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In this video, we're going to talk about Bill Actman, his strategy, and his lessons for investing in the stock market. We'll also review his market opinion and his current portfolio. Bill Actman was born in New York, USA, in 1966. Thanks to coming from an upper-middle-class family, he earned a bachelor's degree in history from Harvard University in 1988.
He later earned an NBA from the same university's business school. He started working in the real estate sector, but in 1992, he started his first hedge fund with Joel Greenland. Despite its positive performance, he went independent in 1994, founding his own fund with an initial capital of $54 million.
His average annual return is 17% from 2002 to 2022. Let's first review his investment principles and strategy. Then, we'll look at his recent opinions on the current market situation, and finally, we'll examine his current investment portfolio. The first principle is company research and valuation. Part of his strategy involves researching to find large companies that are trading below their value.
This is fundamental because, among other factors, investors have exhibited exaggerated behavior due to adverse situations within the company, which may be temporary or caused by complex macroeconomic environments. This implies that the strategy is to be attentive to opportunities arising from short-term factors that do not affect the long-term intrinsic valuation.
Additionally, when acquiring a significant stake in a company, the aim is to intervene in important decision-making, as well as to structure the business and define its strategies. For Actman, control of a company is an important factor. For example, Buffett pays 20% above James's shares because he gains control of the company, which allows him to modify its strategies, the way taxes are structured, or, for example, sell low- performing assets.
Of course, to take control of a company and pay that price, one must be in a good business. Furthermore, having control of the company allows for the inclusion of excellent directors on the boards of directors to guide crucial decisions effectively. The second investment principle is to buy quality businesses.
Actman only tries to buy high-quality businesses at prices that do not reflect their intrinsic value. He defines a great business as simply predictable. Businesses with sustainable and consistent free cash flow generation should have significant earnings growth potential and a moat to prevent competitors from easily eroding their market share.
Investment opportunities should be high-quality, predictable, easy to understand, and priced below intrinsic value. Strategies include minimizing exposure to cyclical businesses like energy and avoiding the healthcare sector due to regulatory uncertainty. The financial sector is also a weak investment choice.
One key lesson is that if you're allocating 10% to 15% of your money, it should n't be a short-term investment. Instead, focus on high-quality businesses that can grow in value over time. Good companies are often global leaders in certain categories, boasting high profit margins, strong customer loyalty, and growth potential in emerging markets.
Brand value is also essential. Quality businesses have leading brands, pricing power, and strong barriers to entry, along with significant margins and growth potential nationally or internationally. Look for companies that have performed well over many years. Similar to Warren Buffett's approach, it's about buying quality companies that are fairly priced and holding them for a long time.
These businesses should also have a catalyst for value creation, though a low price isn't necessarily a catalyst in itself. The third principle is to buy at attractive multiples. In some circumstances, companies underperform historically due to various factors. If the probability of losing money is extremely low, they can be good investment opportunities, but you should check that these companies have continuous and significant growth in their free cash flow.
The fourth principle is to have a long-term investment horizon. For those seeking short-term gains without any losses, the "Ant-Man" type should stay away from the stock market. Therefore, you must avoid short- term noise and have sufficient confidence in your investment decisions. In a way, economic forecasts are largely nonsense, as short-term market fluctuations are practically unpredictable.
This short-term noise can also cause people to lose patience with their investments. Of course, ups and downs are part of investing, and no one can escape them. Investing for the long term reduces the risk associated with short-term market turbulence and allows for greater potential for positive returns.
It is essential to have a well- thought-out strategy when investing to reduce biases in human behavior caused by short- term market volatility. Investing in a good stock and experiencing short- term losses should not worry investors with a long- term vision. A company's financial outlook shows it to be a solid investment, and its performance in the coming weeks or months is largely relevant.
Therefore, apparent short-term losses should not be a concern. We must focus on long-term returns. If we are confident in a company's long-term growth and the research conducted, we should continue with our investment thesis. The fifth principle is how to build an investment portfolio. Ackman believes that having 8 to 12 positions allows for a significant level of diversification by focusing on a handful of well-known investment ideas with characteristics that allow for a fairly reasonable risk-reward ratio.
Generally, 55% of the portfolio is invested. He actively invests 15% in cash and the rest in passive investments; however, 90% of the returns have been generated by the 55% in active investments. The percentage in cash can increase or decrease, considering that he doesn't rely on leverage. Cash serves as liquidity for future opportunities.
Ackman suggests selecting large and mid-cap companies, although small investors can still invest in small-cap companies. The sixth principle is to control the emotional component. One of Ackman's best lessons is explaining how investments shouldn't be driven by emotion; they should be purely rational, and emotions shouldn't be allowed to affect decisions.
Market volatility can scare investors, considering the performance of their portfolios. His suggestion is to try to ignore our emotions, using logic for decision-making and making sound judgments about the selection of a stock or asset. For this, adequate research must be done. Emotions can affect the chances of achieving profits; therefore, they should be set aside.
The seventh principle is to maintain a high public profile. Part of his strategy is to have a level of Important press exposure is crucial, as it allows the media to sometimes focus attention on the companies in which investments have been made, providing a certain boost. However, for this exposure to occur, an investment thesis must be present, allowing the conviction, based on your work, that you are right and the rest of the world is wrong.
Confidence is essential; otherwise, you will never buy, and there will always be reasons to think something will go wrong. Of course, it's important not to lose the balance between humility and confidence. In some cases, it's necessary to acknowledge when we are wrong. Let's now review Belacman's opinion on the current market situation.
He recently stated that the Fed, in his opinion, is causing economic pain from the policy of trying to definitively control inflation by repeatedly raising interest rates. He doesn't believe the Federal Reserve will be able to bring inflation to 2% without a deep recession that destroys many jobs. He sees a strategy of aiming for 3% annual inflation as more reasonable, so as not to completely crush the economy.
The 2% inflation target is not possible due to deglobalization, the search for alternative energies, and the need to pay more to Last April, Ackman lost more than $430 million on his Netflix bet by selling his positions. His fund, after three consecutive years of double- digit returns, had a negative return of 4.8% by December.
In his investment theses of the last year, he also bet that the Hong Kong dollar would lose value relative to the US dollar. Let's now review Bill Ant-Man's current portfolio. These are the current positions of this super investor. The first position is Louis Home Companies, a US retail chain distributing home improvement, construction materials, and DIY products.
Louis's P/E ratio for 2023 is 18.7 times, and for 2024 it is projected to be 14.3. It has a dividend of 1.89 in 2023 and an expected dividend of 2.13 for 2024. Its EV Big DA ratio is currently 10.4 and is expected to be 11 times for 2024. A profit of $8.3 billion is also expected for 2024, with a net margin of 8.9% and an operating margin of 13.3%.
The company has a ROE of 24.6 for 2023 and a ROE of 19.3 with a free cash flow of $8.4 billion for 2023. The historical price-to-earnings multiple is around 22.5 times. If the expected growth is maintained, the multiples for 2023 and 2024 will be below the historical average. The second position is Chipotle Mexican Grill, a Tex-Mex restaurant franchise with more than 2,000 locations in five countries.
The price-to-earnings multiple is a demanding one at 32.1 times for 2023 and 26 times for 2024. The EV ratio is 19.9 for 2023 and 16.8 in 2024. Profits of $1.2 billion are expected for 2023 with a net margin of 12-13% for 2023 and 16% for 2024. The ROE for 2023 will be... 48% and 53% for 2024. Free cash flow is also expected to be $1.1 billion for 2023 and $1.3 billion for 2024.
The historical price-to-earnings ratio is quite high at around 86 times, and the expected ratio for 2023 and 2024 is below these values. Of course, it's important to remember that this is a high-growth company. Remember that in the video description you'll find our recommended stock market investing course for beginners.
It's not a trading course; it's training that aims to help you make your own investment decisions based on fundamental analysis. If you liked the content of this video, give us a like and subscribe to the channel. Share the content on social media and comment on which of Belagman's positions you find interesting. Visit invertología.com for more information.
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