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Bill Ackman's Pershing Square makes big bet on Warren Buffett's Berkshire Hathaway

Bill Ackman’s Pershing Square holdings snapped up a huge stake in Warren Buffett’s Berkshire Hathaway (BRK-B), according to a 13-F regulatory filing.

As of the second quarter ended June 30, Pershing Square owned 3.51 million shares of Berkshire Hathaway’s B shares, a position that would be worth $686 million based on Wednesday’s close.

The new position represents 12% of Pershing Square’s net asset value (NAV), Ackman said in a letter earlier this month before disclosing the name of the stock. The stake in Berkshire Hathaway is not an activist position.

At the 13-D Active-Passive Investor Summit in April, Ackman attributed his major turnaround in performance this year to Buffett. Pershing Square has gained 47.6% year-to-date through August 6, far outpacing the S&P 500 and the average hedge fund’s 8% gain, according to HFRI’s index.

At the conference, Ackman said "one of the most instructive things" from his career has been reading the legendary investor’s letters from the Buffett Partnership, the fund Buffett ran before Berkshire Hathaway, and became a world-class authority on making money.

In May 1969, after several years of outperformance, Buffett told his investors that he would close the partnership, pointing to an investing environment that had become "more negative and frustrating."

In the letter, he offered the partners the option to take their cash out, or keep their investment for shares in the textile company Berkshire Hathaway.

William 'Bill' Ackman, CEO and Portfolio Manager of Pershing Square Capital Management, speaks during the Sohn Investment Conference in New York City, U.S., May 8, 2017. REUTERS/Brendan McDermid
William 'Bill' Ackman, CEO and Portfolio Manager of Pershing Square Capital Management, speaks during the Sohn Investment Conference in New York City, U.S., May 8, 2017. REUTERS/Brendan McDermid

"A bunch of people wanted cash and spent another 50 years seeing their therapists for one of the dumber decisions that they made," Ackman told the crowd.

He added that it was "a pretty interesting decision" for Buffett to transition from managing a hedge fund to running a publicly-traded company.

"And he's done quite well, obviously. Since 1969, Berkshire is one of the greatest investments of all time," Ackman said.

"I think it's instructive. And, I think what Mr. Buffett realized in 1969 is that being a longterm investor with short-dated capital is just ultimately going to lead to a bad outcome at some point in time,” the hedge fund manager said.

‘Rough patch’

Ackman explained that like Buffett, the mission at Pershing Square is to have a permanent capital structure. He said they took a step at that direction, launching a publicly-traded fund in 2014 with the long-term plan to have a majority of capital in that vehicle.

He attributed a string of poor performance at Pershing Square to a couple of bad investments. Those mistakes that led to significant investor redemptions, or what Ackman calls a "rough patch."

Pershing Square Holdings, the public vehicle, is now 80% of the firm's capital, Ackman said at the conference.

He explained that “part of the reason we made that mistake is when you start as a hedge fund manager you start as an investor, particularly if you're an activist investor. When you get to $20 billion in assets, you become the CEO of an asset management business, something I never really aspired to be.”

At that size, investors will "appropriately" take a piece of your time.

"Because Mr. Smith who gave you $250 million wants to say, 'Hello,” Ackman said.

“Those little breaks over the course of the day really interfere with your ability to dig in, read a 10K, etcetera,” he added. “We just made the decision we are going to stop marketing. We are certainly going to answer those calls and keep our investors informed."

He said he's returned to a strategy that had been successful, investing in simple, predictable, cashflow positive companies.

Some of Pershing Square’s stock investments include Restaurant Brands International (QSR), Lowe's (LOW), Chipotle (CMG), Starbucks (SBUX), to name a few.

"I guess the way to think about it is — it's very hard to lose money by buying great businesses if you pay a fair price," Ackman said. "For a while there, we forgot that our main job was to make money, so we woke up, and now we're back in the money making business."

Elsewhere, during the second quarter, Pershing Square exited its stake in human resources software and services provider Automatic Data Processing (ADP) after the stock generated a shareholder return, including dividends, of 51% in the two years the fund owned it.

Pershing Square also dropped its position in United Technologies (UTX) during the quarter. Ackman had opposed the planned merger between United Technologies and defense contractor Raytheon.

Julia La Roche is a finance reporter at Yahoo Finance. Follow her on Twitter.