Bill Ackman on Starting His Own Hedge Fund at 26 and Activist Investing

To put this in context, you were mid-20s and I had just gotten—I just started as a rookie professor two years before. So, Bill, at the time, was trying to set up an interesting business, which ultimately became Gotham Partners. So, for those of you who are students, as a twenty-something-year-old, Bill set up his first hedge fund.

So, why did you set up Gotham? Experience is making mistakes and learning from them, so that's what I learned. No, so the answer is I went to business school to learn how to be a good investor, and I learned the first rule of investing, which is you do your due diligence before you wire your money.

When I got to HBS, I actually opened the course catalog for the first time, and there wasn't a class on investing; there were classes on accounting or classes on finance. So, I decided I had to develop my own little self-study program. I wanted to—so I opened a Fidelity brokerage account. I said this: I had some money I made in the real estate brokerage business; this was my tuition in the investment business, and it was about a year of tuition.

If I lost it, it was as if I had gone to business school for, you know, two years but paid for three. So, I figured it wasn't like the inverse of the Oxford 1+1 program. But, you know, the first stock I bought went up, and I said, "Okay, I found what I want to do." A little more involved in that—but I actually—my father, who's here, he came with us—that's Dad over there in the corner. You can ask him whatever questions you want afterwards.

He told me it was a really dumb idea to start an investment fund right out of business school, and he recommended that I go work for Michael Steinhardt or George Soros or one of the other famous investors at the time. But I figured that I knew enough. This is the perils of youth. But the answer is I was an entrepreneur, and I felt that I wanted to approach investing my own way, as opposed to learn from someone else.

It's one of the few things you can really learn on your own. You can learn investing by reading books, by reading annual reports, by having—you can have a portfolio and invest $100, and you can learn the business. Unlike many other businesses, which require a lot more—at least that's what I thought at the time.

So, you went far away from just investing in Fidelity-type, you know, on a brokerage platform, and Pershing Square has a particular form of investing, which some of our members of the audience may not understand, and it's sometimes called activist investing. So, maybe you can just help, you know, orient the audience about what exactly Pershing Square Capital does, what's the general investment style, and why did you set it up that way?

So, the vast majority of capital invested in the markets today is passive. So, if you think of index funds or ETFs or even the big long-only institutions, the vast majority of capital is by charter passive. Passive means you do your research—and in some cases, you don't do the research; you sort of just blindly follow an index and you're judged based on how closely you follow the index.

If you think about investing a hundred years ago, though, investing—you had Andrew Carnegie owning 20% of U.S. Steel, or you had J.P. Morgan as a large owner of various companies over time. In the old days of investing, an owner would act like an owner. So, if they were unhappy with the performance of the business, they would replace the CEO. If they were unhappy with the board's judgment, they would make changes to the board.

As capitalism sort of democratized the investment process, and as any kid in business school can open a brokerage account, and as the owners of many of these great businesses over time, you know, gave the chairs away to a university or their heirs, and the ownership was, you know, spread out, and the Sam Waltons of the world kind of passed away, the boards became to be managed by professional owners.

What we do is we look for situations where a business has lost its way, where an otherwise great company—within a business that we would define as one that has significant barriers to entry that Warren Buffett would describe as having a moat around it—a business that is simple, predictable, generates cash, and we can be confident we'll be here fifty years from now.

A good example is we own a stake in Canadian Pacific, which is a railroad in Canada. If you think about the railroad business, you know, it's not—it's a business where they're not going to build a new one across the street. You can't, absent some fairly dramatic changes in technology, you can be pretty comfortable that, you know, goods will be shipped on rail for a very long time to come.

So, it's a business we can predict. We can think about it from a very long-term perspective. We can buy it at a price that's interesting, and in the case of CP, this was the worst-run railroad in North America. It had the lowest profit margins; it was trading at the lowest valuation relative to earnings and had a very unhappy shareholder base. But there was nothing they could do about it because they were inherently—again, the biggest investors tended to be very passive.

We saw an opportunity, and the opportunity was if you could replace the worst CEO in the railroad industry with the best CEO in the railroad industry, a lot of money could be made. We bought first 12% of the stock and then another 2%, about 14% of the stock. We recruited a guy named Hunter Harrison, who is widely considered the best railroad executive of all time—certainly in North America.

He had retired at 65; he was 66 and a half. He had signed a two-year non-compete with his employer, and I think the biggest mistake they made was a two-year non-compete because he was running me off the other Canadian railroad, Canadian National. Then we hired him as a consultant; he helped us study the railroad, and he had a fire in his belly.

He said, "Look, would you be interested in the day job?" He said, "Let me check with my wife." She said, "You know what? It's time to get you out of the house again." And we recruited him, and then we had simply to put him in place.

Now, the problem was Canadian Pacific has one of the most sort of esteemed and illustrious boards in Canada—at least at the time. It was the former head of the World Bank of Canada, the former CEO of Suncor Energy, the former head of the steel business, you know—it's a very, very important board—and they didn't like the idea that this idea was coming from outside the company.

So, they said no. So, we went to the shareholders and we ran an election—a proxy contest. We put up seven directors for seven seats on a 13-seat board, and the shareholders voted with us 90% of the time and voted against the other guys, and they got between three and eleven percent of the vote.

We put our directors on, we did a review of the best CEOs in the world; it turns out the guy we identified was the best guy. We put him in as CEO, and that was 16 months ago. It’s almost the most profitable railroad in North America after 16 months. That’s how this guy goes to work; stock’s gone from $46 to $151 a share.

It's, you know, a little under an $8 billion market cap to a $25 billion market cap. That’s kind of the perfect example. No, it doesn't always work that way, and I have a feeling that Peter might ask me about one of those cases.