What's the best way to get conviction in an investment idea? Find the best short seller in something that you own and hear their arguments. If you can rebut each of their arguments, then you can feel more confident in your investment.
And the same thing should be true for your other views. Find the person who makes the best case for why you're wrong. The best hope we have to get to the truth is hearing from all sides and then sorting through who's got the better argument.
Hi everyone, I'm Nicolola Tangan, the CEO of the Norwegian Southern Wealth Fund, and today I'm in really good company. I'm in New York with Bill Akman, the founder of Persing Square. Bill is one of the best known investors in the world, and he does it in a very unusual way because most funds own hundreds of companies, but you own very few, compounding very strong at 16%, and you've been doing it for a long time. So, great to have you here.
A great company is a business you could buy today. The markets could shut for 20 years, and you know with an enormous degree of certainty that you'll own something that's enormously valuable 10 or 20 years from now.
And what kind of industries are they in, these great companies? You know, I think it's less industry specific than the structure of the business.
They're amazing businesses and in many different sectors.
And so what kind of structure does it need?
We love businesses that look like royalty collecting companies, like annuities, where you can be very confident that the annuity will grow at a high rate over a very long period of time, and the cash that's generated from the business doesn't need to be reinvested in the business. Actually, Persian Square, I can — I'll give you the pitch.
We'll talk about that. We'll talk about that a bit later. How many of those companies are there in the world, you think?
The answer is there aren't a large number of big ones. So, from the perspective of Persian Square, we're allocating not the kind of capital you allocate, but you know, writing pretty big checks. That's why we're concentrating, because one, there's a limited number. There are probably actually a couple hundred to 300 really great businesses, but it's not so often that a really great business becomes available at a price that makes it a great investment, and so that's why we're concentrated.
How do you come up with the ideas? Where do you find these things?
You know, just — you know, we love investing, we love learning about businesses. We read the newspaper, so to speak, but we've sort of built a library of companies we admire. And you know, a business that has great economic characteristics, high rates of growth, managed by good management teams, they don't often become available at prices that offer the kind of returns we're looking for.
Why don't more people do like you do? Because I think it's just interesting, you know. Chris Horn has the same philosophy, Warren Buffett, and you talk about how you do it, and yet very few people manage it.
So part of it is structural, and well, many investors want to get rich quick.
And this is not sort of a get-rich-quick strategy. You have to have kind of a longer term view. And then I think most of the capital in the asset management industry is inherently short-term, available for redemption on a minute-by-minute, day-by-day, or you know, quarterly or annual basis.
It's hard to think long term if your investors are going to be judging you on a very short-term basis, or the person you work for. You know, think the Citadels, the Millenniums, firms where very short-term oriented, use a high degree of financial leverage. You can't absorb a high degree of volatility in a strategy like that. Whereas you need — Warren Buffett's had permanent capital. Chris Han has been in the business for a long period of time. He's cultivated investors that have given him kind of long-term backing. You need that in order to implement the strategy, and that kind of capital is very scarce.
Tell me a bit more where you get your information from. What do you read?
So, personally, I read Wall Street Journal, FT, Economist, occasionally the New York Times when I can stomach it. But no, it's a good newspaper. But you have to — all media have biases. I spend a fair amount of time on X actually. It's probably my most important source of information because you can follow people who have very much diverging views on the same topic, and I think it's a very good way to get to the truth. It's become increasingly a big source of where I get my media.
I follow probably a thousand people.
Over time. It depends on the topic. I've got lots of different interests. And you know, interestingly, some of the firm's best investments, my personal best ideas, have just come from particular passions. You know, health being an important passion led me to an insight about — you know, I started seeing COVID emerge in January, concerned about a pandemic, and my interest was not driven by an investment perspective, but it led to an interesting investment opportunity. Now, a family tragedy is, you know, causing me to spend a lot of time learning about what's going on in AI and brain-computer interfaces, and you know, it may lead to some interesting investment opportunities. So it's — you know, once we find something that's interesting, due diligence is driven by, you know, fairly conventional looking at public filings and then talking to — you know, using expert networks to talk to people.
We'll come back to your tragedy. How much time do you spend on X?
My wife might say too much.
What is that? I don't calculate it. But what do you think? What do you think? An hour a day or more or?
I would say it's usually in the morning and the evening, and not during the business day, but it depends on what else is going on in my life. But I can spend — it's actually an interesting thing, is people who are on X versus people who rely on conventional media, you generally feel like you're a week to two weeks ahead. Like news comes out and you learned it a week ago, so it's very much a real-time source of information.
You made a lot of money in restaurants. Why have they been good investments?
Simple, predictable, free cash flow generative businesses. We've kind of focused on, for the most part, kind of the franchise business model. Again, royalty collecting companies. But I think over time you build a domain expertise in an area.
Just that my daughter runs a cocktail bar, and it's not an easy business, huh?
It's not. It's not. But again, it's less the sector than the structure. You know, McDonald's is an amazing business, but people historically thought of it as a restaurant business, and in its core it is, but it's also a real estate business and it's a franchising operation.
How much do you depend on your pattern recognition or your gut feel, the fact that you've seen these things play out before?
I don't know. I think it's very valuable to have experienced lots of market events over time. You know, we've kind of — I think it's — but importantly for us actually, you see that little tablet over there. We took our kind of core investment principles and we created what amounts to a checklist. We have a framework, and so I would say that framework helps us see the world in a way which every once in a while surfaces an interesting investment opportunity.
So we'll now look at this thing here, and we'll zoom in on it afterwards, but just what are the most important things there?
One, it's a business we can predict with a very high degree of confidence. Right, the value of a financial asset is the present value the cash will generate over its life. If you can't build a model of the next reasonable period of time of a business — 10, 15, 20 years — I don't think you can come up with a value for it. You know, a lot of money is managed based on people believing a stock will go up or down based on a new piece of information coming out, but it's inherently a short-term — you know, is the company going to meet, exceed, or miss earnings. A huge amount of money is moved on that basis, or an expectation of an event or news event that will cause a stock to move in a certain way.
We kind of ignore that, right? What we're doing is we're building a financial model of a company over a long period of time. So the business has to be inherently — there are many businesses that we have no idea what they're worth. We just don't even look at them, or once we conclude they're not — we can't predict their certainty. So I think predictability is important, and obviously to have predictable cash flows and revenues over time, the business has to have the proverbial moat around it. You know, so business quality, durability, I would say, you know, critically important. We want companies that are not exposed to, you know, what we call extrinsic factors we can't control. So we don't really invest in commodity sensitive businesses, interest rate sensitive businesses, regulatory sensitive businesses. So it's about — we keep it simple.
Well, at least your principles are set in stone, right?
Exactly. That was intended to be. I told the team to make it stone. We came back with a heavy plastic.
How do you use the analysts? You're like just under 50 people.
I would say our firm is structured differently from Chris Han. We're 48 people. We're nine investment professionals, and it's not me and a team of analysts. It's actually an investment team. You know, Ryan Israel became our CIO, you know, four years ago. But a typical structure of a hedge fund is you have a portfolio manager — I guess that's normally my position — who's responsible for allocating capital among a team of analysts who are working on kind of different areas. And the best ideas win, and people are compensated based on individual P&Ls. We're not structured that way. One portfolio of 12, 14 investments, no one is compensated based on individual P&Ls. Everyone's compensated ultimately based on how the overall portfolio does. So everyone's interest is not getting capital allocated to them. Their interest is making sure our firm's capital and our investors' capital is allocated in the way that makes the most sense.
So how does it work? So you sit around this table here.
This is not — we have an investment team room which is smaller than this, about half the size.
Okay. So there you are. You meet every week or how?
The team has a formal meeting every week, but we have lunch together almost every day, the full team. So very high degree of interaction in the team. Typically someone identifies an interesting idea. It could be me, it could be Ryan, it could be a member of the team. 'Hey, you know, XYZ stock, a company we've followed for years, is now available at a 40% discount because they missed earnings. Let's update the file.' So we pull out the file. The team that has done the most work on the name will dig in again, update their work. Typically a two-person team. Ryan and I will effectively oversee that team by doing some amount of work. So I'll read the annual reports, the proxy, the conference call transcripts, maybe some news articles. The team doing the deeper dive will speak to many industry experts, will do a kind of deep dive, and then...
Will the whole team work on one idea at a time?
Two people will work on one idea and go deep. Two people will have done some work, that's Ryan and I, and then the rest of the team will have done no work on the name, and then that whole group will form a view as to whether — and the team who leads the work will build a PowerPoint presentation and present to the team why they think an investment is interesting, and then we'll make a collective decision.
But actually an important dynamic is, you know, the typical hedge fund is structured in such a way your only incentive is to get capital allocated to you, which sort of causes you to kind of lean in to wanting an idea to be in the portfolio. In our case, we'll have two people who have done the work in a very profound way, two people who have done some of the work, and a group that has nothing invested in terms of time.
We — if there is an objection or someone raises a concern, we do more due diligence to address the objection. Ultimately I have the final say, but I can't think of an investment in the last decade that we didn't have really a collective view on.
So let's take an example, like you own Brookfield.
How does that work? How long a time does it take from when you start to look at it until you make the investment?
So we got to know — I got to know Bruce Flatt and the senior Brookfield team working on a transaction.
So FYI, Brookfield is the private equity Canadian group.
Yes. So I met Bruce Flatt in connection with the bankruptcy of General Growth, where we ended up partnering with them and doing a restructuring with that company. Got to know the team really well. Had enormous respect for — you know, came to have enormous respect for Bruce and Cyrus and other members of that team that today still run that company. But we never invested in Brookfield. Then the company over time restructured and became a bit more of an asset-light royalty collecting business, and then we began a due diligence process a number of years ago. And it was probably — Brookfield's actually quite a complicated company. That's one of the reasons why it's attractively valued. They've been simplifying the business over time. But it was probably a several-month due diligence process that led to that investment.
Is it more difficult to beat the market now than it was when you started?
I don't think so. I would say we don't try to beat the market every month or even every quarter or every year. But I think managing a concentrated pool of capital and having the ability to have a longer-term view gives you a big competitive advantage in terms of beating the market over the long term. But the market's been an amazing competitor, if you will, the index.
Yeah. Now what is AI doing to the market?
I think it's making market participants increasingly shorter and shorter term. You know, a 10-K gets published and AI can read it instantly. There's a huge amount of capital invested in looking for a short-term edge, and AI I think enables that.
The type of investments you have which are AI related would be — I mean, you got AWS, anything else?
So you know, Meta is a big investor in — well, I would say every business today is either AI related or should be, or is going to be disrupted by AI. So I think that's the assessment that you have to do. You know, we own — we purchased Amazon after Trump announced liberation tariffs. We acquired Meta after they disappointed people by committing a large amount of money to capex, and the same with Microsoft. You know, it's sort of an interesting environment when you have a company come out publicly and say, 'We have enormous demand for our service. Therefore, we have to invest well in excess of what we expected in capex just to try to meet the demand from our product,' and then the stock price goes down. And that's what led to an investment in Microsoft. But it's probably those names represent about a third of our portfolio today.
What is AI going to do to the world?
It's going to give almost everyone access to very low-cost, very high intelligence. So if you think about — you know, if intelligence is a competitive advantage in the world, and you would think that it is, and that intelligence becomes a commodity, it's sort of a — it's very interesting to think about what the implications are. I sort of make the argument that what's left when everyone has access to low-cost super intelligence is sort of creativity, right? What LLMs can do, if they can read everything they can before and be incredibly knowledgeable about that. But it's not clear to me that AI can be creative yet, right? Einstein's light bulb moments, E=MC² or theory of relativity. I don't think that anything that came before Einstein that AI would have read would have come out with that formula, if you will. And so I think the space that's left for human beings is — but I do think it could lead to abundance. I think there's going to be an explosion of entrepreneurship, and I think there can be an explosion in overall GDP or global growth.
Now you are known as an activist investor. You know, buy stakes and force them to change. But you don't do that all the time.
Sure. So tell me, what were you an activist investor then, and why are you not so active now?
Oh, I think we're very active now. The difference is we don't have to break down the door to get into the room, right? You know, when we...
Is that because you are older and nicer or?
I think a couple things have happened. One, activism in the early days was not something taken very seriously, and you had to literally break down the door. As activism became more successful as a strategy, as we built our own reputational equity, as I got to know every CEO in America, people realized, you know what, these guys are actually thinking about the long-term interests of the owners of the company, investors in the business, the employees. You know what, they behave themselves on boards of directors, they can add significant value. Why don't we just work with them and be open to their ideas as opposed to having to run a proxy contest? And I think so, our last activist investment we launched in 2016, a decade ago, it's actually about the 10th anniversary of that investment, and today we buy a stake in the business and we generally get a thank you note from the CEO for taking a stake, which is a very different message than we got. You know, years ago we might not even have gotten a return phone call, and that enables us to be, you know, a helpful investor.
The other thing I think that's happened in terms of market dynamics, it used to be that a really high-quality business that somehow disappointed, the stock might drop three or four percent. Today the stock could drop 30 or 40% on a miss. And I think that's driven by the increasing kind of indexation, which is reducing float, and the increasing amount of leveraged capital, short-term capital invested in markets that is creating a lot more volatility. And what that has done is it's made the occasional amazing high-growth durable company available at a discounted price for a period of time based on a short-term disappointment. So our portfolio today is filled with businesses where we have enormous respect for the people running them. They don't need much in the way of an activist. We're happy to be a quiet owner that occasionally has an idea.
Do you think it's something that happened with you as well, in old age, or becoming part of the establishment, or just somehow becoming a nice person, or wealthy, or I don't know?
I've always been a nice person. You know, the media may have portrayed me as otherwise. But you know, look, I'm the generation of people that are running many sort of businesses. I know every CEO in America either directly or one person removed. And so you know, it's pretty easy to get a read on what we're like as owners, as shareholders, and again, we haven't made an activist investment in 10 years.
So how do you assess the role of activist investors?
You know, it depends. First of all, I think it's very, very healthy for markets, right? The risk of increasing indexation and passive ownership is it can lead to — you know, without shareholders holding management to account. You know, if you look at the history of activism, you know, J.P. Morgan, Carnegie, right? These were not activists, but they were major shareholders of U.S. Steel and railroads back then, and they cared about how the businesses were run. As Carnegie, when he passed away, he was a philanthropist, gave away sort of all of his assets. The rise of, you know, Fidelity Investments, Vanguard, indexation, there was this dissemination of controlled companies. You know, Europe is still comprised of many controlled businesses. There are fewer and fewer, other than, you know, sort of technology startups of the last whatever period.
And it led to a period of meaningful underperformance in the 70s and the early 80s, and it was actually Mike Milken that enabled — not quite activists, but a group of entrepreneurs like Carl Icahn and Nelson Peltz — the ability to actually, you know, put companies in play. And you had Marty Lipton invent the poison pill that stopped greenmail activity, and other greenmail sort of became illegal. And then the ability to take companies private without the board having the ability to negotiate was sort of disintermediated by the poison pill. And then we had a period of meaningful underperformance until I would say activism became more of a thing over the last 20, 25 years.
You had a bit of a run-in with KI.
