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Bill Aman has massively outperformed the S&P 500 over the last 20 years, generating a total return of 1,862% after fees, which is almost triple the return of the market over the same time period. In this video, I'm going to break down the nine investing principles that Acman uses to find winning investments so you can apply them to your own portfolio.
Now, Aman's first rule is simple. Only invest in businesses that are simple and predictable. Aman actively avoids complexities and in businesses he does not understand. So, he doesn't invest in biotech moonshots, rocket startups, or crypto companies. If a company's success depends on him guessing the next big trend, that's not investing to him.
That's gambling. If you look at his portfolio, you'll see it's filled with businesses that are easy to understand and have predictable demand. Companies like Uber, Amazon, Hilton, and Chipotle. Aman's test is simple. If you can't explain simply how the company makes money in a sentence or two, you won't find it in his portfolio.
Now, Aman's second rule is all about free cash flow. Aman doesn't want companies that report profits. He wants companies that generate cash because at the end of the day, earnings don't pay dividends. Cash does. Now, just so you understand the difference, net income is found at the bottom of the income statement and it's calculated using acrruel accounting.
Free cash flow on the other hand is found on the cash flow statement and you find it by taking operating cash flow and subtracting out capital expenditures and free cash flow is generated using cash accounting. Now knowing the difference between those two is critical because free cash flow gives management the actual cash that it needs to pay off debt, buy back stock, or return money to shareholders via dividends.
You can't do the same thing with net income. Now, Aman's portfolio is filled with companies that crank out free cash flow each year because companies that can fund their own growth without borrowing make for great investments. Aman's third principle is to look for businesses with barriers to entry. This is what Warren Buffett calls a moat.
That moat could be a powerful brand, a massive consumer base, or a cost advantage that competitors simply cannot match. Now, when analyzing a moat, it's important that you figure out what is the primary source of a company's moat, of which there are five. In addition, you need to know what the current moat size is.
Is it narrow, wide, or non-existent? And equally important, you need to know the direction of the moat. Is that moat shrinking, stable, or widening? Combining all these factors together can give you an indication about how strong a company's moat truly is. Now, a strong mode is essential for protecting profits year after year because if anybody can copy your business model and steal your customers, your returns as an investor will be subpar.
So, before Acman invests in anything, he asks, "What is stopping someone else from taking this company's customers?" If he can't answer that question succinctly, he takes a pass. Now, as a side note, whenever I study super investors, I write down the key principles and I turn them into infographics that I can use to remember later.
And I compiled 10 of those visuals into a simple ebook that is available to you for free. If you want a copy of that ebook, just visit long-termmindset.co/supinvestor or click the link in the video description. Now, Aman's fourth principle is to limit his macro exposure. Aman tends to avoid businesses that depend on forces they cannot control, things like commodity prices, government regulations, or global supply shocks.
He wants management teams steering their own ship, not just hoping that the weather cooperates. That's why he typically avoids industries like banks, airlines, or mining companies. These companies profits are subject to macro factors like interest rates, commodity prices or regulation, and their profits rise and fall according to external events, not simply with great execution.
So instead, he focuses on companies where outcomes come from management decisions, not solely due to luck. Because if success depends on something outside of management's control, you're not investing, you're hoping. Aman's next principle is to only invest in companies that have a strong balance sheet.
Aman believes that a strong balance sheet isn't just protection, it's an opportunity engine. Companies with low levels of debt and lots of cash on hand can not only survive a downturn, they can actually grow and take market share during them. Now, when analyzing a balance sheet, Aman likes to look at key figures like cash, accounts receivable, inventory, goodwill, and on the liability side, he looks at short and long-term debts, as well as retained earnings and treasury stock.
By analyzing these figures and comparing them to each other, he can tell whether a company's balance sheet is built to last, or if it's on the brink of bankruptcy. Now, think back to 2008 when lots of companies were scrambling for financing. Companies with strong balance sheets like Chipotle and Google were heavily investing in themselves because their balance sheet enabled them to go on offense while their competitors were forced to play defense.
Now Aman knows that when the economy turns the weak go into survival mode and that gives the opportunity for the strong to take market share. So that's why before he invests he always asks can this company not only endure a storm but can it emerge from that storm stronger? Now, principle number six is to only invest in companies that are not reliant on capital markets.
ACMAN actively avoids companies that consistently need to raid cash to stay alive. Now, if you're familiar with the concept of the business growth cycle, this means that Acman exclusively invests in companies that are in phases four, five, or six and actively avoids those in phases one, two, or three.
If a business depends on issuing new shares or taking on debt just to operate itself, it's not really a self-sustaining business. It's a fragile one. So, when interest rates inevitably rise or the market inevitably crashes, the companies in Acman's portfolio generally aren't affected. In fact, you could even argue that a market crash creates opportunities for companies that are generating free cash flow to buy back their stock at a discounted price.
So in short, Aman wants to buy businesses that don't need a good market to be a good business. Now, principle number seven is to invest in companies with exceptional management teams. What Aman does is he studies what those managers have said in the past and then he looks to see if they actually delivered on their promises.
The reason is that any CEO can make a bold claim on an earnings call, but very few can consistently execute on the promises that they've made in the past. So when Aman finds a CEO that sets clear goals, meets them, and then goes on to raise the bar, that's a green flag for him. He knows that he's found a management team that is worth betting on.
That brings us to principle number eight, which is to only invest when asymmetric opportunities exist. Aman doesn't just chase lottery tickets, but he does look for opportunities where the upside potential massively outweighs the downside risk. He calls these investments asymmetric bets. He actively looks for situations where if things go wrong, he won't lose a lot of money, but if things go right, the payoff could potentially be huge.
His most famous example was in early 2020 when Aman spent $27 to hedge his entire portfolio. And that investment turned into a $2.6 billion profit when the market eventually crashed. But asymmetric opportunities don't just apply to hedges of the overall portfolio. Aman is actively looking for businesses where improvement potential is huge in the business.
This means looking for companies with underperforming brands that have loyal customers or inefficiently run companies that could do much better with a better management team in place. The key for Aman is simple. He wants to risk a little with the potential to gain a lot. And that brings us to principle number nine, which is to only invest when the valuation is attractive.
Now, Aman notes that even the best businesses in the world are not a buy at any price. Valuation is a tricky thing to figure out, but for Aman, valuation is never just about today's earnings multiple. Acman likes to start with a simple rule. The current valuation must make sense based on today's numbers.
But that's not enough. See, Aman seeks out companies whose earnings he believes are not yet optimized. These businesses offer the potential to meaningfully increase their earnings over time with better execution in place, cost cutting in place, or simply smarter capital allocation decisions being made.
And that to act is what makes an investment truly compelling. Because if today's price already looks fair before those improvements can happen, then the real valuation you're paying today is even cheaper than it appears. Aman doesn't want just the market to hand him bargains. He wants to buy companies that appear to be fairly valued, but the hidden improvement potential inside them actually makes them true bargains.
Now, as a friendly reminder, I keep track of all of the key investing principles of super investors, and I turn them into simple infographics. If you want a free copy of an ebook that I made that compiles 10 of those infographics into a simple ebook, simply visit long-termmindset.co/supinvestor or click the link you see in the video description.
Well, thanks so much for watching. Hope you enjoyed this video. I'm Brian Faldi and I'll see you in the next
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