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Published Apr 28, 2020

Bill Ackman: Getting Back Up | The Knowledge Project Podcast #82

Legendary investor Bill Ackman delves into overcoming personal and professional challenges, shares investment strategies inspired by Warren Buffett and Charlie Munger, and offers economic insights on COVID-19 and the future of markets.
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  • Long-term Investing

    explains his unique approach to long-term investing, emphasizing the importance of evaluating a business's worth over its entire life rather than focusing on short-term earnings. He highlights the advantage of having a capital structure that allows for long-term decisions, which he believes is a significant competitive edge 1. Ackman also shares his investment decision-making process, stressing the need for high-quality, predictable, and cash-generative businesses 2.

    We look for sort of simplicity and then durability and predictability. So it's got to fit that screen.

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    This methodology allows him to make informed decisions with a high degree of confidence, focusing on the long-term value of the business.

       

    Hedging Strategies

    Ackman discusses his hedging strategies, particularly the use of credit default swaps (CDS) during market downturns. He explains that CDS contracts are commitments to make payments over time, which can be a significant financial commitment 3. Ackman also elaborates on why he chose to hedge rather than sell all his investments during the COVID-19 pandemic, emphasizing the importance of maintaining relationships with companies and the elegance of hedging as a risk management tool 4.

    The hedging is kind of elegant because if nothing happened, we would have lost very little money. But if what we expected to happen happened, the hedge would become very, very valuable.

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    This approach allowed him to protect his portfolio while remaining a supportive shareholder.

       

    Index Fund Impact

    Ackman explores the impact of index funds and ETFs on corporate governance and market volatility. He notes that as index funds grow, their votes become crucial in corporate governance, necessitating a partnership between activist investors and index funds 5. He also discusses the challenges index funds face in making thoughtful governance decisions due to their low fees and high volume of proxies 6.

    The problem with the index fund business is it's really a commodity business. If you run an S&P 500 index fund, the only way that you can compete with other S&P 500 index funds is by lowering your pricing.

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    This dynamic can lead to increased market volatility and reduced liquidity, impacting overall market stability.

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