know. And you can learn more by talking to experts about some of the industry dynamics, the personalities. You want to get a sense of management. I like watching podcasts. If a CEO were to do a podcast or a YouTube interview, you get a sense of the people.
So, in the case of Chipotle, for example, by the way, I could talk about Chipotle all day. I just love it. I love it. I wish there was a sponsor. I'll mention it to the CEO.
Don't make promises you can't keep, Bill.
I'm not making promises. Brian Niccol, a fantastic CEO. He's not going to spend a dollar he doesn't think it's the company's best interest.
All right. All I want is free Chipotle. Come on now.
What was I saying? And so you look at a company like Chipotle and then you see there's a difficult moment in its history like you said that there was a food safety issue and then you say okay well I see a path where we can fix this and therefore even though the price is low we can get it to where the price goes up to its value.
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. It's got a long-term trajectory of growth out into the force, 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. 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 value is generally built into the price you have to pay for the business. So 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 going to earn particularly attractive returns. So we get involved in cases where a great business has kind of made a big mistake 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.
You said that barriers to entry. 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 fascinating. All of them were fascinating. So you said barriers to entry. How do you know if there's a type of moat protecting the competitors from stepping up to the plate?
The most difficult analysis to do as an investor is kind of figuring out how wide is the moat, how much at risk is the business to disruption. And we're in, I would say, a period, the greatest period of disruptability in history. Technology, a couple of 19-year-olds can leave whatever university or maybe they didn't even go in the first place, they can raise millions of dollars, they can get access to infinite bandwidth storage. They can contract with engineers in low-cost 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 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. We've only made a fortune interestingly investing in restaurants. A big part of it is a really simple business.
And if you get Chipotle right and you're at 100 stores, it's not so hard to envision getting to 200 stores and then getting to 500 stores, right? And the key is maintaining the brand image, growing intelligently, having the right systems. Now when you go from 100 stores to 3,500 stores, you have to know what you're doing. And there's a lot of complexity, right? If you think about your local restaurant, the family's working in the business, they're watching the cash register. And you can probably open another restaurant across town, but there are very few restaurant operators that own more than a few restaurants and operate them successfully. And the quick service business is about systems and building a model that a stranger who doesn't know the restaurant industry can come in and enter the business and build a 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, all these various brands, Popeye's. 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 sort of franchises, local entrepreneurs.
So if the restaurant has scaled to a certain number, that means they've figured out some kind of system that works. It's very difficult to develop that kind of system. So that's a moat. A moat is you get to a certain scale and you do it successfully and the brand is now 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, 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 serious dinner for under 20 bucks. And eat really 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 farmers around the country. It's a lot easier to make a deal with one of the big massive food producers and buy your pork from them than to buy from a whole bunch of farmers around the country. And so that is a big moat for Chipotle. Very difficult to replicate.
And by the way, another company I think you have a stake is McDonald's.
No, we own a company called Restaurant Brands. Restaurant Brands owns a number of quick service companies. One of which is Burger King.
Burger King. Okay. Well, it's been a meme for a while, but 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 knew you could do this, but a burger patty at Burger King can do this. McDonald's, it's actually way cheaper.
They'll just sell you the patty.
The patty. And it's cheap. It's like $1.50 or $2 per patty. And it's about 250 calories. And it's just meat. And despite like the criticism of memes out there, that's pretty healthy stuff.
And so when I do, when I go, 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 when I'm traveling, the easiest way to get me is that.
So, you go to McDonald's, you order six patties.
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 got to do what you love, what makes you happy, and that's what makes me happy.
I think we should maybe we'll have Burger King feature in it. What about Flame Broiled? What's with these fried burgers? We got to get you to Burger King, you know, grilled burgers.
Wait, is this like fast food trash? I didn't know. I don't know the details of how they're made. I'm not sure I don't have allegiance.
I think we got a chance to switch you to Burger King.
I'm making so many deals today. It's wonderful.
Okay. You were talking about moats and this kind of reminded me of Alphabet, the parent company.
Sure. We're making, where it's a big position for us.
So, it's interesting that you think that maybe Alphabet fits some of these characteristics. It's tricky to know with everything that's happening 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 like as a consumer as just a fan of technology. Why is Google still around? Like it's not just the search engine. It's doing all the basics of the business of search really well, but they're doing all these other stuff. So, what's your analysis of Alphabet? Why are you still positive about it?
Sure. So it's a business we've admired as a firm for whatever 15 years. But rarely got to a price that we felt we could own it because again the expectations were so high and price really matters. And really the sort of AI scare I would call it, Microsoft comes out with ChatGPT, they do an amazing demonstration, people are like this most incredible product and Google which had been working on AI even earlier obviously, Microsoft was behind in AI, it was really their ChatGPT deal that gave them a kind of market presence. And then Google does this fairly really disastrous 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, 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 that's usually a pretty good sign about the moat around the business. So you open your computer and you open your search, and very high percentage of the world starts with a Google page and a one line where you type in your search. The Google advertising search YouTube franchise is one of the most dominant franchises in the world, very difficult to disrupt, extremely profitable. 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. They used to say about advertising, you know, you spend a fortune and you just don't know which 50% of it works but you just sort of spend the money because you know ultimately that's going to bring in the customer. And now with online advertising you can see with granularity which dollars I'm spending, when people click on the search term and end up buying something and I pay, 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 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, by virtue of the investment they've made, the time, the energy that people put into it, we felt their AI capabilities were if anything potentially greater than Microsoft ChatGPT and that the market had overreacted. And because Google is a big company, global business, regulators 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 led the world to believe that they were behind. And we ultimately concluded if anything they're tied or ahead and you're paying nothing for that potential business.
And they also have huge advantages by virtue, think of all the data Google has, the search data, all the various applications, email and otherwise and the Google suite of products. It's an incredible data set. So they have more training data than pretty much any company in the world. They have incredible engineers. They have enormous financial resources. So that was kind of the bet 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 that has a lot of potential for efficiency. You know, sometimes when you have this enormously profitable, dominant company, all of the technology companies in the post March 20 grew enormously in terms of their teams and they probably overhired. And so you've seen some, 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 the business. 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 6.7% yield. And that earnings yield is growing over time as the business grows. That's, compared to what you can earn lending your money to the government, 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 they're one of the top cloud players. So very interesting, generally well-managed company with incredible assets and resources and dominance, and has no debt. It's got a ton of cash and so pretty good story.
Is there something fundamentally different about AI that makes all of 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, is there some more risk introduced by the possibilities of AI?
Absolutely. That's a great question. You know, business investing is about finding companies that can't be disrupted. AI is the ultimate disruptible asset or technology and 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 their profitability. And AI is this incredibly powerful tool, which is why every business is saying, how can I use AI in my business to make us more profitable, more successful, grow faster, and also disrupt or protect ourselves from the incomings. You know, it's a bit like Buffett talks about a great business like a castle surrounded by this really wide moat, but you have all these barbarians trying to get in and steal the princess and it happens. You know, Kodak, for example, was an amazing, incredibly dominant company until it disappeared. Polaroid, this incredible technology. 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 Kodak was caught up in the analog film world and then the world changed.
Well, Google was pretty fat and happy until ChatGPT came out. How would you rate their ability to wake up, lose weight, and be less happy and aggressively rediscover their search for happiness?
I think you've seen a lot of that in the last year. And I would say some combination of embarrassment and pride are huge motivators for everyone from Sergey Brin to the management of the company.
And Demis has thrown them into the picture and all of DeepMind teams and the unification of teams and all the shakeups. It was interesting to watch the chaos. I love it. I love it when everybody freaks out like you said, partly embarrassment and partly that competitive drive that drives engineers is great. I can't wait to see what, there have 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?
So, as I like to say, incentives drive all human behavior. 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 part of the analysis for investing in a company. And you can learn a lot. 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. Conference calls are actually relatively recent. When I started in the business, there weren't conference call transcripts. Now you have a written record of everything management has said in response to questions from analysts at conferences and otherwise. And so 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 going to do. Do they underpromise and overdeliver? Do they overpromise and underdeliver? Do they say what they're going to do? Do they admit mistakes? Do they build great teams? Do people want to come work for them or are they able to retain their talent? And then part of it is 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? And that's kind of the analysis you do.
Are we talking about CEO, COO? What does management mean? How deep does it go?
Sure. So the very senior management matters enormously. We use the Chipotle example. Steve's a great entrepreneur, business got to a scale he really couldn't run it. We recruited a guy named Brian, helped the company recruit a guy named Brian Niccol. 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. Over the course of their career, they'll have a team they've built that will come follow them into the next opportunity. But the key is, really the top person matters enormously. Because and then it's who they recruit. You recruit an A+ leader and they're going to recruit other A type people. You recruit a B leader, you're not going to recruit any great talent beneath them.
You mentioned Warren Buffett. You said you admire him as an investor. What do you find most interesting and powerful about his approach? What aspects of his approach to investing do you also practice?
Sure. So, most of what I've learned in the investment business I've learned from Warren Buffett. He has been my great professor of this business. 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 Berkshire Hathaway annual reports
And then I eventually got the Buffett partnership letters and you can see which are an amazing read to go back to the 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 — he's still at it at 93. Two, he takes a very long-term view. But a big thing that you learn from him, investing requires this incredible dispassionate, unemotional quality. You have to be extremely economically rational, which is not a basic — it's not something you learn in the jungle. I don't think it's something that — if you think about surviving the jungle, the lion shows up, you and everyone starts running, you run with them. That does not work well in markets. In fact, you generally have to do the opposite. 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. Buffett has been great at that and great at teaching about what he calls temperament, which is this sort of emotional — or unemotional quality that you need to be able to dispassionately look at the world and say, 'Okay, is this a real risk? Are people overreacting?' 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, is just inherently human. You have to reverse that. You have to get excited when things get cheaper and you've got to get concerned when things get more expensive.
You've been a part of some big battles, some big losses, some big wins. So it's been a roller coaster. So, in terms of temperament psychologically, how do you not let that break you? How do you maintain a calm demeanor and avoid running with the lemmings?
I think it's something you kind of learn over time. A key success factor is you want to have enough money in the bank that you're going to survive, regardless of what's going on with volatility in markets. People who — 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 the key is getting yourself to a place where you're financially secure. You're not going to lose your house. That's kind of a key thing. And then also doing your homework. Stock prices — stocks can trade at any price in the short term. And if you know what a business is worth and you understand the management, you know it extremely well, it's not nearly as — it doesn't bother you when a stock price goes down, or it has much less impact on you, because as 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 going to just listen to more music next year than this year, you're going to do well. So it's some combination of being personally secure and also just knowing what you own. And over time you build calluses, I would say.
So psychologically, just as a human being, speaking of lions and gazelles and all this kind of stuff, is it as simple as just being financially secure? Is there some just human qualities that you have to be born with slash develop?
I think so. Now I'm a pretty emotional person, I would say, or 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.
So you weren't born with that you think? So being emotional, do you tend to respond to volatility?
Yeah. And you just — it's a bit again — you can learn a lot from other people's experience. It's one of the few businesses where you can learn an enormous amount by reading about other periods in history. Following Buffett's career, the mistakes he made. If you're investing a lot of capital, every one of your mistakes is going to be big. So we've made big mistakes. The good news is that the vast majority of things we've done have worked out really well, and so that also gives you confidence over time. But because we make very few investments — we own eight things today, or seven companies to that matter — if we get one wrong it's going to be big. 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 experience, I call it that.
I think we'll talk about some of that. 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?
Sure. So never invest money you can't afford to lose — where if you lost this money you'd lose your house, etc. So being in a place where you're investing money that you don't care about the price in the short term, it's money for your retirement, and you take a really long-term view. I think that's key. Never investing where you borrow money against your securities. The markets offer you the opportunity to leverage your investment. And in most worlds you'll be okay, except if there's a financial crisis or a nuclear device gets detonated, God forbid, somewhere in the world, or there's an unexpected war, or someone kills a leader unexpectedly. 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, then 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 overreactive, and when markets are doing well. So be able to think long-term and be sufficiently financially secure such that you can afford to think long-term. Now Buffett is the ultimate long-term thinker, and just the decisions he makes, the consistency of the decisions he's made over time, and fitting into that sort of long-term framework is very educational, let's put it that way, for learning about this business.
So you mentioned eight companies, but what do you think about mutual funds that for everyday investors that diversify across a larger number of companies?
I think there are very few mutual funds. There are thousands and thousands of mutual funds. There are very few that earn their keep in terms of the fees they charge. They tend to be too diversified, too short-term, and you're often much better off just buying an index fund. And many of them — if you look carefully at their portfolios — are not so different from the underlying index itself, and you tend to pay a much higher fee. Now, all that being said, there are some very talented mutual fund managers. A guy named Will Danoff at Fidelity's had a great record over a long period of time. The famous Peter Lynch, Ron Baron — another great long-term growth stock investor. So there are some great mutual funds, but I put them in the handful versus the thousands. And if you're in the thousands, I'd rather someone just buy an index fund, basically.
Yeah, index funds. But what would be the leap for an everyday investor to go to investing in a small number of companies, like two, three, four, five companies?
I even recommend for individual investors to invest in a dozen companies. You don't get that much more benefit of diversification going from a dozen to 25 or even 50. Most of the benefits of diversification come in the first 10 or 12. And if you're investing in businesses that don't have a lot of debt, they're businesses that you can understand yourself. 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 — if you bought a Tesla, you understand the product and its appeal to consumers — it's a good place to start when you're analyzing a company. So I would invest in things you can understand. That's kind of a key. You know, you like Chipotle, you understand why they're successful. You can go there every week and you can monitor: is anything changing? How are these new — how's chicken al pastor? Is that a good upgrade from the basic chicken? Are the drink offerings improving? Is the store 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 going to 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.
Yeah, it's interesting. Consumers that love a thing are actually good analysts of that thing, or I guess a good starting point. And I'm just afraid if I invest in Chipotle, I'll be analyzing every little change of menu from a financial perspective and just be very critical.
And by the way, there's much more information available today. When I was first investing, literally we had people faxing us documents from the SEC filings in Washington DC. Now everything's available online. Conference call transcripts are free. You have AI, you have unlimited data, and all kinds of message boards and Reddit forums and things where people are sharing advice. And everyone has their own — by virtue of their career or experience they'll know about an industry or a business, and that gives — I would take advantage of your own competitive advantages. If it's going to affect your experience, I wouldn't buy the stock.
Yeah. I mean, I should also say that I am somebody that emotionally does respond to volatility, which is why I've never — I bought index funds and I just noticed myself psychologically being affected by the ups and downs of the market. I want to tune out because if I'm at all tuned in, it has a negative impact on my life.
Yeah, that's really important.
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. That's part of it, but let's just zoom out. What's this idea of activist investing?
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 invested in the stock market is passive indexed money, and that's the most passive form. So if you think about an index fund, a machine buys a fixed set of securities in certain proportion, there's no human judgment at all, and there's no real person behind it in a way. 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 going to 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 some thoughts on how to make a business more valuable, you can do more than just be a passive investor. So our strategy is built upon 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 on a board, or more than one, 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, we had to make a fair bit more noise. 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. He didn't return my call. So we actually — in that case, our idea was Wendy's owned a company called Tim Hortons, which was this coffee 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 5 billion. 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. So we bought the stake, called the CEO, couldn't get a meeting, nothing. So we hired actually Blackstone, which at the time had an 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 bigger stakes in companies. The media would pay attention. So the media became kind of an important partner, and some combination of shame, embarrassment, and opportunity motivated management teams to do the right thing. And then beyond that, there are certain steps you can take if management is 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 — i.e., you bring in new talent and then take over the management of a business. And that's the most extreme form of activism. So that's kind of the early days and what we did. And a lot of the early things that we did were what we call sort of 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 on to the next one. And then we realized an investment — a company called General Growth was the first time we took a board seat on a company. And there it 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. And then I would say the last seven years we haven't had to be an activist — 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? So welcome. Would you like to join the board?' We're treated differently today than we were in the beginning. And that, 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, J.P. Morgan days, 150 years ago. You had these iconic business leaders that would own 20% of U.S. 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 with Vanguard and others, and all these controlling shareholders kind of gave their stock to society or their children over 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 activists over time. And what activism has done — and 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 U.S. stock market, actually.
So the owners meaning the shareholders. And so there's a more direct channel of communication between the shareholders and the people running the company.
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 — they have to get to sort of a 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.
So the running of a company is, according to Bill Ackman, more democratic now.
It is, but you need some thought leaders. So activists are kind of thought leaders because they can spend the time and the money. A retail investor that owns a thousand shares doesn't have the resources or the time — they've got a day job. Whereas an activist's day job is finding the handful of things where there are opportunities.
So on average, is it good to have such an engaged, powerful, influential investor helping direct the direction of a company?
It depends who that investor is, but generally I think it's a good thing. And that's why 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. 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 — or a new CEO of an old company, let's say — hasn't had the chance to develop the credibility to make the kind of longer-term decisions and can be stuck in a cycle of being judged on a quarterly basis. And the best businesses are forever assets, and decisions you make now have impact three, four, five years from now. And sometimes there are decisions we make that have the effect of reducing the earnings of a company in the short term because in the long term it's going to make the business much more valuable. But 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 that's respected by other shareholders sitting on the board saying, 'Hey, the CEO is doing the right thing and making this expensive investment in a new factory, or we're spending more money on R&D because we're developing something that's going to pay off over time,' that large owner on the board 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.
So that's the good story, but can it get bad? Can you have 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 manipulate the opinions of the shareholders and other people on the board in order to sink the company — maybe increase the price, but destroy the possibility of long-term value?
It could theoretically happen, but again, the activist in your example generally doesn't own a lot of stock. 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 going to be very skeptical of someone coming in with a short-term idea that drives the stock price up in the next six months but impairs the company's long-term ability to compete. And basically, that ownership group prevents this kind of activity from really happening.
So, people are generally skeptical of short-term activist investors.
Yes, and they're very few. I don't really know any short-term activist investors.
Not ones with credibility. You mentioned General Growth. I read somewhere it was called arguably one of the best hedge fund trades of all time. So I guess it went from $60 million to over three billion.
It was a good one. But it wasn't a trade. I wouldn't describe it as a trade. A trade is something you buy and you flip. This is something where we made the investment initially in November of 2008, and we still own a company we spun off of General Growth and it's now 15 years later.
Can you describe what went into making that decision to actually increase the value of the company?
Sure. So this was at the time of the financial crisis, circa November 2008. Real estate has always been a kind of sector that I've been interested in. And I began my career in the real estate business working for my dad, actually, arranging mortgages for real estate developers. So I have kind of deep ties and interest in the business. And General Growth was the second-largest shopping mall company in the country. Simon Properties, many people have heard of. General Growth was number two. They owned some of the best malls in the country. And at that time people thought of shopping malls as these non-disruptible things. Again, we talk about disruption. Malls have been disrupted in many ways. And General Growth — the company, the CFO in particular, was very aggressive in the way that he borrowed money, and he borrowed money from a kind of Wall Street — not long-term 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 market for what's called CMBS, commercial mortgage-backed securities, basically shut. And the company, because 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 going to foreclose and the shareholders are going to get wiped. The company's going to go bankrupt. They're going to get wiped out.' The stock went from $63 a share to 34 cents. And there was a family, the Buckman family, owned I think about 25% of the company, and they had $5 billion of stock that was worth 25 million or something by the time we bought a stake in the business. And what interested me was I thought the assets were worth substantially more than the liabilities. The company had 27 billion of debt and had a hundred million value of the equity, down from like 20 billion. An interesting place to start with the stock down 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 examine the bankruptcy code, it's precisely designed for a situation like this, where it's kind of this resting place you can go to kind of restructure your business. Now the problem was that every other company that had gone bankrupt, the shareholders got wiped out. And so the market, seeing every previous example, the shareholders get wiped out, the assumption is the stock's going to go to zero. But that's not what the bankruptcy code says. What the bankruptcy code says is that the value gets apportioned based on value, and if you could prove to a judge that the assets were worth more than the liabilities, then the shareholders actually get to keep their investment in the company. And that was the bet we made. And so we stepped into the market, we bought 25% of the company in the open market. We had to pay up — it started out at 34 cents. I think there were 300 million shares, so it was at a hundred million value by the time we were done. And 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 of 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 I was a shareholder activist, four years into Pershing Square, and no one had any idea what we were doing. They thought we were crazy. Every day we'd go into the market and we'd buy this penny stock and we'd file what's called a 13D 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 going to lose all your money.' Okay. And I said, 'Well, wait. The bankruptcy code says that if there's more asset value than liabilities, we should be fine.'
And the key moment, if you're looking for fun moments, is there's a woman named Mattie Buckman, who was from the Buckman family, and her cousin John was chairman of the board and CEO of the company. And as she calls me after we disclose our stake in the company, she's like, 'Billy Ackman, I'm really glad to see you here.' And I met her — I don't think it was a date, but I kind of 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.' We kept trying to get on the board of the company. They wouldn't invite us on. Couldn't really run a proxy contest with a company going bankrupt. And their advisers actually were Goldman Sachs, and they're like, 'You don't want the fox in the henhouse.' And they were listening to their advisers. So I called Mattie up and I said, 'Mattie, I need to get on the board of the company to help.' And she says, 'You know what? I will call my cousin and I'll get it done.' A few hours later, you'll be going on to the board. I don't know what she said to her, but she was convincing. Next thing you know I'm invited onto the board of the company, and the board is talking about the old equity of General Growth. Old equity is what you talk about when the shareholders are getting wiped out. I said, 'No, no, no. This board represents the current equity of the company, and I'm a major shareholder. John's a major shareholder. There's plenty of asset value here. This company should be able to restructure for the benefit of shareholders.' And we led a restructuring for the benefit of shareholders, and it took, let's say, 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. All the creditors got their face amount of their investment, par plus accrued interest, and it was a great outcome. All the employees kept their jobs. The malls stayed. There was no liquidation. The bankruptcy system worked the way it should. I was in court all the time. And the first meeting with the judge, the judge is like, 'Look, this would never have happened were it not for a financial crisis.' And once the judge said that, I knew we were going to be fine, because the company had really not done anything fundamentally wrong, maybe a little too aggressive in how they borrowed money. And the stock went from 34 cents to $31 a share.
And actually, fun little anecdote. We made a lot of people a lot of money who followed us into it. 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, probably a few years later. And it's a guy with a very thick Jamaican accent leaving a message for Bill Ackman. So I return all my calls. Call the guy back. He's like, 'Hi, it's Bill Ackman. I'm just returning your call.' He's like, 'Oh, Mr. Ackman, thank you so much for calling me.' I said, 'How can I help?' He says, 'I wanted to thank you.' I said, 'What do you mean?' He said, 'I saw you on CNBC 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, '60 cents or something like this.' And I bought a lot of stock. And I'm like, 'Well, how much did you invest?' 'Oh, I invested all of my money 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 50 times his money. And those are the moments that you feel pretty good about investing.
What gave you confidence through that? It went to a penny stock, and I'm sure you were getting a lot of naysayers and people saying that this is crazy.
It's the same thing. You just do the work. We got a lot of pushback from our investors, actually, because we had never invested in a bankrupt company before. It's a field called distressed investing, and there are dedicated distressed investors, and we weren't considered one of them. So, 'Bill, what are you doing? You don't know anything about distressed investing. You don't know anything about bankruptcy investing.' But I can read. And sometimes it's very helpful not to be a practitioner or an expert in something because you get used to the conventional wisdom. And so we just, you know, abstractly read, step back and look at the facts, and it was just a really interesting setup for one of the best investments we ever made.
How hard is it to learn some of the legal aspects of this? Like you mentioned bankruptcy code. I imagine it's very sort of dense language and dense ideas and the loopholes and all that kind of stuff. If you're just stepping in and you've never done distressed investing, how hard is it to figure out?
I mean, I literally read a book on distressed investing.
Ben Branch or something, on distressed investing.
So you were able to pick up the intuition from that, just all the basic skills involved, the basic facts to know, all that kind of stuff.
Most of the world's knowledge has already been written somewhere. You just got to read the right books. And also had great lawyers, built up some great relationships. We work with Sullivan & Cromwell, and the lawyer there named Joe Shenker, who I met earlier in my career. Pershing Square is actually my second act in the hedge fund business. I started a fund called Gotham Partners when I was 26. One of my early investments was a company called Rockefeller Center Properties that was heading for bankruptcy. And the lawyer on the other side representing Goldman Sachs was a guy named Joe Shenker. So he was like an obvious phone call, because yet another real estate bankruptcy. And that one we did very well, but I missed the big opportunity. And I suffered severe psychological torture every time I walked by Rockefeller Center, because it could have made — we knew more about that property than anyone else, but I knew less about dealmaking and didn't have the resources, and I was 28 years old or 27. And they hired a better lawyer than we did, and they outsmarted us on that one, in a way. So I said, 'Okay, I'm going to go hire this guy the next time around.'
Okay, we'll probably talk about Rockefeller Center and some failures. But first, you said fox in the henhouse. Something that the board and the chairman were worried about. Why would they call you a fox? So you keep saying activist investing is nothing to worry about, it's always good.
But you know that expression applied in this context.
They were still worried about that.
Sure. And so I mean there's a million questions here, but first of all, what does the process of getting on the board look like?
So a board can always admit a member at any time in their discretion for a U.S. company. You maybe — there's some jurisdiction where you need a shareholder vote, but in most cases a board can vote on any director that they want. If the board doesn't invite you to the party, you have to apply to be a member, in effect. And that process is basically the process of ultimately running a slate for a meeting where you propose — every shareholder can propose to be on a board of a company if they own one share of stock in the business. And getting your name in the company's materials they send to shareholders. Those rules were written in a way that were very unfavorable and very difficult to get in the door. Those rules have been changed very recently, where the company now has to include a candidate — really all the candidates — in the materials they send to shareholders, so the shareholders pick the best ones. When we applied — when we ran proxy contests in the past — that was not the case. And so you have to spend a lot of money, mostly mailing fees and all kinds of other legal and other expenses, to let everyone know you're running — like running a political campaign. And then you've got to run around and meet with the big shareholders, fly around the country, explain your case to them. And then there's a shareholder meeting. And if you get a majority of the votes, you get on.
What's this proxy contest, battle idea?
The battle comes when they don't want you down. And a lot of that has to do with, I would say, pride, normal human kind of stuff. And a lot of times a board of an underperforming company doesn't want to admit that they've underperformed. And boards of directors 20 years ago, when we started Pershing Square, were pretty cushy jobs. Sit on a board of a company, you play golf with the CEO at nice golf courses, you make a few hundred thousand a year to go to four meetings. It was kind of a rubber-stamp world where the CEO really ran the show. Once shareholders could actually dislodge board members and they could lose their seats — and that's really the rise of shareholder activism — boards started taking their responsibilities much more seriously, because directors are typically — in many cases they're retired CEOs, this is kind of how they're making a living in the later part of their career. They sit on four boards, they collect a million, million-and-a-half dollars a year in director's fees. If they get thrown off the board by the shareholders, that's embarrassing, obviously, and it affects their ability to get on other boards. So again, incentives, as I said earlier, drive all human behavior. The directors' incentives — they want to preserve their board seats. So if you have a director — now the directors on board serve in various roles — the most vulnerable ones are ones who, for example, chair a compensation committee. And if they put in a bad plan or they overpaid management, they're subject to attack by shareholders. But these contests are not dissimilar to political contests where there's mudslinging and the other side puts out false information about you. You have to respond. And they're spending the shareholders' money. So they have sort of unlimited resources, and you're spending your and your investors' money. When you're a small firm, finite resources. So they can outspend you, they can sue you, they can try to work the mechanics in such a way that you're going to lose. There's some unfortunate stuff that's happened in the past, manipulative stuff.
So also some stuff that's public, like in the press and all this kind of stuff.
Of course. There'll be articles about — the dirty days where they would go through your trash and make sure that you're not sleeping around and things like this. But that's okay. I can survive extreme scrutiny because I've been through this for a long time.
So you're saying the fat and happy hens can get very wolf-like when the fox is trying to break in. Just explain to me why the fox is good for everybody in the henhouse.
At the end of the day, it's actually very good on a board to have someone — there are many examples over time, and some handful of high-profile ones, where the board fought tooth and nail to keep the activist off the board, and then once the activist got on the board, they said, 'You know, the guy's not so bad after all, the shareholders voted him on, he's got some decent ideas, and let's all work together to have this work out.' And so there are very few cases where, after the contest, when the — and by the way, sometimes you have to replace the entire board. We've done that. But most cases you get a couple of seats on the board, and it's just you want to build a board comprised of diverse points of view, and that's how you get to the truth.
What was the most dramatic battle for the board that you have been a part of?
The Canadian Pacific proxy contest. So Canadian Pacific was considered the most iconic company in Canada. It literally built the country, because the rail that got built over Canada is what united the various provinces into a country. And then over time, because the railroad business is a 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. Every quarter management would make excuses, generally about the weather, as to why they underperform versus — and there's a direct competitor, a company called Canadian National, has a rail that goes right across the country. And Canadian Pacific would constantly be complaining about the weather. Same country, same regions, tracks weren't that far apart. 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 — the chairman of the Royal Bank of Canada, the head of the most important privately held grain company, sort of an important collection of big-time Canadian executives. Here we were, this was probably about 13 years ago, and still maybe 44 years old, from New York, not Canadian, basically saying this is the worst-run railroad in North America. And we bought 12% of the railroad at a really low price. And 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're 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 they certainly weren't going to consider hiring him. And that led us to a proxy contest.
And this is where the engine starts churning to figure out how this contest can be won. So what's involved in that?
Well, the key is we had to, one, come up with a group of directors who would be willing to step into a battle. 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 railroad. It needs to be fixed.' But, 'I see John at the club. I see him at the Toronto Club. I can't do this. But you're totally right.' And that was the concern, because 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 that we had to replace basically all the directors. And then one I spoke to — a guy who was one of the wealthiest guys in Canada who was on the board at one point in time — he said, '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 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 we had some pretty interesting dialogue with the company. They tried to embarrass us all the time in the press, publicly. At one point I wrote an email saying, 'Look, let's come to a peace on this thing. But if we don't, you're really forcing my hand, and we're going to have to rent the largest hall in Toronto and invite all the shareholders, and it's going to be 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: here's Canadian National, here's Canadian Pacific, here's what they said, here's what they did. And we had Hunter get up — this incredibly charismatic guy from Tennessee. An amazing — he's like a lion. Incredibly deep voice, unbelievable track record, incredibly respected guy. It's like getting Michael Jordan to come out of retirement and come and run the company. And Hunter was incredible, and other — Paul, Hala — other members of my team were super engaged. And the board — Canadians are known to be nice. So one of the problems we had is shareholders would never tell management or the board that they were losing. It was not until the night before the meeting when the vote came in that management realized they lost. We got 99% of the vote. And they offered us a deal — they begged us to take a deal. They said, 'Look, we'll resign tonight so that we don't have to come to the meeting tomorrow.'
How embarrassed they were, but that was kind of an interesting one.
So in both this proxy battle and the company itself, this was one of your more successful investments?
It was. The stock's up about ten times, and it's an industrial company. It's a railroad. It's not like a growth company like Google. So it's a great story and the company is now run by a guy named Keith Creel, and Keith was Hunter's protege and in many ways he's actually better than Hunter. He's doing an incredible job. The sad part here is we made— we did very well. We tripled our money over several years and then I went through a very challenging period because of a couple of bad investments and we had to sell our Canadian Pacific to raise capital to pay for investors who were leaving. But we had another opportunity to buy it back in the last couple of years and so we're now again a major owner of the company. But had we held on to the original stock, it would have been epic, if you will.
So on this one, you were right.
And I read an article about you— there's many articles about you. I read an article that said, 'Bill is often right, but you approach it with a scorched earth approach that can often do more, sort of can do damage.'
I haven't read the 'often right' article, but the good news is we are often right. And I say 'we' because we're a team— a small team, but fortunately a very successful one. So our batting average as investors is extremely high. And the good news is our record is totally public. You can see everything we've ever done. But the press doesn't generally write about the success stories. They write about the failures and so we've had some epic failures, big losses. The good news is they've been a tiny minority of the cases. Now, no one likes to lose money. It's even worse to lose other people's money. And I've done that occasionally. The good news is if you stuck with us, you've done very well over a long time.
On a small tangent, since we're talking about boards, did you get a chance to see what happened with the OpenAI board? Because I'm talking to Sam Altman soon. Is there any insight you have, just maybe lessons you draw from these kinds of events, especially with an AI technology company, such dramatic things happening?
Yeah, that was an incredible story. Look, governance really matters and the governance structure of OpenAI I think leaves something to be desired. I think Sam's point was— and maybe Elon Musk's point originally— set up as a nonprofit. It reminds me actually, I invested in a nonprofit run by a former Facebook founder where he was going to create a Facebook-like entity for nonprofits to promote goodness in the world. And the problem was he couldn't hire the talent he wanted because he couldn't grant stock options. He couldn't pay market salaries. And ultimately he ended up selling the business to a for-profit. So it taught me for-profit solutions to problems are much better than nonprofits. And here you had kind of a blend, right? It was set up as a nonprofit, but I think they found the same thing. They couldn't hire the talent they wanted without having a for-profit subsidiary. But the nonprofit entity, as I understand it, owns or a big chunk of OpenAI and the investors own sort of a capped interest where their upside is capped and they don't have representation on the board. And I think that was a setup for a problem and that's clearly what happened here.
And there's I guess some kind of complexity in the governance because of this nonprofit and for-profit thing. It seems like there's a bunch of complexity and non-standard aspects to it that perhaps also contributed to the problem.
Yeah. Governance really matters. Boards of directors really matter. Giving shareholders the right to have input at least once a year on the structure of the governance of a company is really important. And private venture-backed boards are also not ideal. I'm an active investor in ventures and there are some more complicated issues that emerge in private venture-stage companies where board members have somewhat divergent incentives from the long-term owners of a business. What you see a lot in venture boards is they're presided over generally by venture capital investors who are big investors in the company and often times it's more important to them to have the public perception that they're good directors so they get the next best deal. If they have a reputation for taking on management too aggressively, word will get out in the small community of founders and they'll miss the next Google. So their interests are not just in that particular company. That's also one of the problems. Again, it all comes back to incentives.
Can you explain to me the difference between venture-backed— like VCs and shareholders? So this means before the company goes public.
Yeah. So private venture-backed companies, the boards tend to be very small. Could be a handful of the venture investors and management. There are very rarely independent directors. It's just not an ideal structure.
Oh, I see. You want independent.
It's beneficial to have people who have an economic interest in the business and they care only about the success of that company. As opposed to someone who, if you think about the venture business, getting into the best deals is more important than any one deal. And you see cases where the boards go along with in some cases bad behavior on the part of management because they want a reputation for being kind of a founder-friendly director. That's kind of problematic. You don't have the same issue in public company boards.
So we talked about some of your big wins and your track record, but you said there were some big losses. So what's the biggest loss of your career?
Biggest loss of my career is a company called Valeant Pharmaceuticals. We made an investment in a business that didn't meet our core principles. The problem of the pharmaceutical industry— and there are many problems as I've learned— is it's a very volatile business. It's based on drug discovery. It's based on predicting kind of the future revenues of a drug before it goes off patent. Lots of complexities. And we thought we had found a pharmaceutical company we could own because of a very unusual founder and the way he approached this business. It was a company where another activist was on the board of directors and kind of governing and overseeing the day-to-day decisions. We ended up making a passive investment in the company, and up until this point in time we really didn't make passive investments. And the company made a series of decisions that were disastrous. Then we stepped in to try to solve the problem. It was the first time I ever joined a board and the mess was much larger than I realized from the outside and then I was kind of stuck. It was very much a confidence-sensitive strategy because they built their business by acquiring pharmaceutical assets and they often issued stock when they acquired targets. And so once the market lost confidence in management, the stock price got crushed and it impaired their ability to continue to acquire low-cost drugs. And we lost $4 billion.
Yeah. How's that for a big loss?
That's... it's up there.
I'm sweating this whole conversation, both the wins and the losses and the stakes involved.
And by the way, that loss catalyzed other what I call mark-to-market losses. So very high-profile, huge number, disastrous press. Then people said, 'Okay, Bill's going to go out of business, so we're going to bet against everything he's doing.' And we know his entire portfolio because we only own ten things and we were short a company called Herbalife. Very famously, we've only really shorted two companies. The first one there's a book, the second one there's a movie. We no longer short companies. So people pushed up the price of Herbalife, which when you're a short seller, that's catastrophic. I can explain that. And then they also shorted the other stocks that we owned. And so that Valeant loss led to an overall more than thirty percent loss in the value of our portfolio. The Valeant loss was real and was crystallized. We ended up selling the position, taking that loss. Most of the other losses were what I would call mark-to-market losses. They were temporary. But many people go out of business because, as I mentioned before, a large move in a price if investors are redeeming or you have leverage can put you out of business. And people assumed if we got put out of business we'd have to sell everything or cover our short position and that would make the losses even worse. So Wall Street is kind of ruthless.
So they can make money off of that whole thing.
So they use the opportunity of Valeant to try to destroy you— reputation, financially— and then capitalize on it, make money off of that.
Well, that's a terrifying spot to be in. What was it like going through that?
It was pretty grim. It's actually much worse than that because I had a lot of stuff going on personally as well. And these things tend to be correlated. The Valeant mistake came at a time where I was contemplating my marriage. And the problem with the hedge fund business is when you get to a certain scale, the CEO becomes like the chief marketing officer of the business. And I'm really an investor as opposed to a marketing guy. But when you have investors who give you a few hundred million dollars, they want to see you once a year— 'Bill, I'd love to see you for an hour.' But if you've got a couple hundred of those, you find yourself on a plane to the Middle East, to Asia, flying around the country. That takes you away from the investment process. You have to delegate more. That was a contributor to the Valeant mistake. So now we lose a ton of money on Valeant. My ex-wife and I were talking about separating, getting divorced. I put that on hold. I didn't want to make a decision in the middle of this crisis and things just kept getting worse. We were also sued— when you lose a lot of money, we didn't get sued by our investors, but we got sued by a shareholder because when the stock price goes down, shareholders sue. We've done nothing wrong other than make a big mistake, but you have litigation. Your investors are taking their money out. I'm in the middle of a divorce. The divorce starts to proceed. My ex-wife's lawyer's expectations of what my net worth was was about three times what it actually was. And it was going lower right in the middle of this. And I remember the lawyer saying, 'Look, Bill, we've estimated your net worth at X, but don't worry, we only want a third.' But X was 3X. So a third was 100 percent.
And then we had— I had litigation— and actually never before publicly disclosed and I'll share it with you now. We had a public company that owned about a third of our portfolio that was called our version of Berkshire Hathaway. I tried to learn from Mr. Buffett over time and it was, so to speak, permanent capital. The problem with hedge funds is people can take their money out every quarter. What Buffett has is a company where if people want to take their money out, they sell the stock but the money stays. So we set up a similar structure in October of 2014 and then a year later Valeant happens. And then a year later we're in the middle of the mess and we're still in the mess. By kind of mid-2017 we've got litigation underway and another activist investor, a firm called Elliott Associates, which is run by a guy named Paul Singer, took a big position in our public company that was the bulk of our capital. And they shorted all the stocks that we owned and they went long— probably went long the short that we were short and they were making a bet that we'd be forced to liquidate. And then they would make money on— our public company was trading at a discount to what all the securities were worth. So they bought the public company, they shorted the securities and then they came to see us and tried to be activists and force us to liquidate.
So I thought this was going to be— I envisioned an end where the divorce takes all of my resources, the permanent capital vehicle ends up getting liquidated and another activist in my industry puts me out of business. And I had met Neri Oxman right around this time and I'd fallen completely in love with her. And I was envisioning a world where I was bankrupt. A judge found me guilty of, you know, whatever. He sends me off to jail— or not that judge because he was a civil judge, but another judge— sues the SEC, Department of Justice, and I find myself in this incredible mess. And I decided I didn't want things to end that way. So I did something I'd never done before. I talked all before about you don't borrow money. I borrowed money and I borrowed $300 million from JP Morgan in the middle of this mess. And I give JP Morgan enormous credit for seeing through it. Also, I had been a good client over a long period of time, and it's like a handshake bank, and they bet that I would succeed. And I took that money to buy enough stock in my public company that I could prevent an activist from taking over and effectively buy control of our little public company. And I got that done. And I knew that was the moment, the turning point. And I resolved my divorce. And divorces get easier to resolve when things are going badly. I was able to resolve that. We settled the litigation. I was buying blocks of our stock in the market. I remember a day I bought a big block of stock in the market and I get a call from Gordon Singer who is Paul Singer's son who runs their London part of their business. He's like, 'Bill, was that you buying that block?' I said, 'Yes.' And he's like, 'Fuck.'
He knew that once I got that they were not going to be able to succeed and they went away and that was the bottom. And then we've had an incredible run since then.
And there you were able to protect your reputation from the Valeant failure still.
I mean, this is a business where you're going to make some mistakes. It was a big one. It was very reputationally damaging. The press was a total disaster. But I'm not a quitter. And actually the key moments for us— we had never taken our core investment principles and actually really written them down. Something we talked about at meetings, our investment team meetings. I had a member of the team. I said, 'Look, go find a big piece of granite and a chisel and let's take those core principles. I want them like Moses's ten commandments. We're going to chisel them and then we're going to put it up on the wall and once we produce those, we put one on everyone's desk.' I said, 'Look, if we ever again veer from the core principles, hit me with a baseball bat.'
And that was the bottom. And ever since then, we've had the best six years in the history of the firm. So refocus on the fundamentals.
That love helps the story.
Love helps. I literally met Neri at the absolute bottom. Our first date was September 7th of 2017. That was very close to the bottom. Actually, there's one other element to the story. So this went on for a few months after I met her. The other element is that one day I get a call from Neri. She's like, 'Bill, guess what?' I'm like, 'What?' 'Brad Pitt is coming to the media lab. He wants to see my work.' I'm like, 'That's beautiful, sweetheart.' I didn't know Brad Pitt was interested in your work.
As a man, that's a difficult phone call to take.
And apparently, he's really interested in architecture. Now Neri and I were like, we would WhatsApp all day every day. We'd talk throughout the day. Brad Pitt shows up at the media lab at 10:00. I talk to her in the morning. I kind of text her to see how things are going. Don't hear back. And on WhatsApp, you can see whether the other person's read it or not. Yeah. No response. Couple hours later, send another text, no response. 6:00, no response. 8:00, no response. 10:00, no response. And she finally calls me at 10:30 and tells me how great it was.
So I had this scenario. Okay, a judge is going to find me— we're going to lose to the judge. All my assets will disappear. And then Brad Pitt's going to take my girlfriend.
Yeah. Brad Pitt's your competition. This is great.
So it was like a moment. That was sort of the bottom and then sort of the motivational thing. I didn't want to lose to an activist. Didn't want to lose my girl to some other guy. So...
Brad Pitt and you emerged from all that the winner on all fronts.
I'm a very fortunate guy. Very fortunate and lucky.
You talked about some of the technical aspects of that, but psychologically, just— what are you doing at night by yourself?
That was a hard time. Hard time because I was separated from my wife and my kids. I was living in, you know, not the greatest apartment. I had a beautiful home and so I had to go find like a bachelor place and I didn't want to be away from my kids. I moved like ten blocks away and I wasn't seeing them and they didn't like it. So I ended up buying an apartment I didn't like in the same building as my kids, like with a different entrance so I could be near them. But I was home alone. I got a dog that was— Babar. We call him Babar, not the elephant. He's a black labradoodle. He was supposed to be a mini but he's not so mini. But I got him at six weeks old and he would keep me company. And I started meditating actually. A friend recommended TM and I would meditate twenty minutes in the morning, twenty minutes in the evening. And I'm also a big believer in exercise and weightlifting and I play tennis. This is not my first proximity to disaster. I had another moment in my career like 2002 and I learned this method for dealing with these kind of moments which is you just make a little progress every day. So today I'm going to wake up, I'm going to make progress. I'll make progress in the litigation. I'll make progress in the portfolio. I'll make progress with my life. And progress compounds a bit like money compounds. You don't see a lot of progress in the first few weeks, but like thirty days in you're like, oh, okay. You can't look up at the mountaintop where you used to be because then you'll give up, right? But you just— okay, just make step by step by step. And then ninety days in you're like, okay, I was way down there. Okay, I'm climbing the mountain. Okay, I don't look up. Just keep making progress, progress, progress. And progress really does compound. And one day you wake up and like, wow, it's amazing how far I've come.
And if you look at a chart of Pershing Square, our company, you can see the absolute bottom. You can see where we were, you can see the drop, and you can see where we are now. And that huge drop that felt like a complete unbelievable disaster looks like a little bump on the curve and it really gives you perspective on these things. You just have to power through. And I think the key is— I've always been fortunate like from a mental health point of view. And nutrition, sleep, exercise and a little progress every day. That's it. And good friends and family. I had— go take a walk with a friend every night, and a sister who loves me and parents who were supportive but they were all worried about their son, their brother. It was a moment. And also by the way, the other thing to think about is when you recover from something like this you really appreciate it. And also as much as the media loves— okay, when some successful person falls they love writing the story of success, they love even more the story of failure, but when you recover from that it's kind of like the American story.
Right. You know, America— you think of the great entrepreneurs and how many failures they had before they succeeded. How many rocket launches did SpaceX have explode on the pad, right? And then you look at success. That's why Musk is so admired.
You mentioned Herbalife, can you take me through the saga of that? It's historic.
So we at Pershing Square shorted very few stocks and the reason for that is short selling is just inherently treacherous. So if you buy a stock, it's called going long, right? You're buying something, your worst case scenario is you lose your whole investment. You buy a stock for a hundred, it goes to zero, you lose a hundred dollars per share. You buy one share at a hundred. You short a stock at a hundred. What it means is you borrow the security from someone else. The analogy I gave that made it easy for people to understand: it's a bit like you think silver coins are going to go down in value. And you have a friend who's got a whole pile of these 1880 silver US dollars and you think they're going to go down in value. You say, 'Hey, can I borrow ten of those dollars from you?' He's like, 'Sure, but what are you going to pay me to borrow?' 'I'll pay you interest on the value of the dollars today.' So you borrow the dollars that are worth a hundred dollars each today. You pay them interest while you're borrowing them. And then you go sell them in the market for a hundred. That's what they're worth. And then they go down in price to fifty. You go back in, you buy the silver dollars back at fifty and you give them back to your friend. Your friend is fine. He lent you ten, you gave him the ten back and he got interest in the meantime. He's happy. He made money on his coin collection. You, however, made fifty times the ten coins. You made five hundred bucks. That's pretty good. The problem with that is what if you sell them and they go from a hundred to a thousand. Now you're going to have to go buy them back and you're going to pay whatever ten thousand to buy back coins that you sold for five hundred. You're going to lose nine thousand five hundred. And there's no limit to how high a stock price can go. Companies go to three trillion in value. Tesla. A lot of people shorted Tesla saying, 'Oh, it's overvalued. He's never going to be able to make a successful electric car.' Well, I'm sure there are people who went bankrupt shorting Tesla. That's why we didn't short stocks.
But I was presented with this— actually a reporter that covered the other short investment we made early in my career, a company called MBIA— came to me and said, 'Bill, I found this incredible company. You've got to take a look at it. It's a total fraud and they're scamming poor people.'
And we should say that MBIA was a very successful short. A big part of it was that we used a different kind of instrument to short it where we reversed that— we made the investment asymmetric in our favor, meaning put up a small amount of money, if it works you make a fortune, whereas short selling is you sell something and you have to buy it back at a higher price. Herbalife didn't have what's called credit default swaps that you could purchase. Not a big enough company. Didn't have enough debt outstanding to be able to implement. You had to short the stock in order to make a bet against the company. And the more work I did on the company, the more I was like, 'Oh my god, this thing's an incredible scam.' They purport to sell weight loss shakes, but in reality they're selling kind of a fake business plan. And the people that adopt it lose money and they go after poor people. They go after actually in many cases undocumented immigrants who are pitched on the American dream opportunity. And because they have few other options, because they can't get legal employment, they become Herbalife distributors. And it's a business where you— so-called multi-level marketing— multi-level marketing is sort of the name for a legitimate company like this, or it's a pyramid scheme where basically your sales are really only coming from people you convince to buy the product by getting them into the business. That's precisely what this company is.
And like, okay, shorting a pyramid scheme seems like we'll make a bunch of money but the world will be behind us because they're harming poor people, regulators will get interested in a company like this. And we said the FTC is going to shut this thing down. And we did a ton of work and I gave this sort of epic presentation laying out all the facts. Stock got completely crushed and we were on our way. And the government actually got interested early on, launched an investigation. But then a guy named Carl Icahn showed up. And there's a little bit of a backstory. His motivations here were not really principally driven by thinking Herbalife was a good company. He thought it was a good way to hurt me. So he basically bought a bunch of stock and said it was a really great company. And Carl, at least at the time, threw his weight around a bit. Was a credible investor, had a lot of resources and that began the saga.
So he was— we should say— a legendary investor himself.
