How to multiply wealth by investing like Bill Ackman

Not everyone has it in him or her to take one risky contrarian bet after another, and live, not just to regale the world with tales of their crazy exploits, but also make billions for themselves and their investors, in the wake.

But if you are Bill Ackman, you have done exactly this, and then some more. The 58-year-old hedge fund manager and founder of Pershing Square Capital Management, now manages assets worth more than $18 billion.

But merely the scale at which he operates is not why we need to talk about Ackman. We need to talk about him and his investing style as Pershing Square Capital Management has managed to deliver a staggering 16.5% annualised return since its inception in January 2004. This translates into an absolute return of more than 2110%.

None of this is to suggest that all of Ackman’s bets have worked out. But he has managed to succeed so phenomenally that his successes have formidably outpaced his failures.

In fact, the outspoken and headstrong investor, who has had a famous public fight with fellow billionaire Carl Ichann, does not even like Pershing a hedge fund, instead preferring to call it an investment holding company, since he says he does not take short term punts.

Ackman’s investment philosophy

So, what really is Ackman’s core investment philosophy and how does it differentiate him from other investors in his league or hedge fund managers in general?

To be honest, his investment philosophy isn’t too different from that of Warren Buffett’s. In fact they both vouch for the investment philosophy propounded by another legendary investor Ben Graham, the author of ‘The Intelligent Investor’ which is considered to be one of the holiest of holy grails of investing, and is usually recommended reading for all retail and institutional investors across the world.

Ackman fancies himself as a value investor who takes contrarian bets. He often takes investment calls and buys such companies that he thinks are good and very hard to compete with, but ones that the market at large has been looking over and undervaluing.

Ackman goes long on such companies, acquires stakes in them and holds on to them for a while, allowing them to grow and his investments to compound.

An activist investor who takes concentrated bets

While all of this sounds similar to Buffet’s ‘buy and hold’ approach, Ackman claims, that unlike Buffer, he is an activist investor. This is to say that Ackman’s fund acquires big chunks of companies and takes active interest in their management by taking board positions, and change company policy the way he wants to, at least to the extent he can influence the management.

But this is not all that differentiates Ackman from most other investors. Ackman is known for taking concentrated bets on just a handful of companies.

In fact, his hedge fund has just nine stocks in its portfolio which include Hilton Worldwide Holdings, Chipotle Mexican Grill Inc, Restaurant Brands International, Alphabet Inc, Howard Hughes Holdings, Canadian Pacific Kansas City, Brookfield Inc and Nike Inc. Of these, the first six alone make up for more than 75% of the portfolio’s holdings.

So, what can you learn from Ackman’s style of investing?

Now, even if you have already reached HNI status, we know that you may not be in a position to take controlling stakes or even significant minority ownership in major corporations to get board positions. But that should not stop you from taking a leaf out of Ackman’s style of investing and giving your wealth a chance at compounding.

Here are some of the key takeaways from Ackman’s investing style that you can adopt as an investor. These investment principles are as relevant in an Indian context as they are in the US where Ackman invests.

Invest in companies with significant moats

Ackman maintains that he only invests in companies that have a significant and a very strong moat. He says investors should look at betting on companies that they think will basically exist forever, whose competitors have a significant barrier to entry and which operate in domains where it would be tough for another company to compete with and put them out of business. When it is hard to compete with a company, a competitor cannot drive down its price and therefore will find it hard to gnaw at its market share. Several Indian companies with legacy brand values could fit the bill here in domains such as FMCG, auto, pharma, industrials, financial services as well as the IT domain.

Take contrarian bets

Ackman once bet on a company going bankrupt. He began investing in a top insurer called MBIA but soon discovered, through copious reading and intense research, that its books were dodgy and that it could go bankrupt.

He then bet on the company going under and began shorting the stock big time. He was mocked at by several other well known investors, but his contrarian bet paid off when the insurer virtually went under and melted under the weight of the financial crisis of 2009, and Ackman walked away with more than a billion dollars.

While we are not suggesting that you go and short the next stock you add to your portfolio we do suggest that you should find everything about the companies that you are investing into and whose stocks you are adding to your portfolio. You should spend as much time as you possibly can, on the balance sheets of such companies, their annual reports, the concalls that the management is having with investors, market rumours and news reports about them and just about anything else that you can lay your hands on, including, possibly even insider information that may help you take a sound call on your money.

And, like Ackman, never shy away from taking contrarian bets, if your reading convinces you that a company that is being ignored by the market, will do well in the long run or if a darling of investors is likely to go under.

Diversification is good, but don’t overdo it

Like Ackman, it is best to have a diversified, yet a concentrated portfolio of stocks and mutual funds that gives you exposure to multiple sectors, but is also manageable at the same time.

In other words, while diversification is important, even necessary for an investor, overdiversification does not help either. Ackman says that individual investors should have a portfolio of between 10 and 20 different securities and should not spread themselves too thin by trying to buy every company out there in the market. By spreading themselves too thin, investors run the risk of not being able to do enough research on and not having enough understanding of their portfolio companies. In other words, you play blind and in doing so, can land yourself up in a mess.

Be on the look out for undervalued stocks

According to Ackman, the price at which one invests in a stock, is key. Investors should look at entering the companies they bet on, at reasonable prices. This can be done by investing in solid companies that have not yet been discovered by the market at large and have largely been ignored or overlooked. While investing is indeed a game of discovering good companies it is also about finding them at the right price and at the right time.

Ackman says that investors should look at investing in stocks of high quality companies that are selling at a price that is not reflective of the intrinsic value of the underlying business. This often means investing in businesses whose long term potential has not been recognised by the market thus far.

Don’t shy away from failure

Investing is all about taking educated bets and mitigating risks as much as possible. Having said that, there is no guarantee that one’s bets will necessarily pay off. It is after all a game of punting on the future, and one’s calculations can go awry.

Ackman lost more than $700 million on a nutrition supplements company Herbalife. Much like MBIA, he was convinced that Herbalife will go under, but his bete noire Carl Ichann bet against him and kept buying up the counter, eventually becoming its biggest shareholder. After a prolonged battle of attrition, in which even the regulators got involved, Ackman gave in and exited it in 2018, with millions in losses.

So, what does this mean for you, the retail investor? This means that while contrarian calls can pay off, these are inherently risky and can become losing propositions. So, it is best not to bet your house and mother’s jewellery on a stock going up or down. Take measured calls, but if your losses start becoming too big to stomach, cut them and get out well in time.

Moreover, you need to understand all the risks associated with an investment and need to remain cool, in times of crisis and properly weigh your own chances of actually succeeding in any given situation.

If you fail, try and come back with a vengeance 

But what should you do, if you do fail as massively as Ackman did? Well, do what he did next. He learnt from his mistake, accepted that he was wrong and took a step back. He says he realised that he had lost his focus and that instead of making investment decisions, he was spending way too much time trying to keep his investors invested in his hedge fund.

If your portfolio has massively underperformed the market, it is time to take stock and restructure it. You need to take a cool, calm look at what you have bought and then weed out the laggards, while at the same time double down on the winning horses.

One aspect of taking contrarian bets is to buy when the market is going down and keep holding on to good companies till the market values them at a premium. So, like Ackman you need to identify good companies and keep lapping them up at rock bottom prices, hold on to them, and then cash out when the tide has turned for the better.

So, it is best to remain focussed and patient when it comes to investing.

Accept that markets are volatile and keep the faith

At times, some of the most educated bets can look like wrong calls, if the market suddenly goes south. You see, you have to accept the fact that markets are fundamentally volatile and that if a stock goes down after you have invested, it does not necessarily mean that you have made an investment mistake.

You need to learn to ignore short term volatility and remain invested for the long haul. You need to have faith in your own research and drown out the noise. Moreover, you need to realise that at the end of the day the market does value companies fairly.