Bill Ackman: Activist Investing and How to Learn Investing

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01. you can learn investing by reading books by reading annual reports by having a you can have a portfolio and invest 100 and you can and you can learn the business to put this in context you were mid-20s and i had just gotten i just started as a rookie professor two years before um so bill at the time was uh trying to set up an interesting um business which ultimately became gotham partners um so for those of you who are students as a as a 20-something year old bill set up his first hedge fund so why did you set up gotham bill and what did you learn from that experience uh experience is making mistakes and learning from them so that's what i learned um you know so so uh the answer is um i went to business school to learn how to be a good investor and i learned the first rule of investing which is you do your due diligence before you wire in your your money and uh when i got to hbs i actually opened the course catalog for the first time and there wasn't a class on investing now there were classes on accounting or classes on finance so i decided i had to develop my own little self-study program and i wanted to so i opened a fidelity brokerage account i said this i had some money i'd made in the real estate brokerage business this was my tuition uh in the investment business and it was about a year of tuition and if i lost it it was as if i had gone to business school for you know two years but paid for three so i figured it wasn't like the the inverse of the oxford uh one plus one program but um and uh you know i the first stock i bought went up and i said okay i found what i want to do a little more involved in that but i uh actually my father who's here he he came with us uh that's dad over there in the corner uh you can ask him whatever questions you want afterwards um he told me it's a really dumb idea to start an investment fund right out of business school and he recommended that i go work for michael steinhardt or george soros or one of the other famous investors at the time but i figured that i knew enough this is the the perils of youth um but uh the answer is i was an entrepreneur and i felt that i wanted to approach investing my own way as opposed to learn from someone else and it's one of the few things you can really learn on your own you can learn investing by reading books by reading annual reports by having a you can have a portfolio and invest a hundred dollars and you can and you can learn the business uh unlike many other businesses which require a lot more uh at least that's what i thought at the time so you went far away from just investing in fidelity type you know on a brokerage platform and pershing square has a particular form of investing which some of our members of the audience may not understand and it's sometimes called activist investing so maybe you can just help you know orient the audience about what exactly does pershing square capital do what's the general investment style and and why did you set it up that way um so the vast majority of capital invested in the markets today is passive so if you think of index funds or etfs or even the big uh kind of long-only institutions the vast majority of that capital is by charter passive passive means you you do your research in some cases you don't do the research you sort of just blindly follow an index and you're judged based on how closely you follow the index if you think about investing 100 years ago though investing you had andrew carnegie owning 20 of u.s steel where you had jp morgan as a large owner of various companies over time and in the old days of investing an owner would act like an owner so if they're unhappy with the performance of the business they would replace the ceo they were unhappy with the board's judgment they would make changes to the board and as capitalism sort of democratized the investment process and as any kid in business school can open a brokerage account and as uh ins you know the uh the owners of many of these great businesses over time you know gave the shares a way to a university or their heirs and the ownership was just you know spread out you know the sam waltons of the world kind of passed away and the boards became to be managed by uh professional owners and so uh what we do is we look for situations where business has lost its way where an otherwise great company with in a in a business that we would define as one that has significant barriers to entry that warren buffett would describe as having a moat around it a business that is simple predictable generates cash and we can be confident we'll be here 50 years from now a good example is we own a stake in canadian pacific which is a a railroad in canada um and if you think about the railroad business you know it's not it's a business where they're not going to build a new one across the street you can have absence some fairly dramatic changes in technology you can be pretty comfortable that you know goods will be shipped on rail for a very long time to come so it's a business we can predict we can think about it from a very long-term perspective we can buy it at a price that's interesting and in the case of cp this was the worst-run railroad in north america it had the lowest profit margins it was trading at the lowest valuation relative to earnings and had a very unhappy shareholder base but there was nothing they could do about it because they were inherently again the biggest investors tend to be very passive and we saw an opportunity and the opportunity was if you could replace the worst ceo in the railroad industry with the best ceo in the railroad industry a lot of money could be made and we bought uh first twelve percent of the stock and then another two percent about 14 of the stock we recruited a guy named hunter harrison who is uh widely considered the best railroad executive of all time you know certainly in north america he had retired at 65 he was 66 and a half he had signed a two-year non-compete with his employer and i think the biggest mistake they made was a two-year non-compete because he was running the other canadian railroad canadian national and we hired him as a consultant he helped us study the railroad and he had plenty of fire in his belly and we said look would you be interested in the day job and he said let me check with my wife she said you know what it's time to get you out of the house again and uh my wife says and and uh we recruited them and then we had to simply put them in place now the problem was canadian pacific has one of the most sort of esteemed and illustrious boards in canada at least at the time and it was the former head of the royal bank of canada the former ceo of suncor energy the former head of the steel business you know it's very very important board and um they didn't like the idea that this idea was coming from outside the company so they said no um so we went to the shareholders and we ran an election a proxy contest we put up seven directors for uh seven seats on a 13 seat board uh and the shareholders voted with us uh ninety percent of the time and voted against the other guys uh and they got between three and eleven percent of the vote we put our directors on uh we did a review of the best ceos in the world turns out the guy we identified was the best guy we put him in a ceo that was 16 months ago and it's almost the most profitable railroad in north america after 16 months that's how quick this guy goes to work stocks gone from 46 uh to 151 dollars a share it's you know a little under 8 billion market cap to a 25 billion market cap that's kind of the perfect example now it doesn't always work that way and i have a feeling that peter might ask me about one of those cases