Bill Ackman (Trades, Portfolio) is the founder and CEO of Pershing Square Capital, an investment manager known for its contrarian and activist strategies. In recent years, Ackman has been in the news for all the wrong reasons, including a disastrous bet on Valeant between 2015 and 2017 and the failure of a well-publicized short-side play on Herbalife (NYSE:HLF).
In the past year, however, Ackman has enjoyed somewhat of a renaissance, with Pershing posting returns of 31% for 2019 as of July. In an April 2013 interview with Reuters, Ackman outlined his investment philosophy.
Investing is a balance between confidence and humility
Successful investing requires a lot of different attributes: analytical thinking, emotional fortitude and patience, to name a few. However, being self-confident is equally as important, in Ackman's view:
"As a general rule, if we conclude that we're wrong, or we find new information [we will sell]. The best investments are the ones where we're confident we're right, and everyone else is wrong. I've been accused recently of being arrogant, among other things. And there's a difference between arrogance and confidence. If you're arrogant in investing, you're going to get killed. If you're not confident you'll never make an investment. So you have to do a sufficient amount of work to be confident enough to have the conviction to do something that's contrarian."
Ackman then used the example of General Growth Properties, one of Pershing's biggest wins, to illustrate the point:
"We bought the stock of a soon-to-be-bankrupt shopping mall company during the financial crisis, at pennies per share. You have to be willing to look silly when you do something like that. General Growth [Properties] stock is up ninety-fold since our original investment. We had confidence. But you also have to be humble, and you have to recognise when there are new facts you hadn't considered that are inconsistent with your thesis."
When Ackman began buying General Growth, he probably did look a little crazy. Regardless, we should not underestimate the pressure that is put on investors to conform to what the crowd considers "reasonable." Only by understanding it can investors learn to really think for themselves.
Missing out on Mastercard
Ackman was asked about what mistakes he had made recently. The interview took place before both Valeant and Herbalife turned on Pershing Square, so in retrospect, the question seems somewhat prophetic. Ackman gave the example of Mastercard (NYSE:MA) as a company that he had the opportunity to invest in, but passed on:
"I was asked previously by a business school student 'what's the single best business in the world?' and I said that if you could own a royalty on people spending money like Visa or Mastercard, that's the greatest business in the world. If that ever became a public company you would want to buy that company. Well, it became a public company. We couldn't get comfortable with the regulatory risk - there was an outstanding antitrust litigation relating to monopolistic practices of Visa, Mastercard."
This example illustrates the difficulties inherent in risk management and portfolio construction. Pershing is known for its large, concentrated bets (which has arguably not served it well, all things considered). This strategy limited Ackman's ability to go in on Mastercard:
"And when you have a strategy where you put in 10%, 15%-plus of your assets into any one investment, you can't take even a very small risk of a catastrophic outcome. And so we passed on Mastercard, and it's been an incredible investment. That's a big miss. Well, it's not clear - did we overestimate the regulatory risk or did it just work out in a reasonable way? As part of a 50-stock portfolio, we would have bought it. As part of a 10-stock portfolio, we couldn't do it."
Disclosure: The author owns no stocks mentioned.
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This article first appeared on GuruFocus.