Bill Ackman: Is Permanent Capital an Investor’s Biggest Edge? | Podcast | In Good Company

The answer is there aren't a large number of big ones. So from the perspective of Pershing Square, we're allocating not the kind of capital you allocate, but writing pretty big checks. That's why we're concentrated because, one, there's a limited number. There are probably actually a couple hundred to three hundred really great businesses. But it's not so often that a really great business becomes available at a price that makes it a great investment. So that's why we're concentrated. How do you come up with the ideas? Where do you find these things? Just, you know, we love investing. We love learning about businesses. We read the newspaper, so to speak. But we sort of built a library of companies we admire.

And, you know, business that has great economic characteristics, high rates of growth, managed by good management teams, they don't often become available at prices that offer the kind of returns we're looking for. Why don't more people do like you do? Because I think it's just interesting, you know, Chris Horne has the same philosophy, Warren Buffett, and you talk about how you do it. And yet, so very few people manage it. So part of it is structural. Well, many investors want to get rich quick. And this is not sort of a get rich quick strategy. You have to have kind of a longer term view. And then I think most of the capital in the asset management industry is inherently short term, available for redemption on a minute by minute, day by day, or quarterly or annual basis.

It's hard to think long-term if your investors are going to be judging on a very short-term basis. Or the person you work for, you know, think the Citadels, the Millenniums, firms where very short-term oriented use a high degree of financial leverage. You can't absorb a high degree of volatility in a strategy like that. Whereas you need, Warren Buffett's had permanent capital. Chris Hahn has been in the business for a long period of time. He's cultivated investors that have given him kind of long-term backing. You need that in order to implement the strategy, and that kind of capital is very scarce.

Tell me a bit more where you get your information from. What do you read? So personally, I read... Wall Street Journal, FT, Economist, occasionally the New York Times when I can stomach it. But no, it's a good newspaper, but you have to, all media have biases. I spend a fair amount of time on X, actually. It's probably my most important source of information because you can follow people who have very much diverging views on the same topic. And I think it's a very good way to get to the truth. That's become increasingly a big source of where I get my media. Who do you follow? I follow probably 1,000 people over time.

It depends on the topic. I've got lots of different interests. And interestingly, some of the firm's best investments, my personal best ideas have just come from particular passions. Health being an important passion led me to an insight about COVID. I started seeing COVID emerge in January, got concerned about a pandemic. And my interest was not driven by an investment perspective, but it led to an interesting investment opportunity. Now, a family tragedy is causing me to spend a lot of time learning about what's going on, AI, and bringing computer interfaces. And it may lead to some interesting investment opportunities.

So once we find something that's interesting, due diligence is driven by fairly conventional looking at public filings and then using expert networks to talk to people. Welcome back to your tragedy. How much time do you spend on X? My wife might say too much. What is that? I don't calculate it. But what do you think? An hour a day or more? I would say it's usually in the morning and the evening, not during the business day. But it depends on what else is going on in my life. But I can spend—actually, an interesting thing is people who are on X versus people who rely on conventional media, you generally feel like you're a week to two weeks ahead, like news comes out and you learned it a week ago.

So it's very much a real-time source of information. You made a lot of money in restaurants. Why have they been good investments? Simple, predictable, free cash flow generative businesses. We've kind of focused on, for the most part, kind of the franchise business model, again, royalty, collecting companies. But I think over time you build a domain expertise in an area. It's just that my daughter runs a cocktail bar, and it's not an easy business, huh? It's not. But again, it's less the sector than the structure. You know, McDonald's is an amazing business, but it's really, people think of it as, historically thought of it as a restaurant business.

And in its core, it is, but it's also a real estate business, and it's a franchising operation. How much do you depend on your pattern recognition or your gut feel, the fact that you've seen these things play out before? I don't know. I think it's very valuable to have experienced lots of market events over time. You know, we've kind of, I think it's, but importantly for us, actually, you see that little tablet over there. We took our kind of core investment principles and we created what amounts to a checklist. We have a framework. And so I think that's, I would say, that framework, it helps us see the world in a way which every once in a while surfaces an interesting investment opportunity so we'll uh now look at this uh thing here yeah uh and we'll uh zoom in on it afterwards but uh just what are the what are the most important things there one it's a business we can predict with a very high degree of confidence right the value of a financial asset is the present value that cash will generate over its life if you can't build a model of the next you know reasonable period of time of a business 10 15 20 years you i don't think you can come up with a value for it. You know, a lot of money is managed based on people believing a stock

will go up or down based on a new piece of information coming out. But it's inherently a short-term, you know, is the company going to meet, exceed, or miss earnings? A huge amount of money is moved on that basis, or an expectation of an event or a news event that will cause a stock to move in a certain way. We kind of ignore that, right? What we're doing is we're building a financial model of a company over a long period of time. So the business has to be inherently, there are many businesses that we have no idea what they're worth. We just don't even look at them. Or once we conclude they're not, we can't predict their certainty.

So I think predictability is important. And obviously, to have predictable cash flows and revenues over time, the business has to have the proverbial mode around it. So business quality, durability, I would say, critically important. We want companies that are not exposed to what we call extrinsic factors we can't control. So we don't really invest in commodity-sensitive businesses, interest-rate-sensitive businesses, regulatory-sensitive businesses. So we keep it simple. Well, at least your principles are set in stone, right? That was intended to be. I told the guy of the team to make it stone. We came back with a heavy plastic.

How does that work? How long time does it take from when you start to look at it until you make the investment?

So we got to know, I got to know Bruce Vlad and the senior Brookfield team working on a transaction. So FYI, Brookfield is the private equity Canadian group. Yes. So I met Bruce Flatt in connection with the bankruptcy of General Growth, where we ended up partnering with them and doing a restructuring of that company. Got to know the team really well, came to have enormous respect for Bruce and Cyrus and other members of that team that today still run that company. But we never invested in Brookfield. um then we you know the company over time restructured and became a bit more of an asset light royalty collecting business and then we began a due diligence process a number of years ago um and uh it was probably brookfield's actually quite a complicated company that's one of the reasons why it's uh attractively valued they've been simplifying the business over time but it was probably a several month due diligence process that led to that investment is it more difficult to beat the market now than it was when you started? I don't think so. I would say we don't try to beat the market every month or even every quarter or every year. But I think managing a concentrated pool of capital and having the ability to have a longer term view, I think gives

you a big competitive advantage in terms of beating the market over the long term. But the market's

And again, we haven't made an activist investment in 10 years. How do you assess the other activist investors? You know, it depends. Well, first of all, I think it's very, very healthy for markets, right? The risk of increasing indexation and passive ownership is it can lead to, you know, So without shareholders holding management to account, you know, if you look at the history of activism, you know, the, you know, J.P. Morgan, Carnegie, right, these were not activists, but there were major shareholders of U.S. steel and railroads back then.

And they cared about how the businesses were run as Carnegie, you know, when he passed away, became, he was a philanthropist, gave away sort of all of his assets, the rise of. You know, Fidelity Investments, Vanguard Indexation, there was this dissemination of controlled companies. You know, Europe is still comprised of many controlled businesses. There are fewer and fewer other than, you know, sort of technology startups of the last whatever period. And it led to a period of meaningful underperformance in the 70s and the early 80s. And it was actually Mike Milken that enabled, not quite activists, but a group of entrepreneurs like Carl Icahn and Nelson Peltz, the ability to actually, you know, put companies in play.

And you had Marty Lipton invent the poison pill that stopped green mail activity and other green mail sort of became illegal. And then these ability to take companies private without the board having the ability to negotiate was sort of disintermediated by the poison pill. And then We had a period of meaningful underperformance until, I would say, activism became more of a thing over the last 20, 25 years. You had a bit of a run-in with Carl Icahn. I did. I did. Yes. Tell me about it. I did a transaction with Carl Icahn. This was in 1998. It was a very small deal. and I sold him an interest in a company called Hallward Realty Partners at a big premium to where it was trading, but a big discount to what it was worth.

And as part of the transaction, he gave me what he called schmuck insurance, which said that if he sold the stake or transferred it any time in the next three years at a premium, I would get 50% of his profit over, I think, a 10% return. and he made a bid for the company, but he didn't win. Someone else bought the company and he sold within two years and he owed us like four and a half million dollars and he refused to pay. So I had to sue him. So you got a bit angry. I didn't get angry. I just, you know, Carl was known for this. So that's why I had a very simple agreement. It was an eight page document. I put in a little mathematical formula and I described sale or otherwise transfer. I give a very complete definition, but he, you know, he likes, uh, he likes the battle. He likes the battle.

Uh, herbalize. Yeah. Yes. That led to herbalife. So basically what happened was, uh, we won the case. Now the way Carl operates, we sued him. We won. And then he waited, you can appeal within 180 days. He would wait till day 179 and then appeal. And then we went on appeal and then he would appeal again. He appealed to the Supreme Court. And again, it was a relevant case, but he delayed us for like, I don't know, six, seven years. Meanwhile, we were earning 9% interest because that was under the terms of the agreement. And eventually we won. And he called me, says, Bill, congratulations. And I said some fairly strong words back to Mr. Icon. And he didn't like that I did that. And he sat in the weeds. And then we did short a company called Herbalife.

And then Carl, without doing any due diligence in the business, basically figured he would squeeze us and he very effectively did yeah so and you lost a billion we did um how do you how do you assess the um kind of the decline in shareholder rights that's happening

business that gets to an attractive price because management has made a series of mistakes.

You mentioned the importance of having long-term capital, and now you have permanent capital. Just tell me about that. If you look back, I'm a sort of Warren Buffett disciple. He started a hedge fund. He was an activist investor. He doesn't talk about it now. Actually, today, he just announced that he's stepping down as the chair, becoming chair emeritus of Berkshire. He was running a $100 million hedge fund in 1969, and he had a right to receive 25% of the profits over a 6% return. He gave up that promote, and he gave back the capital to his investors and took control of a pretty shitty business.

Textile mill. A textile mill, or a series of textiles mills at a time when the Chinese were becoming more and more competitive. And he took a $100,000 salary and no incentive fee. And why did he do it? because he realized, doing the math on compounding over time, that his ability to create value would be impaired by a capital base that could disappear overnight or even disappear in the relative short term. So he traded permanent capital for much less favorable economics, and obviously it's worked out well for him. In a world where the vast majority of other investors have capital that can leave tomorrow, it's a huge competitive advantage to not have to, we were able to go into COVID and the world's melting down and we could be very aggressively deploying capital because we weren't worried about redemptions at the end of the month.

And among the things that create the best opportunities in markets is the fact that the vast majority of asset managers have capital that can get pulled. The human nature, I think, going back to, you know, the early days of man, right? When you're in the savanna and all of a sudden animals are running in that direction, it means something very frightening is behind them. So the human nature is, you know what, I want to go where they're going because otherwise they're going to get eaten by the lions, right? I think that's still inherent to human psychology, which is why when markets implode, people are selling, you know, quote unquote, at the bottom because it's just that fear.

And... You know, one of the important disciplines is a kind of a dispassionate, you know, view of volatility. But you can't be dispassionate if your clients are just going to pull your money. And, you know, if you can set yourself up in such a way that you're, I mean, you've, you know, Norway's done a pretty good job with this. But absent being a sovereign wealth fund, there's very little capital in the asset management industry that's permanent. And that's a huge competitive advantage. Time arbitrage, as some people refer to it, the ability to be a long-term investor in a short-term world really exists for us because of our capital base.

But you have a permanent capital base, but you're also now setting up an investment vehicle, which is, in a way, well, you're trying to replicate Berkshire. Is that the way we should look at it, with an insurance company and so on? So we had our version of a textile business. It happens to be a much better business than textiles. Howard Hughes. Howard Hughes. But it's a business that is, I would say, the market assigns a high cost of capital to the business. And it's hard for us to exceed that cost of capital in a real estate operation. It's a very good business that over decades will generate a huge amount of cash.

Basically, it's a business of sort of building these and developing these small cities. What we're doing is we're transforming that business. What did Buffett do? He took control of Berkshire. Over time, he exited textiles, took the cash from textiles. He bought an insurance company, and he did something different from other insurance operators. That is, typical insurance company invests nearly the entire collection of assets in pretty high-grade fixed-income securities, and they focus on making a profit on the liabilities, i.e. writing insurance. What Buffett did is he, you know, over time focused more on running a profitable insurance business, but he took 100% of the float generated by writing policies and reinvested, put that capital in short-term treasuries and took the surplus of the insurer invested in common stocks.

And that led, enabled him to run a 20 plus percent ROE insurer that's built most of the value of Berkshire over time. So what do you think Howard Hughes will look like in 10 years time? So in the next several years, and hopefully on a more accelerated basis, we're going to take as much capital as we can out of the real estate operation, turn it into an asset-light real estate company, reinvest the capital in the insurance operation, and then compound the capital in the insurance operation at a high rate over time. So I would say in a decade from now, it will be 80-plus percent insurance company and maybe 20 percent real estate.

And then we recruited, we believe, the best insurance team in the industry, a guy named Mark Grandison who ran a company called Arch Capital Group. And then his protege, David Gansberg, Lucy Faito, she was the former vice chairman and general counsel of AIG. We have a team that you would normally put into a $50, $100 billion insurance operation running a, you know, not quite $2 billion capital insurance company. And we think we can do really interesting things with that team. We think we could run a, you know, very profitable specialty insurance company. And then Pershing Square is going to manage the assets much the same way Buffett has done.

And we've taken 100, you know, the moment we closed on the insurer in June, we sold all their fixed income kind of intermediate and longer term fixed income assets, invested the money in short term treasuries. And then we took a portion of the equity the insurer invested in a common stock portfolio, again, some of the best businesses in the world. There are very few examples. You know, one interesting question is why hasn't someone replicated what Buffett has done before? Well, I guess Apollo. No, very different. Very different. So we're doing something very different from Apollo or even Brookfield or KKR and others, ARIES, for example.

Apollo bought a life insurance company that issues kind of fixed annuities and has used it sort of as a financing vehicle, right? Issuing fixed cost, low cost liabilities and then invest. the money in, you know, opportunistically in private credit, using a decent amount of leverage and creating, you know, taking that spread with some leverage and generating an attractive return on capital. We've bought a specialty insurer and reinsurer that actually takes insurance risks, property casualty and type risks. And we're, you know, we're not, it's not a levered spread business. It's a business of taking on various hopefully profitable risks and then using the permanent capital of the insurer to compound over time. But much, much lower leverage than one of these credit strategies. Now, you mentioned X earlier, you are

So one, you know, you go, you spend a meaningful part of your life at a university at a kind of pretty important time. So, you know, I went to Harvard College. I also went to Harvard Business school now that's six meaningful uh years of my life some of the best every year of my life is a great year but you know there's a critical time so you have a certain affection and a loyalty uh to to uh to a university uh and um you know i would i show up on the harvard campus a couple times a year i meet students uh teach a couple classes things like this i've been so you're giving them some money too. Giving them some money too. And then October 7th happened, and then on the morning of October 8th, while there were terrorists still on Israeli soil killing people, 34 Harvard student organizations came out and said that Israel was solely responsible for the acts of Hamas of the last 24 hours. And 34 student organizations, you know, signed this sort of letter. And I'm like, well, this doesn't, I was sort of very puzzled by this. Then I went up to the campus to try to understand, you know, sort of what's going on. And the kind of more I dug on the topic, I started

learning about this oppressor oppressed narrative very naively. I had not even heard of people in this, but they started talking about, you know, how DEI is sort of part of the web of this conversation. And then, you know, professors behind closed doors would tell me, Bill, this is not a place where you can speak freely. You know, I would say among the top professors at Harvard would say this to me. So I'm like, what kind of education can you have if the professors are afraid to speak their points of view, the students are afraid to speak their points of view, and there's certain accepted points of view. And then where Meritok, you know, Harvard but starting to admit students without, you know.

kind of giving up on meritocracy and excellence, which is also not a good strategy for a best-in-class university. So I would say, why do they get upset? Because something very important to me, I watched it diminish in a meaningful way. You mentioned that your family went through a tragedy earlier in the year. Is that something you want to talk about? Sure. So my daughter, my 26-year-old daughter, had a brain hemorrhage. She had a weakness of something called arterial venous malformation, something we could only have been aware of had she had an MRI, which she never had because she never had really any symptoms. And it happened early in the morning when she was alone in her apartment, and we didn't discover her until late the night when she wasn't responding to repeated attempts for us to reach her. And large brain hemorrhage, a lot of pressure on the brain for almost 19 hours. Most people die. And even the ones you save, they die later in a nursing home and sort of made it one of my important life

Bill, what's your biggest personal failure in life? Biggest personal failure? You know, I'm sort of a person who I'm very happy where I am. So I kind of view failures that I've had over time as, you know, if you think about the events that caused me to sit across from you today, you know, had I gone left at one point instead of right, it probably wouldn't be here. Do you have a systematic way of being grateful?

Not systematic. I'm just inherently that way. Well, I would say I'm inherent. I have a ritual I go through every morning, which has really changed my life. Okay, interesting. So you make a list of like. Yeah, I just go through the things I'm really grateful for. And it takes like one minute. and it totally reframes my day. Yeah, but I feel that way every day, obviously. But I'm an optimist. Interestingly, and you interview a lot of people, have any of the people you've interviewed who are successful, are they pessimists? I don't think there's one. No, no. Okay, so I think optimism is really important.

Very. And I'm also grateful, appreciative. I don't do it systematically, but it's part of my yes I love every day absolutely what's the one thing about you that people don't know I'm like the most transparent guy in America I don't know what is the one thing about me I'm actually a really good volleyball player I thought you were a tennis player yes tennis. I'm a good tennis player. I don't know. What's the one thing? I don't know whether it is. That's a good question. When you look at the books you read, which book has taught you the most? I don't know if there's one book that's taught me the most, but there's one book that had a very significant impact on me, Theory of Justice by John Rawls, which is a book that sets up a framework for how to think about the world and obligations and things like this. Basically, the premise of the book is everyone should do a thought experiment. Go back to before you're born and you're about to be born. Is your mother a drug addict in the Bronx? Are you born in sub-Saharan Africa? Are you going to show up in Iran? Or are you going to grow up on the side of New York and dad's an investment banker.

In that you don't know where you're going to land, how would you organize, what's the fairest way to organize the world before knowing what your personal outcome is? And I think it's a very interesting way to think about how the world should be organized. People tend to frame things based on their personal perspective. How should the world be organized? uh i would say uh so far capitalism is the best system that we've we've come up with um you know i think how should the world be organized it's a pretty big question yeah um look i i like our system you know i like you know the basic uh constitutional rights bill of rights type things that we've been offered and I think it's really important that we we protect them you know I think it's very important that the most powerful country in the world is a benign actor that yes it has to yes we're I think America first is is is it a benign actor now I think the president United States is actually trying to do good you know I think a lot of people have objected to, you know, objected to any wars that are, you know, where it doesn't impact U.S. soil, but, you know, in a world where people can get access to nuclear weapons, you know, Iran was getting closer and closer to a place where we couldn't do anything about their

nuclear capability. North Korea, we allowed North Korea to get to a place where we couldn't do anything about their nuclear capability because we allowed them to build a, you know, their proximity to South Korea enabled them to, you know, effectively scared us from trying to intervene in their nuclear program, you know, Iran has sort of made it very clear that they're not operating with any of the same kind of life, liberty, pursuit of happiness principles that we operate under, the way they treat their people, their women, their, et cetera. You wouldn't want someone like that to get, in effect, absolute power. You know, AI creates the same challenge. I don't know that we can slow down on AI because imagine if, you know, one of our enemies gets to super intelligence. So I think it's really important. I think ultimately the U.S. is a benign actor globally, imperfect, but I think our goals and principles are good. I think it's important we maintain our preeminent military AI and nuclear capability to deter people who want to kill us.

I think Western ideals are better than some of the radical Islam, I think, is a real threat to the West. So in this complex world, what is your advice to young people? My advice is it really matters who you hang out with when you're younger. You tend to become or be inspired or otherwise by the people you hang out with. I happened to, when I was in high school, I hung out with kids who were kind of competitive about lots of things, including school. And as a result, you know, partly explains why I was a good student because I wanted to, I was inherently sort of competitive and I wanted to get, I don't know, good grades.

That, you know, that was helpful to me in getting into a good college. But, yeah, you learn the most from the people that you're closest to. So I think that's a really important thing. I think, you know, it's interesting, you know, how has AIs become so powerful? The answer is they've basically read a lot of books and read a lot of content. That's what training a model is. I think the human brain is kind of similar. And the way you train a human brain is by consuming as much information as you can. So reading and pursuing what interests you so that you train the model. You know, I think how do you get to super intelligence?

I don't know any very intelligent person that hasn't read a ton. So I think that's a good place to go and focus on what you're passionate about. I mean, if it's cars, fine. If it's, you know, military, if it's history, you know, so I think that's really, really important. And then get interested and understand nutrition, health, exercise, sleep. Don't consume a lot of alcohol. In fact, if you can just skip it, it's great. Sugar is poison. um weightlifting is a really good thing to do um it's good for confidence good for appearance it's good for health so i would say yeah your your circle oh you know operate in such a fashion that um you know when warren buffett came to speak at harvard business school he said something that i thought was really really good advice he said basically if you want to be successful there are a certain number of qualities that you need to have think of the people that you go to school with that you admire the most other than you know your ma or you know i'm some olympic athlete who's had to just focus on you know or you know Michael Jordan, you know, basketball, in order to achieve the greatness, success depends on having certain human qualities. You know, showing up on time, you know, responding to people who

reach out to you, doing the right thing when no one's watching. All of these human character traits are things you can have tomorrow. It's just a decision you make. I want to be a good person it's whereas being michael jordan is going to be you know first of all maybe uh you know n of one but it requires enormous amounts of work to achieve its character doesn't require really any work it just requires sort of a decision i thought that was a really really good advice so uh you want to be a person that other people admire you want to be a person of character you want to be a person that is noticed by your boss these qualities are ones that uh are totally achievable.

So I think those would be a few things I would give. Oh, and then when you're, one of the most important decisions you make is who you're going to spend the rest of your life with, like your partner, your wife, your husband, be very thoughtful about that decision. And don't rush into it, but don't take too long to make it either. Great place to end. Bill, thanks. Thank you. We'll be right back.