American billionaire Bill Ackman has built one of the world’s most successful hedge fund management companies based on eight investment principles.
The company – Pershing Square Capital Management – has generated a 17.1% annualized return over the last 18 years, comfortably outperforming the S&P 500, which returned 10.2% per year.
Bill Ackman’s Pershing Square’s biggest holdings are Lowes Companies, Chipotle Mexican Grill, and Hilton Worldwide.
Other companies in its portfolio include Domino’s Pizza, The Howard Hughes Corporation, Netflix, Restaurant Brands International, and Canadian Pacific Railway.
As an activist investor, Ackman has eight principles that determine when to invest in a company.
- The business must be simple and predictable
- The company must be free cash flow generative
- It must have a dominant market position
- There must be big barriers of entry for competitors (MOAT)
- There must be a high return on capital
- The company must have limited exposure to extrinsic risks they can’t control
- The business must have a strong balance sheet and not need access to outside capital to survive
- The company must have an excellent management team and good governance
“When we have veered from these eight principles, we have lost money,” Ackman said. “In each case where we compromised on business quality or complexity we have been harmed.
He was referring to a difficult period in 2015 and 2016 where Pershing Square Capital Management’s performance was poor and lost money for investors.
Ackman said they have learned from the mistakes over this period which sparked a monent of reflection for the firm.
Ackman went back to the eight core principles that drove the success of the firm and even had them engraved on stone tablets that now sits on everyone’s desk at the office.
“We have adhered to those principles ever since which helped us to return to the success we had over the first twelve years of the company.”
There is a particularly strong focus on business quality with predictable cash flows.
“If we can’t predict the cash flows, we don’t know what it’s worth. If we don’t know what it’s worth, we can’t invest,” he said.