Hey, everyone. Welcome to the Holy Grail of Investing podcast. I'm Tony Robbins, along here with my partner and co-host, Christopher Zook.
Think about a business that you can't envision a world in which that business is not bigger and more profitable 10, 20, 30 years from now. Buy that company and own it.
Today, we have a legendary guest in a conversation I know you're going to love. Bill Ackman is the founder and CEO of Pershing Square Capital Management, one of the most influential and closely followed investors probably of the last two decades.
Most investors today are very short-term focused because they get compensated that way or they have risk management that way. This FOMO thing about I want to be in memory chips because that's where all the money's being made. Long-term capital is ideal, but permanent capital is a whole lot better.
What that does is it creates the opportunity for an investor that can have a long-term view.
Most people think about just diversification. You've been willing to be that active participant.
The typical investor will say, "I don't like management, so I'm going to find something else." We see a situation like that. We say, "Look, we can buy from people selling because they believe the situation will never change."
And then we can effectuate change. So, you took a closed-end fund public and then you took your management company public at the same time. And you actually gave people who bought into the closed-end fund a piece of the management company.
This was about democratization. This is the only publicly traded hedge fund.
You made a very famous comment on CNBC. I know you remember: "Hell is coming."
The market was down 6% when I went on and it was down 10 by the time I got off. Meanwhile, I went on TV to say we're buying stock, not selling.
If you were going to give one or two pieces of advice to someone who's really trying to build wealth, what would they be?
Bill's known for his willingness to take on the contrarian view, maintain his conviction when consensus disagrees, and really make concentrated investments based on an extraordinary depth of research and understanding. And his investment returns, as you'll learn, have been extraordinary. Today, we're going to discuss how Bill thinks about risk and downside, the importance of long-term investing, active ownership, and the evolution of public and private markets, and what investors can learn from someone who's really willing to think a bit independently. So, Bill, first of all, you're a legend in the business, and it's just a pleasure to meet you. Thanks for joining us on the podcast.
Thank you. Listen, your investment philosophy has always been something that people have stood out for, your ability to stand out from the crowd. But before we get into that and the way you evaluate risk and so forth, we like to start out with a little background. Everybody knows someone's background, kind of their origin story, so to speak. And I remember reading a story about you where they said that you bet your father, I think with your bar mitzvah money, for a couple thousand dollars of the money, that you would get a perfect 800 score on the SAT. So, it sounds like you've had some confidence early in life. Tell us a little bit, if you would, about that story, but also what really started you out in the financial business almost 34 years ago. What pulled you to it? Was it numbers? Was it people you knew? We're curious to know how you kind of started out to move in the direction of the path where you are today.
Sure. So, first, on the story, I was a pretty cocky kid. And the year before I did the SAT, they released a couple of SATs, so I'd taken them, so I had a pretty good idea how I was going to do.
And I bet my dad—I would consistently do perfect on the verbal, and like I'd somehow miss a few questions on the math. So, I bet my dad that I'd get 800 on the verbal, because that I thought was kind of a lock. And I had $2,000, which was my kind of life savings. More from odd jobs than from bar mitzvah money, I would say. And the Friday before the Saturday of the test, my dad canceled the bet.
Was that a mercy decision or—
I think he was worried he was going to lose, and $2,000 was real money. And it was a time—my dad was a successful guy, but then he was an entrepreneur and in the mortgage brokerage business, and he had a couple of years we didn't make any money. In '87, which is when I took that test, was like a bad year. No, it wasn't '87, it would have been '83. It was not a good year in the real estate business. And I think he would have lost $2,000. And anyway, I ended up getting one question wrong, so I was actually very happy that he— That's my story. In terms of investing, so after college, I went to work for my dad in his kind of real estate little boutique, and I was selling office buildings, arranging financing, things like this. And it seemed to me that the people having more fun were the people making the investments as opposed to the people providing the service, if you will, the kind of investment banker type. And at one point I said to my dad, I said, "Look, I really like to learn how to be an investor. Who's a good investor in your friend group?" And he recommended a guy by the name of Leonard Marks, who he said was a fantastic stock market investor. And I went to see this guy. And he recommended I read the famous book, Ben Graham's Intelligent—
—Investor. And I read it, and I was like, "Wow, this is pretty cool." And the next thing I read was like a Berkshire Hathaway Warren Buffett annual letter. And Buffett's stuff is obviously very compelling, and it kind of draws you in. And I started getting obsessed with it. McGraw-Hill had a bookstore on like 50-something and 6th Avenue. It was the best business bookstore in New York. This is obviously pre-Amazon. And I'd go over there, and during lunch, from 12:00 to 1:00, I would just read books.
Yeah, anything I could find on investing. And that's how I got captured by it. And then I went to Harvard Business School for the purpose of learning how to be an investor. And I learned a pretty valuable lesson. I literally get there, and you get a copy of the course catalog, and I go back to the dorm room, and I'm kind of reading through it. I'm starting to look for all the classes on investing, and there wasn't one. The closest class they had at Harvard about investing was a class on like how to be CEO of like Fidelity Investments—like sort of how to be in the asset management management, how to build the next Fidelity Investments, not how to pick stocks or whatever. So I had to develop my own little self-study program. So that's how I got into it. And the first stock I bought went up. Had it gone down, I probably would have done something else.
And did you start right after leaving your father? Did you go straight into it after that? I thought I read someplace you had invested with a firm or a Harvard business classmate.
So at business school, my next step was—going back to the dorm room and reading 10-Ks and 10-Qs by yourself is a pretty antisocial thing to do. And there was a very smart guy in my class by the name of David Berkowitz, and he lived in what they called Soldiers Field Park. It was sort of these apartments on campus, and he was like one floor away. So I'm like, "Hey, what if we have this..." There was no investment club at Harvard, believe it or not. They had one Bloomberg machine; it was in the library. And the guys who would hang out by the Bloomberg machine, like Tim Barakett, Chris Hohn, who's become a very famous investor, a guy named Bob Jaffe—all these guys ended up going into the hedge fund business, the guys that hung around the Bloomberg machine, which was a very old version of what is today's Bloomberg machine. Yeah, that's how I learned. And I had a little two-person investment club. I started a hedge fund September of '92, which is 3 months after I graduated from business school. And raising money without any experience or track record is a pretty interesting thing. And my dad had no interest.
It sounds like your dad had a different idea about risk than you've taken in your life, for sure.
Oh, yeah. Yeah, he never felt comfortable with risk. But after other people had—after we raised money from real people, four of the original six investors were in the Forbes 400 magazine, wealthiest people in the country. And my dad sort of last-minute said, "Okay, well, maybe I'll put some money." So.
That's awesome. I want to take a quick second to cover a few housekeeping items. First, if you've not already, head over to holygrailocinvesting.com and sign up for our free newsletter. We share timely news, insights, and updates on private companies leading the way in areas like artificial intelligence, space and defense, energy, professional sports, and more. And if you enjoyed this episode, please like and subscribe to the channel. It helps us continue to bring incredible guests and conversations to you like we did today. Finally, many of the guests on this show are connected to CAZ Investments in some way. We may have a direct or indirect ownership in their businesses or otherwise benefit from their growth and their opportunity. We're always transparent about these relationships because we've said at CAZ for 25 years, we're freakish about alignment, and alignment is a critical part of everything that we do. Now, back to the show.
Well, look, one of the things that we focus on with all of our investors at CAZ, it's fundamental—I know you know it, you live it—is this whole idea that if you're going to look at an opportunity, the first thing you got to look at is the worst-case scenario. And as you know, if you can live with that, you can do well; the upside takes care of itself. And I want to acknowledge Christopher because over the last 25-year history, we make about 2,000 evaluations a year, and usually invest in about 10 to give you an idea. About 20 or 30 now that we've got a registered fund, but still, in the 25-year history, that philosophy, rigorously, disciplinedly applied with him, has caused us to have 96% of our private investments be profitable, either realized or unrealized. It's pretty amazing. And I know that's been your fundamental philosophy. Tell us, if you would, how do you evaluate worst-case scenario? How do you come up with how you look at that before you make an investment? And how important is that discipline to being an effective long-term investor?
Yeah, man, as a general matter, to your point, investing's about not losing money for the most part. Now, there's a portion of what we do, a very small portion of what we do, where we take the risk of a permanent, almost entire loss as long as the potential upside is much, much larger—almost venture capital-like. And we do this when we purchase these hedges. But the core of our business, we look for these very robust, durable growth companies—businesses that, as Warren Buffett would say, have a moat around them. You know, where—
Moats are getting filled in with lots of dirt these days, right? Because AI is this incredibly disruptive technology. And I would say it's the hardest thing to do as an investor is understand the risk of disruption to a business. So, I think it's become harder. But the kind of company we typically like completely dominates its place in the universe.
The business model is generally relatively asset-light. We love royalty streams, like royalty-collecting companies. We're okay if a business has to invest capital, but we want the business to earn a very high return on that capital. And we have to be confident that two recent Stanford people who left after freshman year aren't going to be able to put together something in a garage and disrupt us, or of course, an even more well-capitalized competitor. But if you think about the atmosphere we're in now, yesterday I met an investor in a venture capital fund, and this guy does seed-stage investments. And what he told me is he goes to the Harvard campus now in the third week of freshman year to start getting to know who all the students are, because he says the best people are going to leave 6 months into freshman year. "We got to get these guys early." Okay. So today, a 19-year-old can raise effectively an unlimited amount of capital, get access to an unlimited amount of bandwidth, recruit super talented people. So it's a world where I would say the downside risk is greater because of disruption. But the way you mitigate it is finding a business with a business model where it's very difficult to disrupt, where the company's balance sheet uses very low leverage. That's another way—you can have the greatest business in the world, you apply too much financial leverage to it, and you can get obviously knocked out. And then of course, it matters who's running it. In our case, the nature of the way we invest, if we don't like who's running it, we can play a role in replacing that person. But you can have a great business, good balance sheet, really bad person, and they can take away a lot of the value. But yes, protecting your downside. And a good way to do that, of course, is price, which we haven't discussed. So you can get all those things right and overpay, and you can also lose a lot of money. But your 96% record on private investments is about the best I've heard, so congrats.
Well, thank you very much, Bill, and we are very proud of it. Obviously, it's a team effort, and it's something that we've stayed with for 25 years, just being consistent and focusing on what's that worst case, because the upside will take care of itself. And it's funny because for years and years and years, when I would talk to people about our investing in GP stakes and private asset management businesses, I would always have to say it like this: owning a private asset management firm is the very, very second best business model in the world because nothing really beats enterprise software. Well, I don't have to say that anymore because now enterprise software is obviously under the gun. But when we talk about private asset management, we can lead directly to your company, which is Pershing Square. You recently did a very unique offering where you took a closed-end fund public in the United States—ticker symbol is PSUS, for those that are watching. And then you also at the same time took your management company, which is Pershing Square, ticker symbol PS, public at the same time. And you actually gave people who bought into the closed-end fund a piece at the IPO, a piece of the management company. So it's a very unique offering. What was your inspiration for doing that? Obviously, the stock's been trading now for a couple of months, both of them have. What have you learned as a result of that? And kind of what do you anticipate of what the market's going to think about those assets collectively over time?
That's a great question. And to your point, asset management is an amazing industry. But there's a whole spectrum of businesses in asset management. What's interesting about ours is our capital base is comprised of these public vehicles where the capital is basically forever. And what that allows us to do is to be a long-term investor. You're in some sense only as good as the investors you raise capital from. If you're a long-term investor and your investors can pull your money in 3 months, you're not going to succeed. And so we set up our business model in a way where the liabilities match the assets, which is kind of a key success factor. So where was the inspiration? Well, you're an investor in private GPs, the general partners of various funds. You understand the economics of that business. It's really attractive. But my guess is your investors are principally very sophisticated high net worth or institutional type investors. And that opportunity hasn't really been afforded to the public market, the kind of retail type investor. But you often see in that private asset management context, you might have an anchor investor, for example, in a new fund being launched, and the anchor gets a piece of the GP as kind of a gift for leading that round. And we took that sort of inspiration and we put it to work in the public markets. And so basically, for investing in this new fund, for signing up for Pershing Square USA, you got a gift of the GP. And the bigger the offering, the more valuable the gift is because asset management, obviously, the more AUM you have, the more fees you generate. And so, it was aligning the interests of the public market investors. So, we did the largest closed-end investment raise in history with a $5 billion IPO. It was actually one of the largest—I think it's in the top 20 IPOs ever, believe it or not. So, we accomplished our objective of a large IPO. We've raised this pool of capital. The management company's trading at about a $14 billion market cap, which, as a percentage of our fee-paying assets, is the highest valuation of any alternative asset management firm in the world. So, we like that. My only complaint is that PSUS has traded to a wide discount very, very quickly. And so, the opportunity for your viewers here is you can buy our portfolio today at basically 79 cents on the dollar. As of this second, it's trading at about a 21% discount to the value of a liquid portfolio of some of the best businesses in the world. I think part of that is we have not yet provided detailed disclosure on what the portfolio is. It's also a pretty volatile time in the market. One of my takeaways from the IPO—why did the discount emerge so quickly—is I thought I was doing retail a favor. In the offering, we had well more than the demand we needed to sell the whole offering. So, how do we allocate it? What you typically do is you give the institutions kind of a better allocation and you cut back the retail. That's the typical approach. But this whole vehicle was about democratization. Access to—this is the only really publicly traded hedge fund, and it's the only opportunity to get a free piece of the GP. We thought that should go to retail. So, we gave retail a full allocation; we cut back the institutions. Apparently, as I did not appreciate, retail's not expecting a full allocation. So, you had a whole bunch of people put in for, let's say, 10,000 shares. They only wanted 1,000, and then they got 10,000 in their account. They're like, "Holy... I got to pay for this by Monday." And the stock opened—it took them, because they had to open both at the same time, it took them to 2:00. So, on Friday at 2:00, someone gets allocated with 10,000 shares of something where they only really wanted 1,000. And with one-day settlement on Monday, they had to pay for the stock, so they sold it immediately, both PS and PSUS, over the last 2 hours of the day. And retail was about 850 million. We had anchors who were about 2.8 billion. I invested like 250 million and the rest of the team. So, of the public float, they were almost half the public float. And so, I think we're still suffering from that retail overhang, which I think will go away. So, the opportunity again, my free gift with purchase here, is you can buy a dollar of assets for $0.79, and it's liquid, high-quality businesses, which we're going to talk about in a month. So.
Well, it's a very interesting dynamic because a lot of times assets move for reasons that have nothing to do with economics. They have everything to do with emotion or fear or in this case, an over-allocation like, "Oh, I actually didn't think I was going to get filled," and then they don't have a choice. But that created a huge opportunity, particularly in the PS stock, the management company. As that traded down, you bought a bunch of stock. We also were aggressive buying stock at that point in time, and then of course the stock just completely ripped higher and went up something like 60% to 70% over the course of the next couple of weeks. The old saying in the asset management business is long-term capital is ideal, but permanent capital is a whole lot better. And so I commend you for building a fantastic business that is really, really unique. When you think about the opportunity set for a vehicle like this, a closed-end fund—the democratization of basically having this publicly traded hedge fund now in the United States—what is it that you think really differentiates what you're doing in PSUS compared to a lot of the other things that they can invest in? Why would somebody say this is better than just buying Nvidia, which obviously everybody wants to do almost every given day except for the last couple of days? But what specifically would you tell them is the value proposition of this offering?
If you look at our record over the last 22 years, we've compounded at 19% per annum, and the S&P's compounded at 10% per annum, and you understand the power of compounding. That's many more multiples. It's something like you made seven or eight times your money in the S&P, and you've made 26 times investing in Pershing Square. So, the power of compounding—obviously the excess return that we've been able to generate over time. Where that's come from is, one, concentration. We concentrate the portfolio in 12 to 15 names. Two, it comes from being a very influential investor. We started out very much as a shareholder activist. We'd buy into a company that was mismanaged, we'd have to go public with our thesis, put pressure on the company, sometimes we joined boards. And that led to a lot of value creation, because we could buy into a story like Chipotle. Think back a bit like what's going on with salads in this new bacteria that people are responding to unfortunately from a GI perspective. But Chipotle had a food safety crisis, and the stock got crushed and management didn't handle it well. So, we bought 10% of the company. They welcomed us on the board of directors. We recruited a new CEO. They fixed it, and we made like seven or eight X times our investment. We can invest in situations that don't exist to the average investor on the street. Chipotle was trading at the right price under what was then the existing management team and governance structure, and they were heading in a bad place. We could buy from people selling knowing that we'd be able to make the changes necessary to make the business more valuable. And so, that's been a big driver of value for us over time. What happened 20 years in, or maybe 15 years in, or maybe actually it's been a decade since we've had to make an activist investment. Now, every CEO in America knows who I am. They know the firm. So, today we buy into a business that has some potential that's being unrealized, and we get invited into the boardroom to either give advice or just deal with the CEO directly or otherwise, and we can kind of create value. So there's an ability to create value beyond just a passive purchase of an existing company. Second thing we do that's kind of less well known, but been a big driver of our returns, is we try to hedge what we call black swan risk. So, beginning circa 2007, or actually maybe a couple years earlier, I became concerned about these AAA-rated companies that were taking on subprime credit risk. And so, we built a large hedge that in '08 and '09 became enormously valuable. We spent 1.5% of our capital; it turned into 20% of our capital. We took that capital and we bought stocks when the market blew up in '08 and '09. And then in February 2020—I started getting concerned from a health perspective about COVID in January of 2020, and then by February, I said, "This is going to have very severe economic effects. We're going to have to shut the global economy." I built a very large hedge in that CDS market. And literally 2 weeks later, the world blows up. We have a hedge, and $27 million turns into a couple billion dollars. We take that capital and we buy stocks in March of 2020. And then the next one was really the Fed raising rates aggressively as inflation spiked. President Trump spent $7 trillion basically bailing us out for COVID. We had Biden committing to spend trillions more. We had interest rates at zero. We had the most aggressive fiscal policy ever. We had the most aggressive Federal Reserve policy with 0% interest rates. And then you have the animal spirits of people who have been locked up for almost two years and starting to spend money again. So this will lead to massive inflation, and you could buy an instrument—a so-called interest rate swaption—betting that rates would rise. And we made a couple billion dollars there, almost $3 billion. We took the money and bought stocks. So that strategy is not one that's available to a typical mutual fund investor or a public markets investor. It's available really to high net worth people who invest in hedge funds. What's unique about PSUS is it's literally the first publicly traded hedge fund. It has the same hedging strategy, the same active investment strategy. It owns a portfolio that is the same. We manage private funds that charge a 20% promote. This is a public entity, and we can't charge a promote, so it's a very low-cost version of Pershing Square.
It's interesting that the structures you've created, again, for permanent capital give you that capacity. Because I remember, if I remember anything, in 2002, 2003, you had your thesis, but people weren't paying attention to it. It looked like it wasn't working well. But in '06, '07, '08, all of a sudden you make $2.5 billion, and that's kind of why you get these extraordinary returns. I'm curious—obviously most people think about just diversification. You're much more concentrated, obviously, and you've been willing to be that active participant to engage with the management company, the capital allocation, influence the strategy, push for a real maximization. What kind of key business conditions have to exist for you before you're willing to become that active investor in the type of investments you make?
The answer is all about business quality. If it's a business that we like, we can predict with a high degree of confidence, and it doesn't have exposure to what we call extrinsic factors we can't control. So, we don't like to invest in businesses that have a high degree of commodity exposure. Why? Because we can't control the price of oil. We don't like businesses that are very sensitive to interest rates because, again, macro factors can change that. We like businesses that are inherently low volatility, and they're insulated from the big macro factors, and they've got long-term secular growth trends. So, if the business has a good balance sheet, got a very strong financial position, and it's mismanaged, that's a huge, huge opportunity. Because the typical investor will say, "I don't like management. They missed their numbers. They're not doing the right thing. Expenses are out of control. So, I'm going to find something else to invest in." We see a situation like that, we say, "Look, we can buy from people selling because they believe the situation will never change." And then we can effectuate change, and that's a huge kind of arbitrage.
And then I know you're very focused on the alignment of management. When you evaluate a business, how important are the management incentives? What do you look for in terms of leadership having a genuine alignment with long-term investors? What kind of criteria do you look at from that area? Am I correct that that's been one of your evaluation points?
I would like to say incentives drive all human behavior. And if you want to understand why management is doing something, just look at the proxy and see how they're being compensated. I think unfortunately, the compensation consultants that boards hire all have kind of the same sort of structure: there's a base salary, there's a bonus salary, there's an incentive plan, and it gets complicated. Really, what you need to do is sit down with the CEO and understand—there's certain kinds of CEOs who don't respond well to all these complicated incentives. Generally, in our view, we want them focused on the share price and a few of the key metrics that matter for the business's long-term performance, and that's how you want to incentivize the kind of key people. And you want to incentivize people based on things they can control, right? So, the CEO should be based on the overall company, but punishing people further down in the organization for things outside their control and not giving them compensation based on things where they can have an input, you're not going to get a good outcome. Look—
The older you get, the more you realize how important incentives are in every aspect of your life, with everyone you're dealing with.
No question. And you made the comment earlier about Buffett and his influence, and obviously Charlie Munger, and what they did at Berkshire Hathaway. Something you said just a minute ago talking about Chipotle, Buffett's famous quote of loves it when a business that's a fantastic business has a one-time but fixable problem, whether it be Coke or American Express or obviously Chipotle or several others. You've obviously been influenced by that in a significant way. One of the things you've done recently with Howard Hughes is kind of talked about it as being a Berkshire Hathaway for the next generation, if you will. Walk us through your thought process there and what your plans are with that company that you now have a very significant influence over.
