Bill Ackman: Betting big on tech cash cows after Pershing Square underperformance

Thank you.

Sure. So fundamentally we're value investors but not by maybe a conventional measure. Some people think of value investors as only buying low PE stocks or stocks trading at a discount to book value. Value is the present value of the cash it generates over its life. Growth plays a very meaningful role in that. We describe ourselves as high quality durable growth investors. In terms of your characterization of our portfolio, I would say we own some of the highest quality durable compounders at amongst the lowest valuations they've traded at in their respective histories. I think it's quite a good moment to be owning durable compounders while the market's attention is taken to the AI race, chip companies, semiconductor manufacturers, etc.

Yeah. The vast majority of our capital is invested in these very high quality durable growth companies. Hertz got on the radar at a time we were looking how to hedge the risk of Trump putting tariffs in place, pre the Liberation Day tariffs. What company would be a beneficiary of tariffs? Hertz came into view. The interesting thing about the business is Hertz is really two companies: an asset owning company that owns a lot of cars financed with a lot of securitized debt, and an operating business of renting those automobiles. The asset-heavy part of the business got them into trouble because of a bad strategic decision to go long Teslas. They suffered the big decline in residual values of Teslas as Elon reduced the price. That forced the company into a very challenging position. The stock crashed. At the time of our investment, the stock was around $3 a share. It was a very levered bet on either asset prices of used cars increasing and their operating business turning around. We thought both were good bets. The tariffs made used cars much more valuable because they became more competitive against new cars, which helped the residual value of their auto portfolio. When you have a levered collection of cars and the car value goes up, that creates excess value that inures to the benefit of the company. The company had a recap because of the destruction in value that had taken place. A new management team was put in place replacing the one that made some of the mistakes, and we felt they had an ambitious but credible turnaround plan. The stock offered a levered bet on that outcome. The vast majority of our investments are in companies with very strong balance sheets, dominant market positions, and very little financial risk. Hertz offered a fair amount of financial risk but an asymmetric upside if they were successful in executing a plan, and we felt we could help them on the balance sheet side. That was the thesis behind the investment. The stock is up approximately two times since our original investment.

It's still early and we think the company's making good progress. There's a blue sky upside in the autonomous vehicle space. The Waymos of the world don't have the infrastructure to maintain a large car fleet. Hertz has enormous experience in that regard. That infrastructure could become very valuable to autonomous vehicle fleets. Putting that aside, at the time of our investment this was potentially a six- or sevenfold return, something approaching a $20 stock from $5 or $6 a share. We still think there's significant upside and the financial risk has been reduced dramatically by good decisions on the part of management.

I would say not so slight a pullback. Microsoft's down something like 40% from the highs, which brought it into a very compelling valuation, and Meta something similar.

We do.

We look at Amazon, Meta, Microsoft businesses we've admired for many years, but never got to a price that we found them compelling. Now each of them are at prices we find compelling. The excitement of SpaceX, semiconductor stocks, the AI energy play. People have sold old tech, and I think people think of Microsoft as old tech, but we think they are incredibly well positioned for the AI era. Meta is a little different. Meta's growth rates have accelerated dramatically as they are a huge beneficiary of AI in serving ads to customers. Advertisers are getting much higher returns, and people are spending more time on Instagram, Facebook, WhatsApp. The business is doing extraordinarily well, and the stock price is cheap. The combination makes it interesting. We care about business quality less than we care about business sector. We're happy to own a tech company if they're in a very strong defensible position and the prices are right.

I think Amazon is one of the most dominant companies in history. Look at their position in online retail. They are the dominant company, maintain very high growth rates, offer an incredible service to customers. You can get stuff delivered in a couple of hours for a pretty large basket of goods. They're expanding into rural areas. There's tons of runway on the retail side, and they've never really pushed price. They've always pushed faster delivery, lower cost for customers. That's an amazing model. Half or so of the business is cloud computing, where there is near infinite demand, and they're the number one player. They continue to grow at a very high rate at a time when there's enormous demand for compute and many companies don't want to spend the capital themselves. They'd rather outsource to the cloud. We think they're very well positioned in both halves of the company.

Sure. Let's go to the Buffett analogy. Buffett bought a cheap textile company at a discount to book value and ended up with half of it, stuck in a challenged business and industry at an attractive price. Over time he liquidated the textile business, took out the cash flows, sold off the assets, and reinvested in a higher return business, principally insurance, and then over time in other industries. We're taking a much higher quality business than a textile operation. Howard Hughes is a real estate company that self-liquidates over time. The bulk of the assets are land lots sold to home builders and condominiums sold as completed. The business generates a lot of cash. Instead of reinvesting the cash into real estate, which is a lower returning asset class, we're redeploying the capital into insurance. We acquired a company last week called Vantage, a specialty insurer/reinsurer. It's a great platform to build a Berkshire Hathaway style insurance operation. Vantage invested all its assets in fixed income securities and outsourced investment management. We're taking over the investment of the Vantage assets. The idea is to build a profitable insurance company that has profitable risks and manage the assets akin to the way Berkshire has over time. That enabled Berkshire to compound its equity at 20% per annum over 60 years. That's our ambition.

We'll judge our success in the insurance operation over time. Every investment should be looked at on a multi-year basis. We're not short-term traders. If you're buying businesses, compounders you want to own for years, the measuring period is years.

Two principal reasons. One is a calculus we do on occasion called return on invested brain damage. If this were a traditional public company, we would absolutely have pressed forward. But it's a controlled company. The Bolloré Group owns 28% plus of the company. It takes a two-thirds vote in Amsterdam for a change of control transaction. This is not a transaction you can do without the consent of the Bolloré Group, and they rejected us. We were surprised because we had quite constructive engagement with them prior to the rejection. We respect their decision. This is a time where there are a sufficient number of opportunities to construct a very high quality portfolio. We had very good uses for the capital from Universal Music Group. We could have continued to bang on the door, adjusted our proposal to make it more compelling, but it wasn't clear we could get there. One of the challenges we had with Universal over time was the Bolloré Group as a controlling shareholder. In light of their response, we just didn't feel comfortable being a minority shareholder there.

In pound terms, we manage this capital and we think we should be judged in dollar terms because you can hedge your dollar risk if you choose to. Over a long period of time, Pershing Square has massively outperformed the S&P. There are short periods where we've underperformed. A big part of our underperformance this year is that the markets are up 7 or 8% and we're down about 10%. There will be periods where we substantially underperform because we manage a concentrated portfolio that is materially different from the S&P. That has enabled us to outperform, but it means there will be periods of underperformance. Those periods are generally the best times to invest with us because we don't own chip stocks, semiconductor companies, and energy, which have driven the S&P recently. We're deploying capital in businesses that have underperformed the S&P, like Microsoft, Amazon, and Meta, which we think are extremely cheap at current valuations and will pay off over time. These periods of underperformance have tended to be short, with one two-year exception almost a decade ago. Over the last eight or nine years, we've compounded at about 22% per annum versus the S&P at 14%, about 800 to 900 basis points of outperformance per annum. This year we're about 15 to 16 percentage points underperforming, but I would make the case that's the time when you want to put capital with Pershing Square, when we're underperforming, because it means our holdings are trading at deep discounts to the high flyers.

Appreciate it.