Pershing Square founder Bill Ackman (Trades, Portfolio) is a renowned investor in his own right, but when he was starting out in his career as a hedge fund manager, he was just like anyone else - trying to learn and get better. In a recent podcast interview with The Knowledge Project, Ackman discussed what he has learned from Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio) over the years.
Take on the qualities of successful investors
Ackman said that a big part of his education as an investor involved reading everything that Buffett has written and watching him speak as a student at the Harvard Business School. In particular, he remembers a lecture in which Buffett advised his class to "adopt the qualities you admire in others." His basic point was that while you can’t become an expert investor overnight, what you can do is quickly take on the traits of successful investors. For instance, following the example set by value investors like Buffett, Munger and Seth Klarman (Trades, Portfolio) and setting hard mental limits against speculative trading is something that you can do even as a novice investor.
Stability over short-term returns
Ackman also pointed out that early on in his career, in the 1950s, Buffett was essentially an activist hedge fund manager - he ran a partnership with a 25% incentive fee and would push for liquidations and other big changes as a board director of the businesses that he took stakes in. It was only in the mid-1960s, when the stock market entered a protracted slump, that he decided to offer his partners a choice: to have their money back or to take stock in a textile company called Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial). Even though he was giving up a 25% share of the profits of his partnership, he realized that what he was getting in return was "permanency of capital." This was the second thing that Ackman learned from Buffett - long-term stability is more important than short-term returns.
Where Berkshire Hathaway is moving
Ackman does believe there are assets on Berkshire’s balance sheet that could be utilized in a more efficient manner. For instance, Burlington Northern Railroad:
“Some parts of [Berkshire’s] portfolio underperform the competition in terms of profitability and growth… Just looking at the Burlington Railroad - it should be the most profitable, highest-margin railroad in the world - but it’s not, and I think a bit of that is Warren’s reluctance to get too actively involved with businesses that he owns.”
Ackman seems to be suggesting that Berkshire could do well by returning to Buffett’s more activist roots and encouraging change at the corporate level in its businesses. While it seems unlikely that Buffett and Munger will change their methods at this stage in their careers, it seems quite possible that their successors will be more focused on extracting value from its subsidiaries.
Disclosure: The author owns no stocks mentioned.
Read more here:
- Aswath Damodaran: The Limitations of Discounted Cash Flow Analysis
- Aswath Damodaran: 3 Myths About Valuation
- Bill Ackman Reflects on J.C. Penney Failure
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