Bill Ackman: The Biggest Investing Opportunity of Your Life

I think you can do very well as a stock market investor if you find really high quality companies, and you buy them at attractive prices. I think today, you know, is a pretty good time. It's a pretty good point of entry. Now, it's no secret that this year has been rough for investors in the stock market. Stocks entered a so-called bear market this year as prices fell more than 20% from their highs. The S&P 500 was down as much as 25 percent. The Dow Jones was down as much as 20, and the tech-heavy NASDAQ has been hit the hardest of them all, down 35 percent from its high.

Now, that sounds like pretty scary stuff for stock market investors, right? What if I told you that now is actually a great buying opportunity? This isn't coming from me; this is coming from billionaire investor Bill Ackman. In this video, we're going to examine why Ackman thinks now is a great time to be buying stocks. We also are going to reveal Ackman's four-step checklist to picking great stocks to invest in.

But first, make sure to like this video and subscribe to the channel if you aren't already, because it's my goal to make you a better investor by studying the world's greatest investors. Let's get into the video. Look, it's much easier to make money in the stock market in a rising stock market environment. If you know rates, a declining interest rate environment is generally a market in which asset prices increase, and so a rising tide lifts all boats.

So, if you just own equities, I think we're right. So right now, we're in a rising interest rate environment. So that's obviously more challenging. Really, I think that what matters is, are the central banks around the world going to stop this out-of-control inflation? I would say I think they will. And where, you know, what's the new level of long-term inflation? Is it going to be? Are we in a world where it's difficult to create? You know, with the Federal Reserve, as recently as I don't know, 24 months ago, central banks around the world were worried about deflation, and that's been a very, very dramatic change.

So I think you can do very well as a stock market investor if you find really high quality companies and you buy them at attractive prices. I think today, you know, is a pretty good time. It's a pretty good point of entry. Right? You know, March of 20 was obviously a very, very good entry point. Anyone who bought stocks in March of 2020, something I went on TV and advocated on March 18th of 2020, I said, "This is a moment."

I think this is sort of another moment where I don't know how well you're going to do over the next three or six months, 12 months. It's a highly uncertain world, but over the next three, four, five, ten years, it's a pretty good place to be an investor or time to commit more capital to equity markets. Although, I would—you gotta pick carefully. You want to own the super high quality, well-capitalized, dominant businesses that you know will be here, you know, 30 years from now. That's where we own companies like Hilton and Universal Music and Restaurant Brands.

So, what you're saying, whether or not there's a Q4 correction or whatever, that doesn't really matter if you're looking further out a few years, three, four, five years out. Now is a good time. You'll look back on today and think, "Yeah, that's a good sign to buy." For sure, that doesn't mean the market's not going lower in the next three months, right? It's, but you know, I wouldn't commit all of your capital today. Right? Keep someone reserved, you know, a bit of the—as they used to call it—dollar cost averaging.

It's, you know, S&P's down, you know, approaching 20% for the year, and it wasn't highly overvalued at the beginning of the year. So, I think prices are fair to cheap. As Bill Ackman mentioned in the clip, the stock market has been challenged this year due to high inflation and the higher interest rates that come along with it. Inflation is running at its highest rate in generations, and this is scaring the U.S. Federal Reserve.

In an attempt to get inflation under control, the FED is raising interest rates dramatically, and this is negatively impacting stock prices. The hope is that increasing interest rates will help slow down the economy and cool inflation. In investing, the most commonly used metric to measure interest rates in the economy is the yield on the 10-year U.S. Treasury bond. Yield is just a fancy way of saying interest rate. This would be the return you could expect to receive for lending the U.S. government money for 10 years.

The yield on the 10-year Treasury was just 0.5 percent in the summer of 2020 and has since risen all the way to four percent. This is a nearly eight times increase in just two years. Now, investing during normal times is hard enough, but add on rising interest rates, and that makes things even more difficult. That brings us to this sponsor: today's video, Candlestick AI.

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Now, let's get back to the video. In the words of Warren Buffett, interest rates are like gravity on stocks. The higher interest rates go, the more downward pressure there is on stock prices. Let me explain what he means. A stock is valued based on the cash you'll generate, discounted back to present day using a given interest rate. This so-called intrinsic value is how much the stock is worth.

Now, I know that definition sounds intimidating, but the math is actually pretty simple. Let's see how rising interest rates impact the intrinsic value of stocks. Let's say we have a stock that will generate twenty dollars in cash for us in year one. In this example, the stock will be able to grow the cash it generates by twenty dollars a year for ten years. So, forty dollars in year two, sixty dollars in year three, all the way to 200 in year 10.

For simplicity purposes, we're going to say the company stops operating in year 10, so you won't receive any cash from selling the stock. Now, in order to determine a value for this stock, we have to discount it back using an interest rate. Let's start out with a five percent interest rate. This gives us a stock price of 787 dollars.

Now, let's see what happens as interest rates start to climb. If we take the interest rate we use to seven percent, this causes the value of the stock price to fall to 695 dollars. Notice how the stock is worth less than before, despite producing the same amount of cash. The only thing that changed was the interest rate. If we take the interest rate all the way up to ten percent, we see that our stock price falls even farther, all the way to 581 dollars.

Just raising the interest rate from five percent up to ten percent caused the value of our stock in this example to fall by 26 percent. But, given that interest rates are rising, why does Bill Ackman think now is a great buying opportunity? It has to do with the fact that he believes the Federal Reserve will be able to get inflation under control.

Once inflation is brought back under control, the FED can stop aggressively raising interest rates. In fact, the FED might actually start lowering interest rates once inflation starts to normalize and the economy weakens. So, if we go back to our earlier example, let's see what happens as interest rates decrease. We saw that a 10 percent interest rate resulted in a stock price of 581 dollars.

Remember, rising interest rates are like gravity on stock prices, pulling stock prices down as interest rates increase. But on the other hand, decreasing interest rates are like jet fuel propelling stock prices higher. Let's see this play out in our example. Let's bring the interest rate down to eight percent. This causes our stock price to rise to 654 dollars.

Let's take the interest rate down even farther to six percent. This causes another bump to our stock price, setting the price up to 739 dollars. If we get really extreme and take the interest rate all the way down to two percent, the stock price skyrockets all the way to 959 dollars.

In the clip, Bill Ackman was making the argument that people who buy stocks now are going to benefit from the tailwind of interest rates coming down as inflation starts to get under control. As we saw in our example, declining interest rates are positive for all stocks. However, Ackman was quick to point out that investors shouldn't just buy any stock. You want to be selective in which stocks you buy.

This is because movements in interest rates are notoriously difficult to predict. You want to buy the right stocks and let declining interest rates be an extra bonus on top. This naturally raises the question of what characteristics should we as investors be looking for in stocks. But thankfully for us, Ackman has provided a checklist of criteria that he uses at his multi-billion dollar hedge fund, Pershing Square.

Here are Ackman's four criteria for what makes a stock something that could be worth buying. The first criteria is that a business needs to be simple. Look at the stocks in Ackman's portfolio. We have home improvement retailer Lowe's, fast casual restaurant Chipotle, Restaurant Brands International, a holding company that owns brands like Burger King, Tim Horton, Popeyes, and Firehouse Subs. We also have hotel chain Hilton and the railroad Canadian Pacific.

While these businesses are in different industries, they all share the common trait of being relatively simple businesses. While Bill Ackman did go to Harvard, you don't have to have an Ivy League degree to figure out how these businesses work. If you're watching this video, I guarantee there's a good chance you're intelligent enough to understand how a business like Chipotle works.

Compare that to other companies, like biopharma stocks as an example. You almost have to have a PhD in chemistry to be able to even start to understand the businesses within that industry. The next criteria is that a company needs to be predictable. This means that you should be able to have a rough estimate of how much money the company will make in any given year.

Think of predictability as a spectrum. On one end, you have highly predictable businesses, like those that own real estate. For example, you know every year that company's profit will grow a little bit as rents are raised. You could project out what that company would be making five years from now, and odds are you won't be too far off.

On the other end, you have companies like electric vehicle startups. In five years, these companies could be making billions in sales or they could be bankrupt, doing zero dollars in sales. So, if you look at Ackman's portfolio, his stocks definitely fall towards a very predictable end of the spectrum.

The third criteria is arguably the most important: the business must have what is referred to as a moat. Capitalism is brutally competitive. If a business is making a lot of money, someone else wants to come along and take the profit from that business. A moat is what stops competitors from destroying a company's profitability.

Picture a castle in our analogy here. This is a company's ability to generate a large profit. The larger the profit, the more rival companies are going to come after that castle. The moat around the castle, in this picture, is what keeps those competitors away and allows the company to remain highly profitable. Take the railroad industry, for example, Ackman's holding Canadian Pacific.

Canadian Pacific has a huge moat. The railroad tracks that the company uses to move goods took hundreds of years to build. As a result, if you are a company and want to move your products using rail throughout this part of North America, you don't have a ton of choices. You have to decide between Canadian Pacific or their rival Canadian National.

If someone wanted to start another company to rival Canadian Pacific, it would cost tens of billions of dollars, and this is even assuming you could get permission from the government to build the thousands of miles of track necessary. This huge moat allows Canadian Pacific to be extremely profitable and prevents any competitor from entering the industry and encroaching on that profitability.

Now, into criteria four: if the stock has met the first three criteria—simple, predictable, and having a moat—it now has to meet one more: selling at a discount. As we talked about earlier, a stock is valued based on the cash flow it will generate. That is referred to as the stock's intrinsic value.

Think of intrinsic value as what the stock is actually worth, which can occasionally be significantly different from what the stock is currently trading at. While going into the specifics on how to calculate intrinsic value is too much to cover in this particular video, here's how to think about it. Let's say that you determined that a stock's intrinsic value is a hundred dollars.

You don't necessarily want to buy this stock when it is trading at a hundred dollars. Instead, you'd want to buy this stock when it is trading at, let's say, seventy dollars. That thirty dollar difference between what the stock is currently trading at and its intrinsic value is what is referred to as your margin of safety. This margin of safety keeps you from losing money if your estimate of intrinsic value turns out to be incorrect.

A margin of safety is especially important when you have a concentrated portfolio like Ackman. He only owns a handful of stocks in his portfolio. This means that even if he is wrong only about one of his stocks, the results can be disastrous. These four criteria have helped Ackman become one of the most respected investors in the world, yet they are simple enough that you can start applying them to your own investment strategy.

You should be looking to invest in businesses that are: one, simple; two, predictable; three, have a moat; and four, are currently trading for less than their intrinsic value. While these four things may sound very simplistic and basic, virtually nobody does them. As Charlie Munger likes to say, "Make everything as simple as possible, but no more simple."

So, there we have it. I hope you enjoyed the video. Make sure to like the video and subscribe to the channel if you aren't already, because our community of investors is approaching 200,000 people strong. It would be even better with you in it. Also, check out this other video on the channel that I'm sure you'd learn a ton from. Thanks for watching, and talk to you again soon.