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 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
had to apply it to myself and certainly a few times.
Hello and welcome. I'm Shane parish and you're listening to the knowledge project a podcast dedicated to mastering the best of what other people have already figured out this podcast center website FS dot blog help. You better understand yourself in the world around you by exploring the methods ideas and mental models from some of the most incredible people in the world if you
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Before we get to Today's show a disclaimer, you'll see why that is glamour is necessary after the disclaimer shame perishes, the CEO of Farnam Street Media all opinions expressed by me and podcast guests are solely their own opinions and do not reflect the opinion of Farnam Street Media or its parent company or its Affiliates. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions or anything else shame.
Infernum Street or friends of Shane May maintain positions in Securities discussed in this podcast, neither Farnam Street nor its Affiliates and or subsidiaries warrant completeness or accuracy of the opinions expressed herein, and they should not be relied upon as such. 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 Pershing Square Capital Management in this in-depth
Our view 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.
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maintain all by yourself without the need to hire expensive developers. So if you've got an app or website idea where you're just ready for a change of pace from your current agency let the team at 80/20 show you how no code can accelerate your business check them out at 80/20 dot Inc. That's 8 0 2 0 dot Inc Bellows. 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.
My parents because I've been living with them now for I think about six weeks and haven't done that for a good 30 years. So it is an interesting time to talk about lessons learned from my parents. But 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
I think that's a big takeaway and Mom and Dad you're a hard-working motivated educated people hike Ambitions for their kids always talked about setting an example. Well, there are a lot of things my parents learn about philanthropy. I think of philanthropy is something that is not genetic. It is learned and something that my dad reinforced pretty much from the time. I was a kid.
How do you think about the role of giving back?
I think the easiest way to think about it one of the more influential classes at 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 as 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. Where are you born in New York City to you know, well educated.
It 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 for the perspective of not knowing where you're going to end up and 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
return the favor. That's 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
so I think one of my biggest drivers from the time I was a kid was Independence 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 live the life. I wanted to live and so that's been a huge.
Driver,
you've come back from failure or at least the brink of disaster 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 faze 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 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 again certainly a few times and 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 had a partner who is 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 everyday, 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 whole 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 never going to get there. But if you don't focus on the peak and just focus on one step at a time.
Making progress eventually as the week's 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 a I would say more emotional or irrational 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.
Lee 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 if I go to speak it's you know Business Schools you go to speak at Harvard Business School and you're in front of a 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 job.
They have great recommendations from their teachers and they have never failed to go to Harvard Business School and they're 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 got to Harvard Business School or pick your favorite top business or law school has not had to deal with failure and that is the determined I think of success you look at Elan 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 is success means it's success means you have a very good ability to deal with inevitable failure mistakes and the 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 might sort of Life trajectory was yeah. I did well in high school went to a good college.
From there good work experience Harvard Business School started my own hedge fund with a partner. We had five years of really incredible success and then some challenges and then success and then challenges and it's just sort of the rhythm of being a concentrated investors certainly and also the Rhythm of Life and I just think you just have to
Stay same 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 challenged, you know business reversal. I used to go for a walk every night with a good friend, you know around Manhattan go walk to the Hudson River.
we talked and I was just nice knowing, you know, a supportive friend was looking out for me 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 enjoying what I do and also
Kind of reversal we're talking about here is very very different than the kind of reversal. Someone experiences for may lose their job loses their job and have no form of economic support or they have a you know, a very very serious illness that threatens their existence. So in my case, you know 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 that.
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 to support the 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. We are losing money on a big investment is disappointing, but it happened it was
s with challenges in my perhaps correlated with challenges in my personal life it is it can be very distracting to be contemplating whether you're 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
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 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 of always been a good sleeper so that
That helps 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 I play tennis just in addition to a workout. It allows your mind. It's almost a form of meditation for me and that he completely takes me out of whatever work-related issues are on my mind and then I've learned a lot about nutrition over the last decade or so that I think helped.
It may be 10 to 15 years and I had a completely I thought wrong idea of
nutrition. I would say until more recently. He'll walk me through that. What are you what do you think now? What I
think now is one start with I think sugar is poison. So minimizing your sugar consumption. I think helps tremendously. I also think for me personally, I think everyone is 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 eating real foods as opposed to foods that come out, you know, anything 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 you know Meat and Fish and I've really done my best to cut back on sugar consumption and in carbohydrates
And that's sort of me, you know sort of well, I feel better. I think 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, you know for my father's side of the family. Let's say and I feel like I finally 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 three meals a day kind of guy or you
Called a or
become a bit of an interim faster, you know, so I generally don't eat before noon and I usually finish dinner by around 8:00. I'll have nuts for snacks occasionally, but not you know, that's about it.
And do you have a normal bed time routine or is it like you going to bed whenever or are you like you start winding down at a certain time? Like what does that look like?
Yeah, read a lot in the evening spent a lot of time with Nary in the evenings occasionally watch a movie case.
It'll stay up and watch something interesting but no no formal
routine. What's the last movie you watch that you loved?
I watched a series on Netflix a four part series called unorthodox 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.
And very well acted in 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 Wall Street Journal Financial Times, New York Times Economist Fortune Forbes grants interest rate Observer and beginning sort of
like a deeper into coronavirus I started using Twitter actually as a news feed and found it to be very very helpful and interesting almost having the experience of reading the news a couple days before you read the news in 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 and though I'm starting to understand the benefits. So I'm a late but sort of recent adopter of finding more interesting curated new 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 I'm have some particular access to some inside secretive news source, that's valuable. There are people that I talk to that. I talked to for perspective on things like the economy and business just people business leader type people that I respect in compare notes with 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 of you know reading
Basic media Financial Times columnist Atlantic New Yorker,
how do you search your investment ideas? Like where did 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
Not many ideas are sourced by members of the team and my roll over time has become one 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 call transcripts work that I do the 80% work a lot of that will involve conversations with experts to understand Nature's of businesses. And that's work that's partly done by other members of the team and then the team overall discusses whether something you merits inclusion in the portfolio. So some combination of a couple of people work very very hard and voted a lot at the last, you know, perhaps a couple of months looking.
Idea one person myself that's spent not nearly as much time but knows enough to be dangerous and then another call it for 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 certainty. We don't do more work than anyone else. So I wouldn't 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 Joey to make a decision. So the
Of concentration the benefits of being a long-term owner of companies is there isn't we might add one or two new ideas a year, which means we can have we have the 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 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 in 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 heads 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 then it was really an hour discussion among the team before we decided to implement the Hedge in that form and away 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 so 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 my business quality. I mean we've never won 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 got to be what we call a simple predictable free cash from generative business.
the reason for that methodology is 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 because the complexity of the business means we don't know what the cash flows will be 3 years out let alone years for
50 which which matter in terms of determining what the business is worth. So we look for sort of Simplicity sort of and then durability and predictability. So it's got to fit that screen and you talk about Starbucks, for example, so we made an investment Starbucks a couple years ago. You may not quite a couple years ago and what we saw was a simple predictable free cash flow business be careful generative business that we could
Dead end. So it met the the first screen we think about coffee, you know, people have their coffee habit Starbucks has built a week then our view of very durable franchise are in very high Returns on every store that they build and it's a it's a habit that people don't like to break and so we had confidence in the durability and the benefit of the called the restaurant business is once you understand the economics one box and then
You have a company that's built 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.
And at the time of our investment there was uncertainty because the recent same-store sales had comes flattened and this was a company that had delivered consistent sort of mid-single Digit the same store sales over a very long period of time and our analysis of the kind of crooks 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 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 the markets generally overreact to short-term information and noise because many stocks are traded on the basis of the marginal buyer and seller is a short term investor trying to predict with us.
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 some of the problems.
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 companies. They were actually taking 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.
Activist 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 big part of our competitive advantage today comes from the fact that our capital structure compared to a typical investment firm is very different 85% of our capital is in the 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 court.
ER or this year in making decisions and that I think is a huge advantage in a world in which most other investors have their they give their investors either daily or monthly or quarterly liquidity having permanency to a very large percentage of our Capital base allows us to make very long-term decisions. And that 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 the short term pressure and Sue. I like the structural sort of like approach to addressing that problem. How do you see the role of ETFs and Index Fund investing and how does it impact our affect investors like yourself?
So the the impact on investors who care about governance in particular sort of activist investors is
is you know over time as index funds effectively come to control Corporate America 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 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 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 seen a number of the top firms overtime take these issues much more seriously, and we've had a good experience working with 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 SP 500 index funds is by lowering your pricing and you know, the pricing is
When the few basis points, in fact, there are index funds today that charge no fees and it's hard for them to scale up scale up to have the governance resources necessary to make thoughtful decisions about about running businesses. You know, if you think about it if you managed ETFs and index funds you have to vote call it ten fifteen twenty thousand proxies right around the same time. Most annual meetings are called when the May sort of timeframe. So by February
Ajan, Black Rock 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 initiative to support which not just support. It's almost impossible hurdle for them particularly as their revenues asymptotically or the fees. They charge asymptotically go to 0 so that is a problem that needs to be addressed. Actually. I made a small investment in the 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 black rock to differentiate themselves from for example of fidelity or Vanguard is to transfer back the right to vote to the underlying holder in this company say sort of has a technology that enables that to take place. Now, you wouldn't want a person investing in S&P 500 Index Fund who's got $1,000 investment broken up in 500-piece to Dollar pieces to have to think through
Ooh 500 different proxies there you have to solve the problem, but they may have certain principles that they operate under that they would want Black Rock to you know, vote on for them. And this company would enable that to take place and perhaps there were a few high-profile elections proxy contest 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 March statement in the mail and looking at that going what just happen to generally ignore the
market. Yeah. I think the premise of your question is, correct. I think if you think about index funds and constant inflows of money, you know each with each page.
Like when people take a portion, I think invest in the 401 401 k 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 of a security. So the marginal Trader can move a stock more because there's less float if that makes sense. It's almost like having it having index funds as major holders of Securities and 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 some of the volatility. You know that you've seen I think can be is somewhat due to the fact that there is limited less liquidity insecurities today because of the greater percentage of shares that are held by index funds now, you know, if that were to reverse if Index Fund performance underperforms active management for a
you know meaningful period of time you could see instead of constant additions to the index funds you can 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 be interesting to see what the impact of recent events have on
who are some of your investing heroes or actually who are some of your Heroes not investing here as but who just generally are some of your
Heroes sure, so briefly on the investment side, you know, I got into this business because someone tipped me off about Warren Buffett early on so he's certainly obviously a hero to investors. I learned a ton from over the course of my career and we're kind of supportive of me early on guy named Joe Steinberg just likes being out of the headlines and its partner Ian coming ran a company called Leucadia National Corporation, very interesting investment firm. I learned a ton over time, but you know, I
Are people like Elan musk know I admire people who take on unbelievable challenges and and succeed the notion of building a car company to compete with the big car companies is something that on its own. I think it's fairly remarkable. And if you want if you do that at a time when you're building a company, you know to launch rockets into space, you know, I think it's even more remarkable. So he's someone I have enormous respect
for
the world needs more people like Eline. Do you feel do you feel those people are better served in private roles as CEOs or as public company CEOs,
you know, I don't know that Elan musk has been the ideal public company CEO. I think had a challenging period there with with his tweets. So I guess that's why my teams were is a little bit as I've used Twitter a little bit more last a month or two, but I don't know that
Look, 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 through of egregious example, but you know, the the governance structures of private companies Venture back businesses, their capital structure is all these sort of funky prefer.
Birds will liquidation preferences and you know, I would not rely on the market values of many of these venture-backed companies and I think the soft thanks to the world that have allowed them to stay private. I don't think have done them a service.
Can you elaborate a little longer or 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 back markets and I'm a relatively small investor in
startups and I do it for fun. I do it because occasionally I make a good investment and and also it helped 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 the how these boards sort of operate is far from ideal particularly when you compare them with
Public company equivalence, I mean, you know, we work I just think was the sort of first opportunity for people really to see what's been going on. But I don't think we work as a typical of many venture-backed companies where 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 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 in a private context. And so SoftBank injecting, you know, a hundred billion dollars 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
This is because the ear you cannot public company shareholders for being too short term, but there are real benefits that come from the disclosure and the input that your holders can bring to kind of a public Enterprise.
Do you think that these sort of like Mark to investment valuations that seemed to translate into some form of public market are realistic or do you
Think it's just a game almost like
yeah, so if 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 of really can't make a living until you know, their first fun starts to generate some realization events.
and that can be yours of 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 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 at the lowest possible valuation in 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 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
the 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 I think Short Selling is a central and generally positive function for markets. I give a lot of credit to the folks at Muddy Waters who have been Unearthed a meaningful number of fraudulent companies and have yet to find an example of a regulator at finding a fraudulent company. It's either a journalist.
Most often being fed by a short seller or a short seller that has been is, 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
To uncover fraud. So I think that is a very effective and good thing. We're the 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, you know, in order to make their short successful and that's where it crosses the line and
You know sort of follow the whole again never been an investor and Tesla you no longer short, but you do see example, you know again companies that complain about your Sailors. I usually look at those management team skeptically, but in the case of Tesla, no, I do think you know, some of the short sellers went beyond the role of identifying overvaluation and 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
Ilan 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
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 if you Google my name if you want to do this right now, what will pop up is an advertisement and it the advertisement is paid for by
Lies and it talks about find out how you know billionaire, you know funded this this movie called betting on zero
betting on zero. Yeah. It's the first link.
Yeah. What does it say? What's the subtext
paid for by a billionaire hedge fund
manager? Okay, that is entirely false. Okay another at 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 betting on zero the facts are that a documentarian? I never heard of called me up one day and said finding this whole Herbalife think fascinating. We'd love to follow you around and I met with them and like them decided I would trust him and I thought it would be helpful in getting the story out in the company and I participated in the film by agreeing to be interviewed a number of times and followed me around a number of times. The film was financed by actually a hedge fund manager not me is his name is
Get me for a moment. But it's 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 tells you something so this Herbalife thing was very very polarizing people felt that we were
way too aggressive in our or some people listed and are 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 right publicly or what I say in the letter unfortunately particularly today the more visible your profile the more lovers and haters are 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 the 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 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 found myself, you know, I recently I was becoming more and more concerned that our government was not taking the coronavirus. Seriously, you know, it's Gravely concerned a few months ago.
And took steps both to protect my father whose immune compromised my family The Firm our investors with a hedge excetera 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 our country and I kept waiting for the president to go on TV and make them say, okay guys. We're shutting them a country.
And it wasn't happening. So I figured okay. 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 I said would you come on and I had I had forced Wars going on TV, you know for a couple 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.
All 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 date shut down and following day when York State shut down and then here we are, you know, we can get there the way I expected. I was back in the president to basically order a Countrywide shut down. But yeah living in a federal system with the states make these decisions.
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 4th that you had done this through your website that you have put this head John and yeah that it 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, right?
Right and you could see through the weeks that your asset value was going up. Well, the market was going down so clearly they were a symmetric in nature. Yes, and then you went on you. It's 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 walking me through that
sure. Yeah. So basically we put the Hedge on in maybe third.
Week in February and by March 12th that had gone from being worth nothing to being worth 2.7 billion dollars and the markets it could drop down 25% or so at that point in time. And we said, you know what we've got this massive position and a hedge which maybe has the potential to double of 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 heads could be worth zero.
Stock market 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 want on CNBC at 12:30 on the 18th. And the reason why I know these details it 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 12:30 in the stock market buying, you know editions adding to our portfolio buying spree purchasing Starbucks.
We had sold half the Hedge for a billion 300 little more than half the Hedge for billion 300 million. And so we were three billion 350 million more long stalks. If you will then we were on March 11th and bear in mind. This is a firm with total assets total Equity of about seven seven a half billion dollars. So adding three billion dollars of risk. We were much longer than we were even before we had the edge on.
So we were and we had no short positions. That's when I went on TV. So I want on TV to give a very bullish message which is look I think markets are going to soar. We just need to stop the virus is really simple solution stopping the virus. It's locked on the country for 30 days kill off the virus you open carefully continue to practice social distancing, but you know, the stock market's are discounting machine. It will look forward and soon as we do this the markets will recover and that's why we're buying stocks and that's
We're buying stocks. We've been buying stocks over the last week and we're buying stocks today and here the stocks. I'm buying. So it's rare that someone goes on TV and makes their case and says 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 Bill drove down the market now what they forgot was the stock market was already down almost 7% by the time I made I want on 30 and
and you know an hour later was down more so simply because the market went down after I spoke didn't mean I call it the market to go down. I mean the market has gone up that I was I could cause for the market going up the answer is no it's but now and 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.
Then we'll kill the virus Marcus will cover 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 in 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 Interpol a put four directors on the board we were for a directors when we joined the company and we were helped to recruit Brian Nichols 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's
It's 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, you know, our view was if you looked at what was going on in China, there is a straightforward solution to how to deal with, you know pandemic in China did it they've been able to manage their cases and deaths from again. You have two
Russian some of the data of China but I don't think the data is materially different from what they've described. Our assumption was the we would you know as the virus is made of suede West. You know, Little Italy Spain. Everyone's adopting a shutdown approach. I'm sure America is going to get there and if we do markets going to recover and we own big, you know somewhat of liquid positions in the companies that we are shareholders out because of our degree of concentration. So, you know, we could sell everything and then, you know wave
Marcus to go down by everything back. There's a lot of frictional costs associated with that. We 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 we're not we don't have an opportunity to rebuild stakes and these great businesses with on WE incur a huge amount of tax liabilities because we have big and better 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 hedging is kind of elegant because if nothing happened we would have lost very
No money, but if we expect it to happen happened, we would you know, the Hedge would you come very very valuable we could cash it in the more the market went down the more valuable to hedge becomes we could cash it in. Hopefully 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 those funds that are dedicated so called Black Swan funds. All they do is put on these kind of Hedges waiting for
Stir and there are some of them are up a thousand percent, you know, some smaller ones rather thousand percent in the last month or so, we would have had you know, extraordinary short-term results, but we would have been paired 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 maybe better than they would have been had we tried the alternative approach. So those are some of the thoughts that we
had appreciate you going.
Into such detail. How did your staff react when you put the head John?
So actually the way it came down is I have been getting more and more concerned about the coronavirus and the interestingly the organization started to think I was losing it even some of my friends thought I was overreacting and that of course maybe more concerns because when people are really respect and like think I'm being extreme and I think I'm not, you know telling you every day.
That goes by without our you know in effect shutting down the firm. I felt like taking more risk that may be that much more concerned and one Sunday night. I think it was maybe the third week in February, you know, 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 course that 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 you know, it's happens to be really interesting time in which to hedge credit risk because credit is sort of at the tightest or sort of, you know, the pricing of credit is at the lowest. It's almost ever been and so it became a relatively easy decision for
A large hedge because the inherent asymmetry was about the most attractive has ever been and then if we were completely wrong about the economic implications of the virus would be of no
moment. Very limited downside compared to assets. I think you only had twenty 1 million or 26 million in total
invested. Yes, although it really understates it. It's not credit default swaps are not like options. So as CDs contract is a commitment to make payments.
Over time and we at the peak had 70 billion actually 71 billion of notional insurance that cost about an average of 70 basis points per annum. So about 500 million dollar be committed to make five hundred million dollars a year and okay in payments for five years. So that's you know, two and a half billion dollar commitment again for a seven half billion dollar Enterprise. You know, it's not a small number. That's why it's
Something that an individual really can't do right. Thanks form do CDs contracts generally with with individuals. So but the way we thought about the risk is there are two forms of risk one for risk is just the premium recommitting 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 with the stock market would go and I also had a very good sense of the timing, you know, I had a very very few that
back in O7 and before of where things were headed in terms of I thought we could be headed for 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. I mean, we're gonna have this thing on for five years. Let alone one year. I thought it was, you know, worst case we'd be taking off in 90 days. So I thought about that as not a 500 million a year risk, but rather, you know
Spend a hundred and twenty five million
dollars, right because he would play it you would know if you were right and the next sort of 90
days. That's right. And so I viewed as a hundred twenty five million dollars in the context of seven half billion years not even two percent 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 a credit spreads go from, you know an average of 70 and again, it was a mix of both investment grade where we paid around 50 bases.
Points and a high-yield CVS where we paid about three hundred three hundred and 30 basis points, but the Blended average was around 70 basis points. It went from 70 to 50. We could lose about a hundred basis points times the notional amount of the contracts. We could lose a big number, you know, theoretically we could lose call 700 million dollars which is, you know, almost call it nine percent or so of our assets but
My view was the probability of credit spreads tightening. And again, you have to look at the easiest to look at it by splitting between by blending the cost of high yield and that's what great it really is misleading. So the investment grade C DS 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 a Time.
I'm that they were artificial subsidies that cause credit to be very tight. There were these things called synthetic cdos and bond insurers were writing synthetics videos creating this huge supply of cheap, very inexpensive spreads and that that had really gone away during the credit crisis. So I just it was really a one-way bet and the biggest risk was how long we have it on and we ended up spending 27 million in premium because we built a 70 billion dollar CBS position beginning in the third week of
Since February you're gonna have to completely on by the early in the first few days of March and we started taking it off March 12 when it hit two point six billion dollars of value and it took us no call it 10 days to unwind the whole thing just because of the size of the position but to the average light puts of the position is very small. So we end up spending very very little but the it's a little unfair to say we invested 27 to make 2 and 1/2 billion device explode.
So
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 of
obviously every life is important life particularly to the close friends and family, but the economic implications I thought could be much more harmful even in 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 a unintended shutdown of an economy look like and as that rolls around the globe, what are the implications but I think the difference between
between a depression and a intended but short term shut down 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.
And the other thing is that governments around the world of taking 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 and shut down so I think we can start Rio.
Opening this country, you know beginning June type time frame. And the other thing that's going on is you have the entire world working on solutions to the problem. I got just yesterday. I read a piece saying there are 70 different vaccine related and therapeutic trials that are underway as we speak and you know, so you have the world's best Global biotechnology Pharma companies looking for Solutions.
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 the negative however, is that, you know small businesses that certainly can get destroyed in a several months shut down 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 and do everything they can to help rebuild. You know, if you think about New York City, I think the moment that people can go out to eat again and going out to eat in New York City is sort of part of what it means to live in New York restaurants going to be reopening. I actually had an idea maybe we start a venture or private Equity Fund to back the reopening of restaurants and you work and you can see that happening and you know cities around the country and it could be one a good investment.
Into 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 a you know as they say a v-shaped recovery. I think it's a little bit slower kind of 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 it could be 18 months. But there is an end date. Whereas the depression, you know, you go back to the 1930s. It's the 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 like walk me through how you think of that sure. So again, it's a very
similar kind of analysis, you know, if you own a street retail in New York City, you're probably not getting rent today.
But as soon as your tenants going to be open and operating they'll start paying rent again, I talked to a friend of one of the major real estate private Equity firms. And what they're doing is in cases of hardship. They are giving tenants a up to a several month kind of holiday. We're 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've what they didn't collect at least for commercial tenants and
People give sort of someone lost their job. For example, you know, maybe we'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 will
cause you to change your mind on that via
look the what's permanent what's permanent is we're adding a lot of debt to you know, sovereigns governments and that's a burden that will exist for a long time. So that's a that's a negative and that that will hold back.
And you know 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, you know the the globe and I think the the way we solve that issue is really just testing and there are a lot of testing, you know companies and just yesterday I learned about this pregnancy like test that's in sort of a emergency.
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 in the Google Apple sort of app that you have in 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 a solution but I would say more importantly they the reputational benefits inure to the person who comes up with the person or company who comes up with the drug that saves us all for the
It 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 the F-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.
Mm, and I'm sure the same thing is true in every country.
What industries do you think are going to come out stronger benefit from this Amazon
Amazon. We don't own Amazon, but I do think that obviously they're going to have the greatest several months in their history, but I do think they're going to change a lot of behavior of people who used to shop in a normal fashion. Obviously, something's video technology companies cloud-based software companies will be beneficiaries of this.
long term, although I will say that pretty much everyone I speak to is completely sick a video conferencing and yeah, I really would like to get and actually this whole work from home thing is not so great because you know, you're I'm talking to from the den, you know, I'm hearing, you know, quite beautiful later 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
at you go you focus and then when you come home, it's easier to leave it behind and it's much harder to do that when your office phone is in the TV room. So
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. I look I think there are businesses.
That prior to the coronavirus were structurally challenged think department stores 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 likely put them out of business, but I wouldn't spend any of taxpayer resources on them, you know the way that you know,
Big companies the only thing that happens when a big company goes through A disruption like this, is that the owners and you and there isn't quoted 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 bond holders end up becoming, you know converting into equities through some kind of either prepackaged or other restructuring process the end up being the owners and you know, I am receptive to this notion that you have airlines that have spent billions of dollars.
Find back stock. Why should taxpayers come in and affect support the shareholders that were beneficiaries of vivax and had they retain that capital for a rainy day. They wouldn't need a government bailout. So that that concept to me makes a lot of sense and it's 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 plans and or the bond holders will end up, you know controlling your line. So I 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. I just think that you know, Boeing needs to be saved Boeing had issues prior to this Boeing spent many many tens of billions of dollars on share repurchases. I do think
Stuff. It 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 I guess is my point and I respect the CEO of 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 aren't arms-length economic terms. It shouldn't be free money by any means and we shouldn't be afraid to let companies that are over-leveraged pre-crisis, you know file for
practice reorganization where the creditors end up owning the equity that that's how the process is supposed to work
I think it was Munger Charlie Munger who said capitalism with a failure is religion without how
he's better with words and I but it's
what do you think will end up going just a the Amazon comment for a second do you think we'll end up going back to malls or malls effectively ages dead
now
I actually think that people will be that much more desperate for human connection after this experience and they were before and the issue with malls malls are located at the intersection of you know very highly trafficked roads they've got big parking lots their 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
Or is it 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 either shop or you know, the entertained and I do think that Innovation is happening. It's just not happened as quickly as you know, the kind of Legacy tenants or 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 long-term is probably fine. The problem is the capital cost to take an old line old-fashioned shopping mall with Sears in a JC Penney and 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 and it was equal to 80 percent 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 will make half of it a hospital medical facility office apartments and then they'll be this great, you know, foodcourt restaurant Entertainment movie theater type 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 part of something new 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
Ridge
yes, I do think this is a depression-era moment in the sense psychologically the same way that the generation of people that went to the depression. It's not very different about some differently about financial leverage, you know, then the generations that came after them. I think the same thing would be true here and I think it would be true for for Corporate America, you know the because shareholders are Diversified they generally put pressure on companies to quote unquote optimize their
On 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 IE the board and the management that oversee that company for the benefit of the employees and the other stakeholders and I think it does lead to an over leveraging of corporate America and I think every business has to have Capital put aside if you will for the rainy day.
And you know the companies that live on edge to kind of maximize their return on equity and then die and the businesses that will be the shoulders will be hurt the most from this period will be the companies that just were too aggressive in the way. They finance themselves going into the crisis and I think that will cause boards to rethink, you know, super aggressive Capital
structures. This is like a dream like opportunity for
Them in some ways you could say with all that cash and print leverage and sort of the ability to take on multiple big elephants if you will
exactly. Yeah, so I think 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. And actually the big opportunity for Berkshire is Berkshire itself prior to the coronavirus crisis was a cheap stock in the low 200s.
you know in the 180s it's you know real bargain and so I would expect Buffett to have a hope that he's purchased a lot of his own shares and I hope he's deployed capital and other companies as well
walk me through how you see Berkshire Hathaway like without hitting price targets or anything just walk me through how you see the structure of the company like how you view
it sure so so Berkshire is really principally insurance company but half of the called intrinsic value of the business is an insurance
It was built beginning with a company called National Indemnity many many years ago. That was the first I think I think it was the first insurance company he bought for again. Yeah, whatever 18 million dollars or something like that in the 1960s and then over time we built the most profitable best capitalized unique business. And if you know for certain kinds of insurance Berkshire is the only place you can call and so it's a you know, I don't like to use the word monopoly.
We but it's a very unique very profitable business and he structured in a way both legislatively being a omaha-based insurer where he has the flux and lighted 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 and the flow from the
Ernst business in allowed to invest in equities and that's a generally an enormous Advantage but in this interest rate environment and even greater Advantage, so you have the say the most advantaged insurance company in the world that is grown its Insurance float over time at a nice higher single-digit. Nothing's in like an 8% compounded rate over time. And the cost of that insurance float has been has been negative meaning they most insurance companies lose money on insurance and make money and flowed and this interest
An environment they lose money on insurance and they can earn any money on on the last estimate from and buff. It is really making money on both sides. So that's where someone should really spend a lot of their time if they want to understand the company and then in the asset side of the insurance company are really the you know, the equities that you read about, you know apple and and so on. The rest of Berkshire is a collection of sort of wholly owned or 80 percent owned subsidiaries.
Like the Burlington Northern Railroad Precision castparts businesses that Buffett has collected over time for their durability and quality and it's a mixed bag. The biggest one generally are the highest quality businesses offering a lot of stability think the utility energy utility part of his operation the railroad very durable big profitable businesses and then business is he
Just collected and held onto over many many years some of which have have been great and remain great businesses. Like See's Candy others, you know, if you go back and read The Berkshire Hathaway annual reports. He was glowing about the World Book Encyclopedia and you know other subjects businesses that have disappeared Dexter shoe. He was skipping into work thinking about the Dexter shoe company the worst investment probably ever made. So even mr. Buffett makes mistakes, which is instructive and of itself.
The good news is when you buy things as opposed to short things your mistakes become smaller. It's really some part in decent chunk of the businesses Industrial company small pieces and Retail and other smaller manufacturing and other Diversified businesses and the large majority is isn't a kind of unique and extremely profitable Insurance business.
And do you see this as like a long-term holding or as a proxy for cash or how do you
About
that. Yeah, you know I don't I think it's a really cheap interesting stock, you know run by the best investor in the world. We think you know buffets taken an approach toward really all of his businesses. That's extremely hands off and that's worked very well for many of those companies, but other parts of the portfolio in our view under perform the competition in terms of their profitability or growth Etc and I
I think the 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 in terms of the businesses Berkshire owns. I'm 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, you know, it should be the most profitable highest margin Railroad in the world. It's not and I think a bit of that is its
Warren's very kind of his reluctance to get to actively involved with businesses that he owns but I do think that over time that gets solved. So you have this very well capitalized company controlled by, you know, great investor CEO and a portfolio of businesses many of which have opportunities for improvement. And you know, 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 Lyon.
Meantime we think we 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.
So a big part of my education as an investor came from reading everything buffets written, you know watching you're watching from speak. It came to Harvard Business School and 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
You know, 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 and his basic point was you know, if you want to play the violin, you know, and you're not
And you can practice your entire life. It's gonna be hard to pick up the violin tomorrow or cello tomorrow and India 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, you know, honest and straightforward fair-mindedness. These are all things you can have to if you don't
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, you know, just how to think about investing in the stock market and all of the Ben Graham isms that he's reinterpreted in presented. All that stuff is super helpful and just thinking even the way he builds his business over time your buff. It started out in the mid 1950s as an
Hedge fund manager, right? He had a partnership. He charged a 25% incentive fee over a six percent return and he was quite active. He would buy steaks and businesses. He would push for liquidations of companies that had large security portfolios relative to the market value of their of their business. He was really an activist investor and then 15 years in at a hundred million under management. I think 25 million of it was his and he wrote his investors will let her and said okay you can have it.
Your money back or you can have stock in this crappy textile company and I'm gonna take stock in the textile company, but I'm going to be a little less motivated than what's in the past. I've 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 if you want your money back and you know, as I like to say some number of people he Larry tissue apparently withdrew $400,000 back then from the partnership, which today would be. Oh man, you know, whatever 400 million probably
Probably four billion and some people rolled their capital and what's interesting is buffered gave up the 25% share of the profits for the right to run what he called a crappy textile company with a 40 million dollar market cap for a hundred thousand dollar salary, but what he got was stability permanency of capital and that was not lost on me. And so we've basically, you know, our business plan was basically to do the same thing over time.
And we're you know largely there
today. So I mean you're going to waive your feasts
could waive the fees no current plans to do that, you know, unlike Buffett who you know runs rennet really a one-person operation and you know as an accountant and a couple of assistants the way we built our business is, you know, hired a lot of super talented highly compensated people. You're actually charging fees enables me to incentivize and pay
The people I work with but yes Buffett is a better bargain and we are because we do charge these
away. 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, you know, we're we now have a pretty clear path right vast majority of our Capital today is 85% and over time that will be 90 or 95 or eventually a hundred percent of our Capital will be in a public Enterprise that were the largest shareholder of
We on 22% of our 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 will become bigger shareholders of these kinds of companies will be a very long duration older. I think we'll do similar things to the things that we do now and hopefully we'll do them better. But I think you know, I'd love to have you know, in terms of ambition. The goal is to have one of the best investment records ever buffets. Got a 55 year or 16-year advantage.
And Persians been in business for 16 years. So we've got a lot of work to do.
How do you 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're running the SEC in detail?
I would I would lean on short sellers to be sources to help me determine where my look I think the SEC is generally got a very very good job, and they have a very difficult.
And they have limited resources. So let's start there my one area of disappointment with the SEC having been on very rare occasions short seller. Is that how slow it takes the SEC to you know, come to conclusions about company's operating illegally or responsibly 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.
Life that they were operating in China illegally was trying to does not allow multi-level marketing companies to operate and they were using but they were using the same compensation scheme same methodology, but they were doing it in a sort of hidden misguided way and they in accurately described how they were doing this in their public violence to end. We made a to our Public Presentation about this for 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 Etc in the last six months and you can Google it Herbalife painted settle with the SEC for 20 million dollars for misleadingly describing their China business and their public filings because it actually the compensation scheme is precisely the same as and the business model is the same as their Core Business the United States exactly what we said years ago about the company and my disappointments are one too.
The SEC however, many years to come to the same conclusion that we have identified and they slapped on the wrist with a 20 million dollar fine that investors could ignore and so I yes, I've I have been disappointed by you know, Herbalife by the way is a pyramid scheme. Okay. It's continuing to operate and caused enormous harm the stocks actually not that up that much for the price. We sure did. We sure did it at split adjusted $23 and Sharon today. It's probably 30 or something like that. So it's not been a great investment for
for anyone if they had if they had bought the stock when we made our presentation but I do think it's coming it'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 settle with the company with two for two hundred million dollars and let them continue to operate and now the SEC has you know slap my wrist again and it does seem like if you're a well-capitalized company back by
no very large shareholder and he got a lot of good lawyers you can out with 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 the more aggressive companies that are causing 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 have Forsworn short selling for the reason you describe the calculus I call I think I invented this phrase that you're you seem to be adopting, but I called it return on invested brain damage. There you go. We return on invested brain damage for short selling is 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
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 the muddy water is in the in the Jim chanos is when they come out, you know with detailed work about problematic businesses. I'm less interested in companies that are overvalued that that I don't think does so much service to the world to point out whether you believe a company's overvalued or not.
Just systematically like this shouldn't
exist. Yeah, but identifying fraud
A very important thing for markets and short sellers provide a very valuable service and generally when there are markets that you can't short prices get to extremes and investors lose lots of money and the housing market was a market that you could not short until the invention of synthetic CEOs and some other it was really the John Paulson trade if you will was he was just going short the housing market and house.
the market was allowed to get two extremes because we're not short Sellers and there were no no one had any incentive to blow the whistle on overvaluation the market you can't short today is basically or difficulty short today is the is the Venture back market and that's why you're you're going to see that's why the weworks the world are allowed to happen and billions of dollars money is wasted so I do think short sellers preferred for very valuable service now that I'm I don't know 53 and I just had a baby and you know and 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, the what's interesting about this period is it's really been education in in the
What's good about living in a you know democracy and what's bad? That's why you can't democracy. So you look at how China now the negatives of China is they, you know, the government officials and local government officials were too afraid to go public with what was going on or when they did they got whether you're a doctor or public official you got, you know, shut down by by the system. You know, that that allow the virus
Propagate to it became a serious issue in China. The good news is the dictatorship allowed them to very aggressively shut down the virus you've watched, you know, I've made my public case for a Countrywide shutdown and the president instead sort of allow the states to take the lead 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, how do we write and during the shutdown, you know, March 1 for 30 days the outcome would have been meaningfully different than starting on March 19th and rolling out over 30 days and we're not even you know, we're still not in a Country Wide Shut down and the degrees of shutdown or different different places. So I do think it's it shows that you know, the wonderful things about a democracy and that people are generally not afraid to come public with issues and we have a very well functioning media. That's not a afraid to surface.
problems you know the downside is we could not we did not take the Extreme Measures to China took as quickly as they did and I wish we had so that's sort of the up-down of it but you know 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 see the Corona virus team led by the Vice President dr. Fouch
dr. Burke's Etc they seem like capable people but the CDC has not been these particularly visible as far as I've seen in making recommendations where was the CDC in terms of recommending a national shut down Etc 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 the end
you have quite the age range right so you go from one to how old is the oldest
2222
at what lessons do charted 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 type things you know persistence you know that 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 you there are sometimes negative associated with those qualities, but you try to teach your kids about that try to keep you teach your kids about the value of money and you know saving and minimizing waste and then also more difficult topic.
Giz, you're trying to teach teach kids about nutrition. That's a very high-risk subject to talk
with your guilty pleasure. Do you have chocolate in the
house? Yeah. I'm a big dark chocolate fan. I like this one. It's called endangered species 88% and it's amazing 88% to seems too good to be true. It's sort of very very good. So I definitely on my
list as my weakness cheering it'll run out and get some of that Bill. Thank you so much for your time.
And this has been
amazing. Yeah, I enjoyed it. I really appreciate it.
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