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hi guys welcome back to the financial interest youtube channel my name's dan so recently i've been looking to develop my own checklist for investing and what i'm currently using as a framework for investing is phil towne's 4ms approach recently i came across an interview from bill ackman which was last year and in that he outlined his eight principles for successful investing so i thought i'd take a look over those and see how they compare with phil townes and also charlie mungers so let's get on with the video so bill ackman is a hedge fund manager and he's actually the ceo and founder of pershing square capital management and we can just look at some of the holdings for pershing square capital management in their last uh 13f filing so here we can see they hold lowe's agilent technology chipotle mexican grill hilton worldwide restaurant brands international howard hughes corporation and domino's pizza so there are some of the major holdings for pershing square capital management so now i'm going to jump into bill ackman's eight principles uh straight away and then we'll come back and look at each one in a little bit more detail so firstly the business should be simple and predictable it should be free cash flow generative have a dominant market position large barriers to entry high return on capital limited exposure to non-controllable extrinsic risks a strong balance sheet where outside capital is not necessary and excellent management and good governance and now we'll just jump one by one through the different points that he makes so the first part is we should be looking at simple and predictable and in phil townes approach this would be the meaning or also your look looking at circle of competence which is what you'll hear from charlie munger and we'll have a little look at what he has to say about that as well later and as you can see from the 13f i showed earlier he's dealing in quite a lot of restaurant businesses and those are generally fairly easy to understand they don't have kind of complicated operations or anything like that so this is where you'll see like dominoes or chipotle mexican grill playing a role in his portfolio there and the company should be free cash flow generative and this sounds quite obvious but quite a lot of companies struggle to generate free cash flow from their operations you'll see this typically with anything that's got kind of really high capex demands so if you're looking at automotive obviously to build cars you need to constantly be updating your factory equipment and things like that and as a result it's much more difficult for those capital-intensive companies to be generating a lot of free cash flow and here we want to see that the company is able to fund its own growth through its free cash flow without having to take on debt or give away equity in the business and we want to see that the company has a dominant market position and the dominant market position usually comes from the moat so for this we're typically looking for a durable competitive advantage which protects the company from its competition and there's lots of different types of moats i've made a previous video on that so i'll leave a link to that as well and when looking at dominant market position we're looking for the most successful or the the couple of most successful companies in a particular industry so in digital advertising you might be looking at google or alphabet in this case and facebook because they're really strong competitors in the digital advertising space or if we're looking at the beverage industry or food and beverage then you might look at something like coca-cola and pepsico being two of the top performers in that in that area and we want the competitors to have large barriers to entry so this means that it's going to be very difficult for anyone new to enter the market and this again relates to moat particularly in the idea of a tow moat or a switching moat and phil time will often give the example for this of burlington northern uh railway so if you think about it from a perspective of trying to buy the land to build a railway obviously that was developed 150 years ago or something like that in the u.s so the government is not going to allow any more right of way to build railroad tracks so that's kind of a really strong competitive advantage and it's actually would be impossible for a competitor to um to start up and get the right of way to build those tracks and even if they did you have to consider the amount of money they would have to spend on that infrastructure to be able to start making a profit and the amount of money they would spend there they would never really make a profit from that point because it would just be so expensive to build a railroad across the country and you're also looking at companies like google i think it would be very difficult for someone to create a new search platform and compete with google at this stage just because they've become so established in this area and the next point is looking at high return on capital so this is really something that the management has a lot of influence over how they allocate the capital to grow the business a good number here is um like in the mid teens or above 20 percent is great for return on capital and we also want the company to have a limited exposure to non-controllable extrinsic risks so for this we might be looking at a company which has got an area of quite high legislation so for example you might be looking at utilities companies and things like that there might be laws that the government passes that they have no control over and the same thing could be said for the commodities industry if you're a housing development or building company and particularly now as you see the rates of inflation getting higher the cost of lumber and things like that you really don't have any control over so that's a kind of big risk on your side because you're going to have to pass those costs eventually onto the customer and that actually risks you losing business as well if you can't be competitive with the pricing and we want to see a strong balance sheet where outside capital isn't necessary and by strong balance sheet we're looking for a company that's got a lot more assets than liabilities so in an economic downturn it's always useful to have a lot of cash on hand so you don't have to take out debt at unfavorable kind of rates of interest which you might have seen with the cruise lines recently so obviously in the pandemic no one was going on cruises so in this case uh the cruise lines money all but dried up within a few months and they had to go back and take on a lot of debt at quite high interest rates to be able to keep the business afloat no pun intended there and again here we want to see that the company can grow from the cash it produces itself without having to take on any extra debts and finally you want to see excellent management and good governance so for this we want to see that the management's aligned with the shareholders in their values they're doing everything for the best of the company to actually be able to maintain and grow the business as well so for this they should be thinking about the customers the employees and also the shareholders in 2009 charlie munger did an interview with the bbc in this interview he laid out the important things that he looks for when making an investment so i thought it'd be quite good here to kind of compare and see how these things differ between bill ackman's and charlie mungers and they're actually very similar but there's a few differences that we'll look at here so charlie says we have to deal with things that we're capable of understanding and once we're over that filter we need to have a business with some characteristics that give us a durable competitive advantage then of course we would vastly prefer management in place with a lot of integrity and talent finally no matter how wonderful it is it's not worth an infinite price we have to have a price that makes sense and gives a margin of safety considering the normal vicissitudes of life so we can see there that they're quite similar between the two and i guess probably bill ackman's looked quite a lot into warren buffett and charlie munger kind of developing his own style of investing as well and the only real difference you see here is that during bill ackman's eight principles he doesn't actually mention anything to do with uh the price and buying a margin of safety now i would assume that he has to be doing that because that's obviously one of the key principles if you don't buy it at a low enough price your returns are actually going to be quite poor and bill ackman actually mentioned that as soon as he veered away from any of those eight principles that was when he actually lost money so this shows the importance of having a framework in place to kind of allow you to stay rational and you're taking away the emotion from the process which makes it a lot easier to invest i think it's really important to develop your own checklist as well because it needs to be something that works for you someone else's checklist probably is not going to work for me completely because everyone has different ways of working and things like that but i'm trying to develop my own and it's going to be an interesting process to see how that goes on as i get more experience with investing so that's it for the video i hope you enjoyed it if you did please give us a like and also consider subscribing to the channel as well if you haven't already and you can click the notification bell to get notified of whenever i'm releasing new videos and if you want to see more similar content from me i recommend that you check out my phil townes 4ms approach video so thanks for watching and i'll see you in the next video cheers you
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