Bill Ackman: Investing, Financial Battles, Harvard, DEI, X & Free Speech | Lex Fridman Podcast #413

Added: Feb 21, 2024

Value Investing and Determining the Value of a Company

Ackman explains that the value of a company is the present value of the cash flows it generates over its lifetime. He looks for businesses with a high degree of certainty in predicting future cash flows and seeks to buy them at a price that represents a significant discount to their intrinsic value. By focusing on companies with strong fundamentals, he aims to avoid losing money and achieve attractive returns over time.

Factors Indicating a Company's Potential Success

Ackman looks for companies with strong barriers to entry, sustainable competitive advantages, and predictable cash flows. He mentions Universal Music Group as an example of a company with a strong moat due to its dominant market share in the music industry and its ability to help artists become global superstars. He also discusses the impact of technology on industries like music and the importance of adapting to new trends like streaming.

Adapting to Industry Transformations

Ackman highlights the importance of companies like Chipotle in adapting to industry changes and overcoming challenges. He mentions Chipotle's food safety issue as a setback but sees potential in the company's ability to recover and maintain its brand image. By analyzing financial reports, industry dynamics, and management quality, Ackman assesses the potential for companies to navigate industry transformations and remain successful.

Barriers to Entry and Moats

Ackman explains that barriers to entry are crucial in assessing a company's competitive advantage and long-term sustainability. He uses the example of fast-food chains like McDonald's and Burger King to illustrate how successful companies build moats through scale, brand recognition, and operational efficiency. By developing strong systems and brand loyalty, companies can protect themselves from competition and maintain their market position.

Investing in Alphabet

Ackman discusses his positive outlook on Alphabet (Google) as a company with a strong moat and potential for growth. He believes that Google's dominance in online advertising, data resources, and AI capabilities position it well for the future. Despite concerns about AI disruption, Ackman sees Google as undervalued relative to its earnings and considers it one of the cheapest among major tech companies.

Investing Strategy

Ackman emphasizes the importance of investing in businesses that one can understand well. He suggests focusing on a small number of companies rather than diversifying too much, as deep knowledge of a few companies can lead to better investment decisions. He also highlights the need to be financially secure and avoid borrowing money to invest, as this can lead to emotional decision-making during market volatility.

Value Investing

Ackman draws inspiration from Warren Buffett, known for his long-term, value investing approach. He admires Buffett's temperament and rationality in making investment decisions. Buffett's focus on finding undervalued companies with strong fundamentals resonates with Ackman's investment philosophy.

Activist Investing

Ackman explains activist investing as a strategy where investors actively engage with companies to drive change and unlock value. By taking stakes in companies and advocating for strategic changes, activists aim to improve the company's performance and enhance shareholder value. Ackman shares his experience with activist investing, including successful campaigns such as the one with General Growth Properties.

Role of Management

He emphasizes the importance of understanding the management of a company when making investment decisions. He looks for management teams that are transparent, have a track record of delivering on their promises, and are focused on long-term value creation. He believes that incentives drive human behavior, and understanding the motivations of management is crucial in evaluating a company's potential.

Impact of AI

Ackman discusses the disruptive potential of artificial intelligence in various industries. He acknowledges the exponential possibilities of AI products and services but also highlights the risks associated with rapid technological advancements. Companies that leverage AI effectively can gain a competitive edge, but they must also be prepared for potential disruptions in the market.

Everyday Investing

Ackman offers advice to everyday investors, recommending that they invest in companies they understand and can analyze effectively. He cautions against investing money that one cannot afford to lose and suggests focusing on long-term goals rather than short-term market fluctuations. Ackman encourages individual investors to educate themselves about the businesses they invest in and to avoid speculative or risky investments.

Mutual Funds

Ackman shares his views on mutual funds, noting that while there are talented fund managers, many mutual funds do not justify their fees. He suggests that individual investors consider index funds as a cost-effective way to gain exposure to the market. He believes that a focused approach to investing in a small number of companies can often yield better results than investing in a large number of securities through mutual funds.

Investing in General Growth Properties

Ackman discusses his investment in General Growth Properties, a mall operator facing financial distress during the 2008 financial crisis. Despite the stock price plummeting, he saw potential in the company's underlying assets and believed that the bankruptcy code could allow shareholders to retain their investment. By purchasing a stake in the company and joining the board, he led a successful restructuring that preserved shareholder value and saved the company from liquidation.

Challenges in Board Battles

Ackman shares his experience with board battles, particularly in the case of Canadian Pacific, where he led a successful proxy contest to overhaul the board and management of the company. He discusses the complexities of navigating board dynamics, gaining support from high-profile directors, and effectively communicating with shareholders to secure a victory. His approach to board battles involves assembling a strong slate of directors, engaging with shareholders, and presenting a compelling case for change.

Governance and Nonprofit Structures

Ackman reflects on the governance challenges faced by organizations like OpenAI, where complex nonprofit structures and conflicting incentives can lead to governance issues. He emphasizes the importance of clear governance structures, independent board members, and alignment of interests between stakeholders to ensure effective decision-making and accountability.

Lessons from Losses

Ackman candidly discusses his biggest loss in Valiant Pharmaceuticals, where a series of strategic missteps and market volatility led to a significant financial setback. He acknowledges the impact of the loss on his portfolio and reputation, as well as the subsequent market reactions that further exacerbated the situation. His experience with losses underscores the importance of risk management, due diligence, and adaptability in the investment process.

Market Reactions and Recovery

Following the Valiant loss, Ackman faced market reactions and challenges, including short selling pressure and portfolio losses. He describes the cascading effects of a major loss on investor confidence, market sentiment, and overall portfolio performance. He explains how Wall Street can be ruthless and how he had to navigate through personal and financial crises during that time. He shares how he borrowed $300 million from JP Morgan to prevent an activist investor from taking over his company, which marked a turning point in his journey.

Personal Struggles

Ackman opens up about his personal struggles, including contemplating a divorce and dealing with litigation and financial losses. He shares how he found solace in meditation, exercise, and the support of friends and family during this difficult period. He emphasizes the importance of making progress every day and staying focused on the fundamentals to overcome challenges.

Herbal Life Saga

Ackman delves into the Herbal Life saga, where he took a short position on the company, believing it to be a pyramid scheme that targeted vulnerable populations. He details his conflict with investor Carl Icahn, who took a long position in Herbal Life to counter Ackman's short position. Despite facing financial losses, Ackman stands by his decision to expose what he believed to be a fraudulent business model.

Views on the Middle East Conflict

Ackman expresses sadness over the October 7th attacks by Hamas on Israel, highlighting the ongoing conflict in the Middle East. He acknowledges the complexities of the situation and condemns acts of terrorism. He mentions his pro-Palestinian stance, indicating a desire for peace and understanding in the region.

Ackman reflects on the reactions to the war, particularly in the United States and on university campuses. He acknowledges the polarizing nature of the conflict and the challenges of navigating discussions around such sensitive topics. He emphasizes the importance of dialogue, empathy, and a nuanced understanding of the issues at hand.

He continues by sharing his background and early experiences with philanthropy in Israel, where he worked on promoting peaceful coexistence between Israelis and Palestinians. He emphasizes the importance of valuing all human lives and the need for peace and prosperity in the region.

Ackman expresses his support for Israel's right to exist and defend itself, while also acknowledging the plight of Palestinians and the challenges they face. He highlights the role of Hamas in perpetuating violence and indoctrinating hatred, leading to a cycle of conflict and suffering. He calls for a focus on governance and leadership to address the root causes of the conflict and promote peace and prosperity in the region.

Free Speech at Harvard University

The conversation then shifts to Ackman's involvement in addressing issues of anti-Semitism and free speech at Harvard University. He recounts his efforts to engage with university leadership and the board of directors to address concerns about protests on campus calling for the genocide of Jewish people. He criticizes the university's response to the protests and its failure to denounce calls for violence and hatred.

Ackman discusses the governance structure at Harvard, highlighting the lack of accountability and transparency in the board of directors' decision-making process. He points out the ideological influences at play on campus, particularly the dominance of a diversity, equity, and inclusion (DEI) framework that he believes has led to a one-sided view of the Israeli-Palestinian conflict.

Ackman shares his concerns about the impact of DEI ideology on academic freedom and the exchange of diverse viewpoints on campus. He argues that universities should be places of open dialogue and critical thinking, where students are exposed to a range of perspectives and encouraged to engage in respectful debate.

In response to criticism that he used his financial influence unfairly to affect the governance structure at Harvard, Ackman clarifies that he only used public letters and social media posts to raise awareness about the issues at hand. He emphasizes the importance of leadership and governance in addressing complex challenges and promoting a culture of accountability and transparency.

Ackman reflects on the broader implications of the DEI movement and its influence on academic institutions, calling for a reevaluation of the ideological frameworks that shape campus culture. He stresses the need for universities to uphold principles of free speech and intellectual diversity, while also fostering a sense of inclusivity and fairness for all members of the community.

Accusations of Plagiarism against Neri Oxman

Ackman also delves into the saga of the accusations of plagiarism against his wife, Neri Oxman. He recounts how the allegations surfaced and the subsequent media frenzy that ensued. He clarifies that the accusations were based on technicalities and misunderstandings, rather than intentional academic fraud. He defends Oxman's integrity and character, highlighting her brilliance, creativity, and contributions to the field of science and engineering.

The podcast sheds light on the challenges faced by Oxman and Ackman in dealing with the false accusations and the impact it had on their personal and professional lives. Ackman expresses his frustration with the media's handling of the situation and their failure to accurately report the facts. He criticizes Business Insider for their misleading and defamatory coverage of the plagiarism allegations, emphasizing the need for responsible journalism and accountability in the media industry.

Despite the adversity faced by Oxman and Ackman, they remain resilient and determined to seek justice and clear Oxman's name from the false accusations. Ackman discusses the steps they are taking to address the situation, including sending a letter demanding corrections from Business Insider and potentially pursuing legal action if necessary. He emphasizes the importance of standing up against false accusations and defending one's reputation in the face of adversity.

Media and Journalism

Ackman criticizes the role of the media in spreading misinformation and damaging reputations. He highlights the negative impact of sensationalist journalism and the lack of accountability in the industry. He believes that platforms like X can help counterbalance the power of traditional media outlets and provide a platform for individuals to share their perspectives.

Political Views and Support for Dean Phillips

Ackman shares his thoughts on politics and his support for Democratic candidate Dean Phillips in the 2024 US presidential race. He praises Phillips for his honesty, intelligence, and bipartisan approach to governance. He believes that Phillips has the potential to be a great president and hopes to see more candidates like him in the future.

Future Outlook

Ackman expresses optimism about the future, citing technological advancements and the resilience of the United States economy. He believes that AI and other technologies will drive progress and innovation in various industries.