Bill Ackman Spills The Beans On How He Identifies Companies That Are Going To Make A Lot Of Money: 'Close Your Eyes…'

Pershing Square Capital Management founder Bill Ackman had a conversation with computer scientist and tech YouTuber Lex Fridman earlier this week, during which he divulged his process to identify the right companies for long-term, high-value investment. 

What Happened: During the interview, Ackman was asked about the factors that signal a company's potential for growing into "something that's going to make a lot of money," and have long-term reliability. 

In response, Ackman said, "So, every consumer has a view on different brands and different companies. What we look for are these non-disruptive businesses — a business where you can close your eyes, stock market shuts for a decade, and you know that 10 years from now it's going to be a more valuable, more profitable company." 

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He went on to give the example of Universal Music, a company that facilitates artists' global reach and holds music publishing rights of songwriters. 

"I think music is forever, right? Music is a many thousand year old part of the human experience, and I think it will be thousands of years from now. And so that's a pretty good backdrop to invest in a company," he said, adding, "The company basically owns a third of the global recorded music, the most dominant market share in the business."

Ackman provided another example from the restaurant industry. 

He said, take McDonald’s, for instance—it’s a business rooted in the 1950s era. Yet, 75 years " you can kind of predict what it's going to look like over time. And the menus' going to adjust over time to consumer tastes but I think the hamburger and fries is probably forever."

The Pershing Square founder then delved deeper into the research aspect taking American fast-food chain Chipotle as an example. He highlighted the company's initial appeal despite a stock price drop of about 50%. 

"Great company, great concept. Athletes love it, consumers love it. Healthy, sustainable, fresh food made in front of your eyes and great… Steve Ells is the founder, did an amazing job, but ultimately the company's lacking some of the systems and had a food safety issue. Consumers got sick, almost killed the rent," he said. 

However, he said that such incidents are not uncommon in the fast-food industry, but most companies survive them.

In their evaluation process, Ackman’s team usually begins with studying SEC filings such as the 10-K annual reports and quarterly 10-Q reports. They also analyze proxy statements to understand governance structures. 

He also said accessing conference call transcripts from the past five years provides insight into management’s promises versus actions. "It's like a historical record of how competent and truthful they are. It's a very useful device." 

Ackman said they also delve into competitor analysis and industry dynamics, seeking insights from experts through interviews or expert networks. "I like watching podcasts. If a CEO were to do a podcast or a YouTube interview, you get a sense of the people."

Photo Courtesy: Wikimedia Commons

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Disclaimer: This content was partially produced with the help of Benzinga Neuro and was reviewed and published by Benzinga editors.