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Here's a question. What if you could take the checklist of one of the most disciplined investors alive and just run it across the whole ASX? That's what we're doing today. This is the Investor Lens series. The idea is simple. Each episode, we take a famous investor's documented criteria, the actual rules they've written down, and we screen the ASX against them.
Nothing made up, their words, our market. Today, that investor is Bill Ackman. Pershing Square, concentrated bets, $30 billion under management, and an eight-commandment rulebook he's been sharpening for 20 years. We pulled those commandments from his shareholder letters, his interviews, and his Columbia Business School lectures.
Then, we pointed them at the ASX. Let's see what survives. Before we do, though, quick disclaimer. Nothing in this video is financial advice. I'm not a licensed advis you need to. All right, let's go. So, who is he? Bill Ackman founded Pershing Square back in 2004. And the thing to know is how he invests.
He runs a tight portfolio, sometimes fewer than 10 positions, and he holds each one for years, not months, years. He's really known for two things. The first is the big activist campaigns. You might remember his famous bet against Herbalife, or the restructuring push he led at Canadian Pacific Railway.
And the second is an almost obsessive focus on one idea, business quality. His defining line is about as blunt as it gets. He only wants to own the best businesses in the world. But that just raises the real question, doesn't it? What does best actually mean to Ackman? That's what the whole lens is built on.
Across 20 years of shareholder letters, Ackman has spelled it out in precise, repeatable terms. So, we distilled it down to five non-negotiables. One, simple and predictable. He wants a business you can describe in two sentences. If you can't forecast the revenue without first forecasting the whole economy, he's out.
Two, free cash flow. Not earnings, cash. The business has to keep turning profit into real cash that management can actually put to work. Three, a dominant position. Number one or number two in its core market. And the pricing power has to be shown, not just assumed. Four, high return on capital. Return on invested capital above 15% held there for five years.
This is the filter that quietly removes the capital-hungry businesses, no matter how good the revenue line looks. Five, a strong balance sheet. Net debt to earnings below two and a half times. No dilutive equity raises. Ackman really dislikes financial fragility. And here's the strict part. These five are non-negotiable.
Fail even one and a company doesn't make it through the screen. So, here's how the screen actually ran. We started with the full ASX universe, more than 200 companies, each above 1 billion Australian dollars in market cap. Pass one was a sector filter. Ackman openly avoids businesses where the outcome rides on commodity prices, interest rate cycles, or regulatory capital.
That alone strips out the miners, the big banks, and early-stage biotech. We're down to around 80. Pass two applied all five non-negotiables at once. Free cash flow positive in four of the last five years. Return on invested capital above 15%. Revenue swings under 25%. Net debt below two and a half times earnings, and no equity raises in three years.
That cut the list to roughly 15. From there, we layered on what Ackman prefers. Asset-light models, recurring revenue, and as little exposure as possible to forces management can't control. And three names rose clearly to the top. Technology One, REA Group, and Cochlear. Let's start with the closest fit of them all.
Technology One scores 25 out of 30, the closest fit on the entire ASX. Here's why. Simple and predictable. Pass. It sells mission-critical enterprise software on subscription to ANZ governments, universities, and councils. You can describe it in two sentences. Free cash flow. Pass. Subscription billing pulls cash in early with no heavy capital spent.
Cash conversion stays above 90%. Dominant position. Pass. It's number one in its niche, and switching costs are brutal. 15 years in, the pain of moving beats almost any price difference. Return on capital. Pass, and striking. Return on invested capital of 71%. Return on equity of 33%. Both held across five years.
Balance sheet. Pass. Debt-free, net cash, no dilutive raises. The gap, and there's always one, is external risk. Government budget cycles add timing wobble, and the UK expansion adds execution risk the home market doesn't have. But against the full checklist, it's about the model answer. Second is REA Group, 23 out of 30.
It's Australia's dominant property listings platform, and the model is simple. Agents pay to reach buyers, and it's woven into how property changes hands. Six of eight criteria are clean passes. Free cash flow around $718 million, return on invested capital of 34%, the number one spot with real pricing power.
The two it only partly clears are the balance sheet, some debt from overseas deals, and external risk. Its volumes move with the property cycle, which Ackman likes to avoid. News Corp also owns 61%, limiting capital flexibility. Now, flip it around. Why Australia's most valuable company doesn't fit at all.
Commonwealth Bank fails two non-negotiables. First, simple and predictable. Its margin shifts with every RBA move, and its credit quality rides the cycle. You can't model it without forecasting rates, credit, and housing. Second, limited external risk. It's wired into RBA policy, the property cycle, capital rules, and global credit.
None of it in management's hands. CBA is a great business. It's just not what this lens was built to find. Now, every screen has blind spots, and being honest about them is the whole job. Here are the three that matter most for this one. First, management quality. The screen reads financials. It doesn't read character.
Ackman's real edge was judging whether a management team would hold the line when things got hard, whether they thought like owners. That's a human call. No metric on a spreadsheet captures it. Second, valuation and timing. The lens tells you which businesses are high quality. It does not tell you when to buy.
Technology One at 80 times earnings is a completely different risk from Technology One at 30 times. Quality and value are two separate questions, and this screen only answers one of them. Third, the size problem. Ackman builds big concentrated stakes in large companies, partly so he can lean on how capital gets allocated.
The ASX names that pass this screen are simply too small for that activist playbook. So, we're borrowing how he thinks. We're not copying what he does. Use the lens to spot quality. Then, do your own work on price and timing. One thing to take away. Quality businesses look remarkably similar everywhere.
Simple models, real cash generation, dominant positions, high returns on capital, clean balance sheets. Technology One, REA Group, Cochlear look like that because they are that. Ackman found the structure of a great business repeats across markets, cycles, and geographies. The ASX has its own smaller, less famous versions, and the same pattern shows up here at home.
That's the point of this series. Not to copy what famous investors do, but to borrow how they think. If you want to go deeper, the playlist's in the description. And if this helped, subscribing keeps the channel going. Thanks for watching.
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