Billionaire Bill Ackman (Trades, Portfolio) is a legendary investor and the founder of Pershing Square Capital Management, which reported ~$8.78 billion in U.S. common stocks as of its most recent 13F report for the fourth quarter of 2022, which ended on Dec. 31.
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
Ackman is known for his activist approach to investing and his relentless focus on "finding the truth." This approach once led to a five-year battle with MBIA over their bond insurance ratings, which was detailed in the book “Confidence Game."
In a recent podcast with 20VC, Ackman revealed how he raised his first fund, and he also shared his thoughts on the Silicon Valley Bank (SIVB, Financial) crisis. This article is a summary of the podcast's key takeaways, along with my own commentary; let’s dive in.
How did Ackman raise his first fund?
Ackman explains that raising his first fund for Gotham Partners “wasn’t easy." He compares it to “blind dating” with not much success. Out of over 100 people Ackman pitched to, only six people offered capital, which totaled $3.1 million - a relatively small sum in the world of hedge funds. Interestingly enough, of the six people who invested, four of them were among the Forbes 400 wealthiest people in America. Thus, relatively speaking, Ackman only asked for approximately half a million each from people whose net worth was over $400 million. Ackman realized that those wealthy investors who were former entrepreneurs liked the idea of backing a “couple of young guys," which enabled a “connection" between them. The first lesson we can learn from this is to choose your audience and tailor your speech to them when pitching any type of product or raising capital.
Ironically, one of the investors who turned Ackman down (an heir to a wealthy real estate family) actually invested in the companies he pitched as great investments in the meeting. Many of these investments went out to have great success with one of Ackman's stock recommendations doubling and another increasing by 90%. Luckily for Ackman, the investor "had a good heart" and decided to offer funds to him after the success.
Usually, a lack of track record can make the raising of capital challenging. However, Ackman’s strategy was to pitch himself as following the strategy of Warren Buffett (Trades, Portfolio), who uses a conservative value investing approach without leverage. This means that if the fund had bad investments, the investors wouldn’t necessarily “lose money” as they could just hold the public securities.
He also made sure he let the investors know he had “skin in the game," putting his own net worth in as well as missing out on taking safe corporate jobs such as those offered to him at McKinsey or Goldman Sachs (GS, Financial). He also sold them on a track record of life success (getting into Harvard Business School, etc).
Silicon Valley Bank
Over the weekend following the March 10 collapse of the bank, Ackman took to Twitter to urge the Central Bank to guarantee deposits to avoid a “run on the banks” and make people “calm."
According to Ackman, capital is still outflowing from regional banks and flowing into major banks such as JPMorgan (JPM, Financial). Ackman also clarifies that he is “not long or short any regional banks." He was looking at opportunities but preferred to be impartial so he could speak publicly without criticism.
The regional banks are needed for a variety of reasons. For example, Ackman states that a venture capital fund may need to make a call for capital and receive “100 wire transfers." At a large corporate bank, this can be more cumbersome and they often have worse customer service. The regional banks also tend to focus on real estate lending, which is a major part of the economy. Therefore, if these banks lose deposits, it could cause an economic slowdown.
For businesses, Ackman believes keeping excess cash in a U.S. Treasury account or owning U.S. Treasury bills directly is the safest way to store assets which aren’t invested.
Losing $400 on Netflix
On the podcast, Ackman also discusses his fairly recent miss with Netflix (NFLX, Financial). Pershing Square invested ~$1 billion into the company after its stock price had fallen by around 50%. However, in the next quarter, Netflix reported its first-ever loss in subscribers, which changed the thesis for Ackman. He could no longer reliably predict the future of the company and thus sold his position at a loss of ~$400 million.
Ackman is known as one of the most “persistent” investors on the planet. However, he believes it still makes sense to change your mind when “new facts become available," as in the case of Netflix.
How to size positions?
Position sizing is a vital part of investing. Investors always want more capital in their best opportunities. Ackman believes a “bigger mistake” than Netflix was not making his position related to hedging interest rates larger. He believes Pershing Square should have made “$10 billion” on this, but his fund made “just” $2.8 billion.
This bet was done by effectively purchasing a two-year call option which paid off when two-year interest rates went above 93 basis points. At the time when this instrument was purchased, two-year interest rates were at 12 basis points. This is similar to buying a call option on a stock which trades at $12 but its strike price is $93. It looks massively “out of the money” and there is a fixed time frame, so the risk of loss is high. Therefore, Ackman made this bet quite small at ~2% of his total capital, but he believes 3% or 4% would have also been reasonable, especially given the macroeconomic factors around inflation, high interest rates, etc. This type of investment is special as it is effectively a “hedge” that would protect you if interest rates rise, while also having a major opportunity for payoff.
An example of a “sure thing” for Ackman was his investment into Universal Music (XAMS:UMG, Financial), which is the market-leading music rights company in the world with ~35% market share. Universal Music has the rights to music by major artists such as Drake, Sting, Taylor Swift, Ariana Grande, Otis Reading and many more. Any time a song by an artist in its catalog has their songs streamed, Universal Music takes a cut. In Ackman’s mind, this makes the future of Universal Music “predictable” and the chance of Pershing Square losing, say, 25% of its capital over the next several years, was minimal. Therefore, a larger position size would be deemed necessary if it can be invested in at a “fair price."
How to deal with challenges
Some people “run away” from painful situations of the past, and that is their driving motivator. However, Ackman flips this on his head as he is “running towards” his goals. This includes “great self-actualization, great relationships, friendships, etc."
Interestingly enough, Ackman has a very strong internal compass and doesn’t seem too phased by external situations. He boldly states he has been “consistently happy” since birth. However, Ackman believes nothing in life is ever a “straight line up," as there are ups/downs etc. This is also similar to the stock market.
He has had “volatility and loss” in his career as well as his marriage and experienced challenging times. His “big challenge number one” was his battle with MBIA in 2002, regarding its bond ratings. As MBIA was a “politically influential organization," this resulted in Ackman being investigated by the SEC, and ultimately he had to wind down Gotham, with a backdrop of headlines such as “Ackman falls from grace." His second major business challenge was between 2015 and 2017, which also included the end of his first marriage. However, Ackman states he is fundamentally an “optimist” and “success is defined by how you deal with failure."
During any challenging time, Ackman believes you should aim to “make progress every day” and take things one step at a time to get through challenges. This “progress," whether it be business, mental or physical, “compounds” over time, which is also a nice analogy for the stock market. Experience is “making mistakes and learning from them." Also taking care of the basics like sleep and health is really beneficial.
How to find great partners
Ackman believes you should “choose your partners carefully” and also pick someone you can “totally trust” - someone, you can “work worth, succeed with, etc." In order to “trust” a person, Ackman tends to form a view of their character “pretty quickly” and uses his “gut feeling."
Ackman’s original co-founder at Gotham, David Berkowitz, was a classmate of his at Harvard for many years and thus he built trust and understanding with him over time.
Bill Ackman (Trades, Portfolio) is an incredible investor and an extremely wise individual. Despite being very busy, Ackman still takes his time to share his thoughts on the economy, investing and life, which I am very grateful for. “Happiness,” Ackman believes, is about “helping other people,” and compounding assets can help one to do more of that in the long term.