Hedge fund billionaire Bill Ackman lays down his investing ‘commandments’

The hedge fund manager, who founded Pershing Square Capital in 2004 and serves as its CEO, has built up a fortune of $3.7 billion during his decades-long career, according to Forbes.

However, it hasn’t always been smooth sailing for Ackman, who has made bets that both won and lost him billions of dollars.

But in a recent interview, he said looking back over the past two decades reinforces his belief that investing can be fairly straightforward if some simple principles are followed.

Ackman, a Harvard Business School graduate, has such faith in his rules of investing that they’re engraved in a stone tablet and placed on the desk of every employee at Pershing Square Capital’s New York base.

Speaking to The Julia La Roche Show in an interview published last week, Ackman said he was a “big believer” in strategy and maintaining focus on longer-term outcomes.

“If you look at the chart of Pershing Square over time, the difficult periods look like nothing now,” he said. “You won’t even notice the little blip in a decade or two decades, and you just have to have that kind of perspective.”

Pershing Square’s results last year could be the perfect example of why Ackman advocates for a wider lens perspective.

In 2022, the hedge fund posted an 8.8% decline as stocks suffered their worst year since the Financial Crisis—but that loss followed three consecutive years of double-digit gains: 26.9% in 2021, 70.2% in 2020, and a 58.1% spike in 2019.

In last week’s interview, Ackman also explained his “basic commandments” for investing.

“We want to buy the best businesses in the world,” he said.

He described these as firms that are “simple, predictable, free-cash-flow generative, dominant companies with, as Warren Buffett would say, a moat around them.”

The economic moat theory, which was popularized by the Berkshire Hathaway chairman, refers to a business’s ability to maintain an advantage over its competitors in order to protect its market share and long-term financial outlook.

Also on the Pershing Square checklist is a strong balance sheet and excellent governance.

“The short version of the principles are own the best, super-durable companies you can find with conservative balance sheets,” Ackman said. “Buy them at attractive prices, and use our influence to make sure they’re managed and governed correctly. That’s it, pretty simple.”

It’s a tactic that appears to have worked: According to financial services publication Seeking Alpha, Pershing Square has outperformed the S&P 500 over the past 20 years, growing its investments at an annual rate of 16.1%.

Investing can be ‘very simple’

While his “commandments” are a simple enough list, Ackman revealed he rarely finds businesses that tick every box for a fair price.

And although Ackman knows what he is looking for, he also revealed the red flag he doesn’t want to see from businesses: “You don’t want a company that has to constantly raise money in order to implement a business plan.”

It’s avoiding these short-term hiccups and focusing on the long term that’s key to Ackman’s strategy, he added.

“Stay away from shorting stocks, avoid commodity-sensitive industries, and you do great,” he advised. “There’s a part of investing that’s very simple…Just make sure you think about the potential for disruption, because we’re in a world where technology is a very dynamic force.”

Ackman, who has previously said he looks up to fellow billionaire investor and “mentor” Warren Buffett, appears to be taking a lesson from the Buffett school of thinking when it comes to the simplicity of his “commandments.”

Buffett himself has also given out notably simple investment advice in the past.

“The first rule of an investment is ‘don’t lose money,’” Buffett once said. “And the second rule of an investment is ‘don’t forget the first rule.’ And that’s all the rules there are.”