Building a £6bn investment company, AI’s arms race and backing Big Tech ︳Bill Ackman

Look, I think the AI conversation is probably the most important conversation to be having. Our focus is identifying the great businesses of the world. The less you know about investing and what you're investing in, the more diversified you want to be. And I said, look, I'm going to quote unquote try to allocate as much of the world's resources to me as possible and then reallocate them in the way that I think makes the most sense.

Thanks for having me.

One, I hope we don't have companies that are going to be disrupted by AI. So if you think we do, I'm happy to have that conversation. But we do own some stocks where there's a perception of risk of disruption due to technology, and that's, you know, created an opportunity for them at more attractive prices. Look, I think the AI conversation is probably the most important conversation to be having. You know, it's a bit like, you know, we're developing a nuclear weapon, and we're competing around the world to develop that nuclear weapon, and we think that technology is going to have lots of benefits for mankind, but it also has the potential to destroy mankind. It's, you know, fairly analogous. But I think before we tested a nuclear weapon, we didn't know exactly precisely what would happen. But at least we were relying on our understanding of physics here.

Number one, we don't have an incredible understanding of the human brain. That's actually something I've learned about more recently. And AI and, you know, some of the recursive learning and reinforcement learning that is done by a lot of that is modeled off of, you know, how human beings learn. So you have these models that are developing, approaching superhuman intelligence, and we don't know what the implications are going to be. And we've certainly seen some pretty frightening recent episodes — this Hugging Face, you know, the swarm of AI kind of working together to achieve an objective, you know, committing a felony to break into another website. And this is pretty frightening stuff. And then of course the noisy exits of various people from Anthropic and OpenAI, and even Elon saying yes, we have to be, you know, Elon has been saying for a while, you know, in fact he was early in the creation of OpenAI. The theory was, you know, we need to get out ahead of this and we need to have benign force. I think the complexity is I don't know how we slow AI development. There's such an incentive for China, Russia, whatever, to get there before us.

I'd rather be the AI leader and then have, as you know, I would say, as much oversight as possible without restricting the ability of us to be the competitive leader. I think that to me is critical. As much as I worry about AI, I worry about it more if one of the enemies of the United States gets it before we do.

So look, the world is an uncertain place for my lifetime. That's always been true.

Whether it was the pandemic, you know, again, I think inflation wasn't so dramatic versus the pandemic, but now AI is, you know, there have been a series of very dramatic events, financial crisis. It seems like every whatever five or seven years, we have some development either in the financial markets, technologically, geopolitically or otherwise, that create risks. We are not trying to maneuver around kind of short-term movements in markets. You know, what we think is the best long-term strategy is to find kind of the business that can withstand the test of time, the business that you can own if the stock market closes for a decade. And who knows what's going to happen, but you can have a high degree of confidence that coming out of that, that the business will not just exist, but continue to thrive. And I think if you look at the businesses we own, you know, in each case, we spent a lot of time thinking about, you know, their durability, their potential for long-term growth. And you know, Buffett always used to talk about, you know, if you look at the last whatever period of time, you know, last hundred years, we've had a couple of world wars, we've had the development of nuclear weapon, we had the detonation of a nuclear weapon, we've had, again, more recently a pandemic, a financial crisis, you know, the internet. The world will always have disruptive events, but during these periods, if you own, you know, kind of these high-quality, durable businesses with strong balance sheets that have long-term, you know, opportunities for growth, that's been a pretty good thing to do. So our job is to find those companies and generally not part with them unless they get kind of stupidly overvalued. And that's worked well for us for almost 23 years. But it's worked well for investing for, you know, I would say hundreds of years or certainly a couple hundred years.

So I don't agree with the proposition. So we own in the hyperscaler space, we own, you know, Microsoft and Amazon, which are not pure hyperscalers, obviously they have other obviously important core businesses. But what I can say is what is absolutely clear, and maybe clear from the fear of AI, is that AI is incredibly powerful, and that the demand for compute is going to continue to, you know, be enormous and scale for, you know, probably, you know, decades to come. Right? How much value can be created per dollar of compute is only improving as AI gets more and more powerful. A company's balance sheet is only getting worse if the investments that it's making... What's happened in the last, you know, couple of years is that, you know, let's say Microsoft, Amazon, Google, etc., are accelerating their capex spend in anticipation of demand that they're actually seeing. Right? They're trying to keep up with the demand for their service. Right? Normally, and that's actually created an opportunity to buy Microsoft stock, Meta stock. You know, the market, these were pretty, or certainly Microsoft was a, you know, a very capex-light kind of business model to, well, I guess the, you know, ultimately data centers were, but it was still relatively capex-light relative to their cash flows, you know, AAA balance sheet, etc.

Now what they're doing is they're just front-loading that capex spend because the demand is so great and they want to be in a position to meet it. And that demand will, you know, I think the evidence suggests that they'll be able to price that demand appropriately to earn, you know, a very attractive return on capital. So you have a very high-quality business that has an opportunity to invest even more capital in a high-return business. To me, that's ultimately a better company that will have an even stronger, you know, market position over time. So I'm not skeptical at all about that. I think that's good. Okay. Now, if on the other hand, you know, if you have a business where you're forced to make an investment in capital and you're not, and the incremental investment does not come with a substantial incremental return, then yes, I would be quite concerned about that. But I don't think that's the case here. So I think this is indeed growth capex where there's just a big, massive, significant, sustained spike in demand. In order to meet that demand, they've had to make investments on which they expect to earn high rates of return.

I would say our focus is identifying the great businesses of the world, and every day we're trying to learn about these great companies. And over time we've built a library of great businesses that someday we'd love to own. And the great, durable, high-growth, well-capitalized, well-managed company generally trades at a price that offers a relatively modest return because people like all those factors.

Every once in a while, a company that meets all those criteria trades at a price that offers, you know, twice that return or more. Yeah. You know, this happens to be one of those moments where a business like Microsoft, a business like Amazon, a business like Meta, Uber, you know, some of the kind of core names in our portfolio, we believe are trading at prices that offer well north of a 20% IRR on a long-term basis, kind of going forward. The hard part is this business, a business that's going to be disrupted, is this a business that has a wide moat, as Mr. Buffett would say, around it to protect it from competition. That's where we spend most of our time understanding the durability of the franchise. And then it's building a model of what that business looks like over time. And we try to invest in these kind of relatively highly predictable businesses, and then it's just a little bit of math to determine what the go-forward return is. And then when that go-forward return gets within our strike zone, we update the analysis, and everything checks, we'll buy a stock.

Much more frequently.

So I would say the factors driving more volatility in the market are driven by two principal forces. One, the rise of indexation. Bigger percentage of companies owned by index funds that in effect shrinks the effective float, right? Index funds are basically permanent owners. More and more capital flows into index funds. They end up owning a greater and greater percentage of the shares, which means the marginal buyer and seller will have more impact on price. I would say the bigger force, maybe it's hard to calculate the scale, but you know, the so-called, you know, there are a lot of trading investment strategies today that are very short-term because of the underlying leverage of the strategy. Think Citadel, Millennium, maybe Jane Street. Firms that are very short-term trading oriented, they're looking for small advantages in markets. When a company disappoints or exceeds expectations, you see huge changes in stock prices. Now, that has created for us the opportunity to own some truly great companies at occasionally insanely cheap prices. You know, retail investors are an obviously very important force. Some have permanent capital and some don't, right? If you're a retail investor operating with margin leverage, you have the opposite of permanent capital, and there's a lot of speculative activity in markets. If you're trading options, it's not really long-term capital. You know, we're fortunate in that we manage public entities where Pershing Square and affiliates are the largest shareholders. We have, you know, so-called permanent capital. This means we can buy something on the basis of a five-year IRR without worrying about where it's going to be on, as you say, on December 31st. Of course, we'd like December 31st to be a good price because, you know, always good to report a good year. But, you know, a year that creates the opportunity for us to own great businesses at attractive prices sets up for higher returns in future years. And that's how we think about it. And this has been largely that kind of a year for us where we've been able to buy, you know, substantial stakes in businesses, a number of which we've always liked but never got a chance to own.

Sure. So diversification makes sense. The less you know about investing and what you're investing in, the more diversified you want to be. I would argue the more you know about the businesses you're investing in, the more opportunity you have to be a concentrated investor. And the reason for concentration is unlike children, where you're not supposed to rank order your favorites, investing, you can assess risk and return. And for every portfolio manager, they're likely to have an investment that they believe has less risk and more return than another investment in the portfolio. You know, there aren't hundreds of incredible businesses. There are smaller numbers in terms of companies of a scale that we would be able to invest in, and they don't always become, they won't always be available at prices that make sense. So that limits us, it limits our universe if we want to achieve our return objectives. And the benefits of diversification, once you get beyond, you know, a dozen or 15 names, the incremental diversification benefit of idea 16 is not, in my view, is not meaningful versus the benefit you get by owning more of ideas one, two, and three. Right? I'd rather have a more concentrated portfolio. I still think diversification makes sense because, you know, investing still fundamentally is a probabilistic game. There, you know, the unexpected can happen. You can be disappointed. But, you know, we think we have an adequate degree of diversification, but not too much. It's hard to beat the market if you are the market.

Sure. So actually, it's been a decade since we've made an activist investment, that is an investment where our business plan was to take a series of steps to make changes to the way the business was being run. You know, what's happened with the passage of time is the firm, you know, people know who we are. That was not the case 20 years ago. And so in order to get the market's attention, as a relatively small investor, we had to put out our thesis in a very public way. And, you know, we weren't, we didn't get invited immediately to join a board of directors. In fact, we couldn't even get a meeting in some cases with management. But as we sort of built our reputation, and as we had to on occasion run a proxy contest, which is maybe the most extreme version of shareholder activism, and run these contests successfully, that gave us, and then, you know, as the track record demonstrated over time, it gave us credibility not just with investors but with board members and management teams. And people figured out, you know, what, Pershing can be a force for good. We'd rather have them onside than offside. And so today we buy a stake in the business. I was, I mentioned, you know, what's interesting is I got a few thank-you notes when we took some initial stakes in companies where a CEO wrote a personal letter, you know, dear Bill, thank you for investing in, you know, ICE, you know, the owner of the New York Stock Exchange, and sharing that they shared our view. We put out our thesis and our letter as to why we own the stock, and they sort of confirmed our thesis. They respected our analysis. We didn't get many thank-you notes in the first decade, but we're getting more now. But it means that if we do have an idea on how to help a business be more successful, they're going to be more receptive. And the opportunity for, you know, being an influential shareholder, you don't have to call yourself an activist, is that sometimes, you know, when you're managing a business, you don't have the perspective of an investor that's looking at and has access to all your competitors, right? In fact, you have certain limitations on your ability to do that. But as an outside investor, not a member of management, you know, we can talk to the competitors of each of our various companies. We can meet the management teams. We can get the perspective that comes from looking at, you know, many businesses over time that occasionally gives us an insight. You know, the most extreme version of activism is a case where you think the person running it can't fix the company. You need to replace that person. We're up to taking a stake in a company that offers that opportunity. You know, the market generally values stocks on the basis of what, you know, assuming that all holders are passive, meaning that whatever mistakes the company's making are going to continue. And we can, you know, the opportunity for an activist or someone who's an influential shareholder is you can buy with the confidence to believe that you can change whatever is wrong about the business. You know, Chipotle was trading at half of what it was worth if they could fix the problem, but none of the shareholders believed the problem could be fixed. But we bought a 10% stake with the confidence that we could, you know, make necessary changes. We had a CEO in mind who could come in and who we think would, you know, and the question in our mind was, are we going to be able to convince the board and the CEO, who was the founder, that he, you know, step upstairs to chair, that bring in a new person? And he was quite receptive, and we didn't have to run a proxy contest. They invited us to join the board. That's really been our history of the last sort of decade.

So if we do our job, we're going to buy a really high-quality business. And in the last, I would say nearly decade, we've been able to find businesses like that that are already being run by good people and just take advantage of the volatility in the market to buy them at a good price. That's a much easier strategy, less... I used to call it return on invested brain damage. I'm more cautious with that term because I'm more unfortunately familiar with true brain damage. But, you know, much rather invest with a phenomenal team and a great business at a good price than a great business at a good price with a bad team where you have to do a lot of work. And if one of those investments, you know, one of our experience has been we generally avoid investing in controlled companies where there's a need for change. And our experience in investing in controlled companies with a need for change has not been great because a controlling shareholder is a true barrier to change. You have to convince them, and that's not something, you know, they may have an agenda that's different from yours, or they frankly may have a different view, and there's nothing you can do about that.