Process of researching companies

The only person who'll cause you more harm than a thief with a dagger is a journalist with a pen. The following is a conversation with Bill Ackman, a legendary activist investor who has been part of some of the biggest and at times, controversial trades in history. Also, he is fearlessly vocal on X, FKA Twitter, and uses the platform to fight for ideas he believes in. For example, he was a central figure in the resignation of the President of Harvard University, Claudine Gay, the saga of which we discuss in this episode. This is the Lex Fridman podcast to support it. Please check out our sponsors in the description. And now to you, friends, here's Bill Ackman.

In your lecture on the basics of finance and investing, you mentioned a book, Intelligent Investor by Benjamin Graham, as being formative in your life. What key lesson do you take away from that book that informs your own investing? Sure. Actually, it was the first investment book I read, and as such, it was kind of the inspiration for my career and a lot of my life. So important book. Bear in mind, this is sort of after the Great Depression, people lost confidence investing in markets, World War II, and then he writes this book. It's for the average man, and basically he says that you have to understand the difference between price and value. Price is what you pay, value is what you get. And he said the stock market is here to serve you, and it's a bit like the neighbor that comes by every day and makes you an offer for your house. It makes you a stupid offer, you ignore. It makes you a great offer, you can take it. And that's the stock market.

So every consumer has a view on different brands and different companies. And what we look for are these non-disruptively businesses, a business where you can close your eyes, stock market shuts for a decade, and you know that 10 years from now it's going to be a more valuable, more profitable company. So we own a business called Universal Music Group. It's in the business of helping artists become global artists, recorded music business, and it's in the business of owning the music publishing rights of songwriters. And I think music is forever, right? Music is a many thousand year old part of the human experience, and I think it will be thousands of years from now. And so that's a pretty good backdrop to invest in a company. And the company basically owns a third of the global recorded music, the most dominant market share in the business. They're the best at taking an artist who's 18 years old, who's got a great voice, and has started to get a presence on YouTube and Instagram and helping that artist become a superstar. And that's a unique talent. And the end result is the best artists in the world want to come work for them, but they also have this incredible library of the Beatles, the Rolling Stone, U2, et cetera. And then if you think about what music has become... It used to be about what records and CDs and eight track tapes for those of whom... And it was about a new format and that's how they drive sales. And it's become a business which is like the podcast business, streaming. And streaming is a lot more predictable than selling records. You can sort of say, "Okay, how many people have smartphones? How many people are going to have smartphones next year?"

You said that barriers to entry... You said a lot of really interesting qualities of companies very quickly in a sequence of statements that took less than 10 seconds to say, but some of them were... All of them were fascinating. So you said barriers to entry. How do you know if there's a type of moat protecting the competitors from stepping up to the plate? The most difficult analysis to do as an investor is that, is kind of figuring out how wide is the moat, how much at risk is the business to disruption? And we're in, I would say, the greatest period of disruptability in history. Technology... A couple of 19 year olds can leave whatever university or maybe they didn't even go in the first place, they can raise millions of dollars, they can get access to infinite bandwidth storage. They can contract with engineers in low cost markets around the world. They could build a virtual company and they can disrupt businesses that seem super established over time. And then on top of that, you have major companies with multi-trillion dollar market caps working to find profits wherever they can. And so that's a dangerous world in a way to be an investor. And so you have to find businesses that it's hard to foresee a world in which they get disrupted.

Sure. It's a big position for us. So it's interesting that you think that maybe Alphabet fits some of these characteristics. It's tricky to know with everything that's happening in AI... And I'm interviewing Sundar Pichai soon. It's interesting that you think that there's a moat. And it's also interesting to analyze it because as a consumer, as just a fan of technology, why is Google still around? It's not just a search engine, it's doing all the basics of the business of search really well, but they're doing all these other stuff. So what's your analysis of Alphabet? Why are you still positive about it?

Is there something fundamentally different about AI that makes all of this more complicated, which is the exponential possibilities of the kinds of products and impact that AI could create when you're looking at Meta, Microsoft, Alphabet, Google, all these companies, xAI, or maybe startups? Is there some more risk introduced by the possibilities of AI? Absolutely. That's a great question. Investing is about finding companies that can't be disrupted. AI is the ultimate disruptable asset or technology. And that's what makes investing treacherous, is that you own a business that's enormously profitable, management gets, if you will, fat and happy, and then a new technology emerges that just takes away all their profitability. And AI is this incredibly powerful tool, which is why every business is saying, "How can I use AI in my business to make us more profitable, more successful, grow faster, and also disrupt or protect ourself from the incomings?" It's a bit like... Buffett talks about a great business is like a cast...

You mentioned Warren Buffett. You said you admire him as an investor. What do you find most interesting and powerful about his approach? What aspects of his approach to investing do you also practice? Sure. So most of what I've learned in the investment business, I've learned from Warren Buffett, he's been my great professor of this business. My first book I read in the business was the Ben Graham Intelligent Investor, but fairly quickly you get to learn about Warren Buffett and I started by reading the Berkshire Hathaway annual reports. And then I eventually got the Buffett partnership letters that you could see, which are an amazing read to go back to the mid 1950s and read what he wrote to his limited partners when he first started out and just follow that trajectory over a long period of time. So what's remarkable about him is one, duration, right? He's still at it at 93. Two, it takes a very long-term view, but a big thing that you learn from him investing requires is incredible, dispassionate, unemotional quality. You have to be extremely economically rational, which is not a basic, it's not something you learn in the jungle.

You've been a part of some big battles, some big losses, some big wins. It's been a roller coaster. So in terms of temperament psychologically, how do you not let that break you? How do you maintain a calm demeanor and avoid running with a lemmings? I think it's something you learn over time. A key success factor is you want to have enough money in the bank that you're going to survive regardless of what's going on with volatility in markets, people who... One, you shouldn't borrow money. So if you borrow money, you own stocks on margin, markets are going down and you have your livelihood at risk. It's very difficult to be rational. So key is getting yourself to a place where you're financially secure, you're not going to lose your house. That's kind of a key thing. And then also doing your homework.

Can you explain what activist investing is? You've been talking about investing and then looking at companies when they're struggling, stepping in and reconfiguring things within that company and helping it become great. So that's part of it, but let's just zoom out. What's this idea of activist investing? I think recently in the last couple of days I read an article saying that more than 50% of the capital in the world today invests in the stock markets passive indexed money. And that's the most passive form, right? So if you think about an index fund, a machine buys a fixed set of securities in certain proportion. There's no human judgment at all, and there's no real person behind it, in a way. They never take steps to improve a business. They just quietly own securities. What we do is we invest our capital in a handful of things. We get to know them really, really well because you're going to put 20% of your assets in something, you need to know it really well. But once you become a big holder and if you've got some thoughts on how to make a business more valuable, you can do more than just be a passive investor.

You mentioned general growth. I read somewhere called arguably one of the best hedge fund trades of all time. So I guess it went from $60 million to over 3 billion. It was a good one.

What was the most dramatic battle for the board that you have been a part of? The Canadian Pacific Proxy contest. Canadian Pacific was considered the most iconic company in Canada. It literally built the country because the rail that got built over Canada is what united the various provinces into a country. And then over time, because the railroad business is a pretty good business, they built a ton of hotels, they owned a lot of real estate, and it became this massive conglomerate, but it was horribly mismanaged for decades. By the time we got involved, it was by far the worst run railroad in North America. They had the lowest profit margins, they had the lowest growth rate. Every quarter management would make excuses, generally about the weather as to why they underperformed versus ... And there there's a direct competitor, a company called Canadian National, has a rail goes right across the country. And Canadian Pacific would constantly be complaining about the weather.

On a small tangent since we were talking about boards. Did you get a chance to see what happened with the OpenAI board? Because I'm talking to Sam Altman soon. Is there any insight you have, just maybe lessons you draw from these kinds of events, especially with an AI technology company, such dramatic things happening? Yeah, that was an incredible story. Look, governance really matters, and the governance structure of OpenAI, I think leaves something to be desired. I think Sam's point was, and maybe Elon Musk's point originally set up as a nonprofit. And it reminds me actually, I invested in a nonprofit run by a former Facebook founder where he was going to create a Facebook-like entity for nonprofits to promote goodness in the world. And the problem was he couldn't hire the talent he wanted because he couldn't grant stock options, he couldn't pay market salaries. And ultimately he ended up selling the business to a for-profit.

Biggest loss in my career is a company called Valiant Pharmaceuticals. We made an investment in business that didn't meet our core principles. The problem in the pharmaceutical industry, and there are many problems as I've learned, is it's a very volatile business. It's based on drug discovery. It's based on predicting the future revenues of a drug before it goes off patent. Lots of complexities. And we thought we had found a pharmaceutical company we could own because of a very unusual founder in the way he approached this business. It was a company where another activist was on the board of directors of the company and governing and overseeing the day-to-day decisions, and we ended up making a passive investment in the company. And up until this point in time, we really didn't make passive investments, and the company made a series of decisions that were disastrous and then we stepped in to try to solve the problem. It was the first time I ever joined a board, and the mess was much larger than I realized from the outside and then I was kind of stuck. And it was very much a confidence sensitive strategy because they built their business by acquiring pharmaceutical assets, and they often issued stock when they acquired targets. Once the market lost confidence in management, the stock price got crushed and it impaired their ability to continue to acquire low cost drugs. And we lost $4 billion. $4 billion.

You mentioned Herbalife. Can you take me through the saga of that? It's historic. So we at Pershing Square short a very few stocks. And the reason for that is short selling is just inherently treacherous. So if you buy a stock, it's called going long. You're buying something, your worst case scenario is you lose your whole investment. You buy a stock for 100, it goes to zero, you lose $100 per share. You buy one share, you lose 100. You short a stock at 100. What it means is you borrow the security from someone else. The analogy I gave that made it easy for people to understand, it's a bit like you think silver coins are going to go down in value, and you have a friend who's got a whole pile of these 1880 silver US dollars, and you think they're going to go down in value, and say, "Hey, can I borrow 10 of those dollars from you?"

Of course, there's more than just the investing that your life is about, especially recently. Let me just ask you about what's going on in the world. First, what was your reaction and what is your reaction and thoughts with respect to the October 7th attacks by Hamas on Israel? It's a sad world that we live in. That, one, we have terrorists, and two, that we could have such barbaric terrorism. And just a reminder of that.

Take me through the saga of university presidents testifying on this topic, on the topic of protests on college campuses, protests that call for the genocide of Jewish people and the university presidents... Maybe you could describe it more precisely, but they fail to denounce the calls for genocide. So it begins on October 8th probably. And you can do a compare and contrast with how Dartmouth managed the events of October 7th and the aftermath, and how Harvard did. And on October 8th or shortly thereafter, the Dartmouth president, who had been in her job for precisely the same number of months that the Harvard president had been in her job. The first thing she did is she got the most important professors of Middle East studies who were Arab and who were Jews and convened them and held an open session Q&A for students to talk about what's going on in the Middle East, and began an opportunity for common understanding among the student body. And Dartmouth has been a relatively benign environment on this issue, and students are able to do work and there aren't disruptive protests with people with bullhorn...

I was like, "How can this be?" October 7th, the event that woke me up was 30 student organizations came out with a public letter on October 8th, literally the morning after this letter was created and said, "Israel is solely responsible for Hamas' violent acts." Again, Israel had not even mounted a defense at this point, and there were still terrorists running around in the southern part of Israel. I'm like, "34 Harvard student organizations signed this letter?" I'm like, "What is going on? WTF?" That's when I went up on campus and I started talking to the faculty. That's when I started hearing about, actually, Bill, it's this DEI ideology. I'm like, "What?" Diversity, equity, inclusion. Obviously I'm familiar with these words and I see this in the corporate context. They say, "Yeah." They started talking to me about this oppressor-oppressed framework, which is effectively taught on campus and represents the backdrop for many of the courses that are offered and some of the studies and other degree offerings. I had not even heard of this and I'm a pretty aware person, but I was completely unaware. Basically they're like, "Look, Israel is deemed an oppressor and the Palestinians are deemed the oppressed, and you take the side of the oppressed. Any acts of the oppressed to dislodge the oppressor, regardless of how vile or barbaric, are okay." I'm like, "Okay. This is a super dangerous ideology."

Neri Oxman, somebody you mentioned several times throughout this podcast, somebody I had a wonderful conversation with, a friendship with. I've looked up to her, admired her, I've been a fan of hers for a long time, of her work and of her as a human being. Looks like you're a fan of hers as well. Yes. W.

My kid's school, the epithet of the school, or the saying is go forth unafraid. I think it's a good way to live. And again, words can't harm me. The power of X, And we do owe Elon enormous thanks for this is now, so for example, the Washington Post wrote a story about me a couple days ago, and I didn't think the story was a fair story. So within a few hours of the story being written, I'm able to put out a response to the story and send it to 1,200,000 people. And it gets read and reread. I haven't checked, but probably 5 million people saw my response. Now, those are the people on X, It's not everyone in the world. There's a disconnection between the X world and the offline world. But reputation in my business is basically all you have. And as they say, you can take a lifetime to build a reputation and take five minutes to have a disappear. And the media plays a very important role and they can destroy people. At least we now have some ability to fight back. We have a platform, we can surface our views. The typical old days, they write an incredibly damning article and you point out factual errors and then two months later they bury a little correction on page, whatever. By then the person was fired where their life was destroyed or the reputation's damaged. It was with Warren Buffett talking about media, and it's a business he really loves. He says, "You know what, Bill?" He said, "A thief with a dagger. The only person who cause you more harm than a thief with a dagger is a journalist with a pen." And those were very powerful words.

You mentioned Trump. I have to talk to you about politics. Sure.

You've been a supporter of Dean Phillips for the 2024 US presidential race. Yes.

Outside of politics, let me look to the future, first, in terms of the financial world, what are you looking forward to in the next couple of years? You have a new fund. What are you thinking about in terms of investment, your own and the entire economy, and maybe even the economy of the world? Sure. So the SEC doesn't like us to talk about new funds that we're launching, that we filed with the SEC.