Hedge fund billionaire Bill Ackman had a fruitful 2023 without doing much to his investment portfolio. With an gain of $610 million, or a return rate of 26.7 percent, the founder of the Pershing Square Capital Management was ranked No.7 on Bloomberg’s annual list of the highest-earning hedge fund founders published yesterday (Feb. 20), his highest position ever. By percentage measure, Ackman outperformed Millennium Management’s Israel Englander and Citadel’s Ken Griffin, the top two hedge fund managers on Bloomberg’s list.
Ackman’s investment portfolio consists of just eight stocks. Last year, with the exception of cutting back his bet on Lowe’s, Ackman barely touched his other equity holdings. In a podcast interview with Lex Fridman that aired yesterday, the investor revealed his process of researching companies and how he picks stocks to invest in.
At the end of 2023, Ackman’s top holding was Chipotle (CMG), in which he began investing in 2016, shortly after the restaurant chain’s stock tumbled following a major food safety scandal.
“It’s a great company, great concept…but ultimately the company’s lacking some of the systems and had a food safety issue,” Ackman said on the Fridman podcast. “But the reality of the quick service industry is almost every fast food company has had a food safety issue over time. And the vast majority have survived.”
Chipotle in 2016 perfectly fit Ackman’s criteria for a publicly traded company worth investing in. “The kind of business we’re looking for is the kind of business everyone should be looking for, right? The problem is those companies tend to have very high stock prices,” he said. “So we get involved in cases where a great business has kind of made a big mistake or lost its way, but it’s recoverable.”
“We buy from shareholders who are disappointed, who’ve lost confidence, selling at a low price relative to what it’s worth if fixed,” Ackman continued. “And then we try to be helpful in fixing the company.”
After becoming a shareholder, Ackman pushed Chipotle to move its headquarters to California from Colorado and name a new CEO, Brian Niccol, replacing its founder Steve Ells.
“Steve Ells, great entrepreneur. But business got to a scale he really couldn’t run it,” Ackman said. “And sometimes one way to redo the culture of a company is just to move it geographically, and then you can reboot the business.”
How Ackman researches a new company
When doing research about a potential investment, Ackman said he usually starts with publicly available documents, such as a company’s SEC filings and earnings call transcripts.
“It’s very helpful to go back five years and learn the story,” he said. “Here’s how management describes their business, here’s what they say they’re going to do. And you can follow along to see what they do. It’s like a historical record of how competent and truthful they are.”
Then, he would look at the company’s competitors and talk to experts to learn about the industry it operates in.
And, of course, a prudent investor can’t skip the step of analyzing the people behind a business. “Understanding the people and what drives them, and what the actual financial and other incentives of a business, are very important part of the analysis for investing in a company,” Ackman said. “Part of it is how much are they running the business for the benefit of the business? How much are they running the business for the benefit of themselves? And that’s the analysis you do.”
“The top person matters enormously, and then it’s who they recruit,” he added. “You recruit an A-plus leader and they’re going to recruit other A- type people. You recruit a B- leader, you’re not going to recruit any great talent beneath them.”
