Let’s take an in-depth examination at the Bill Ackman investing strategy at his hedge fund. Pershing Square Capital
He is known to be an activist/value investor which means he normally invest in companies well stablished with great moats and normally buys a stake big enough to be able to have a word in the decision making of the company, that is an activist investor.
This is his portfolio as late 2023.
Now, it is no secret that most Hedge funds and Private equity funds earn a lot of their money by charging management fees over their AUM (Assets under management).
So a lot of them don’t really care if the have any alpha/outperformance, they just go for the safe route, and they still cash in.
Thats why there is some controversial takes on the matter but in the specific case of Bill Ackman, he employs a strategy that consists of the following:
Bill Ackman Investing Strategy
He is indeed investing in this already stablished, well known, matured companies, which as we already talked about would imply that much of their growth in terms of Revenue and Stock price are already gone.
BUT…
He exploits the inefficiencies of the market, the fear, the chaos, to buy those businesses when the stocks of those companies are being punished.
What a wonderful strategy!!
You get awesome companies, with great branding, great cashflow, strong balance sheets. All with a 50% discount? COUNT ME IN!
He had bought Starbucks SBUX 0.00%↑ a couple of times to add to his portfolio. But he does it mostly when he sees this market discrepancies punishing the stock.
Take for example his investment in Chipotle- CMG 0.00%↑.
Again, we are taking about a fast food restaurant, yes it has good growth numbers, but that is not the whole story.
Back in 2015 there was a Norovirus outbreak in 2 Chipotle locations, which caused the first quarter same-store sales to plummet by 30% and the stock of course followed by a 40% drop.
Showcasing how markets react guided by emotions, in this case fear. Think about it, the profit margins, the franchise system, the revenue, etc. Did all of that really lost 40% of its value? Of course not.
That is always a clear example of irrational market behavior. Short term sighted.
So, what did Bill did? He bought!
Why? Well, he understood this was an opportunity as market participants were overreacting to the news, he saw a great company with great cashflow and a great product, being discounted by 40% over something that could be corrected.
What was the result of that decision? Well, he still holds Chipotle stock, in fact is now his main portfolio holding.
Bill Ackman investing while hell is coming
The controversy of Bill investing through 2020 – “Covid 19” pandemic
In March of 2020 when markets were in full sell off mode, crashing tremendously fast in the very short span of about 3 weeks.
It was about that time that Bill Ackman went on CNBC to be interviewed about his view on the economy and how covid could have an impact on it and of course the stock market.
He went on to say that he had a feeling that “Hell is coming”, that stocks like Hilton HLT 0.00%↑ (which he owned) could possibly even go to zero $0.
Basically a very dark outlook on the economy and on the full Covid-19 situation. Ok but what is the big deal? It was that over the next couple of months it was known that at the time he was saying taton CNBC his fund Pershing Square was buying!
It was buying Hilton HLT 0.00%↑ , Lowes LOW 0.00%↑ , Restaurant Brands QSR 0.00%↑ , etc.
That was the controversy, it was seen as market manipulation, spreading fear so he could continue buying at discounted prices. Then again, it probably was his honest opinion that “Hell was coming”, but why couldn’t he acknowledge in full disclosure he was buying too!?
I`ll let you the reader make your own conclusion.
The last piece of the Bill Ackman investing strategy
The way Bill invest is pretty simple and straightforward if you think about it.
He buys great companies when their stock is being punished due to certain short-term problem that the company is facing, or even no problem at all but the stock is still falling.
We could say another edge he has when investing is his long-term approach, which allows him to buy and hold great companies for couple of years and reduce the hedge fund turnover.
But there is a missing piece to his investment strategy and that is his hedging.
Pershing is mainly a long equity fund. Which in simple terms means it buys stocks. But a small part of the fund is sometimes invested in shorting stocks, which means it will profit if certain stock price falls.
Now this is not a big part of the strategy and in fact after some unsuccessful and costly short trades, like the one he had with Herbalife.
He made it so public and controversial, that billionaire Carl Icahn took the other side of the trade buying Herbalife stock.
What he has been doing in recent years is buy “insurance” for his portfolio. The way he does that is by using instruments called “Credit Default Swaps” or CDS.
Then he pays a premium to purchase those just like you would do to an insurance. The profit is made depending on what the underlying asset tied to the CDS does.
Bill Ackman Hedging Strategy
In February 2020 as Covid 19 started to intensify, Bill bought some credit default swaps on high yield bonds.
His thesis was that if Covid would get worse around the world (as it did) and affect greatly the economy the “credit risk” would of course increase. As spreads would increase his position the would be in a hefty profit.
This he did not to just bet against the economy and profit, but to hedge his 6-billion-dollar portfolio of stock holdings, as he mentioned he was considering just selling everything and going 100% cash.
He thought would be a better idea to hedge his portfolio and that was the strategy he employed. Just one month later with the fastest sell off that occurred in March 2020, his hedge was already netting $2.6 Billion in profits.
Which he proceeded to cash out and use that profits to reinvest in his main stock holdings (Hilton, Lowes, Restaurant brands, etc.) when the stocks were being the most punished.
He perfectly used the hedge, having a hefty amount of cash, when it was most needed.
That of course made one of the best trades of his entire career as he paid around $27 million in premium for the “CDS.”
Not too bad, huh?
Final thoughts
Bill Ackman investing strategy is something to study, he has a concentrated portfolio of 6-10 stocks at a time.
He is focused on buying and holding, and normally likes to take action when the stock price of some great company is being destroyed in the markets for a short-term spur of fear.
Lastly i think he enjoys the macroeconomic analysis of the economy to place complex and more sophisticated “bets” with the purpose of hedging the portfolio.
One of the great investors out there! Thanks for the lessons, Bill!
Let me know in the comments if there are any specific investors you would like to learn about
Take care!
Zifush