The Knowledge Project｜#82 Bill Ackman: Getting Back Up

So I've always had this view that success is not a straight line up.

And, you know, if you read the stories of successful people, almost every successful person has had to deal with, you know, some degree of hardship.

And I've always had the view that how successful you are is really a function of how you deal with failure.

And if you deal with failure well and you persist, you know, you have a high probability of being successful.

So I've always kind of had that view.

And then I had to apply it to myself, you know, certainly a few times.

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Okay. So why is all that necessary?

Well, today I'm talking with legendary investor, Bill Ackman.

Bill is an investor and fund manager, as well as the CEO of Perishing Square Capital Management.

In this in -depth interview, we're going to talk about what drives him, the lessons he's learned from his parents coming back from failure more than once, information consumption and idea sourcing, the role of ETFs, facing criticism, nutrition, COVID, the lessons he tries to teach his kids, and of course

stocks. It's time to listen and learn.

Bill, I'm so glad to have you on the show.

Well, thanks for having me.

What are some of the lessons you learned from your parents?

It was interesting to speak about my parents because I've been living with them now for, uh, I think about six weeks, uh, and haven't done that for a good 30 years.

So, uh, it is an interesting time to talk about lessons learned from parents, but you know, my father is, I like to describe myself as the most persistent person in America, but actually my father is the most persistent person in America.

So I certainly live in a home where you learn never to give up on pretty much anything, and so I've, I've, uh, I think that's a big takeaway and, uh, you know, mom and dad, you know, hardworking, motivated, educated people, high ambitions for their kids, always talked about setting an example.

I learned a lot of things from my parents, talking about philanthropy.

I think of philanthropy as something that is not genetic.

It is learned and it was something that my dad reinforced pretty much from the time I was a kid.

How do you think about their role of giving back?

I think the easiest way to think about it, one of the more influential classes at a college, I read John Rawls theory of justice and he talked about, you know, how do you, how should the world be organized?

Well, his argument is you should organize the world, not from your perspective, but from the perspective of not knowing where you end up in the genetic lottery and in the geographic lottery, you know, where are you born in New York city to, you know, well educated parents and a upper middle class home?

Or are you born in sub -Saharan Africa?

And, you know, you don't get to decide where you end up.

And in that sort of world, you should design the world from that position, the perspective of not knowing where you're going to end up.

And, uh, you know, I always expected to be successful and I had sort of a business plan and I said to myself that if I'm very successful, that I'm going to make sure to return the favor and that's what I've tried to do.

That's Rawls, the veil of ignorance, right?

Yes. And you have been incredibly successful.

What drives you? Well, I think one of my biggest drivers from the time I was a kid was independence, you know, as much as I love my parents, I did not want to be reliant upon them.

So everything from financial independence to the independence to say what I think, the independence to, you know, live the life I wanted to live.

And so that's been a huge driver.

You've come back from failure or, um, at least the brink of disaster, uh, twice in your career, you've had to shut down your first fund.

And after Valiant, you lost a lot of assets, but it doesn't seem to phase you at all.

How does this affect you personally?

So I've always had this view that success is not a straight line up.

And, you know, if you read the stories of successful people, almost every successful person has had to deal with, you know, some degree of hardship, whether that hardship is, you know, personal hardship, health related hardship or a business issue.

And I've always had the view that how successful you are is really a function of how you deal with failure.

And if you deal with failure well, and you persist, you know, you have a high probability of being successful.

So I've always kind of had that view.

And then I've had to apply it to myself, you know, certainly a few times.

And, uh, I always like to say that experience is making mistakes and learning from them.

And I've had the benefit of having made a lot of mistakes.

What are some of the lessons that you've drawn from, from those experiences?

You know, it's interesting in my first fund, I had a partner who remains a very good friend and the stress of the ending was enough for him that he just didn't want to continue and do it again, where I was excited to kind of rebuild and go forward.

And my business plan was just to make a little progress every day.

And if you make a little progress every day, eventually that compounded progress will dig you out of the hole.

And what is difficult is you find yourself in a hole, whether it's an investment hole or in your personal life or otherwise, it seems incredibly daunting to get back to, you know, if you will, where you were, and you're looking up at this peak where you were before, and it's just, you're never going

to get there, but if you don't focus on the peak and just focus on one step at a time, you know, making progress, eventually, you know, as the weeks go by, just make a series of smart, thoughtful decisions, use good judgment, stay healthy.

Eventually you climb your way out of the hole.

Most people look at that peak and then they make, I would say, more emotional or rational decisions in order to get back.

Like how do you ground yourself in the moment of the day to day and just getting incrementally better?

I think having good friends, being in a loving relationship, having a supportive family and staying healthy, you know, huge believer in exercise, good nutrition, sleep as a way to deal with stress.

My first business reversal, if you will, was the most difficult because I hadn't had to experience that before.

I mean, it's sort of the speech I give, but when I go to speak at, you know, business schools, you go to speak at Harvard Business School and you're in front of an audience of students and they've done, you know, top of their class in high school and they went to a great college and they've done great at summer

jobs and they have great recommendations from their teachers and they've never failed.

They go to Harvard Business School and then they're about to go out into the real world and the problem with that approach is the single most important thing you need to understand is how to deal with failure.

And the vast majority of people who've got to, you know, Harvard Business School or pick your favorite, you know, top business or law school has not had to deal with failure and that is the determined, I think, of success.

You know, look at Alon Musk, he's been on the brink of failure however many times and it's, I think, why he's beloved by many, hated perhaps by some.

But I really admire the guy in terms of how he's dealt with, you know, near catastrophe and I just think there are many, many examples of people, you know, what does success means?

Success means you have a very good ability to deal with inevitable failure mistakes and, you know, life issues that emerge over time.

What lessons would you give people on how to deal with failure?

I mean, it's got to be more complicated than sort of like, how do you learn from it?

Like, do you reflect?

Is there a process that you go through?

How do you reset yourself and go forward?

You know, for me, it is literally just a bit of a plotting one step at a time.

You know, we had, you know, my sort of life trajectory was, you know, did well in high school, went to, you know, good college from there, a good work experience.

Harvard Business School started my own hedge fund with a partner.

We had five years of really incredible success and then, you know, some challenges and then success and then challenges.

And it's just sort of the rhythm of being a concentrated investor, certainly.

And also the rhythm of life.

And I just think you just have to stay sane and stay balanced.

People have always told me, Bill, you deal with stress incredibly well.

And I think it's really about being, you know, healthy, going to the gym, playing sports, you know, having the perspective that comes from spending time with, you know, people that you love.

And, you know, going for a walk during my first most challenge, you know, business reversal, I used to go for a walk every night with a good friend, you know, around Manhattan, we'd go walk to the Hudson River.

We talk. And it was just nice knowing, you know, a supportive friend was looking out for me and wanted me to succeed.

And nothing as dramatic happened the second time around, because, you know, I'm very fortunate in being in a wonderful marriage and relationship, which I think helps enormously.

And also surrounded by work colleagues that I like and respect and, you know, enjoying what I do.

And also the kind of reversal we're talking about here is very, very different than the kind of reversal someone experiences for, you know, may lose their job, loses their job and have no form of economic support, or they have a, you know, very, very serious illness that threatens their existence.

So in my case, you know, I've done very well.

My family is well taken care of, very nice roof over my head, so to speak.

So I don't really view this as anything like the kind of challenges that people deal with when they get cancer, for example, or they have, you know, they lose a job that they need for their, you know, to support their family, to pay for health care for their kids, you know, that kind of thing.

So I just try to keep perspective.

You did go through a divorce though, right?

Yes. I mean, the most challenging moment from a business standpoint was not the most recent challenges, you know, losing money on a big investment is disappointing.

But it happened. It was coterminous with challenges in my, and perhaps correlated with challenges in my personal life.

It is, it can be very distracting to be contemplating whether one should stay married while running a business that requires, you know, a lot of judgment and clarity of thinking.

And, you know, I ultimately made some failures of judgment in my business.

And I'm quite sure that the personal challenges I was facing at the same time made things worse.

And then I had to deal with the business challenges at the same time.

I was in the midst of the normal challenges of divorce and resolving things with a former spouse and kids.

And, uh, you know, so it was, it was a challenge period.

You mentioned sleep, exercise and nutrition are really important to you.

Can you go into a little bit about your routine and sort of like how you view those things?

Sure. So on the sleep side, I've always been a good sleeper.

So that, that helps.

Um, I do think it is related to, you know, taking care of yourself generally.

So, you know, I work out pretty intensely.

You know, I really play tennis, just in addition to a workout, it allows your mind, it's almost a form of meditation for me and that it completely takes me out of whatever work related issues are on my mind.

And then I've learned a lot about nutrition, uh, over the last decade or so that's I think helped maybe 10 to 15 years.

Um, and I had a completely, I thought that wrong idea of nutrition.

I would say until more recently.

Oh, walk me through that.

What do you, what do you think now?

What I think now is, uh, one we start with, I think sugar is poison.

Uh, so, you know, minimizing your sugar consumption, I think helps tremendously.

I also think for me personally, although I think everyone has different genetic makeup and how they respond to various things.

I think, you know, I'm better off with kind of a higher fat, higher protein, lower carbohydrate diet, you're eating real foods as opposed to foods that come out, you know, anything that, that comes out of a package that was processed.

I generally avoid so real food, kind of higher fat, you know, avocados, nuts, things like that.

But I eat, you know, meat and fish and I've really done my best to cut back on sugar consumption and in carbohydrates.

And that's served me, you know, sort of, well, I feel better.

I think, I think better also able to manage my weight much more effectively.

You know, I come from a family where managing your weight has not been an easy thing for my father's side of the family, let's say.

And I feel like I've finally, uh, I finally figured out what the issue is.

And just, you know, at least our genetics, we have a super high sensitivity to sugar intake or carbohydrates.

Are you a three meals a day kind of guy or you snack all day or?

I've become a bit of an interim faster, you know, so I generally don't eat before noon and I usually finished dinner by around eight, I'll have nuts for snacks occasionally, but not, you know, that's about it.

And do you have a normal bedtime routine or is it like you go to bed whenever or are you like, you start winding down at a certain time?

Like, what does that look like?

Uh, you know, read a lot in the evening.

I spend a lot of time with Nari, uh, in the evenings, you know, occasionally we watch a movie occasionally stay up and watch something interesting, but you know, no formal routine.

What's the last movie you watched that you loved?

I watched a, a series on Netflix, a four part series called unorthodox, uh, just in the last couple of nights.

And I don't watch many Netflix series.

I thought it was excellent.

It was a very sort of in depth look at life in the kind of ultra orthodox Jewish community, but very well acted and very real.

I'm curious as to you mentioned reading sort of a lot at night.

I'm curious as to what your information intake looks like.

Like what publications do you read regularly, books, blogs, specific authors, memos, what does that look like?

Sure. So, you know, I read a lot of traditional media sources, you know, wall street journal, financial times, New York times, economists fortune, Forbes, a grants interest rate observer.

And beginning sort of as I got deeper into coronavirus, I started using Twitter actually as a newsfeed and found it to be very, very helpful.

Interesting. Almost having the experience of reading the news a couple of days before you read the news and the rest of the media, Bloomberg and Bloomberg News, of course.

And then I just, you know, I go where the, you know, the facts sort of take me.

And then, you know, I don't regularly listen to read blogs.

Although I'm starting to understand the benefits.

So I'm a late, but sort of recent adopter of finding more interesting curated news sources.

Is there information you avoid like information that everybody else has?

Not really. I think it's helpful to have kind of the conventional perspective.

And, you know, I don't think we have, you know, have some particular access to, you know, some inside secretive news source that's valuable.

You know, there are people that I talk to, that I talk to for perspective on things like the economy and business, just people, business leader type people that I respect and compare notes with, you know, what's really going on in China, that kind of thing.

That can actually be quite, quite helpful.

But, you know, I get a lot out of, you know, reading basic media, Financial Times, Economist, Atlantic, New Yorker.

How do you source your investment ideas?

Like where do the, where do the ideas come from?

Like, how does that process work?

Is it you? Is it your team of analysts?

Is it? Sure. So I would say the early days of Pershing, I would generate the ideas and the team would help me analyze them.

And as the business has matured, and I really think it's a credit to the team and the maturity of the business, many ideas are sourced by members of the team.

And my role over time has become one, you know, setting the sort of framework for things that are likely to be interesting, you know, whether, and whether something fits within the framework or not.

And then I'm usually the 20 % person on every idea.

So 80 % of the work is work led by a two person subset of the investment team.

And 20 % of the work, you know, the reading public filings, conference called transcripts work that I do the 80 % work.

A lot of that will involve conversations with experts to understand natures of businesses.

And that's work that's largely done by other members of the team.

And then the team overall discusses whether something merits inclusion in the portfolio, so some combination of a couple of people who worked very, very hard and voted a lot at the last, you know, perhaps a couple of months looking at an idea, one person, myself, that's spent not nearly as much time,

but knows enough to be dangerous.

And then, you know, another call it four members of the team that have not done real work on the idea, but are economically incentivized to make sure that, you know, we make the right decision.

And that's sort of the composition of how we get to an idea that makes sense traditionally.

You said that you guys do more work on any investments than anybody else.

And you know it better than often the people that are running the company.

Is there a point where or at what point does that become self -reinforcing?

Like you've done so much work that you it's hard to walk away from this.

Like how do you build it that into your process?

Yeah, I don't know if I've ever said that I don't know for a certain.

Do you do more work than anyone else?

So I wouldn't say that.

But because we manage a very concentrated portfolio, we have the benefit of going very, very deep on something and we don't need to make a decision.

There's no time pressure generally to make a decision.

So the benefits of concentration, the benefits of being a long -term owner of companies is there isn't, you know, we might add one or two new ideas a year, which means we can, we have a luxury, if you will, of doing more work than many, many other investors, but we only want, we want to do the work that is necessary

to determine that an investment makes sense in the portfolio.

We don't, we don't have some view that we have to exhaustively spend six months in order to make a decision.

In fact, if you have to spend a large amount of time and it's not obvious, it's probably not a good investment.

And we have made investments and some of our most successful investments, the amount of work that was done was in the hours, as opposed to even in the days or weeks or months, I mean, the, just most recently, our hedge that we put on to protect the portfolio, I guess I wasn't specifically doing work

on that investment at all, but I was thinking about the ramifications, for example, the coronavirus, and then came to a conclusion.

This was something we wanted to hedge and that it was really an hour discussion among the team before we decided to implement the hedge in that form.

And in a way, one of our more successful investments, if you look at the, the risk versus the reward, the amount of time spent was minimal.

Can you take me behind the scenes on an investment decision that you've made and sold to nothing currently in your portfolio?

Like what does that process look like to Bill Ackman?

How do you think about it?

How do you walk through it?

So it starts with the framework of what we're looking for.

So the most important thing for us is that the business quality is extremely high.

And by business quality, I mean we, we've, number one, we want it to be both high quality business and one that we can predict with a very high degree of confidence.

So it's, it's got to be what we call a simple, predictable, free cash flow, generative business.

And the reason for that methodology is, you know, the, the value of a financial asset is the present value of the cash that you can take out of it over its life.

And particularly in a low interest rate environment, you know, you need to be able to predict the cash flows for many, many years in order to figure out, you know, approximately what the business is worth.

And for many companies, we have no idea, uh, because the complexity of the business means we don't know what the cash flows will be three years out, let alone, you know, years four through 50, which, which matter in terms of, uh, determining what the business is worth.

So we look for sort of simplicity, uh, sort of, and then durability and predictability.

So it's got to fit that screen.

And you know, we can talk about Starbucks, for example, so we made an investment in Starbucks, uh, a couple of years ago, not quite a couple of years ago.

And, uh, what we saw was a simple, predictable, free, casual business, free, casual, generative business that we could understand.

And so it met the first screen.

You know, you think about coffee, you know, people have their coffee habit.

Starbucks has built a week in our view, a very durable franchise.

They earn very high returns on, you know, every store that they build.

And, uh, it's a, uh, it's a habit that people don't like to break.

And so we had confidence in the durability and, you know, the benefit of the, called the restaurant businesses, once you understand the economics of one box, and then you have a company that's built, you know, thousands of boxes over time, it becomes more predictable and easier to understand what that business

will look like over a very long period of time.

And so it, Starbucks met the business quality threshold.

And then the next most relevant consideration is price and price.

What matters here is that there's a wide gap between price and value.

And so once we understood the business and we could model the business, we could look at where it was trading and compare those two.

And at the time of our investment, there was uncertainty because the recent, uh, same store sales had kind of flattened.

And this was a company that had delivered consistent sort of mid single day same store sales over a very long period of time.

And our analysis, the kind of crux of the analysis was, is this a blip?

Is this an indication of things about to go awry?

And that's really where we spent our time.

So you're looking at Starbucks and then, but there's millions of people looking at Starbucks.

Where does that edge come from?

I think a big part of the edge comes from, we're not going to do a better job predicting next quarter's earnings than people who focus on that.

And we just don't focus on that at all.

What we focus on is, what is this business worth over its life?

And did the, the markets generally overreact to short term information and noise because many stocks are traded on the basis of, you know, the marginal buyer and seller is a short term investor trying to predict, predict whether the stock's going to go up or down on the quarter and we don't spend any

time trying to figure that out and that kind of activity, whether it's driven by quantitative traders or computers or, you know, fast, fast money, so to speak, moves securities around occasionally to crazy prices.

And Starbucks was trading as if the business had fundamentally changed.

And our view is it happened and that the company was taking all the right steps to address, you know, some of the performance related issues that they had both in the US and that they had a lot of opportunity for growth and they were becoming a more focused, better company.

They were actually taking, you know, normally we look for a great business that had lost its way.

We try to figure out what they had done wrong and then we'd recommend a series of changes after buying a stake in the company.

That's sort of our core business.

But in the case of Starbucks, they were already doing all the things that we would have recommended that they do to fix the problem.

And so it was a bit of an activist investment where the management had already become activists in their own company.

And so we thought, I think a big part of our advantage is we didn't have to think about next quarter's earnings.

You know, the big part of our competitive advantage today comes from the fact that our capital structure compared to a typical investment firm is very different.

You know, 85 percent of our capital is in the, you know, comes from a public company and as a result, we have very, very long duration money and we don't need to worry about this quarter or this year in making decisions.

And that I think is a huge advantage.

And a world in which most other investors have, they give their investors either daily or monthly or quarterly liquidity, having, you know, permanency to a very large percentage of our capital base allows us to make, you know, very long term decisions and that time arbitrage is a big part of our advantage.

Time arbitrage is like a hard one to go away because there's always going to be this short term pressure and so I like the structural sort of like approach to addressing that problem.

How do you see the role of ETFs in index fund investing and how does it impact or affect investors like yourself?

So the impact on industries who care about governance, in particular, sort of activist investors, is, you know, over time as, you know, index funds effectively come to control corporate America, you know, their vote can be the deciding factor, you know, in a contest.

And so that's one way that index funds play a major role.

The other side of that is index funds are also because of their growing influence under a fair amount of pressure from their shareholders to oversee the businesses that they own.

People thought about the index fund investment business as a business almost without governance where governance was not a focus at all.

And then they're increasing ownership of corporate America.

Global, you know, global securities puts more pressure on them to be thoughtful.

Now, they don't have the resources to lead an activist campaign.

I think that requires more entrepreneurial type investor.

So, you know, there's in a way, there has to be a partnership between activist investors and index funds to make sure that we're governing companies correctly.

And, you know, I've seen a number of the top firms over time take these issues much more seriously and we've had a good experience working with most of these major owners.

The problem with the index fund business is it's really a commodity business.

You know, if you run an S &P 500 index fund, the only way that you can compete with other S &P 500 index funds is by lowering your pricing.

And, you know, the pricing is now in the few basis points.

In fact, there are index funds today that charge no fees and it's hard for them to scale up to have the governance resources necessary to make thoughtful decisions about running businesses.

If you think about it, if you manage ETFs and index funds, you have to vote and call it 10, 15, 20 ,000 proxies, you know, right around the same time, most annual meetings are called it, you know, in the May sort of timeframe.

So by February, imagine BlackRock gets, you know, tens of thousands of proxies in the mail and they have to make a decision on each of them, which directors to vote for, which initiatives to support, which not to support.

It's almost an impossible hurdle for them, particularly as their revenues asymptotically or the fees they charge asymptotically go to zero.

So that is a problem that needs to be addressed.

Actually, I made a small investment in a company called Say, which is a business that wants to put the vote back into the hands of the owner.

And one of the opportunities for a BlackRock to differentiate themselves from, for example, a Fidelity or Vanguard, is to transfer back the right to vote to the underlying holder.

And this company, Say, sort of has a technology that enables that to take place.

Now, you wouldn't want a person investing in an S &P 500 index fund who's got $1 ,000 investment broken up in 500, you know, $2 pieces to have to think through 500 different proxies.

There you still have the problem.

But they may have certain principles that they operate under that they would want, you know, BlackRock to, you know, vote on for them.

And this company would enable that to take place.

Perhaps there are a few high profile elections, proxy contests, etc., with the underlying shoulder would like to vote.

That's an interesting potential change in governance.

Yeah, that sounds like a pretty cool technology.

Do you think that we end up with bigger swings as a result of more and more people being invested in index funds?

Like, do you think the highs are higher and the lows are lower?

Or do you think it really has no impact?

Like I imagine a lot of people right now are getting their merch statement in the mail and looking at that, going, what just happened to generally ignore the market?

Yeah, I think the premise of your question is correct.

I think, you know, if you think about index funds and constant inflows of money, you know, each with each paycheck, when people take a portion to invest in the 401k, that's been a major support for the stock market and index funds really in a way they take more and more of the float out of a out of a security.

So the marginal trader can move a stock more because there's less flow, if that makes sense.

It's almost like having index funds as major holders of securities in stable market conditions actually reduces the liquidity of companies.

And it means that sort of hedge funds and more active investors who are making day to day buying sell decisions actually push securities around more.

So some of the volatility that you've seen, I think can be is somewhat due to the fact that there is limited less liquidity in securities today because of the greater percentage of shares that are held by index funds.

Now, if that were to reverse, if index fund performance underperforms active management for a meaningful period of time, you could see instead of constant additions to the index funds, you could see constant reductions of capital, which could be a big overhang on the securities that are held by index

funds. But that trend has sort of continued to be interesting to see what the impact of recent events have on it.

Who are some of your investing heroes?

Or actually, who are some of your heroes, not investing heroes, but who just generally are some of your heroes?

Sure. So just briefly on the investment side, I got into this business because someone tipped me off about Warren Buffett early on.

So he's certainly obviously a hero.

Two investors I learned a ton from over the course of my career were kind of supportive of me early on.

A guy named Joe Steinberg, who likes being out of the headlines and his partner Ian Cumming ran a company called the Acadia National Corporation, a very interesting investment firm.

I learned a ton over time.

But I admire people like Elon Musk.

I admire people who take on unbelievable challenges and succeed.

The notion of building a car company to compete with the big car companies is something that on its own, I think, is fairly remarkable.

And if you do that at a time when you're building a company to launch rockets into space, I think it's even more remarkable.

So he's someone I have enormous respect for.

The world needs more people like Elon.

Do you feel those people are better served in private roles as CEOs or as public company CEOs?

I don't know that Elon Musk has been the ideal public company CEO.

I think he had a challenging period there with his tweets.

I guess that's why my team worries a little bit as I've used Twitter a little bit more in the last month or two.

But I don't know that I think that a lot of companies have stayed private too long.

And so I'm actually a fan of the public markets and a fan of public company governance versus the kind of governance that you've seen certainly in many of the venture -backed companies we work being, perhaps the kind of most public sort of egregious example.

But the governance structures of private companies, venture -backed businesses, their capital structures, all these sort of funky preferreds, liquidation preferences...

And I would not rely on the market values of many of these venture -backed companies.

And I think the soft banks of the world that have allowed them to stay private, I don't think have done them a service.

Can you elaborate a little more on why they've stayed private too long and what effect or impact that has on capital markets or the company itself?

Sure. So there is a certain discipline that comes from being a public company.

Today, public companies have to report on a quarterly basis.

The SEC does a pretty good job in various requirements of the disclosures you need to make.

Most companies have adopted a quarterly conference call format where you can ask questions of management.

And I think there's a lot of just inherent transparency in that process.

And whether you own one share or millions of shares, everyone gets the same information.

In the private sort of venture -backed markets, and I'm a relatively small investor in startups, and I do it for fun.

I do it because, you know, occasionally I make a good investment.

And also it helps me see the future in terms of what potential threats are coming that might disrupt either a business we own or a business we're looking at.

So I do find it to be an interesting thing.

But, you know, the quality of the information you get, the lack of disclosure, how these boards sort of operate is far from ideal, particularly when you compare them with their public company equivalents.

I mean, we work, I just think, as the sort of first opportunity for people really to see what's been going on.

But I don't think we work as atypical of many venture -backed companies where, you know, the founders become almost godlike figures who are handed control by, you know, the venture partners.

And they may be talented entrepreneurs and they may have been the right person to start and build a company from scratch, but the business may now be at a stage where it needs more professional, you know, management and it can't happen or it's difficult for that to take place in a private context.

And so a softbank injecting, you know, $100 billion in marking up the value of companies and giving them capital that they could use to postpone going public.

I think it's fundamentally been a disservice to the capital markets and probably to those businesses because you cannot, public company shareholders are being too short -term, but there are real benefits that come from the disclosure and the input that shareholders can bring to kind of the public enterprise.

Do you think that these sort of like mark -to -investment valuations that seem to translate into some form of a public market are realistic or do you think it's just a game almost?

Yeah, so, you know, the problem with many venture funds is because of the life expectancy of many companies, you won't know whether a venture capital firm does well for a decade.

And venture capital funds, particularly startup venture funds tend to be small and the founder really can't make a living until, you know, their first fund starts to generate some realization events and that can be years out.

And so the incentive on the part of many of these sort of earlier stage funds is to have markups in the portfolio because it's a way of showing to your investors that you're making business progress.

And I think it does encourage, you know, certain kinds of behavior that's not ideal.

And a lot of this dynamic between the desire for the early venture fund investors to, you know, show a markup to their underlying investors and the desire for a new investor to come in, you know, at the lowest possible valuation and the way those issues are generally solved by creating these sort of funky securities

that give the later investors, you know, preferential rights over the earlier investors.

And I think a lot of times those features are not accurately considered and valuing different, you know, round A versus round C or D.

And so I think there are games that are played that are not ideal.

And you can't really short them.

Right. So talk to me about the role of short selling.

Is that good for the world?

Is it bad for the world?

Is there a line where it becomes you've gone too far or how do you see that?

Sure. So I think short selling is an essential and generally positive function for markets.

I give a lot of credit to the folks at Muddy Waters who have unearthed a meaningful number of fraudulent companies.

And I've yet to find an example of a regulator finding a fraudulent company.

It's either a journalist often being fed by a short seller or a short seller that has been, you know, the one to identify fraud because they have a huge economic incentive to define bad companies or certainly fraudulent businesses.

So I think that function is a great function for the capital markets.

And I think if, you know, if I were running the SEC, I would make sure that my enforcement division was talking closely with the best short sellers hearing their favorite ideas and that would be the best way for the SEC to uncover fraud.

So I think that is a very effective and good thing.

Whereas a negative is the problem with being a short seller.

If all you do is short stocks, you want your companies to fail no matter what.

And, you know, some short sellers will take steps to actually cause harm to a business as a goal in order to make their short successful.

And that's where it crosses the line.

And I sort of followed the whole, again, never been an investor in Tesla, you know, longer short, but you do see example, you know, again, companies that complain about short sellers, I usually look at those management teams skeptically.

But in the case of Tesla, you know, I do think some of the short sellers went beyond the role of identifying overvaluation in their attempts to actually harm a company.

And that's where I think it goes beyond the pale.

I want to come back to the Twitter comment about Elon and you.

You're both. I don't think it's a surprise.

You're pretty polarizing when you make comments, they make news.

How do you judge that before going on Twitter?

You know, I wasn't particularly controversial, I don't think.

And the media was generally pretty supportive until I went publicly short Herbalife.

And then Herbalife, using their PR machine, has done everything they possibly can or did everything they possibly could to try to discredit me, you know, in the press.

And what's fascinating to me actually, if you were to Google now, we have not been short Herbalife for a very long time.

Herbalife is still running a negative campaign about me personally, which I find fairly remarkable.

The way you can see this is we Google my name.

I don't know if you want to do this right now.

What will pop up is an advertisement.

And the advertisement is paid for by Herbalife.

And it talks about find out how billionaire funded this movie called Bedding on Zero.

Bedding on Zero, yeah.

It's the first link.

What does it say? What's the subtext?

Paid for by a billionaire hedge fund manager.

Okay. That is entirely false.

By the way, my picture comes up.

So you see this paid for by billionaire hedge fund manager, then you see a picture of me.

And any reasonable person would assume that ad, you know, that I paid for this movie Bedding on Zero.

The facts are that a documentarian I'd never heard of called me up one day and said, finding this whole Herbalife thing fascinating, we'd love to follow you around.

And I met with him and liked him, decided I would trust him.

And I thought it would be helpful in getting the story out of the company.

And I participated in the film by agreeing to be interviewed a number of times.

And he followed me around a number of times.

The film was financed by actually a hedge fund manager, not me.

His name has escaped me for a moment.

But if you Google it, you can find out his name.

But I played no role whatsoever in financing funding, directing.

Literally all I did was appear in the film because he videotaped me at various presentations.

But the fact that a public company, SEC registered company, continues to put out completely false information about me personally tells you something.

So this Herbalife thing was very, very polarizing.

People felt that we were way too aggressive in our, or some people at least did, in our sharing our views.

But, you know, ever since then, I think I've become even, if you will, even more polarizing.

But it doesn't affect my thinking in terms of what I say publicly or write publicly or what I say in a letter.

Unfortunately, particularly today, the more visible your profile, the more lovers and haters you're going to have.

It's just the nature of the beast.

But walk me through that a little bit because you're, you know, you seem way more in touch with your emotions than most people.

And yet you're putting yourself out there in a way that people love or hate.

There doesn't seem to be a lot in the middle.

How do you deal with that?

Do you just ignore it?

Do you even look at it?

Do you, does it affect you at all?

You know, I just, and myself, you know, recently I was becoming more and more concerned that our government was not taking the coronavirus seriously.

You know, I was gravely concerned a few months ago and took steps both to protect my father, who's being compromised, my family, the firm, our investors with the hedge, etc.

And then I, you know, by, you know, call it mid -March, I said, well, there's just this really straightforward, simple answer.

We just need to shut down the country.

And once we do that, we can reopen carefully and go back to rebuilding an economy and rebuilding a country.

And I kept waiting for the president to go on TV and say, OK, guys, we're shutting down the country.

And it wasn't happening.

So I figured, OK, that's when I went back to Twitter for the first time and I wrote a tweet saying, look, here's the simple answer.

And it went pretty viral.

And I got a call from CNBC and said, would you come on?

And I had I had foresworn going on TV, you know, for a couple of years.

But I thought this issue was important enough that I should make a public case for a countrywide shutdown, which I did.

And unfortunately, I had a whole bunch of people right after I went on make the case that I was doing this for some market manipulative reason or to benefit me personally.

And so it's frustrating.

It's disappointing.

But I still thought it was important to make my case.

And I was very happy the next day when California, you know, the first day shut down and the following day when New York state shut down.

And then here we are.

You know, we didn't get there the way I expected.

I was expecting the president to basically order a countrywide shutdown.

But, you know, living in a federal system where the states make these decisions, I'm happy we finally got there, although it took longer than I would have liked.

Let's keep going on this covid theme.

You disclosed publicly.

I don't know what day it was, but it was like March 4 that you had done this through your website that you had put this hedge on.

And that is surprised me because nobody nobody noticed.

It seemed like everybody was caught up with all this other media.

And then you could see through the weeks because you release your weekly nav on Wednesdays.

And you could see through the weeks that your asset value was going up.

Well, the market was going down.

So clearly they were asymmetric in nature.

And then you went on.

You had sold them. What was the timing around that?

Like I don't quite know what happened.

But you went on CNBC and you sort of like said, we need to do more.

And you were you were where you walked me through that.

Sure. Yeah. So basically, we put the hedge on in maybe the third week in February.

And by March 12th, the hedge had gone from being worth nothing to being worth two point seven billion dollars.

And the markets dropped, I don't know, 25 percent or so at that point in time.

And we said, you know what, we've got this massive position in a hedge, which maybe has the potential to double if the credit spreads widen to where they were during the financial crisis.

But if they don't and the government takes the right steps, you know, this hedge could be worth zero and stock market and go right back up to where it was.

So we made a decision to exit the hedge.

And so we started selling the hedge and we started aggressively buying stocks on the 12th.

I went on CNBC at 1230 on the 18th.

And the reason why I know these details is because, you know, I wanted to respond to some of my detractors.

We've invested two billion, 50 million between March 12th and March 18th at twelve thirty in the stock market buying additions, adding to our portfolio, buying, repurchasing Starbucks.

We had sold half the hedge for a billion, three hundred, a little more than half the hedge for a billion, three hundred million.

And so we were three billion, you know, 350 million more long stocks, if you will, than we were on March 11th.

And bear in mind, this was a firm with total assets, total equity of about seven, seven and a half billion dollars.

So adding three billion dollars of risk, you know, we were much longer than we were even before we had the hedge on.

So we were and we had no short positions.

That's when I went on TV.

So I went on TV to give a very bullish message, which was, you know, look, I think markets are going to soar.

We just need to stop the virus.

There's a really simple solution to stopping the virus.

It's locked down the country for 30 days.

We kill off the virus.

You open carefully, continue to practice social distancing.

But, you know, the stock market's a discounting machine.

It will look forward.

And as soon as we do this, the markets will recover.

And that's why we're buying stocks.

We've been buying stocks over the last week.

And we're buying stocks today.

And here are the stocks I'm buying.

So it's rare that someone goes on TV and makes their case and explains which securities are actually purchasing, which we did.

And after I got off, I noticed other commentators coming on and also on Twitter, people saying, oh, Bill drove down the market.

Now, what they forgot was the stock market was already down almost 7 percent by the time I went on 30.

And, you know, an hour later, it was down more.

So simply because the market went down after I spoke, didn't mean I caused the market to go down.

I mean, the market had gone up.

Did I? Was I the cause for the market going up?

The answer is no. But an hour and a half later, I put out a tweet basically saying, look, making sure people understand my message.

Yes. If the government ignores the virus and just allows it to continue to propagate and we don't shut down the country, we're going to end up in a very, very dark place.

However, if we shut the country down for 30 days, which is what I expect to happen, we'll kill the virus.

Marcus will recover.

And that's why we're buying securities.

So it was a bullish message delivered with there is a fork in the road.

I know we're going to take the right fork.

And that's the bet that we're making.

But if we don't, it could be bad.

But I believe it strongly enough that we've invested three billion dollars in the last week buying stocks.

So many questions I have here.

I just want to for the context of listeners date this interview.

It's April 13th, just so whenever it comes out, people have an idea of when we were recording.

Why didn't you sell everything instead of the hedge?

Why the hedge? So we are a long term investor.

We get to know our companies and their management teams.

Well, we often play a role in putting the CEO in the seat.

So in Chipotle, we put four directors on the board.

We were four directors when we joined the company and we helped to recruit Brian Nichol to become CEO of the business.

And we've been a supportive shareholder of the company.

So we still have a director representative of the firm that sits on that board.

So one, it's not a very supportive thing in the midst of a crisis to, if you will, abandon companies that you've supported and helped build.

And that's really true for many of the companies we own.

So one, I don't love doing that.

The second thing is, our view was if you looked at what was going on in China, there is a straightforward solution to how to deal with a pandemic.

China did it. They've been able to manage their cases and deaths.

And again, you have to question some of the data out of China.

But I don't think the data is materially different from what they've described.

Our assumption was, as the virus has made its way west, Italy, Spain, everyone's adopting a shutdown approach.

I'm sure America is going to get there.

And if we do, markets are going to recover.

And we own big, somewhat illiquid positions in the companies that we are shareholders of because of our degree of concentration.

So we could sell everything and then wait for the markets to go down, buy everything back.

There's a lot of frictional costs associated with that.

What if the stock market doesn't decline as much as we think it might?

And what if it declines very briefly and we don't have an opportunity to rebuild stakes in these great businesses we've owned?

We incur a huge amount of tax liabilities because we have big, embedded gains in the companies that we own.

So there are a number of reasons why we just didn't like the idea of selling.

And the hedging is kind of elegant because if nothing happened, we would have lost very little money.

But if what we expected to happen happened, the hedge would become very, very valuable.

We could cash it in.

The more the market went down, the more valuable the hedge becomes.

We could cash it in, hopefully at the bottom, or as close to the bottom, and redeploy the money buying companies that we like.

And that's what we chose to do.

We would have had better results in the short term.

You look at these funds that are dedicated, so -called black swan funds, that all they do is put on these kind of hedges waiting for disaster.

And some of them are up 1 ,000%.

Some of the smaller ones are up 1 ,000 % in the last month or so.

We would have had extraordinary short -term results, but we would have impaired our relationships with companies and management teams.

And I think our results, again, over time, even over the course of the next year or two, may be better than they would have been had we tried the alternative approach.

So those were some of the thoughts that we had.

I appreciate you going into such detail.

How did your staff react when you put the hedge on?

So actually, the way it came down is I had been getting more and more concerned about the coronavirus.

And interestingly, the organization started to think I was losing it, even some of my friends thought I was overreacting.

And that, of course, made me more concerned, because when people I really respect and think I'm being extreme, and I think I'm not every day that goes by without, in effect, shutting down the firm, I felt taking more and more risk.

That may be that much more concerned.

And one Sunday night, I think it was maybe the third week in February, I called an investment team conference call, which I very rarely do.

And I talked through the economic implications of the virus, which I felt very few people were focused on.

And we fairly quickly, with the course of the conversation, the team agreed that this was a reasonable probability of the kind of case that I laid out for what would happen.

And then we spent the time talking about how we would hedge this.

And we kind of came to a group decision that it happens to be a really interesting time in which to hedge credit risk, because credit is sort of at the tightest.

The pricing of credit is at the lowest it's almost ever been.

And so it became a relatively easy decision to put on a large hedge, because the inherent asymmetry was about the most attractive it had ever been.

And that if we were completely wrong about the economic implications of the virus, it would be of no moment.

Very limited downside compared to assets.

I think you only had 21 million or 26 million in total invested.

Yes, although that really understates it.

Credit default swaps are not like options.

So a CDS contract is a commitment to make payments over time.

And we at the peak had $71 billion of notional insurance that cost about an average of 70 basis points per annum.

So about $500 million.

We committed to make $500 million a year in payments for five years.

So that's a $2 .5 billion commitment.

Again, for a $7 .5 billion enterprise, that's not a small number.

And that's why it's something that an individual really can't do.

Right. Banks won't do CDS contracts generally with individuals.

But the way we thought about the risk is there are two forms of risk.

One form of risk is just the premium you're committing to pay.

And the moment you unwind the contract, you stop paying the premium.

And this was one of the few cases in my life where I had a very negative view on where the stock market would go.

And I also had a very good sense of the timing.

I had a very bearish view back in 07 and before of where things were headed in terms of I thought we could be headed for a credit crisis.

I just didn't have a good sense of timing.

Here, I thought the timing was weeks away.

And so that made the commitment to make premium payments a much lower risk commitment.

We were going to have this thing on for five years, let alone one year.

I thought it was worst case we'd be taking it off in 90 days.

So I thought about that as not a $500 million a year risk, but rather we're going to spend $125 million.

Because you would know if you were right in the next 90 days.

That's right. And so I viewed it as $125 million in the context of $7 .5 billion.

It's not even 2 % of assets.

So that seemed not to be an unreasonable risk.

The other risk was that credit spreads tightened.

Because when you go to unwind, the credit spreads go from an average of 70.

And again, it was a mix of both investment grade, where we paid around 50 basis points, and a high yield CDS where we paid about 330 basis points.

But the blended average was around 70 basis points.

But it went from 70 to 50.

We could lose about 100 basis points times the notional amount of the contracts.

We could lose a big number.

Theoretically, we could lose, call, $700 million, which is almost, call it 9 % or so of our assets.

But my view was the probability of credit spreads tightening.

And again, it's easiest to look at it by blending the cost of high yield and investment grade.

It really is misleading.

So the investment grade CDS was trading around 50.

The previous all -time tightest levels were just under 40 basis points.

So a 10 basis point tightening.

And I could not see a scenario in which the coronavirus would lead to a tightening of credit spreads.

And the all -time tight levels were achieved at a time that there were artificial subsidies that caused credit to be very tight.

There were these things called synthetic CDOs.

And bond insurers were writing synthetic CDOs creating this huge supply of cheap, very inexpensive spreads.

And that had really gone away during the credit crisis.

So it was really a one -way bet.

And the biggest risk was how long we'd have it on.

And we ended up spending 27 million on premium because we built a $70 billion CDS position beginning in the third week of February.

You probably had it completely on by the early first few days of March.

And we started taking it off March 12 when it hit about $2 .6 billion in value.

And it took us, call it 10 days to unwind the whole thing just because of the size of the position.

But so the average life of the position is very small.

So we ended up spending very, very little.

But it's a little unfair to say we invested 27 to make $2 .5 billion, $2 .6 billion.

This is just the headline numbers.

I'm glad you explained that behind the scenes.

That's really insightful.

Thank you. Walk me through some of the economic implications you see today.

Like, we can't do this for 18 months.

Are we going to enter a depression?

Like, how do you handicap that?

How do you see the risk?

Sure. So my concern about the virus, I was less concerned about the health implications because I thought it would affect relatively small percentages of people and, for the most part, people who are already sick.

Obviously, every life is an important life, particularly to the close friends and family.

But the economic implications I thought could be much more harmful even than the health implications.

And that's because the only way to stop a virus is to shut down the economy.

And I had never, in my lifetime, seen what an intended shutdown of an economy looked like.

And as that rolls around the globe, what are the implications?

But I think the difference between a depression and an intended but short -term shutdown, if it's managed correctly, the economic implications are nothing like the Great Depression.

So I am not concerned about a Great Depression -like event taking place really for a couple reasons.

One, that this is sort of an intended, somewhat artificial, temporary shutdown, not driven by economic reasons but driven by health -related reasons just to stop the spread of the virus.

So that's a very important distinction.

The other thing is that governments around the world have taken this incredibly seriously, not just the health implications but the economic implications.

And the government is basically stepping in to provide economic support to everything from a low -wage or unemployed worker to businesses as a bridge to get us through the crisis.

And the bridge doesn't need to last 18 months because the entire globe is basically in shutdown.

So I think we can start reopening this country beginning June -type timeframe.

And the other thing that's going on is you have the entire world working on solutions to the problem.

Just yesterday I read a piece saying there are 70 different vaccine -related and therapeutic trials that are underway as we speak.

And so you have the world's best global biotechnology pharma companies looking for solutions.

And so I think that increases the probability that there's a therapeutic that is available sooner rather than later and that there's a safe vaccine within a reasonable period of time.

So that makes the economic disruption a shorter period of time.

The negative, however, is that small businesses that certainly can get destroyed in a several -month shutdown and it takes time for them to rebuild, think the small restaurant, the small corner store.

And there is a lot of friction and disruption.

But I do think that governments are going to do everything they can, and communities are going to do everything they can, to help rebuild.

If you think about New York City, I think the moment that people can go out to eat again, going out to eat in New York City is sort of part of what it means to live in New York.

Restaurants are going to be reopening.

I actually had an idea.

Maybe we start a venture or private equity fund to back the reopening of restaurants in New York, and you can see that happening in cities around the country.

And it could be, one, a good investment and two, good for the community.

And so I think you're going to see a lot of some combination of for -profit and philanthropic -related investment to help restart a lot of small businesses.

So I don't think it's, as I say, a V -shaped recovery.

I think it's a little bit slower coming out of this.

But there is an end date where we're back to normal, I think, within a reasonable period of time.

And back to normal could be a year.

It could be 18 months, but there is an end date.

Whereas a depression, you go back to the 1930s, it's sort of unending.

How does this affect real estate?

Because a lot of people aren't paying rent right now.

Commercial property values are probably affected.

Walk me through how you think of that.

Sure. So again, it's a very similar kind of analysis.

If you own a street retail in New York City, you're probably not getting rent today.

But as soon as your tenant's going to be open and operating, they'll start paying rent again.

I talked to a friend at one of the major real estate private equity firms.

And what they're doing is, in cases of hardship, they're giving tenants up to a several -month kind of holiday, or kind of a rent holiday, where it's really they're deferring the rent.

And my guess is they'll end up spreading it out over time to kind of recover what they didn't collect, at least for commercial tenants.

And maybe they'll give someone who lost their job, for example.

Maybe they'll give that person a little bit more of a break.

Again, it's a temporary business disruption, and then we grow out of it, as opposed to a permanent impairment for the vast majority of the economy.

What would cause you to change your mind on that view?

What's permanent? What's permanent is we're adding a lot of debt to sovereigns, governments, and that's a burden that will exist for a long time.

So that's a negative, and that will hold back somewhat the global economy.

I guess what would cause me to change that view would be, we can't beat back the virus, and we're constantly shutting down the globe.

And I think the way we solve that issue is really just testing.

And there are a lot of testing companies, and just yesterday I learned about this pregnancy -like test that's in sort of an emergency authorization mode where you can prick your finger, and in five minutes find out whether you have antibodies or not.

And I think once you have something like that, we'll be able to see where the virus is, and people can start going back to work.

So I just think technology is going to help a lot here.

The Google, Apple, sort of apps that you have on your phone, that combined with testing, hopefully we can start going back to a more normal life.

The inspiring, I guess, silver lining in this is for the first time ever we're probably all faced with the same problem.

It doesn't matter what country you're in or what race you are, what socioeconomic status you are, the best and the brightest people are gravitating towards working on this.

Yeah, I mean, just the economic motives to coming up with the solution, but I would say more importantly the reputational benefits in order to the person who comes up with the person or company who comes up with the drug that saves us all or the vaccine that saves us all.

And so I think, you know, I talk a lot to scientists as part of my philanthropic work we're doing and we had a call with 35 heads of major institutions and scientific researchers who normally focus on cancer research and basically all of them have redirected their work to coronavirus.

And so you've had this huge migration of talent focused on a global problem and I'm sure the same thing is true in every country.

What industries do you think are going to come out stronger or benefit from this?

Amazon. Amazon, we don't own Amazon, but I do think that, you know, obviously they're going to have the greatest several months in their history, but I do think that they're going to change a lot of behavior of people who used to shop in a normal fashion.

Obviously, you know, some of these video technology companies, cloud -based software companies, will be beneficiaries of this, you know, long term.

Although I will say that pretty much everyone I speak to is completely sick of video conferencing.

And really would like to get...

And actually, this whole work from home thing is not so great because you know, you hear I'm talking to you from the den, you know, I'm hearing, you know, quite beautiful, I hear my wife and baby in the kitchen, mom and dad are constantly walking in and out of the room and there is no break.

You know, one of the nice things psychologically about going to an office is that you go, you focus and then when you come home, it's easier to leave it behind and it's much hard to do that when your office phone is in the TV room.

I definitely relate to that.

How would you handle the bailouts?

Like, is there, who would get what and is there a way that you can think of realistically to direct capital to capable hands and away from just prolonging economic failure or is that not the way that you would handle this or walk me through that?

Sure, look, I think there are businesses that prior to the coronavirus were structurally challenged, you know, think department stores.

So the notion that you'd want to save these businesses, I don't think makes a huge amount of sense to me that you, it makes sense to take taxpayer money and try to save a otherwise dying business.

So think about businesses that are in structural decline.

This would, you know, likely put them out of business but I wouldn't spend any of taxpayer resources on them.

You know, the way that big companies, the only thing that happens when a big company goes through a disruption like this is that the owners, and there isn't quote unquote a government bailout, if you will, is that the owners change, right?

If you're an airline and you run out of cash, what happens is, you know, the bondholders end up becoming, you know, converting into equity, you know, through some kind of either pre -packaged or other restructuring process, they end up being the owners.

And, you know, I am receptive to this notion that you have airlines that have spent billions of dollars buying back stock, you know, why should taxpayers come in and affect, support the shareholders that were beneficiaries of buybacks and had they retained that capital for a rainy day, they wouldn't

need a government bailout.

So that concept to me makes a lot of sense.

And, you know, airplanes are not going to stop flying because airlines go bankrupt.

What will happen is, you know, the owners of the planes, the lessors of the planes and or the bondholders will end up, you know, controlling airlines.

So, you know, if I were making these decisions, I wouldn't, we have scarce resources, I would save the money, you know, for, well, let's put it this way, any capital that was injected into an airline or another business, the government should earn an adequate return on that capital and get equity upside

the business recovers.

Now, I just think that, you know, Boeing needs to be saved, you know, Boeing had issues prior to this, Boeing spent many, many tens of billions of dollars on charity purchases.

I do think, you know, if Buffett doesn't want to, the government shouldn't come in on terms that are more favorable than where Warren Buffett would provide the company with capital, I guess is my point.

And I respect the CEO, recent CEO of Boeing saying he's not going to take money from the government and I don't think he should.

So I don't think the government should be bailing out companies unless it's done on arm's length economic terms.

It shouldn't be free money by any means and we shouldn't be afraid to let companies that are overlevered pre -crisis, you know, file for a pre -packaged reorganization where the creditors end up owning the equity.

That's how the process is supposed to work.

I think it was Munger, Charlie Munger who said capitalism without failure is religion without hell.

He's better with words than I but...

Do you think we'll end up going...

Just the Amazon comment for a second, do you think we'll end up going back to malls or are malls effectively just dead now?

I actually think that people will be that much more desperate for human connection after this experience than they were before.

And the issue with malls, you know, malls are located at the intersection of, you know, very highly trafficked roads.

They've got big parking lots.

They're big physical pieces of real estate.

The problem is that the tenants have not innovated as quickly as the markets have changed.

And the result is you have old line department stores that have been around for a hundred years that haven't sufficiently innovated to attract customers.

And I do think that malls for many communities are public gathering places and they just have to have tenants that are interesting enough to inspire people to come together and, you know, either shop or, you know, be entertained.

And I do think that innovation is happening.

It's just not happened as quickly as, you know, the kind of legacy tenants are dying.

And so that's why malls are challenged.

But I do think that, you know, for every community, having a place where people can come and, you know, gather and have fun and bring their kids, I think, is important.

And so I think the real estate, you know, long term is probably fine.

The problem is the capital cost to take an old line, an old fashioned shopping mall with, you know, Sears and a JCPenney and a Macy's and make it into something that's going to be exciting for the next generation is, you know, wasn't contemplated when they put a mortgage on it that was equal to 80 %

of its value, you know, five years ago.

And so, again, you'll see restructurings where the lender to the mall ends up with the asset, someone entrepreneurial decides, you know, we don't need this much retail, we'll make half of it a hospital, medical facility, office, apartments, and then there'll be this great, you know, food court, restaurant,

entertainment, movie theater, you know, type of thing.

But I do think people will desperately want to go out to have a drink, go to a cafe, go to a restaurant, go to a movie, be entertained, and they'll be desperate to do it as soon as it's safe to do so.

I think one of the byproducts of this is like we feel less like we're a part of something than we used to before, right?

We're less attached.

We're more attached to our family, but less attached to our community, less attached to our sort of city, less attached to our state or country in some ways.

Even though we're all going through this, we're feeling very isolated.

Do you think we come out of this on the other side being more prudent financially with leverage?

Yes, I do think this is a depression era moment in the sense, psychologically, the same way that the generation of people that went through the depression thought very differently about financial leverage, than the generations that came after them.

I think the same thing would be true here, and I think it would be true for corporate America.

Because shareholders are diversified, they generally put pressure on companies to quote -unquote optimize their balance sheets, but optimization is generally designed for the short -term shareholder who has a diversified portfolio of other such companies.

It's not designed for the portfolio of one, i .e.

the board and this management that oversee that company for the benefit of the employees and the other stakeholders.

I think it does lead to an over -leveraging of corporate America.

I think every business has to have capital put aside, if you will, for the rainy day.

The companies that live on edge to kind of maximize their return on equity and then die.

Businesses that will be, the shareholders that will be hurt the most from this period will be the companies that just were too aggressive in the way they financed themselves going into the crisis.

I think that will cause boards to rethink super -aggressive capital structures.

This is like a dream -like opportunity for them in some ways.

You could say with all that cash and prudent leverage and sort of the ability to take on multiple big elephants, if you will.

I think Berkshire, I'm surprised they haven't done anything yet that's visible, but my guess is they've been buying stocks a lot.

Actually, the big opportunity for Berkshire is Berkshire itself, prior to the coronavirus crisis, was a cheap stock in the low 200s.

In the 180s, it's a real bargain.

I would expect Buffett to have, I hope that he's purchased a lot of his own shares and I hope he's deployed capital in other companies as well.

Walk me through how you see Berkshire out the way.

Without hitting price targets or anything, just walk me through how you see the structure of the company and how you view it.

Sure. Berkshire is really principally an insurance company, but half of the intrinsic value of the business is an insurance company that was built beginning with a company called National Indemnity many, many years ago.

I think it was the first insurance company he bought for whatever, $18 million or something like that in the 1960s.

Over time, we built the most profitable, best capitalized, unique business.

For certain kinds of insurance, Berkshire is the only place you can call.

I don't like to use the word monopoly, but it's a very unique, very profitable business.

He structured it in a way, both legislatively, being an Omaha -based insurer where he has the flux in light of the diversified nature of the overall company, that unlike many insurance companies that have to keep their assets in something very close to risk -free or very highly rated corporate bonds,

he deploys the flow from the insurance business and is allowed to invest in equities.

That's generally an enormous advantage, but in this interest rate environment, an even greater advantage.

You have, obviously, the most advantaged insurance company in the world that has grown its insurance float over time at a nice higher single -digit, something like an 8 % compounded rate over time.

The cost of that insurance float has been negative, meaning most insurance companies lose money on insurance and make money and float.

In this interest rate environment, they lose money on insurance, and they can't earn any money on investing their float.

Buffett is really making money on both sides.

That's where someone should really spend a lot of their time if they want to understand the company.

Then in the asset side of the insurance company are really the equities that you read about, Apple and so on.

The rest of Berkshire is a collection of wholly owned or 80 % owned subsidiaries like the Burlington Northern Railroad, Precision Cast Parts, businesses that Buffett has collected over time for their durability and quality.

It's a mixed bag. The biggest ones generally are the highest quality businesses, offering a lot of stability.

I think the utility part of his operation, the railroad, very durable, big profitable businesses.

Then businesses he's just collected and held onto over many, many years, some of which have been great and remain great businesses like C's Canity.

To go back and read the Berkshire Hathaway annual reports, he was glowing about the World Book Encyclopedia and other such businesses that have disappeared.

Dexter Shoe, he was skipping into work thinking about the Dexter Shoe company, the worst investment probably he ever made.

Even Mr. Buffett makes mistakes which is instructive in and of itself.

The good news is when you buy things as opposed to short things, your mistakes become smaller.

A decent chunk of the business is industrial company, small pieces in retail and other smaller manufacturing and other diversified businesses.

The large majority is a unique and extremely profitable insurance business.

Do you see this as a long -term holding or is it a proxy for cash?

How do you think about that?

I think it's a really cheap interesting stock run by the best investor in the world.

We think Buffett's taken an approach toward all of his businesses that's extremely hands -off.

That's worked very well for many of those companies but other parts of the portfolio in our view underperform the competition in terms of their profitability or growth, etc.

I think as the generational change happens at Berkshire, it appears to us the next generation is going to be much more focused on extracting the most from the businesses Berkshire owns.

Just looking at the Burlington Northern Railroad, we know a lot about railroads by virtue of our experience at Canadian Pacific.

It's the largest, it should be the most profitable, highest margin railroad in the world and it's not.

I think a bit of that warrants very reluctance to get too actively involved with businesses that he owns.

But I do think that over time, that gets solved.

You have this very well -capitalized company controlled by great investor, CEO and a portfolio of businesses, many of which have opportunities for improvement.

I think that's interesting.

I don't know how long we're going to own it.

We always retain the right if we find something better to do with our money to sell something we own.

But in the meantime, I think we've bought more at lower prices in the last few weeks.

What are some of the lessons that you've learned over the years from Warren Buffett and Charlie Munger?

A big part of my education as an investor came from reading everything Buffett's written, watching from speak.

He came to Harvard Business School when I was a student there.

One of the most influential things he said to me, and I say to me because it was me and the other 300 people in the audience, was if you want to be successful, all you need to do is look around the room and think about the classmate or classmates you most admire and what qualities they have and just

decide to adopt those qualities.

And if you do that, your chances of being successful go up enormously.

And it was incredible advice.

His basic point was if you want to play the violin and you're not Yo -Yo Ma and you haven't practiced your entire life, it's going to be hard to pick up the violin tomorrow or cello tomorrow and be a virtuoso.

But character and the qualities that enable you to be successful in business, hard work, discipline, returning phone calls promptly after you receive them, showing up at meetings on time, being honest and straightforward, fair -mindedness.

These are all things you can have.

If you don't already have them, you can have them tomorrow by just deciding that you're going to adopt these characteristics.

I thought that was a very powerful thing to say.

That was one. And then just how to think about investing in the stock market and all of the Ben Graham -isms that he's reinterpreted and presented, all that stuff is super helpful.

And just think, even the way he built his business over time, Buffett started out in the mid -1950s as an activist hedge fund manager.

He had a partnership.

He charged a 25 % incentive fee over a 6 % return.

And he was quite active.

He would buy stakes in businesses.

He would push for liquidations of companies that had large security portfolios relative to the market value of their business.

He was really an activist investor.

And then 15 years in, he had 100 million under management.

I think 25 million of it was his.

And he wrote his investors a letter and said, okay, you can have all your money back, or you can have stock in this crappy textile company.

And I'm going to take stock in the textile company, but I'm going to be a little less motivated than what's in the past.

I made a lot of money.

Markets aren't that attractive.

I can't promise anything, but happy to have you.

If you want to go long, take your money if you want your money back.

And as I like to say, some number of people, Larry Tisch apparently withdrew $400 ,000 back then from the partnership, which today would be $400 million, probably more, probably $4 billion.

And some people rolled their capital.

And what's interesting is Buffett gave up the 25 % share of the profits for the right to run what he called a crappy textile company with a $40 million market cap for a $100 ,000 salary.

But what he got was stability, permanency of capital.

And that was not lost on me.

So our business plan was basically to do the same thing over time.

And we're largely there today.

Does that mean you're going to waive your fees?

I'm not going to waive the fees.

No current plans to do that.

Unlike Buffett, who runs a one -person operation and has an accountant and a couple of assistants, the way we've built our business is, I've hired a lot of super talented, highly compensated people.

So actually charging fees enables me to incentivize and pay the people I work with.

But yes, Buffett is a better bargain than we are because we do charge fees.

Oh, wait. I want to get to that in a second.

But where do you think Pershing Square will be in 10 years?

I think in 10 years, we now have a pretty clear path.

The vast majority of our capital today is 85 % over time that will be 9 the year 95.

Or eventually 100 % of our capital will be in a public enterprise that we're the largest shareholder of.

We own 22 % of our public company Pershing Square Holdings today.

And our goal is to compound Pershing Square Holdings at a high rate over a long period of time by investing in the kind of businesses we invest in today.

And over time we'll become bigger shareholders of these kinds of companies.

We'll be a very long duration holder.

I think we'll do similar things to the things that we do now and hopefully we'll do them better.

But I think in terms of ambition, the goal is to have one of the best investment records ever.

Buffett's got a 55 year or 16 year advantage.

And Pershing has been in business for 16 years, so we've got a lot of work to do.

Do you think you'll ever get into buying complete companies?

Yes, I think that's possible.

Or at least controlling interests in companies.

Bill, what would you do differently if you were running the SEC in detail?

I would lean on short sellers to be sources to help me determine where my...

Look, I think the SEC has generally done a very good job and they have a very difficult job and they have limited resources, so let's start there.

My one area of disappointment with the SEC having been on very rare occasion, a short seller, is that how slow it takes the SEC to come to conclusions about companies operating illegally or irresponsibly or fraudulently.

I'd like to fix that.

You know, getting back to my Herbalife example before, we went public and said, among other things, about Herbalife, that they were operating in China illegally because China does not allow multilevel marketing companies to operate, but they were using the same compensation scheme, the same methodology,

but they were doing it in a sort of hidden, misguided way, and they inaccurately described how they were doing this in their public files.

And we made a two -hour public presentation about this, I don't know, four years ago, something like that.

The company comes out and says, you know, Pershing again is materially misleading, investors accuses us of all kinds of market manipulation, et cetera.

In the last six months, and you can Google it, Herbalife paid it, settled with the SEC for $20 million for misleadingly describing their China business and their public files, because actually the compensation scheme is precisely the same and the business model is the same as their core business in the United

States. It's exactly what we said years ago about the company.

And my disappointments are one, it took the SEC however many years to come to the same conclusion that we had identified and they slapped them on the wrist with a $20 million fine that investors could ignore.

And so, yes, I have been disappointed by, you know, Herbalife, by the way, is a pyramid scheme, okay?

It's continuing to operate and cause enormous harm.

The stock's actually not up that much from the price we shorted it.

We shorted it at split adjusted $23 a share and today it's probably $30 or something like that.

So it's not been a great investment for anyone if they had bought the stock and we made our presentation.

But I do think it's a company that's causing enormous harm and the government, you know, the FTC launched an investigation shortly after our presentation.

It took them a couple of years and they settled with the company for $200 million and let them continue to operate.

And now the SEC has, you know, slapped them on the wrist again and it does seem like if you're a well capitalized company backed by, you know, a very large shareholder and you've got a lot of good lawyers, you can outwit the SEC and cause harm.

And so that is my biggest frustration with the SEC.

What would I do differently?

I would pay much more careful attention to short sellers and I would work more quickly and be more aggressive with companies that are causing harm.

I like that there's people in you in the world that do this, but I also simultaneously question why you do it.

Like the return on brain power or energy expended for you is so small.

Yeah, so I'm short selling.

I've foresworn short selling for the reason you described.

I mean, the calculus, I think I invented this phrase that you seem to be adopting, but I called it return on invested brain damage.

Yeah, there you go.

And the return on invested brain damage for short selling is quite challenging and public short selling is the worst because, you know, unfortunately if you go public and say a company is violating the law, everyone hates you.

You know, the shareholders hate you, the management hates you, the employees hate you, you have no friends.

And that's why I view it as a kind of a noble pursuit and I admire, you know, the muddy waters and the gym channoses when they come out, you know, with detailed work about, you know, problematic businesses.

I'm less interested in companies that are overvalued.

That, I don't think, does so much service to the world to point out whether you believe a company is overvalued or not.

It's just systemically like this shouldn't exist.

Yeah, but identifying fraud is a very important thing for markets and short sellers provide a very valuable service.

And, you know, generally when there are markets that you can't short, prices get to extremes and investors lose lots of money.

You know, the housing market was a market that you could not short until the invention of synthetic CEOs and some, you know, it was really, you know, the John Paulson trade, if you will, was he was just going short, the housing market.

And the housing market was allowed to get to extremes because there were no short sellers.

And there were no one had any incentive to blow the whistle on overvaluation.

The market you can't short today is basically, or difficult to short today is the venture backed market.

And that's why you're going to see, that's why the we works in the world are allowed to happen and billions of dollars of money gets wasted.

So I do think short sellers perform a very valuable service.

Now that I'm 53 and I just had a baby, and, you know, in the life's too short kind of point of view, you know, we're done with public short selling.

It's just not our thing anymore.

But I'm pleased to see other people doing it.

I do think it is a public good.

Do you think that there's a problem with just large institutions, like did the CDC and the WHO fail us in this current pandemic?

And that the problem is the institutions and not the people?

Or how do you think about that?

You know, what's interesting about this period is it's really been education in the, what's good about living in a, you know, democracy.

And what's bad about the time it came to democracy.

So you look at how China, now the negatives of China is they, you know, the government officials, the local government officials were too afraid to go public with what was going on.

Or when they did, they got, you know, whether you were a doctor or a public official, you got, you know, shut down by the system.

You know, that, that allowed the virus to propagate to have became a serious issue in China.

The good news is the dictatorship allowed them to very aggressively, you know, shut down the virus.

You've watched, you know, I made my public case for a countrywide shutdown and the president instead sort of allowed the states to take the lead.

And in governor by governor, one by one, we got to almost to the place where we should have, and it took instead of 24 hours, it's taken, you know, 30 days or 45 days.

You know, had we entered into a shutdown, you know, March one for 30 days, the outcome would have been meaningfully different than, you know, starting on March 19th and rolling out over, you know, 30 days.

And we're not even, you know, we're still not in a countrywide shutdown and the degrees of shutdown are different in different places.

So I do think it's, it shows that, you know, the wonderful things about a democracy and that, you know, people are generally not afraid to come public with issues, and we have a very well functioning media that's not afraid to surface problems.

You know, the downside is we could not, we did not take the extreme measures that China took as quickly as they did.

And I wish we had. So, you know, that's sort of the up -down of it.

But, you know, the CDC, I think, you know, I would have thought they would have taken a much more forward leaning public approach here, and it's just not clear what role the CDC has played.

You know, you see the coronavirus team led by the vice president, Dr.

Fauci, Dr. Birx, et cetera, you know, it seemed like capable people.

But, you know, the CDC has not been at least particularly visible as far as I've seen in making recommendations.

You know, where was the CDC in terms of recommending a national shutdown, et cetera?

I didn't, unless I missed it, I didn't see it.

Yeah, I think like the post hoc on this is going to be super interesting in terms of how they look at it.

You mentioned you have four kids, I think, right?

And you're 53. What are the lessons that you, and you have quite the age range, right?

So you go from one to how old's the oldest?

22. What lessons do you try to teach your kids or instill in your kids?

So, you know, it's a lot of the obvious ones, you know, hard work pays off, education is really important, treat other people the way you want to be treated yourself, from a basic, perhaps somewhat biblical type things.

You know, persistence.

You know, we started the interview asking what I learned from my parents and both mom and dad are super persistent and you recognize the wonderful qualities of persistence.

And then when you live with your parents for six weeks, there are sometimes negative associated with those qualities, but you try to teach your kids about that, try to teach your kids about the value of money and, you know, saving and, you know, minimizing waste.

And then also, you know, more difficult topic is, you know, trying to teach kids about nutrition.

That's a very high risk subject to talk about.

What's your guilty pleasure?

Do you have chocolate in the house?

Yeah. I am a big dark chocolate fan.

I like this one. It's called endangered species, 88%.

And it's amazing. 88 % just seems too good to be true.

It's sort of very, very good.

So that's definitely on my list.

That's my weakness to you.

I'm going to run out and get some of that.

Bill, thank you so much for your time.

This has been amazing.

Yeah. I enjoyed it.

I really appreciate it.

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[比尔·阿克曼：成功是应对失败的能力，而非直线上升的轨迹]-[#82 Bill Ackman: Getting Back Up]

📋 Summary

成功并非直线：比尔·阿克曼的逆境哲学与投资智慧

从父母那里学到的坚持与回馈

应对失败的具体策略：一步一个脚印

投资哲学：时间套利与深度研究

疫情下的决策与未来展望

🎯Key Sentences

📝Key Phrases

📖 Transcript