Bill Ackman, CEO of Pershing Square Capital Management, says investors need to look at the bigger picture to find the best stocks.
There's a simple rule for owning a great company, according to billionaire hedge-fund manager Bill Ackman.
"A great company is a business you could buy today, the markets could shut for 20 years, and you know with an enormous degree of certainty that you'll own something that's enormously valuable 10 or 20 years from now," the founder and chief executive of Pershing Square Capital Management said in a podcast interview with Norges Bank Investment Management's CEO Nicolai Tangen that published Wednesday.
Ackman said these businesses aren't industry specific. "We love businesses that look like royalty collecting companies, like annuities, where you can be very confident that the annuity will grow at a high rate over a very long period of time, and the cash that's generated from the business doesn't need to be reinvested in the business," he said.
His investment vehicles focus on just a handful of companies. Pershing Square's portfolio has exposure to Amazon (AMZN), Microsoft (MSFT) and Meta (META) on the big tech side, along with companies including Canadian investment company Brookfield (BN), ride-hailing provider Uber Technologies (UBER) and payment-card services providers Visa (V) and Mastercard (MA).
Ackman famously exited Netflix $(NFLX)$ in 2022 at a loss of around $400 million just months after buying it, but revealed in August that his fund was once again investing in the streaming giant. Netflix shares have lost 10% in October, following a disappointing sales outlook and amid concern over its content strategy and increasing competition.
Explaining that limited concentration, Ackman said that while maybe 200 to 300 really great businesses exist, it's less often those become available "at a price that makes it a great investment."
That's as most investors are looking for a "get-rich-quick strategy," and the asset management industry is inherently short-term, when what's needed is a longer-term vision on companies, such as employed by legendary investor Warren Buffett, he said.
As for how to find those stock names, Ackman offered this advice: "Find the best short seller in something that you own and hear their arguments. If you can rebut each of their arguments, then you can feel more confident in your investment."
"Find the person who makes the best case for why you're wrong. And then they either convince you and you're wrong or you can carefully rebut each of their various arguments," and figure out whose is best, he said.
Ackman said his firm's checklist helps whittle down the best companies. One attribute they look for is confidence in a business's present value and the cash it will generate over its lifetime that help give it a moat.
"If you can't build a model of the next reasonable period of time of a business, 10, 15, 20 years, I don't think you can come up with a value for it," he said. "There are many businesses that we have no idea what they're worth. We just don't even look at them."
He said investors pay too much attention to short-term factors such as quarterly earnings.
"Business quality durability, I would say is critical. Important. We want companies that are not exposed to what we call extrinsic factors we can't control. So we don't really invest in commodity-sensitive businesses, interest-rates-sensitive businesses, regulatory-sensitive businesses. We keep it simple," he said.
As for the artificial intelligence investment theme, Ackman believes all businesses are either AI-related or facing disruption, and that's the assessment an investor needs to make.
"We purchased Amazon after Trump announced Liberation Day tariffs, we acquired Meta after they disappointed people by committing a large amount of money to capex and the same with Microsoft," he said.
Ackman's publicly traded U.S. closed-ended fund, Pershing Square $(PSUS)$ is up 42% over three months, following an initial public offering in the spring, but down 16% in October. A rough month for tech stocks over worries about AI spending have weighed on some of the Ackman's big bets, such as Meta, whose stock is down 14% in October despite better-than-forecast results from the tech giant.
Investors will get earnings from another of Ackman's bets, Microsoft, after the closing bell on Wednesday.
-Barbara Kollmeyer
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