Bill Ackman: Dealing with Haters, My Largest Trade Ever, and Sounding the Alarm for the Government

KEYPOINTS

• 01

  Success depends on how you handle failure, so climb out one step at a time.

  Ackman thinks almost every successful person has faced real hardship, and that how you deal with failure largely decides how well you do. He watched it play out when his first fund closed. His partner, worn down by the stress, didn’t want to start over; Ackman was excited to rebuild. His plan was simply to make a little progress every day. Staring up at the peak you fell from feels hopeless and pushes people into emotional, irrational bets to get back. Focusing on one sound decision after another, and staying healthy, compounds until you’re out of the hole.

• 02

  The most important lesson elite students never learned is how to fail.

  When Ackman speaks at Harvard Business School, he points out that the audience topped their high school classes, went to great colleges, excelled at summer jobs, earned glowing recommendations and has never failed. That, he tells them, is exactly the problem, because handling failure is the single most important thing to understand. He admires Elon Musk largely for how he has handled repeated brushes with catastrophe.

• 03

  Protect your judgment with health, people and perspective.

  During his first reversal, Ackman walked across Manhattan to the Hudson River most nights with a friend who wanted him to succeed. The second time was easier because he had a strong marriage and colleagues he respected. He admits his worst business decisions overlapped with the turmoil of his divorce, and he’s sure the personal strain made them worse. He keeps perspective: losing money on an investment is nothing like losing a job you need to feed your family, or getting cancer. He plays tennis, which he calls a form of meditation, avoids sugar and processed food, and eats only between noon and about 8 p.m.

• 04

  Invest only in simple, predictable businesses, then wait for a gap between price and value.

  An asset is worth the cash it produces over its life, so Pershing Square needs to forecast cash flows for decades; most businesses are too complex to predict even three years out. The first test is quality: simple, predictable and generating free cash. The second is a wide gap between price and value. Starbucks qualified because coffee is a daily habit, each new store earns high returns, and understanding one store lets you model thousands. When same-store sales flattened, the stock traded as if the business had broken. Ackman’s team concluded it was a blip, and management was already making the changes he would have pushed for.

• 05

  Permanent capital lets you ignore next quarter, and that is the real edge.

  Ackman doesn’t try to out-predict quarterly earnings; he bets that markets overreact to short-term noise. About 85% of Pershing’s capital comes from a publicly listed holding company, so investors can’t withdraw it at short notice. He copied the idea from Warren Buffett, who gave up a 25% share of profits in his partnership to run what he called a ‘crappy textile company,’ Berkshire Hathaway, for its permanent capital. The firm adds only one or two ideas a year, and Ackman says that if an idea needs months of work and still isn’t obvious, it’s probably not a good investment.

• 06

  The COVID hedge was a lopsided bet with good timing.

  In late February 2020, as friends thought he was overreacting, Ackman called a rare Sunday-night team call. With credit spreads near all-time tights, insurance against corporate defaults was unusually cheap. Pershing built about $71 billion of credit-default protection, which carried roughly $500 million a year in premium commitments. Because he expected the outcome to be clear within weeks, he treated the real risk as about $125 million, under 2% of assets. It ended up costing about $27 million in premiums. By March 12 the position was worth about $2.6 billion, and Pershing cashed in and bought about $2 billion of stocks within a week.

• 07

  Hedging instead of selling preserved relationships, taxes and the position.

  Selling everything would have meant abandoning companies whose boards and CEOs Pershing helped install. At Chipotle, for example, it added four directors and helped recruit CEO Brian Niccol. Selling would also have triggered big taxes on gains and risked missing a short-lived bottom. The hedge cost little if nothing happened and paid off hugely if it did. He went on TV on March 18 with what he saw as a bullish message: shut the country down for 30 days and markets will recover. Critics accused him of driving the market down, although it had already fallen about 7% before he spoke.

• 08

  After the pandemic, expect a slower recovery and less appetite for debt.

  Ackman argued in April 2020 that a deliberate, temporary, health-driven shutdown, backed by government support and some 70 vaccine and treatment trials, was nothing like the open-ended Great Depression. He expected a slower than V-shaped recovery, a heavier lasting government debt load, and a generation of boards rethinking ‘optimized’ balance sheets, since the companies that suffer most will be those that borrowed too aggressively. He also predicted people would be desperate for human connection, so the best-located malls would be reinvented rather than abandoned.