How Bill Ackman DESTROYED the Market by 3,023%

Big part of investing is not losing money. If you can avoid losing money and then have a few great hits, you can do very, very well over time. Billionaire investor Bill Amman just shared his secret five-step formula for successfully investing in the stock market. This simple strategy has helped make Amman and his investors billions of dollars investing in stocks. The beauty of this process is that you don't have to have a degree from Harvard like Amman to begin implementing it. You need to hear what he is about to say because it is nearly guaranteed to make you a better investor and help you make more money. Make sure to stick around till the end of the video because number five on the list is my personal favorite.

Now let's get into it. In a recent interview on The Lex Friedman podcast, Bill Amman laid out his investing process in a simple, easy to understand way. Amman's investment process focuses on five key tenets that we will cover throughout this video. The first investing tenet is the concept of Mr. Market. Listen to Aman explain: "You have to understand the difference between price and value. Right? Price is what you pay; value is what you get." He said the stock market is here to serve you, right? And it's a bit like the neighbor that comes by every day and makes you an offer for your house. Makes you a stupid offer, you ignore it; makes you a great offer, you can take it. That's the stock market.

The key is to figure out what something's worth, and you have to kind of weigh it. He talked about the difference between the stock market in the short term and the long term. He said, "The stock market in the short term is a voting machine; it represents speculative interests, you know, supply and demand of people in the short term. But in the long term, the stock market's a weighing machine. It's much more accurate; it's going to tell you what something's worth." So if you can define what something's worth, then you can really take advantage of the market because it's really here to help you, and that's kind of the message of the book.

As counterintuitive as it may seem, one of the biggest secrets to successfully investing in the stock market is to actually completely ignore the stock market. Here, let me explain what I mean with a quick story. The perfect analogy to demonstrate this concept is to imagine you own the most popular restaurant in your city. Picture what the most popular restaurant in a city looks like: every table is always full, guests have to reserve a table weeks in advance to even be able to eat there. The food is so good, customers don't even care about the price. You, as the owner, could charge essentially whatever you want, and customers will gladly pay it. Your restaurant has built such a loyal following that everyone in the town knows and loves the restaurant; it has become a staple in the community.

Out of the blue, you start getting text messages from a random person you've never met, offering to buy your restaurant literally every second between 9:30 a.m. and 4:00 p.m. Monday through Friday. This person texts you how much they would be willing to pay. The price fluctuates up and down by the second, based purely on the mood of this particular person. Would you, as the owner, base how much your restaurant is worth on these price quotes you get from a moody potential buyer? Of course not! You would block the stranger who keeps trying to influence you on how much your business is worth. Instead, you would look at the quality of your business and how much cash it generates to get an estimate of how much it's worth.

Value investors like Amman say you should take the same logic and apply it to the stock market. Ignore the short-term price movements in the stock, and instead, focus on the underlying fundamentals of the business for which the stock you own represents a fractional ownership stake in. As legendary investor Warren Buffett has famously said: "Only buy something that you would be perfectly happy to hold if the stock market shut down for 10 years." Incidentally, Amman says he learned most of what he knows about investing from Warren Buffett. We've compiled a PDF of Warren Buffett's investment checklist items for you so you can start investing using the same process as super investors like Buffett and Amman. To get your free copy, head to the link in the description.

Anyways, back to Amman. The next item on his list is how to value a stock. Listen to Amman explain the value of a security: "The value is the present value of the cash you can take out of it over its life." So if you're thinking about a bond, a bond pays a 5% coupon interest rate. You get that, let's say, every year or twice a year split in half, and it's very predictable. If it's a U.S. Government bond, you know you're going to get it, so that's a pretty easy thing to value. A stock is an interest in a business; it's like owning a piece of a company, and a business—a profitable one—is like a bond in that it generates these coupons or these earnings or cash flow, you know, every year.

The difference with a stock and a bond is that with the bond, it's a contract; you know what you're going to get as long as they don't go bankrupt and default. With the stock, you have to make predictions about the business, you know? How many widgets are going to sell this year? How many are going to sell next year? What are their costs going to be? How much of the money that they generate do they need to reinvest in the business to keep the business going? And that's more complicated. But, you know, what we do is we try to find businesses where, with a very high degree of confidence, we know what those cash flows are going to be for a very long time. There are a few businesses that you can have a really high degree of certainty about.

As Amman just described, the value of a stock is based on the cash that business will generate over its life for you as an owner, discounted back to the present day. While this may sound like a complicated concept, it's actually deceptively simple. Let's see what this looks like in practice. Let's say you have a stock that will generate $5 in cash each year for 10 years. At the end of your 10 years, you will be able to sell that stock for 10 times the $5 in cash it generates, so $50. You now have your estimate of how much cash this stock will generate. The next step will be to use an interest rate, also known as a discount rate, to discount these future cash flows back to the present day.

The reason we do this is because of a concept known as the time value of money. This is where a dollar received today is more valuable to you than a dollar you receive at some point in the future. There's one simple thought experiment that perfectly demonstrates the concept of the time value of money. If I offered you the choice of receiving $1,000 today or $1,000 10 years from now, which would you choose? Of course, you would pick receiving that money today. This is why we have to discount the future cash flows back to the present day to determine the value of a stock.

In our example here, let's say we use a 7% discount rate. This gets us a value of $60.64 for the stock. Now, there is an important caveat that needs to be made to this example. As Amman alluded to in the clip, it is very difficult to project a company's cash flow years into the future. This is why Amman's stock portfolio is heavily concentrated in what he refers to as simple and predictable businesses: companies like the railroad Canadian Pacific Kansas City, the hotel company Hilton, and restaurant franchiser Restaurant Brands International, parent company of popular North American restaurant concepts Burger King, Tim Hortons, and Popeyes.

So now that we know how to calculate the value of a stock, that leads perfectly into the next item on the list: the concept of margin of safety. Here's Amman to explain: "You can't get to a precise view of value; you can get to an approximation. And the key is to buy at a price that represents a big discount to that approximation." And that gets back to Ben Graham. Ben Graham was about what he called—he invented this concept of margin of safety, right? You want to buy a company at a price that if you're wrong about what you think it's worth, and it turns out to be worth 30% less, you've paid a deep enough discount to your estimate that you're still okay. It's about investing. A big part of investing is not losing money. If you can avoid losing money, and then have a few great hits, you can do very, very well over time.

Before Ben Graham introduced the concept of margin of safety to the world of investing, it had been around in the engineering profession for centuries. Imagine you're building a bridge over a body of water. You estimate that the most cars that will ever be on this bridge at one time is 100. Logically, it would make sense to design the bridge to only be able to support these 100 cars because based on your numbers, there never will be more than 100 cars on the bridge. However, using the concept of margin of safety, you would want to design the bridge to be able to hold up 200 cars—more than double your estimate of what the bridge would ever need to be able to support. This protects you in the event your estimate turns out to be incorrect.

In engineering, a margin of safety can help prevent mistakes that would have very severe and costly consequences. It can have the same impact when applied to the field of investing. Going back to our example from earlier, we determined the stock was worth $60.54. Ideally, we would like to purchase the stock when it is trading at a significant discount to what we estimate it's worth. This protects us in the event we are wrong about the value of the stock. For the sake of this example, let's say the stock in question is trading at $30 a share. This difference between our estimation of the intrinsic value of the stock and where it's currently trading represents our margin of safety.

This margin of safety is our protection against losing money in the event our estimate of the company's value turns out to be incorrect. Let's take a look at our example from earlier. Our value of roughly $60 a share was based on our assumption that the stock would be able to generate $5 in cash per share each year. For the sake of this example, let's say a new competitor enters this company's market and negatively impacts its profitability. Instead of $5 in cash each year, that gets cut to only $4. As we can see here, the value of the stock falls from $60.54 down to $48.40, a reduction of roughly 20%. However, notice that the new lower stock price is still above the $30 it was trading at when we purchased it. This is the beauty of the concept of margin of safety and why it is so important to successful investing. With a margin of safety, you can be wrong and still make money.

In order to have a margin of safety, you first have to be able to value a company. However, as you're about to hear Amman explain, not every company can be valued with a high degree of accuracy. So what are the factors that indicate that a company is going to be something that's going to make a lot of money, it's going to have a lot of value, and it's going to be reliable over a long period of time? What is your process of figuring out whether a company is or isn't that?

So every consumer has a view on different brands and different companies. What we look for are sort of these non-disruptable businesses: a business where you can kind of close your eyes and know that 10 years from now it's going to be a more valuable, more profitable company. As we discussed earlier, in order to value a stock, you have to be able to have an understanding of what the future profitability of that company is going to look like with a relatively high amount of confidence. For many companies, this is not possible, and this is especially true for high-growth technology companies. Areas like technology are rapidly changing. Today's winners can easily become tomorrow's losers, dethroned by fast-growing, innovative startups.

Compare that to a company like the railroad Canadian Pacific Kansas City, or CPKC for short, a company that Amman's fund, Pershing Square, owns a whopping $1.2 billion worth of stock in. CPKC is the only railroad that owns tracks that connect Canada, the United States, and Mexico. The history of the railroad dates all the way back to 1881. Over the subsequent nearly 150 years, countless mergers and acquisitions led to CPKC expanding its rail track footprint throughout the continent. This over-century-long process culminated in the year 2021 when Canadian Pacific, with its rail network in red here, acquired Kansas City Southern, the rail network here in black. This combination formed the only railroad to be able to move goods between Canada and Mexico. This rail footprint took literally generations to build. Even if you gave a smart, hardworking entrepreneur tens of billions of dollars, they would not be able to replicate it. CPKC is what Amman refers to as an undisrupted business.

The simple, relatively predictable nature of this business, combined with its enduring competitive advantage, means you can estimate what the business is going to look like in 10, 15, even 20 years from now. These are the kinds of businesses that can be valued with a relatively high level of confidence. Now, at this point in the video, you may be saying to yourself, "Look, that's good and all, but how do I find businesses like CPKC, Hilton, or Restaurant Brands International, or Chipotle?" Now that you know what you're looking for, how exactly do you go about finding it? This leads us to our fifth and final item on Amman's list: the research process.

Here, Amman is going to explain how he goes about finding these types of great investments. "What's the actual process you go through? Like literally, the process of figuring out what the value of a company is: how do you do the research? Is it reading documents? Is it talking to people? How do you do it?"

"It's all about—so Chipotle, what attracted us initially is the stock price dropped by about 50%. Great company, great concept. Cons—athletes love it, consumers love it, healthy, sustainable, fresh food made in front of your eyes, and great. Steve Ell's, the founder, did an amazing job. But ultimately the company's lacking some of the systems and had a food safety issue. Consumers got sick—almost killed the brand. But the reality of the fast food, quick service industry is almost every fast-food company has had a food safety issue over time, and the vast majority have survived. And we said, 'Look, such a great concept, but their approach was far from ideal.'

But we start with usually reading the SEC filings. Companies file a 10-K or an annual report; they file these quarterly reports called 10-Qs. They have a statement which describes kind of the governance, the board structure. Conference call transcripts are publicly available; it's kind of very helpful to go back 5 years and kind of learn the story. You know, here's how management describes their business. Here's what they say they're going to do, then you can follow along to see what they do. It's like a historical record of, you know, how competent and truthful they are. It's a very useful device.

And then, of course, looking at competitors and thinking about, you know, who could dislodge this company. And then we'll talk to—if it's an industry we don't know well—we know the restaurant industry really well, music industry—you know, we'll talk to people in the industry, we'll try to understand, you know, the difference between publishing and recorded music. We'll look at the competitors. We'll talk to, we'll read books. I read a book about the music industry, or a couple books about the industry. So it's a bit like a big research project.

And there are these so-called expert networks now, and you can get pretty much anyone on the phone, and they'll talk to you about an aspect of the industry that you don't understand and want to learn more about. Try to get a sense, you know. Public filings of companies generally give you a lot of information but not everything you want to know. You can learn more by talking to experts about some of the industry dynamics, the personalities. You want to get a sense of management. I like watching, you know, podcasts. If a CEO were to do a podcast or a YouTube interview, you get a sense of the people.

One of the most powerful resources for individuals to research a stock is that company's investor relations website. Nearly every publicly traded company has one, albeit with some being much better than others. Simply type in the company name and then investor relations, and it will take you right there. Let's do that with Chipotle. On Chipotle's investor relations site, we can see things like news releases, presentations, SEC filings, and recent events such as earning calls and investor days.

One of the best resources to learn about a company is through its annual report. An annual report is a corporate document disseminated to shareholders that spells out the company's financial condition and operations over the previous year. Think of this as almost like an introduction to the company for new investors. Let's use Chipotle as an example.

With Chipotle, you can learn about the business and its strategy. In the strategy section, you can see that opening new locations throughout the U.S. and abroad is a key element of the company strategy and a focus area for management. You can also see that the company's digital business gets its own section, demonstrating how important it is for Chipotle. As you can see here, you can see that management continues: Chipotle's digital in-app ordering and use of third-party delivery platforms is, quote, "a strategic driver of growth."

It doesn't stop there. You can even get very granular details about the financial performance of the business. For example, we can see revenue breakdowns for 2023. Here, we can see that the average Chipotle restaurant did $3 million in revenue in 2023, up from $2.8 million the previous year. We can also see that revenue in stores that had been open for at least a year was up 7.9%. Where things get really interesting is that this annual report breaks revenue growth down further into the number of transactions and the average value of each transaction. There were 5% more transactions, and the average transaction amount grew 2.9%.

All of this information is extremely important for investors that are interested in potentially buying Chipotle stock. This is only the tip of the iceberg when it comes to stock research. An entire series of videos could be made solely dedicated to this one topic.

Let's recap Amman's five key elements of his investment process. First, we have Mr. Market. Remember that the value of the hypothetical restaurant you own is dependent on how much cash it generates, not on the mood swings of the random guy trying to buy it from you. Second is how to value a stock. Remember, when it comes to determining what something is worth, cash flow is king. Third is the concept of margin of safety. When building a bridge, always make it so it can support more weight than what you think is necessary. Fourth, we have what makes a company valuable: look for the undisrupted businesses, a company like CPKC and how it took 150 years to build out its rail network. And fifth, the research process: focus on understanding the important things you would want to know if you were buying the entire business.

If you enjoyed this video, you are obviously serious and dedicated to learning from legendary investors like Bill Amman. If that is the case, make sure to check out this video here of Warren Buffett explaining how to generate high returns with little amounts of money because it is a super helpful explanation on how to invest successfully. The video has 250,000 views already, so you definitely don't want to miss it. I'll see you over there.