In this fireside chat at USB, Bill Ackman discusses the value of understanding the predictable nature of businesses, akin to bonds with varying coupons and no fixed maturity, emphasizing the higher worth of early years in a discounted cash flow analysis.
Ackman, influenced by Warren Buffett, prioritizes investments in businesses with high predictability and durability, despite the constant threat of technological innovation and disruptive new entrants.
He highlights the importance of economic moats, referencing Michael Porter, a significant figure in business strategy, who taught him about competitive forces. Ackman believes in carefully selecting investments that can ideally be held indefinitely, focusing on those with characteristics that allow for confident long-term ownership.
Here’s an excerpt from the discussion:
Ackman: The only thing I would add is the following. You know the business… I would add to his 5, 10 years 20, 50 again in the discounted cash flow analysis of business years five through 10, zero through ten, are worth a lot more than years 10 through 20.
But what you’re really looking for, business is like a bond where the coupons vary and there’s no date by which the principal comes due.
So it actually, you know, it really matters what happens over time, and I think you know to make it I think one of the big things I learned from Buffett is that you sort through the world for things that you can understand and know.
What’s fascinating about the stock market is securities move up and down every day on the basis of all kinds of information.
And I think there are many businesses it’s just unknowable what they’re worth. But they still trade, they move up and down. It’s kind of an interesting sort of phenomenon.
What we do is we kind of screen for the world, for… by the way we give him an A, just teasing. But I would, I would screen the world for things that we can predict and know, and that has something to do with what we know.
But it has a lot more to do with the characteristics of a business that have a high degree of predictability. And what we think about when we’re buying businesses, you know these are bonds really we’re looking for very, very high certainty.
You know, companies that we can theoretically sort of own forever. And that’s a hard… that’s the most difficult thing to do in investing is not building a financial model but predicting the durability, you know, of a business, particularly in a world where there’s constant technological innovation.
When two students, you know, who dropped out of ABC, what used to be a great University, and you know rented a garage and they come up with some disruptive technology, that’s a very hard thing to envision.
So you have to think about, think about moats. Michael Porter, who is another mentor of mine, at least, Business School professor of mine very sadly has severe Alzheimer’s. now.
His first book he wrote is probably one of the most cited pieces of any kind of research. And so you should give it a read. Just thinking about the various balances of power, if you will, in the forces that affect a business.
You can watch the entire discussion here:
Bill Ackman and Ryan Israel – UBS Fireside Chat
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