Pershing Square Capital Management: Bill Ackman

Bill Ackman, one of the biggest names on Wall Street. This guy is awesome. He does a lot of political commentary and just investment commentary on like CNBC and Bloomberg. So you've probably seen his face. He manages about $20 billion through Pershing Square Capital Management, which is a hedge fund that he's known for running. To take it back, let's talk about, you know, how he started his firm, how he got his footing in the marketplace today, and some of the bigger deals Bill Ackman started right out of school. Uh, he convinced one of his professors to give him $250,000 to start his hedge fund. With that $250K, he went out and raised about another $3.2 million, which he traded very successfully, uh, with a schoolmate of his and ultimately turned that into $10 million. This was 1993. By 1998, this guy was managing $500 million. In Gotham Partners. So how did he do it? His first thesis was value investing. Public stock prices are influenced by supply and demand. There's a number of people buying a stock, it's gonna go up on the public markets, irregardless of their fundamental book value. What he said is he started analyzing companies and was identifying firms that had a higher book value than what they were trading at. And this typically happens in times of distress. Maybe there's some poor publicity about a firm that drives the stock price down. So, you know, that's a great time to buy because the assets of the firm are worth more than what it's trading for. And no, guys, this is not financial advice. This is not investing advice. Just my own opinions. Warren Buffett is actually well known for value investing. There's this famous quote that he says where diversification is a hedge against ignorance. Essentially, in value investing, you don't make a lot of small bets. You make a few very large ones, and it's a concentrated portfolio. And you are just extremely bullish on the few investments that you take. Bill Ackman started, you know, value investing through this hedge fund in 1993. He was doing really well. And then he started to kind of get a little sidetracked. And this kind of leads to his demise in Gotham Partners. He started investing into illiquid assets. Quick lesson on hedge funds is they're often open-ended vehicles. There's an initial 1-year lockup. If I'm an investor in the fund, then I I can't get my money out for that first year. Too bad. So sad. But after that 1-year lockup, they're, they're called open-ended because they kind of go on in perpetuity and investors can come into the fund. They can invest in the fund or they can redeem their shares at any given time. In a hedge fund, you know, it's if I invested $1 million and then I was there for 2 years and then something happened, I wanted my money back. I'd file what's called a redemption notice. To the hedge fund manager and say, hey, I want my money back. And they're required to give me my money back within 60 to 90 days. Because the investor has to get my money back within a certain time period, you know, your hedge funds are most commonly invested into liquid asset classes, public markets, stocks, bonds, anything that's tradable on a public exchange. For Bill Ackman's case is he went out and he started buying golf courses. He started buying this land and developing it. Well, if 10 investors invest into this golf course and, you know, in an open-ended vehicle, I say, hey, I want my, I want my money back. It's not like you can go just sell one hole of the golf course, right? You can't just go bifurcate an asset like that. You have to go out and he has to sell the entire asset. And that maybe at the time, maybe it's in development and the assets are underwater, or there can be a myriad of things going on, but he would be forced to sell. There were some problems and he ended up, you know, trying to sell off a stake of these courses to bifurcate, you know, a piece of this because due to the capital calls from investors, he ended up getting sued by the investors because he wasn't able to provide liquidity. And this kind of just compounded negatively. And he was forced to close its door because he could not return capital to his investors. So you basically have to close up the fund and unwind it. And close shop. Bill learned a really good lesson there. At the time, he was managing $500 million. He learned a great lesson about liquidity management. He also made a lot of money in these 5 years, though. You know, it's a very lucrative industry. I think it's important to note that most times when asset managers fail like this, they don't really get second chances all that often. Most of the time, it's, it's very difficult for them to reinvent themselves and get going. It's harder to go convince investors. But Bill was fortunate. He made a lot of money. And so about 3 years later, he started a new firm called Pershing Square Capital Management. He seeded the firm. So he, he had $54 million of his own capital that he put in to start this new firm, a combination of value investing and activist investing. And this is why you hear about, you know, Bill Ackman maybe more so than other investors. Again, there's, there's a lot of asset management firms out there that manage billions of dollars. Right? I mean, you may have heard Bill Ackman's name because of his strategy as an activist investor. So let's talk about activist investing. As I mentioned earlier, stock prices, asset prices, and the public markets are often driven by supply and demand. Let's take the crypto markets, for example. They don't have a lot of intrinsic value, right? Bitcoin or any of these other, you know, coins out there in the marketplace. But the value, the price of the of the, of the crypto is just driven by the amount of people that want to buy it. If more people want to buy it, there's a lot of people buying crypto, then the price goes up. If a lot of people are selling it, the price goes down. An activist strategy is where I take a position in a stock and then I publish good press about that stock in an effort to drive demand towards that stock, right? Forcing appreciation. Alternatively, I could take a short position betting on the market to go down, and I publish a bunch of negative press, right? Trying to get people to sell the stock, and then I make money either way. He went out and, uh, you know, he started doing this a lot. He was really good at it. Uh, you know, there's kind of this famous company called Herbalife, uh, that he took a big short, like a billion-dollar short position in, uh, where, you know, he, he was doing some research and he found that the company was violating, you know, FTC guidelines, or it was It was operating as an MLM, that it wasn't a good company for its customers or its employees, and that it was way overvalued. And he put out this big negative press about it. Carl Icahn was a, was a big shareholder of this firm. And basically, if you're a shareholder of a firm, you're betting that the price is going to go up over the long term. And he comes back and he fights against Bill Ackman. And, you know, it's kind of, it was this very public event. It was all over the news where both, you know, Bill and Carl will just go in and against each other arguing about what this company was actually worth. And, you know, when Bill initially published the bad press, the stock took a quick hit. But then, as you know, when Carl stepped in and defending the company's case, it stabilized. And eventually, you know, the price went up over time and Bill lost a ton of money. But it was a very public exchange. And that's kind of the nature of value investing. Alternatively, Bill had a really big win recently during COVID He took, again, a negative position on all these, you know, private credit vehicles And, you know, companies that would be negatively impacted by a lockdown. And then he goes on to all these— he did this campaign where he did all these interviews and segments where he would go out and say, yeah, look, we have to lock down. We have to shut, close our doors. Like, this is a danger. And he took this really big political stance. Why? Because, you know, he wanted a lockdown, hoping that it would negatively impact his portfolio companies. Meaning he makes a lot of money. And guess what he did? I will say activist investing has gotten less common over the years, uh, just because there's an abundance of information, uh, out there on the marketplace, right? With, uh, with internet and AI and all these news outlets, like, like it is, you know, that discrepancy between the, you know, the stock price and the intrinsic value of a company. You make money when there's a big gap there. Well, guess when there's more information on the markets, typically markets tend to be more accurate. Not always. Obviously not always. Is the market efficient? That's a big question that you discuss in your, in your, in financial literature. Bill Ackman, incredible investor. Not only did he fail with it, but for the most part, he's navigated pretty well over the past decade. And he's a, he's a pretty well-respected opinion in the financial marketplace. All right. So hopefully you guys learned something new about Bill Ackman and Pershing Square Capital Management. You know, give me a comment. Let me know your thoughts. Feel free to message me. I'd love to hear your opinions on some of these big, well-known Wall Street veterans. And if you are bullish or bearish on their positions, but hope you guys enjoyed the show today.