Bill Ackman: $9 Billion Investing Playbook

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1. OUTPERFORMANCE

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98% of professionally managed funds can’t beat the S&P 500,¹ but Bill Ackman has. From 2003 to 2021, his 18-year track record averaged 17.1%, compared to 10.2% for the S&P 500.² This level of outperformance translates into 3x the returns: $100k at 10% grows to $555k, while $100k at 17% grows to $1.68M.

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2. BENJAMIN GRAHAM, THE INTELLIGENT INVESTOR

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Like Buffett, Benjamin Graham had a significant impact on Ackman. Graham's book was the first investment book Ackman read, and it became the inspiration for his career. Some key lessons Ackman took away include:

• Understanding the difference between price and value — price is what you pay, value is what you get.
• The key is figuring out what something is truly worth by focusing on its intrinsic value.
• In the short term, the stock market behaves like a voting machine, driven by speculators.
• In the long term, the stock market acts as a weighing machine, eventually reflecting a company's true value.

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3. SPECULATION VS. INVESTING: GAMBLING OR GROWING WEALTH?

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Speculation is when you have no idea what things are worth, just hoping they go up.Investing is when you really do your homework—digging deep, understanding the business, the competitive dynamics of an industry, what management is going to do, and the price you're going to pay.

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4. VALUE INVESTING – HOW HE GETS TO THE VALUE OF A BUSINESS

Find businesses where you have very high confidence in what the cash flow will be over a long period of time. There are very few businesses in which you can have high confidence, which means that some are speculative because it’s very hard to predict the future.Seek those rare companies where you can predict what they are going to do over a long period of time.

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5. FACTORS THAT INDICATE LONG-TERM PROFITABILITY AND VALUE

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• Every consumer has a view on different brands.
• Look for businesses that are non-disruptible, where if you closed your eyes and the stock market was closed for 10 years, this business would be more valuable.
• Universal Music Group owns a significant portion of music rights. As a major shareholder, Ackman believes that music is timeless, providing a strong foundation for investing in a company that controls about a third of the global music market.
• They are the best at taking a young artist and helping them become a superstar. They also have an incredible library, including the Rolling Stones, The Beatles, and more.
• Streaming is more predictable than selling records. With how many people have smartphones, you can build a model of what the world will look like over time.
• You can’t get to a precise value, but you can arrive at an approximate value, and the key is to build in a discount or margin of safety.

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6. MARGIN OF SAFETY (DON’T LOSE MONEY)

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Benjamin Graham invented the concept of Margin of Safety. You want to buy a company at a price where, if you are wrong and it turns out to be 30% less, you paid a deep enough discount to your estimate that you are still okay.A big part of investing is about not losing money. If you can avoid losing money and then have a few great hits, you can do very well over time.

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7. HOW TO RESEARCH COMPANIES AND DETERMINE THEIR VALUE‍

• Start by reading its SEC filings, which include the 10-K annual report and quarterly 10-Q reports. These documents provide insights into the company’s financial performance and future plans, while the proxy statement details the board's structure and governance.
• Quarterly call transcripts are invaluable; reviewing the past five years can help you learn the narrative of the business, revealing how management describes their operations and commitments, and allowing you to assess their competence and honesty over time.
• It's essential to evaluate competitors and consider potential disruptors in the industry. Engaging with industry experts and reading relevant books can provide a more comprehensive understanding, as this process is akin to conducting a large research project.
• While public filings offer substantial information, they may not reveal everything you need to know, underscoring the importance of conversing with experts in the field. To grasp the company's leadership, listen to interviews or podcasts featuring the CEO; this helps you better understand the individuals driving the business.
• Ackman looks for companies with a long history and growth trajectory—businesses that generate substantial cash flow, are easy to understand, and have significant barriers to entry, making it challenging for competitors to enter the market. However, these companies often command high stock prices, which can limit potential returns.
• Price is crucial in investing; even the best business can yield unattractive returns if purchased at an inflated price. Ackman typically invests in great companies that have lost their way due to significant mistakes but remain recoverable, buying shares from shareholders who have lost confidence.

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8. BARRIERS TO ENTRY AND ECONOMIC MOATS

The most difficult analysis to perform as an investor is determining whether there’s a type of moat protecting a business. Questions like "How wide is the moat?" and "How big are the barriers?" become crucial in this evaluation.In today's rapidly evolving technological landscape, many companies are highly susceptible to disruption. For instance, a 19-year-old can raise millions, gain access to bandwidth and storage, hire engineers, and build a virtual company that could potentially disrupt an established business. Therefore, it’s essential to identify businesses where it is challenging to foresee a world in which they could be disrupted.

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9. AI

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AI adds complexity and risks to investing, given its profound impact and capabilities. If investing is fundamentally about finding businesses that can’t be disrupted, then AI emerges as the ultimate disrupter. This reality underscores the dangers of investing; a new technology can suddenly emerge and strip away the competitive advantages of established businesses, making the landscape highly unpredictable.

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10. MANAGEMENT

Senior management matters enormously in the success of a business. The adage "Show me the incentive, and I’ll show you the results" highlights the importance of understanding whether management is incentivized for long-term shareholder value or short-term gains. A+ leaders are crucial as they recruit great talent; if a leader isn’t an A player, they are unlikely to build a quality team, which can hinder the organization's overall performance and growth.

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‍11. WARREN BUFFETT

Most of what Ackman learned in the investing business came from Warren Buffett; he has been Ackman’s great professor. Ackman started by reading the Berkshire Hathaway annual reports and the letters Buffett wrote to his limited partners. Buffett’s duration in the industry is remarkable, and he consistently takes a long-term view. One of the key lessons from Buffett is that investing requires the right temperament and emotional control. People often get excited when investments are rising and feel depressed when they are declining. However, the opposite mindset is essential: investors should get excited when things are becoming cheaper and be concerned when they are becoming more expensive.

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12. CONTROL YOUR PSYCHOLOGY

Avoid borrowing money. Never use margin; doing so can lead to panic when stocks decline, triggering emotional responses that can cloud judgment. Additionally, never invest money you can’t afford to lose. It’s essential to do your homework. If you know what a business is worth and have a solid understanding of its management, a decline in stock price will affect you less. Remember, in the short-term, the market acts like a voting machine, reflecting sentiment rather than value. Lastly, invest with a long-term perspective, which allows you to disregard short-term price fluctuations.