Bill Ackman's Journey to Investing Stardom

Bill Ackman's talent for investing became evident early in his career. This was first demonstrated by his predictive stance on the junk bond market collapse in 1989 and later by the establishment of Gotham Partners, one of the most successful hedge funds worldwide in the 1990s. In 2003, he founded another hedge fund, Pershing Square, which remains active and frequently gains attention due to its impressive ~250% return over the past decade. Let's delve into the journey, notable trades, and investing insights from one of the most reputable and famous investors globally.

• Ackman predicted the 1989 junk bond market collapse, leading to the successful founding of Gotham Partners in 1992.

• Launched in 2003 by Ackman, Pershing Square Capital became a top global hedge fund, known for its activist investment approach and substantial annualized returns.

• His strategy focuses on simple, predictable businesses with strong cash flow, market dominance, and minimal risk exposure.

Born in 1966 in Bronx, New York City, to a real estate developer father and an interior designer mother, Ackman was groomed for success. He pursued his early education at Harvard University, where he wrote a thesis on junk bonds – a type of security with which he later became famously successful. He later secured an MBA from Harvard Business School.

Ackman made a name for himself by successfully predicting the collapse of the market for junk bonds in 1989 while working as an analyst for a hedge fund in New York City. After several years as an analyst, he founded his own hedge fund in 1992. Under his leadership, Gotham Partners rose to become one of the most successful hedge funds of the 1990s.

In 2003, Ackman decided to launch a new hedge fund, Pershing Square Capital Management. It rapidly rose to prominence, becoming one of the most successful hedge funds globally. Named after the historic Pershing Square in New York City, the fund began with approximately $54 million in initial capital. A significant portion of this came directly from Ackman himself, underscoring his confidence in the venture. As the sole managing partner of Pershing Square, Ackman initially held the responsibility for all investment decisions.

Pershing Square is known for its activist approach to investing. This means the fund often takes substantial positions in companies and then pushes for changes at the corporate level to unlock shareholder value. Some of these positions have led to public debates with company management, making headlines in the financial world.

Ackman's investing success is largely attributable to his ability to identify undervalued and underperforming companies and then implement strategies that steer them towards profitability, subsequently increasing the company's value. His willingness to go against the crowd, combined with his understanding of market behavior, are perhaps his primary strengths as an investor. Despite the high stakes and inherent risks, which have led to both significant successes and several missteps, Pershing Square generated a 17.1% annualized return between 2003 and 2021, significantly outperforming the S&P 500’s 10.2% annualized return.

The fund has taken on several high-profile investments and has experienced both notable wins and setbacks. Two of Ackman’s most well-known investments are Canadian Pacific Railway (CP) and Herbalife:

• Canadian Pacific Railway (CP): In 2011, following Pershing's purchase of a 14.2% stake in CP, a heated proxy war erupted between the CP Board and Ackman's hedge fund. Pershing ultimately triumphed, subsequently appointing a new CEO and overhauling the company's strategic approach. This led to a sharp rise in CP’s stock value, climbing from $49 per share in September 2011 to $220 by December 2014. By 2016, Pershing had divested its position, profiting around $1.45 billion in this deal alone.

• Herbalife: One of Bill Ackman's most notable trades was his high-stakes short position in the health supplement company, Herbalife. In 2012, fueled by his belief that Herbalife was operating as a pyramid scheme and had a true value of zero, he took a $1 billion short bet against the company. This move was extensively covered by numerous financial media outlets and remains a point of discussion even today. The trade became particularly recognized due to a heated on-air exchange between Ackman and Carl Icahn on CNBC, with Icahn and other major hedge fund figures favoring a long stance on the stock. In the aftermath of Ackman's move, Herbalife shares took a nosedive, dropping about 60 percent. However, the company's stock managed to recover, reaching its initial levels prior to the short, leading to substantial borrowing fees and unrealized losses for Ackman. By February 28, 2018, Ackman had completely withdrawn his short position in Herbalife with a substantial loss.

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Bill Ackman's decision to invest in Netflix came about in late January 2023 when he observed a sharp decline in the company's stock price. Seeing this as an opportunity, Ackman's hedge fund purchased over 3.1 million shares of Netflix, amounting to a $1.1 billion investment.

His investment in Netflix was motivated by the opportunity to acquire shares at an attractive price following a negative reaction from investors to Netflix's quarterly subscriber growth and management's short-term guidance. Ackman expressed his long-standing admiration for Netflix and its leadership under Reed Hastings, suggesting confidence in the company's long-term prospects​​.

However, the investment in Netflix proved to be challenging. Following Netflix's first-quarter earnings report, which revealed a loss of 200,000 subscribers and the expectation of losing 2 million more, Netflix's stock experienced a significant downturn. This resulted in a considerable loss for Ackman, with estimates suggesting a potential loss of nearly $415 million within a short period​​.

1. The business must be simple and predictable

2. The company must be free cash flow generative

3. It must hold a dominant market position

4. There must be big barriers of entry for competitors (MOAT)

5. There must be a high return on capital

6. The company must have limited exposure to extrinsic risks they can't control

7. The business should possess a strong balance sheet and not rely on external capital to survive

8. The company should be backed by an excellent management team and adhere to good governance practices

Bill Ackman's financial achievements have garnered much curiosity about his net worth, reflecting his remarkable success. As of 2024, Ackman's net worth is estimated to be approximately $4 billion.

From Bill Ackman's early days predicting the collapse of junk bonds to the establishment of Pershing Square Capital Management, his decisions have often influenced the direction of financial markets. While he has faced challenges and criticisms – as any investor of his stature would – his ten trading advice points offer valuable insights, emphasizing the importance of planning, understanding, and discipline. As with many great financial figures, Ackman's legacy will be a mix of his immense successes, occasional setbacks, and the lessons he imparted to the next generation of investors. The finance world will undoubtedly watch his moves for many years to come.