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My full interview with Bill Ackman of Pershing Square originally appeared in my national bestselling book, Market Masters, which is available at Chapters, Indigo, and Coles as well as Costco and Amazon.ca.
I know what you’re thinking: “Bill Ackman doesn’t belong in this book; he isn’t Canadian.” In my mind, though, Bill is almost an honorary Canadian, since he’s been heavily involved in the Canadian market through three large and notable plays: Wendy’s/Tim Hortons, Canadian Pacific Railway, and Valeant. While each of those Canadian investment plays is unique, they all underscore Bill’s multi-faceted activist methodology at Pershing Square Capital Management. The first, Wendy’s/Tim Hortons, was a breakup play. The second, Canadian Pacific Railway, was a turnaround play. The third, Valeant, is a growth or “platform” play.
Bill capitalized on all three of his Canadian investments, which is why in my first email to him, I asked, “Do you have a love affair with Canadian companies?” Honestly, I didn’t expect to hear back from the man who heads Pershing Square Capital Management, with close to $20 billion in assets under management. Bill’s one of the most high-profile hedge fund managers in the world, and it seemed unlikely he would take time to talk to a kid from Toronto rather than U.S. media outlets like CNBC or Bloomberg. Not to mention I had emailed Bill during a period in which his Herbalife short had attracted the attention of the media, the FBI, and the SEC. He must have been busy. But since my mantra is “Don’t fail to try. Try to fail,” I went for it. Just two minutes after I sent Bill my “Canadian love affair” email to ask if he would be willing to be interviewed, he responded: “Sure.”
As I prepared for the interview, I started to think that while Bill’s Canadian investments are excellent market case studies, the way in which he invests and then realizes value in companies is out of reach to most, if not all, common investors. Bill is an activist investor with deep pockets and strong influence. He can and does push the board of directors and management at companies to make changes that will positively affect operations, and as a result, raise stock prices. Take Canadian Pacific Railway, for example. Yvan Allaire, executive chair of the board of directors for IGOPP, the Institute for Governance of Private and Public Organizations, summed up Bill’s CP play quite eloquently in the Financial Post: “In 2011, Pershing Square Capital Management, an activist hedge fund founded by William (Bill) Ackman, acquired some 14.2% of Canadian Pacific Railway’s outstanding shares and proceeded to require several changes in the management and governance of the company. The CP board resisted fiercely his entreaties. A memorable proxy fight ensued, which was won by Pershing and resulted in a new CEO, new board members, and a new strategy for CP. Results of this palace revolution were, in share price terms at least, remarkable — astounding, actually. From September 2011 to December 31, 2014, CP’s stock jumped from less than $49 to north of $220, a compounded annual rate of return of 62% (including dividends).” The average investor won’t be able to accomplish something of that magnitude. So, I asked Bill how an investor with limited resources could replicate the activist approach, to which he replied, “You can ride the coattails of shareholder activists.” Investors can indirectly employ the activist approach, by directly buying the stocks that successful activist investors hold in their portfolios, along the lines of Som Seif’s Best Ideas Fund. In fact, Som includes Bill Ackman’s highest-conviction positions in that fund.
Bill is a busy man, and he occasionally had to pause our telephone interview (Bill’s office is in Manhattan), to address people as they came into his office. However, Bill is a talented enough multitasker that he was able to hold the thread of the conversation while carrying out his business. He was archetypal Bill Ackman: confident, articulate, and to the point — everything I had come to expect about Bill from his television appearances. I highly recommend that you watch the CNBC clip “Billionaire Showdown: Bill Ackman vs. Carl Icahn,” to get a better picture of Bill’s attitude, demeanour, and train of thought.
Bill Ackman’s 13 Investing Lessons:
1) “I was a passive investor, and then I saw an opportunity for a company to do something that would create more value, and that made me into a shareholder activist, which wasn’t planned.”
2) “For us the most important thing is what we call ‘business quality.’ We’re looking for a simple, predictable free cash flow generative dominant company.”
3) “The moat is usually created by brands, unique assets, long-term contracts, market position, or perhaps some combination of all of these factors.”
4) “We’ve done a couple of real turnarounds, but in most cases it’s about optimizing a business as opposed to completely transforming it.”
5) “With most of our investments we’re investing in a great business that has perhaps gotten a bloated cost structure, or that has not thought about its business correctly and maybe over-invested in parts of the business or has not allocated capital correctly, or perhaps has lost focus and owns assets it should sell.”
6) “In a market, most stocks are based on people’s estimates of next year’s earnings: analysts’ estimates.”
7) “If there’s one business making $2 billion and another business, or another subsidiary, losing $1 billion, people will look at it and say, ‘Oh, it’s got $1 billion of earnings.’ But that’s not the right way to think about it.”
8) “If you take a more skeptical view, CEO compensation tends to be correlated with the size of the company that you’re running, so you get to be paid more if you’re running a bigger business. You can also justify a bigger airplane.”
9) “[Turnaround strategy:] The key things are, one, finding a good target. A good target is a great business that’s undervalued because of under-management. Two, figuring out and finding the right person to run the company. And then a big part of the execution, which is three, is getting ourselves in a position where we can install that management and have meaningful influence going forward over the company.”
10) “We’ve had a very favourable experience in Canada in pretty much everything we’ve done.”
11) “You can’t necessarily buy at the activists’ price, but once they announce the investment you can invest in it alongside them. And oftentimes stocks don’t go straight up, so there’s an opportunity to buy it again at a cheaper price.”
12) “We’ve avoided businesses that are hard for us to predict with a high degree of confidence.”
13) “I would really encourage people to invest in the highest-quality businesses that they can identify in the market. Make sure you buy them at attractive prices. And hold them for the long term.”
Robin Speziale is the national bestselling author of Market Masters, which is available at Chapters, Indigo, and Coles as well as Costco and Amazon.ca. He lives in Toronto, Ontario. Learn more about Market Masters.