Bill Ackman: Investing, Financial Battles, Harvard, DEI, X & Free Speech | Lex Fridman Podcast #413

Bill Ackman: Investing, Financial Battles, Harvard, DEI, X & Free Speech | Lex Fridman Podcast #413

Introduction (00:00:00)

  • Bill Ackman is a legendary activist investor known for his controversial trades.
  • He is outspoken on Twitter and uses the platform to fight for his beliefs.
  • Ackman played a central role in the resignation of Harvard University President Claud Dean Gay.

Investing basics (00:00:47)

  • Bill Ackman, influenced by Benjamin Graham's "Intelligent Investor," differentiates between speculation and investing, emphasizing the distinction between price and value in investment decisions.
  • He defines value as the present value of an investment's future cash flows and views a profitable business as a bond generating cash flow.
  • Ackman seeks non-disruptable businesses that will likely appreciate in value and profitability over time, even in challenging market conditions.
  • He recognizes that consumers have opinions and preferences regarding various brands and companies.

Investing in music (00:05:39)

  • Bill Ackman's investment in Universal Music Group (UMG) is based on the enduring nature of music and the company's dominant market share in the global recorded music industry.
  • UMG's success is attributed to its ability to identify and develop talented artists and its extensive library of iconic musicians.
  • Despite industry transformations, such as the shift from physical formats to streaming, UMG has successfully adapted and maintained its strong position.
  • Ackman emphasizes the importance of buying companies at a discount to their intrinsic value, following Benjamin Graham's margin of safety principle.
  • While acknowledging business risks, Ackman believes UMG's assets provide persistence in the face of future technological advancements.
  • AI will enhance artists' capabilities rather than replace them, as AI-generated music lacks the emotional connection that resonates with audiences.
  • Considerations regarding name and likeness rights may arise as AI systems potentially possess rights similar to human rights.
  • Industries like the restaurant business have remained relatively unchanged, with core offerings enduring over time.
  • Bill Ackman enjoys eating at Chipotle, typically ordering a double chicken bowl or burrito, with a preference for steak over chicken.

Process of researching companies (00:14:00)

  • Bill Ackman focuses on researching companies with long-term growth potential, strong cash generation, and high barriers to entry.
  • He prefers to invest in undervalued businesses that have faced temporary setbacks and can be improved.
  • Ackman emphasizes the importance of buying companies at attractive prices to avoid disappointing returns.
  • He believes in open dialogue and debate as the best way to achieve diversity, equity, and inclusion (DEI), while criticizing Harvard University's restrictive DEI policies.
  • Ackman stresses the significance of free speech for a free and democratic society.

Investing in restaurants (00:18:39)

  • Bill Ackman emphasizes the significance of identifying companies with strong competitive advantages, or "moats," to safeguard against disruption in an era of rapid technological change.
  • He cites the restaurant industry as an example where successful businesses can be scaled relatively easily due to established systems and models.
  • Chipotle's success is attributed to its focus on high-quality, sustainably sourced ingredients, creating a strong moat due to the difficulty of replicating its supply chain.
  • Ackman also highlights his investment in Restaurant Brands, which owns Burger King, emphasizing the value of its franchise model.

Investing in Google (00:24:08)

  • Bill Ackman is bullish on Alphabet (Google's parent company) due to its dominant position in online advertising, particularly its highly profitable search and YouTube franchises.
  • Despite the threat posed by AI competitors like Microsoft's Chat GPT, Ackman believes Google's AI capabilities are potentially superior and that the market overreacted to Bard's demonstration.
  • Ackman highlights Google's advantages in terms of data, engineering talent, and financial resources, which position it well to compete in the AI space.
  • He views Alphabet as undervalued compared to its peers and sees potential for efficiency gains within the company.
  • Amazon's current price-to-earnings ratio of 15 corresponds to a yield of approximately 7.5%, which is attractive compared to government bond yields of around 4%.
  • Despite reinvesting all profits from its rapidly growing cloud business into growth, Amazon remains a well-managed company with valuable assets, resources, and market dominance, and it has no debt and ample cash reserves.

AI (00:29:50)

  • AI poses a unique risk in investing due to its exponential growth and potential to disrupt entire industries.
  • Companies must constantly innovate and adapt to avoid disruption by new technologies like AI.
  • Analyzing management is crucial in investing, as incentives drive human behavior, and understanding what motivates managers and their track record is essential.
  • Senior management has a significant impact on a company's success, with great leaders building strong teams and adapting to changing circumstances.
  • Recruiting top talent is crucial for a company's success, as A+ leaders attract other talented individuals and build strong teams.
  • Bill Ackman believes that to recruit great talent, a leader must be a type of person that others want to follow, citing Warren Buffett as an example of a leader who has been able to attract and retain great talent.

Warren Buffet (00:35:05)

  • Bill Ackman admires Warren Buffett as an investor and considers him his great professor in the investment business.
  • Buffett's approach to investing requires an incredible dispassionate and unemotional quality, which is not something that comes naturally.
  • In markets, one often has to do the opposite of what the majority is doing. When everyone is running over the cliff, that's the time to face the other direction and buy stocks at low prices.
  • Buffett has been great at teaching about temperament, which is the emotional control needed to dispassionately look at the world and assess risks.
  • People tend to get excited about investments when stocks are going up and depressed when they're going down, but successful investing requires the opposite: getting excited when things get cheaper and concerned when things get more expensive.

Psychology of investing (00:37:14)

  • To maintain composure during market volatility, investors should have financial security, avoid borrowing money, and focus on long-term potential rather than short-term price fluctuations.
  • Developing emotional resilience and learning from others' experiences are essential for successful investing.
  • Everyday investors should only invest money they can afford to lose, avoid borrowing against their securities, and take a long-term view.
  • Financial security and long-term thinking are significant advantages for successful investing, as emphasized by Bill Ackman.
  • While mutual funds often charge high fees and may not outperform index funds, there are a few talented mutual fund managers with proven long-term success.
  • For everyday investors, investing in a small number of companies (around a dozen) can provide sufficient diversification.
  • Individual investors can analyze companies they understand better than professional investors, and it's beneficial to invest in simple businesses with predictable growth potential.
  • Today's investors have access to a wealth of online information, including conference call transcripts, AI tools, and discussion forums, which can be leveraged to their advantage.

Activist investing (00:46:45)

  • Activist investing involves taking a significant stake in an underperforming company and using that ownership to influence and improve its performance.
  • Bill Ackman's investment strategy focuses on identifying great companies that may have lost their way and working with their management teams to help them succeed.
  • Ackman's most successful investment was in General Growth, where he took a board seat and helped restructure the company's finances and operations.
  • Over time, Ackman's success and credibility have allowed him to work more collaboratively with companies, rather than having to resort to confrontational activism.
  • Activism in investing has restored the balance of power between business owners and management, leading to improved performance in the US stock market.
  • Engaged and influential investors can help control and direct a company's direction, but the impact depends on the investor's intentions and credibility.
  • A respected major owner on the board can provide credibility and support for a CEO's long-term decisions, benefiting all shareholders.
  • Index funds, as the largest shareholders, tend to think long-term and are skeptical of short-term ideas that harm a company's long-term competitiveness.

General Growth Properties (00:56:33)

  • Bill Ackman invested in General Growth Properties (GGP) during the 2008 financial crisis, seeing value despite its 99% stock decline and significant financial challenges.
  • Ackman acquired a 25% stake in GGP for $60 million, aiming to restructure the company through bankruptcy proceedings, preserving shareholder investments.
  • Despite skepticism, Ackman successfully negotiated a restructuring that preserved the vast majority of shareholder investments, yielding significant returns for investors.
  • Ackman emphasizes the importance of thorough research and investing in distressed companies, even against conventional wisdom, and suggests learning the legal aspects of distressed investing.
  • Proxy contests occur when shareholders propose to be on a company's board, involving significant expenses and potential battles with the board.
  • Shareholder activism has led to boards taking their responsibilities more seriously, but proxy contests can involve mudslinging and false information.
  • Despite challenges, Ackman believes having an activist on the board can bring diverse perspectives and lead to better decision-making.

Canadian Pacific Railway (01:12:49)

  • Bill Ackman led a successful proxy contest to improve the management of Canadian Pacific Railway, despite challenges in finding Canadian directors.
  • Rebecca McDonald, the first woman to take a company public in Canada, joined Ackman's slate of directors, inspiring others to follow.
  • Ackman won the proxy contest and turned around the company with the help of renowned railroad CEO Hunter Harrison.
  • The company is now run by Keith Creel, who is considered even better than Harrison.
  • Despite the success, Ackman had to sell his Canadian Pacific shares due to challenging periods and bad investments.

OpenAI (01:20:13)

  • Governance matters, and the governance structure of OpenAI leaves room for improvement.
  • OpenAI was initially set up as a nonprofit, which made it challenging to hire talent due to the inability to grant stock options or pay market salaries.
  • The nonprofit entity owns a significant portion of OpenAI, while investors have a capped interest with no board representation, leading to potential conflicts and the recent issues.
  • Venture-backed boards are not ideal as board members may have divergent incentives from long-term owners, prioritizing their reputation and access to future deals over the success of a particular company.
  • Private venture-backed companies often have small boards with few independent directors, making them less effective in overseeing management.
  • Public company boards are generally more effective due to the alignment of interests between directors and shareholders.

Biggest loss and lowest point (01:24:24)

  • Bill Ackman experienced significant career losses due to disastrous decisions made by the management of Valeant Pharmaceuticals, a company he joined the board of.
  • The Valiant loss led to a 30% loss in the value of Ackman's portfolio, triggering market-to-market losses and causing investors to bet against his other investments.
  • Ackman faced personal challenges during this time, including a challenging divorce and the demands of managing a large hedge fund business.
  • Amidst the divorce proceedings, Ackman's public company faced a lawsuit and an activist investor, Ed Associates, led by Paul Singer, who shorted the company's stocks and aimed to force its liquidation.
  • Despite the reputation damage from the Valiant failure, Ackman persevered and protected his reputation by emphasizing core investment principles and borrowing $300 million from JP Morgan to gain control of his public company.
  • Ackman's firm has since experienced its best six years, and he met his girlfriend, Ner, during a difficult time for his company.
  • To cope with the stress, Ackman adopted a dog, practiced meditation, and focused on making small daily progress.
  • Ackman believes in the power of compounding progress and emphasizes the importance of mental health, nutrition, sleep, exercise, and a little bit of luck in overcoming challenges.
  • He appreciates the lessons learned from recovering from challenges and draws parallels to the American story of entrepreneurs overcoming failures to achieve success.

Herbalife and Carl Icahn (01:39:13)

  • Bill Ackman rarely engages in short selling due to the unlimited potential for stock prices to rise.
  • Ackman successfully shorted Herbalife, a fraudulent company targeting vulnerable populations with a pyramid scheme disguised as a weight loss business.
  • Ackman's extensive research and presentation led to Herbalife's downfall, attracting regulators and ultimately resulting in the company's shutdown.
  • Ackman had a business disagreement with Carl Icahn over the sale of Hallwood Realty Partners, leading to a legal battle that Ackman eventually won.
  • Icahn targeted Ackman's short position in Herbalife, resulting in a billion-dollar loss for Ackman's firm.
  • The Federal Trade Commission (FTC) investigated Herbalife and found evidence of a pyramid scheme but settled with the company for $220 million due to concerns about losing in court.
  • Ackman closed out his short positions on Valeant and Herbalife, marking a turning point for his firm.
  • Ackman admires Carl Icahn's charm and charisma, and they eventually reconciled after their legal battles.
  • Ackman tries to be economically rational in his investment decisions and has not been an activist investor in the traditional sense for many years.

Oct 7 (01:56:03)

  • Bill Ackman expresses his sadness about the ongoing terrorism and barbaric acts in the world, particularly the October 7th attacks by Hamas on Israel.
  • Despite supporting Israel's right to exist and defend itself, Ackman emphasizes his concern for humanity and sides with the disadvantaged.
  • His perspective on the Israeli-Palestinian conflict was shaped by his involvement with the Jerusalem Foundation, where he gained an understanding of the plight of Palestinians and the importance of peaceful coexistence.
  • Ackman believes the root cause of the conflict lies in the indoctrination and incentives that drive terrorist organizations like Hamas, which generate resources through violence and corruption.
  • He suggests that peace can only come with prosperity and that the withdrawal of Israelis from Gaza in 2005, followed by Hamas's takeover, was a mistake.
  • Ackman proposes that a consortium of Gulf States, such as Saudi Arabia, should oversee the governance of the region to ensure peace and prosperity.
  • He believes good governance is essential for the success of any region and could give the people of Gaza a chance to thrive.

College campus protests (02:02:34)

  • Bill Ackman criticized Harvard University's handling of anti-Semitism on campus, particularly the inadequate response to protests involving calls for the genocide of Jewish people.
  • Despite his efforts to address the issue directly with Harvard's president and board of directors, Ackman faced resistance and lack of cooperation, prompting him to write public letters calling for action.
  • The issue gained national attention when the US Congress launched an investigation into anti-Semitism on campus, leading to Harvard's president testifying alongside other university presidents.
  • Harvard's commitment to free speech absolutism is questionable, as evidenced by the allowance of calls for genocide on campus, while restricting other forms of speech, particularly conservative viewpoints.
  • Harvard's governance structure is flawed, with a self-perpetuating board of directors and no effective mechanism for accountability, contributing to the university's problems.

DEI in universities (02:21:01)

  • Bill Ackman criticizes the problematic aspects of DEI (Diversity, Equity, and Inclusion) ideology in academia, which promotes a Marxist and socialist worldview that advances racism rather than fighting it.
  • Ackman believes in diversity, equity, and inclusion but seeks solutions to fix its infiltration in universities, where it restricts free speech and limits the exploration of different viewpoints.
  • He suggests that universities should be run by business leaders rather than academics and proposes a diverse and permanent board structure to ensure a variety of viewpoints.
  • Harvard's recent presidential selection process was influenced by the desire for a diverse candidate, leading to the appointment of Larry Bacow as an interim solution after the initial candidate faced plagiarism allegations.
  • Despite the importance of Harvard in Bill Ackman's life, he believes the university needs a "reboot" to address its current challenges, such as the lack of significant growth in class size and limited reach of its online education.

Neri Oxman (02:41:52)

  • Bill Ackman admires his wife, Ner Oxman, for her beauty and shared values, interests, and love for spending time together.
  • Ackman revealed that he checked his own thesis for plagiarism after the allegations against former Harvard president Larry Bacow and found no issues.
  • Oxman admitted to plagiarism in her dissertation and apologized, while Ackman believes the accusations against her are exaggerated and inadvertent.
  • Ackman criticized Business Insider for publishing false and defamatory articles about Oxman, claiming it was part of a political agenda to hurt him.
  • Despite plagiarism accusations, scientist Ner Yishay remains focused on her work and has built an impressive team and lab in New York City.
  • Ackman intends to take legal action against Business Insider for their false accusations and hold them accountable for their actions.

X and free speech (03:07:22)

  • Bill Ackman discusses the power of X (formerly Twitter) in providing a platform for individuals to respond to negative media coverage and defend their reputations.
  • Ackman highlights the importance of free speech and the ability to present alternative viewpoints, especially in the context of mainstream media narratives.
  • He mentions the example of the Hunter Biden laptop story, where Twitter initially restricted its sharing, and questions the government's response to the COVID-19 pandemic, including lockdowns, school closures, and mask and vaccine mandates.
  • Ackman emphasizes the need for an independently owned platform to counterbalance the power of the government and the mainstream media, and to encourage diverse perspectives and open dialogue.
  • He acknowledges the challenges faced by Elon Musk, the new owner of X, including government scrutiny and negative media attention, but stresses the significance of standing up for free speech and challenging the establishment.

Trump (03:11:46)

  • Bill Ackman, a former Democratic supporter, praised Donald Trump's business experience and its potential benefits for the US economy after Trump's 2016 election win.
  • Ackman acknowledged both positive aspects of Trump's presidency, such as economic growth and addressing challenges with China, as well as negative aspects, including a decline in civility and ineffective team management.
  • He believes that Trump could have done more to prevent the Capitol riot on January 6th and contributed to the divisiveness in the country.
  • Ackman supports the president but criticizes the two-party system for its self-interested nature and suggests reforming the American political system to create a more competitive environment and incentivize politicians to act in the best interests of the country.

Dean Phillips (03:19:22)

  • Bill Ackman supports Dean Phillips for the 2024 US presidential race, considering him a centrist who is respected by his colleagues and has a proven track record of advancing legislation during challenging times.
  • Phillips is financially independent and willing to sacrifice his political career for the best interests of the country.
  • Ackman believes Biden is unfit to be president due to declining mental and physical health and should step aside.
  • Phillips is the only remaining Democratic candidate with a path to victory through the delegate system.
  • Ackman helped Phillips gain recognition in New Hampshire by hosting a Spaces session with 350,000 attendees, resulting in Phillips receiving 20% of the vote despite having no prior name recognition.
  • Ackman suggests voting for Haley as an independent in Michigan to increase the likelihood of Phillips winning independent votes, potentially leading to Biden's withdrawal from the race.
  • Phillips' appeal to voters from the center, Republicans who won't vote for Trump, and Democrats makes him a viable candidate.
  • Ackman believes Phillips is a strong candidate who can engage in important conversations and negotiations with world leaders, unlike Biden, who appears to be struggling due to his age.
  • Ackman expresses disappointment with Biden and his family for not recognizing his decline and preventing further exposure, which is detrimental to America.
  • Ackman emphasizes the importance of succession planning and views Biden's situation as a failure in this regard.

Future (03:26:28)

  • Bill Ackman is optimistic about the future, believing technology, especially AI, will bring positive changes and advancements.
  • He emphasizes the importance of the next US leader's impact on the economy and global affairs, highlighting the resilience and advantages of the United States.
  • Ackman sees technology as a solution to global problems and praises Elon Musk's X for its potential as a successful advertising platform.
  • He acknowledges the importance of diversity and inclusion as a means to return to a meritocratic world, expressing concerns about race quotas and other practices that were made illegal years ago.
  • Ackman predicts an end to the conflict in the Middle East, particularly the war with Hamas, in the coming months, envisioning Saudi Arabia and other Gulf States taking over the governance and reconstruction of Gaza.
  • He views the recent protests on university campuses as a wake-up call for universities to address issues with Diversity, Equity, and Inclusion (DEI) while also recognizing the importance of free speech.
  • Lex Fridman admires Bill Ackman's brilliant mind, persistence, and fearlessness, describing their conversation as incredible.

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