Pershing Square founder Bill Ackman (Trades, Portfolio) has achieved phenomenal levels of success during his time on Wall Street. However, it hasn’t always been a straight line up, with the activist investor suffering a number of major setbacks, chiefly from his positions in Herbalife (HLF, Financial) - on the short side - and Valeant, which is now Bausch Health Companies (BHC, Financial) - on the long side. In a recent interview with Bloomberg, Ackman shared why he chose to become an activist investor discssed several investing principles.
Why be an activist investor?
Ackman started out as a regular investor, but quickly became disillusioned with the way that managers ran the businesses that he wanted to invest in. This quickly led him to the conclusion that the best way for him to deploy his and his investors' capital was to pursue active change by appointing new executives to manage businesses.
One of his first investments was in a company called Rockefeller Centre Properties, where he was so put off by the decisions made by that managers that he used his stake to turn the business around and make it profitable. He describes the difference between being a passive investor and active investors as “If you’re passive, you can feel like a patsy; if you’re active, you can actually create some value." More recently, Ackman’s Pershing Square Capital took a large stake in Chipotle Mexican Grill (CMG) at a time when the fast-food company was really going through some tough times - mainly concerning health and safety at the chain’s locations.
Lessons learned the hard way
Ackman sums up his basic investment philosophy as:
“Invest in companies that have simple, predictable free cash flow generative, dominant companies, with high barriers to entry and that have high returns on capital, and that have limited exposure to extrinsic risk factors that we can’t control. Strong balance sheets and don’t need access to outside capital to survive, have excellent management and governance. Sounds logical, but occasionally we’ve diverged [from those principles] and that there’s a certain discipline that comes with investments and there always seems to be a countervailing quality that caused us to diverge. But each case that we’ve comprised on business quality we’ve been hurt.”
What Ackman is saying is that every time he and his team have relaxed their investment rules, they have found poor results waiting for them at the end of the line. The cautionary lesson that investors should take from this is that it is better to stick to the rules you set out in your own system than it is to get seduced by the promise of an easy gain elsewhere. In the long run, you will probably be better off because of it.
Disclosure: The author owns no stocks mentioned.
Read more here:
- Charlie Munger and Warren Buffett on EBITDA​
- The Value Investor’s Handbook: The Importance of Cash Flow
- Charlie Munger and Warren Buffett on the Problem With Earnings Projections
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