Pershing Square Capital Management founder Bill Ackman has made billions by following a strict set of principles to decide where to invest his and his clients’ money.
Pershing Square Capital has around $15 billion in assets under management, with $12 billion in a publicly traded hedge fund.
Ackman’s hedge fund has comfortably outperformed the S&P 500 over the last two decades, which made him Wall Street royalty.
Bill Ackman’s Pershing Square’s biggest holdings are Lowes Companies, Chipotle Mexican Grill, and Restaurant Brands International.
Other companies in its portfolio are Hilton Worldwide, Canadian Pacific Railway, and The Howard Hughes Corporation.
He is well known for investing in very few companies, and his current portfolio of only six companies clearly illustrates this strategy.
Ackman is highly selective in picking investments and said he follows eight principles that determine whether an investment is worthwhile.
- 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.
- 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 has a strong focus on business quality with predictable cash flows, which he described as paramount to determining how much a company is worth.
Bill Ackman’s investment rules, according to ChatGPT
The rules above come from what Bill Ackman said. He even created stone tablets with these principles, which sit on each company desk.
When we asked the artificial intelligence (AI) chatbot ChatGPT about Ackman’s investment rules, it provided a different answer.
ChatGPT is a chatbot launched by OpenAI in November 2022, which is built on top of OpenAI’s GPT-3 family of large language models. It is fine-tuned with both supervised and reinforcement learning techniques.
Here is the answer ChatGPT gave when we asked it to provide us with Bill Ackman’s investment rules.
Bill Ackman is a well-known hedge fund manager and investor who has developed a set of investment rules that he follows in his investing strategy. Some of his key investment rules include:
- Invest in what you know: Ackman emphasizes the importance of having a deep understanding of the industries and companies in which you invest.
- Be patient: Ackman believes that good investments take time to play out and that investors should be prepared to hold their positions for the long term.
- Focus on the downside: Ackman focuses on identifying potential risks and downside scenarios in order to minimise the potential for loss.
- Be disciplined: Ackman believes that discipline and consistency are key to successful investing, and that investors should stick to their investment strategy, even when markets are volatile.
- Have a margin of safety: Ackman’s investment approach is built on the principle of having a margin of safety, which means investing in assets at a significant discount to their intrinsic value.
- Do extensive research: Ackman is known for his extensive research and due diligence on companies, he spends a lot of time understanding the business and industry in which the company operates.
- Don’t be afraid to go against the crowd: Ackman is not afraid to take positions that are contrarian and that may be out of favour with the market.
These rules are aligned with Ackman’s investment principles – but more closely resemble Warren Buffett’s way of describing how to invest.
However, Ackman is a follower of Buffett’s investment philosophy, and it is not surprising to see these principles linked to him.