Bill Ackman: Pershing Square, hedge funds & learning from your mistakes

so good afternoon so for those of you who have not been to the side business school before welcome to site physical law University of Oxford just out of curiosity how many of you are students from the University but not from the business school excellent welcome to Syed I'm delighted this afternoon Pacific because that's what I'm going to be doing all afternoon I'm delighted to welcome this afternoon Bill Ackman CEO of Pershing Square Capital which is a multi-billion dollar investment fund that takes long term positions and investments in companies and then works with them sometimes very publicly to improve their performance in addition to being one of the world's most renowned investors bill is opposite bill and his wife are also substantial philanthropists and we an Oxford are the beneficiaries of some of their of their donations in particular we are created a program called the 1+1 program here at the Business School Wow that allows you to combine depth plus breadth so get the depth of a master's degree in one of the many topics around the Oxford get domain expertise and layer on top of that management skills for those of you who are masters students around the university and you're thinking you might want to have a second year here and get your MBA the purchase where foundation scholarships graduate scholarship scheme actually will make that possible in addition to making it possible to come for students to come who had not yet been in Oxford but apply for both years of first-year masters as well as ours in the MBA program so we are grateful to Bill Ackman for that gift but today is not about you know Oxford and it's not about the 1+1 program it's a conversation about activism in investing in activism and philanthropy so to set the stage here I think bill it was 1991 when you and I first met 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 it as a 20-something year old bill set up his first hedge fund so why did you set up Gotham bill and maybe you learn from that experience experience is making mistakes and learning from them so that's what I learned no so 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 in your money and when I got to HBS I actually opened the course catalog for the first time and there wasn't a class on investing in other classes on accounting or classes on Finance so I decided I had to develop my own little self study program and I wanted to so I opened a fidelity brokerage account I said this I had some money I've made in the real estate brokerage business this was my tuition in the investment business and it was about a year of tuition and 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 the inverse of the Oxford 1+1 program but and you know I the first stock I bought went up and I said okay I found what I want to do well more involved in that but I 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 is a really dumb idea to start an investment fund right out of his in school and he recommended that I go work for Michael Steinhardt or George Soros or one of the other famous ambassadors at the time but I figured that I knew enough this is the 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 and it's one of the few things you can really learn on your own you can learn investing by reading books are reading annual reports by having a you can have a portfolio and invest $100 and you can 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 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 activists in investing so maybe you can just help you know orient the audience about what exactly this person Square Capital do what's the general investment style and 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 kind of long-only institutions the vast majority about capital is by charter passive passive means you do your research 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 follow the index if you think about investing 100 years ago though investing you had Andrew Carnegie owning 20% of US Steel where you had JP Morgan as a large owner of various companies over time and 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 they were unhappy with the board's judgment they would make changes to the board and as capitalism sort of democratized the investment process and as any kid in Business School can open a brokerage account and as its you know the the owners of many of these great businesses over time you know gave the shares away to a university or their heirs and the ownership was to you know spread out you know the Sam Waltons of the world kind of passed away and the boards became to be managed by professional owners and so what we do is we look for situations where a business has lost its way where an otherwise great company within a in a business that we would define as one that has significant barriers to entry that Warren Buffett would describe is 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 as we own a stake in Canadian Pacific which is a railroad in Canada and 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 need to have 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 we 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 were inherently again the biggest investors tend to be very passive and 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 and we bought first 12% of the stock and then another 2% about 14% of the stock we recruited the 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 and that we hired him as a consultant he helped us study the railroad and he had plenty of fire in his belly and we said look would you be interested in a day job and 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 and we recruited them and then we had to simply 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 and it was the former head of the Royal Bank of Canada the former CEO of Suncor Energy the former head of the steel business you know it's 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 3 and 11 percent of the boat we put our directors on we did a review of the best CEOs in the world turns out the guy we identified with the best guy we put him in a CEO and that was 16 months ago and it's almost the most profitable railroad in North America after 16 months that's how quick this guy goes to work Sox gone from 46 to 151 dollars a share it's you know a little under 8 billion dollar market cap to a 25 billion dollar market cap that's kind of the perfect example now it doesn't always work that way and I have a feeling that Peter might ask me about one of those cases so I used to cold-call bill as a student so this is going to be fun so it's very clear you've had notable successes Bill's only own estimation is twenty three two and one except I get the numbers right 2424 town one twenty four wins two not wins 1 tie something like that and Canadian Pacific is clearly a win I think you just monetized 800 million that's what I read about a billion dollars and then MBIA is another one where a bill was prescient about you know the fact that the financial markets were going to well the MBIA which is large insurance bond insurer was in for a bad ride and you figured that out but there are some that - and one where I think what you've said in in some of your recent things where you've had some things that you've learned from those experiences they might include for example JCPenney that's been in the news this summer so what have you learned from the successes and then maybe what if you learned from the ones that haven't been successes again as I said at the beginning experiences making mistakes and learning from mistakes and unfortunately as students you haven't made many mistakes yet it you've gotten to Oxford at this point in your career the biggest risk is you probably haven't screwed up a lot and so you know the risk of that is when data comes across your desk that's inconsistent with your being successful you're less likely to pay attention to it than if you've made a few mistakes so I encourage you to make some mistakes and actually I've made plenty of over the course of my career and I think I've been very successful over time but it's not been a straight line up in fact I had if I were a stock it would look something like this after business school you know and then so the concern is whether this is coming in but but so far the overall trend has generally been positive but now there are certainly bumps along the way and JCPenney is a company that we invested in that we knew on the way in was a much higher risk situation than a Canadian Pacific so JCPenney for those you're not familiar is 112 year old American sort of iconic retailer that's certainly way past its prime they probably peaked 25 or 30 years ago again another example you had James Cash Penney who founded the company he died I think in the early 70s and there's a pretty good correlation between when the founder goes and when the he goes and part of that has to do with governance which is a topic I'm sure we'll get to but the time we invested JCPenney stock was down from 80 to about $20 a share it was trading at about 4 times operating income it had lots of assets lying around in the company that were non-core assets it had a very bloated expense base and it was generating very little sales per square foot it was a very underachieving retailer and part of that is the brand had become somewhat tired and they had gone to a very highly discount oriented model where they'd mark a address at $40 and they wouldn't sell any of that price and a week later they market to 20 and they probably wouldn't sell many at that price and then they would send you a coupon you got $10 off and then start to sell a few and then if you used your credit card you got $4.00 off and if you bought this moment you get another $5 off and eventually it was you know eight bucks or whatever they sell a lot of them at that price and but this was undifferentiated merchandise and the thesis was this company has actually still a brand all faded restorable and because they were created over last hundred twelve years they actually owned about a hundred and twelve million square feet of some of the best real estate in the shopping mall and the shopping malls and the shopping real estate industry they owned or have very long term lease halted very low rents we said look this is a great platform to rebuild the company and we bought a 16 percent stake in the company we drew I was invited to join the board I joined the board with a friend who bought ten percent along with us we owned together twenty six percent of the company we both joined the board we were two of eleven directors and the CEO was 64 and the board was very much focused on succession as any board should be generally but particularly in their CEOs in his mid-60s and we helped the board with succession and there was a candidate that kept surfacing as the best guy in retail and this guy's name is Ron Johnson and he had an ideal background he didn't go to the Oxford Business School but he or Syed he went to Harvard Business School and he graduated he went to work for Mervyn's his dream in life was to reinvent the department store and Mervyn's was kind of a dying department store it was acquired by Target so he spent a few years at Mervyn's he spent ten or eleven years at Target which is probably the best run us discount department store and then he was hired by Steve Jobs to build the Apple Store from a blank sheet of paper and he did an absolutely incredible job and we said look he couldn't ask for a better background to do what we're trying to do here reinvent the department store combine the Apple customer store experience with you know kind of some of the Target brand excellence and cost management and the problem was recruiting him it's very happy living in you know Atherton California he had three four hundred million dollars restricted to talk and Apple 100 million of which he was going to lose if he left and he had kids who were in you know 13 15 years old middle there you know the time when parents don't like to move but I managed to convince him to take the job and he walked away from a hundred million restricted stock we gave him 50 million to make up for it but he still took a loss when he took the job then he invested 50 million dollars in seven-year options that he bought with his own money that he couldn't sell for six years I thought this is the absolute perfect thing we have the best guy we've got a great platform and a really cheap price we have the perfect alignment of incentives and I thought it's done but it didn't work and and so Ron got started in November of 2011 and he proceeded to make a series of changes many of them very favorable among them took a very hard look at the cost structure and found about a billion dollars that he could take out of the cost structure of the business we took a hard look at all the non-core assets and we monetize about six hundred million dollars with an encore assets so far so good and then he launched a business plan to convert the JCPenney store into basically a mini shopping mall a Selfridges type model where there were a series of brands each of which would have their own kind of presence in the store and then you have a consolidated checkout with a wireless experience and sort of that's Apple like customer service experience and he sold this idea to brands that heretofore wouldn't be willing to go into JCPenney and the guy's very charismatic was a great idea they had a whole bunch of brands that he got from around the world who were excited about opening up inside JCPenney and he went to work but he made one very significant strategic mistake this whole notion of what he almost called fraudulent pricing this over pricing an item and then marking it down and marking down and coupons he said looked as a waste of time let's just mark it at the price the consumer knows the fair price because when you looked at those $40 dresses and four don't load shirts they all sold it from something like $12.30 but you got on average and very little sold it any other prices let's just mark it at 12 bucks the consumer understands value we can save a huge amount of you know the company had it's been an enormous amount of man-hours actually changing signs if you think about how often they're constantly repricing Andry ticketing and changing signs made the stores look really cluttered and you know that sounded like a brilliant idea an apple the Apple experience was not about testing so instead of trying this out in one or two stores or in a region he rolled it out across the country and it fit and the customer who had become accustomed to getting coupons in their sunday circular all of a sudden coupons weren't there and so they decided not to come and we lost about a third of our customers after about 12 months and the great thing about a retail business if you get it right is this business has enormous operating leverage all right because you've got a substantial fixed cost base but once you start generating additional sales at almost all drops that a lot of it drops to the bottom line Oh only problem with leverage as you learn in business schools it works in Reverse and so all of a sudden come he was losing huge amounts of money after having spent a ton of money on capital rebuilding and redesigning these stores and we found ourself in a turnaround 15 months after he was hired and we had to replace him and the lesson there many so number one this was what I call an extreme makeover of a company and when you do an extreme makeover it requires perfect board alignment and backing for the CEO and we didn't have that number one we were one of eleven directors in the board and there was still look while it had it worked perfectly from the beginning that wouldn't have been a problem has things got dicey er there was a divergence of opinion on the board what to do and when to do it and who to hire so I think that's one interesting lesson I don't think I'll ever go on a board and be one of eleven anymore like going on with a mandate like in Canadian Pacific to you know I think Ron is an incredible talent but I don't think like the students in the room he'd ever made a mistake before and I think it was as the data kept coming back you know Ron's still had a lot of confidence it was going to work and you've got a back year CEO and giving and give him and give him rope and I think Ron will be and I think he'd say this today he'll be a much better CEO the next time because having had a big negative experience like this I think third retail is one of the businesses where you can really test right you can take a region you can take a store and you can try things out and rejigger them and test them and I think you know the Apple experience Steve Jobs was all about the customer doesn't know what he or she wants I know what the customer wants and Steve Jobs you know got it right I think in retail you know there's a kind of a saying the customer knows what he or she wants and I think you really have to listen to that so while I actually I still love the vision for JCPenney I think it was right I think the execution was difficult and you know to do something like that and also in the public domain right this is a major change and the company was constantly being harassed by the press and Ron was attacked I think it makes it difficult to make decisions in that kind of a public context there's there's a lot could use up the rest of the lecture here with that otherwise you know what's amazing for the audience is this is this is on the bad side of the ledger and Bill you know you being so frank about what worked and what didn't work I think this is how we learn at a business school because even though you may not have failed yet you know we uh sold guys typically have and we have an opportunity to do that I'm failure just for a second I don't know they're very few people you look at the most successful people in the world I know very few then that haven't had a major failure you know if you read through the they're not the financially most successful people if you'll read for the Forbes billionaire list and you read their stories you know they've had failed businesses and they've lost everything and they've hung on the you know they almost died holding on to the ledge you know what's his name the guy on CBS and Sumner fire somebody redstone redstone so there are lots of examples of people who had huge adversity I think it's how you deal with adversity that determines your ultimate success as opposed to how you deal with success that determines your ultimate success so so that's one of the things I've learned good lesson from JCPenney and otherwise okay so you're an investor Bill but you know once you get on a board you're also you know you're a board member inside Pershing Square you are a kind of a manager and leader so how do you describe your personal management style your leadership style not necessarily as an investor but when you're actually leading things in around okay so the only leadership role I have in a public company today is I'm chairman of the board of a company called the Howard Hughes corporation and there I'm a non-executive chair and I work I have an outstanding CEO guy by the name of David wine rabbit runs a company and he's outstanding is and the key things I did there were one I recruited him two I gave him we set up a tan sent 'iv arrangement with him I you know he was the first guy I did one of these you know by seven year warranty can't sell for six years we put up his own money in his case he invested 15 millions worth 150 million three years later so in his case it seems to have worked better than in the JC Penney case although I would say in the JC Penney case had worked well too for a second in that Ron did he lost his 50 million dollars so he did the alignment was there but that doesn't guarantee you an outcome but key you know set up the incentive structure that so that the management's issues are aligned with yours and then just be direct you know my approach in business in my personal life in a management role is extreme candor and I think that if you live that way you know you'll run the risk of offending various people over time but you'll have much better relationships because you know if you tell people the truth first of all it's not typical you know a lot of people in the interest of politeness or fear of confrontation or it's just uncomfortable don't speak the truth and that goes for people on boards you've there lots of examples of super talented people sitting around the room as an institution is failing think of all the banks during the crisis where people were not willing to confront the CEO so I'm willing to confront the CEO and but I'm completely candid with him about his successes and his failures and it's but I give him a you know I don't step on his I don't run the company I'm not involved day-to-day at all I trust his judgment it's a bit of a trust but verify type relationship and it's worked very well so that's the my only public leadership role I am CEO of Pershing Square it's a much easier business to run than a normal company because we've got only 56 employees and here the key is the key to successful leadership is one hiring the right people I have the benefit of not inheriting anyone because I hired in the company I interview every receptionist I interview every secretary I interview every investment person and so I get to pick ultimately everyone that I work with and that helps leadership a lot because if you hire the key behind leadership if you hire super talented people you don't need to do that much leadership because they're going to do the right thing second thing is setting up the incentives correctly so in Pershing Square everyone is incentivized by how the overall firm does which i think is a good dynamic because it creates teamwork I follow the same extreme candor approach in evaluation evaluating people and I care about everyone I work with as I do a family member simm so we look out for each other and if someone's going through a difficult health issue or personal issue financial issue or you know I have the benefit of having a lot of relationships and whether it's the medical community or in the business community or in the political community and so we help our people and we don't tolerate insincerity I you know people are encouraged to admit their mistakes immediately before they figure out a solution to the problem it's my when I hired my CFO in the first year working with him he would approach me with a mistake he had made after he had figured out how to solve the problem now we get angry with them every time no no I don't want to hear about the mistake after you figured out the solution I want to happen the mistake now and then we can work together on solving the problem so I think if you have an organization where people very quickly admit mistakes and where you're candid with them and they're not punished for making mistake that is a very good dynamic and it's worked very well we have almost no turnover even in the reception desk at Pershing Square and and that's what it's been a good model so I don't do that much leadership other than I guess on the leadership side I think you have to you know you have to set an example in terms of the way you live in terms of the way you behave because that affects how other people watch is my other key success factor for being a leader in the 21st century in the era of everyone having a video camera on their cell phone is assume that everything you do is being videoed and recorded at all times that will you know and consider that the video ends up as a top video on on YouTube and then adjust your behavior accordingly so fair you are being videoed by the way so if I'm correct all or almost all of your investments have been in North America but I note that you are creating a new fund that will be listed on the London Stock Exchange with an eye to raising money from the global capital markets any observations on opportunities for your kind of investing outside of the Americas sure I think there are a lot of opportunities for shareholder activists in markets outside the United States the reason why we focus on the US is because there's a lot to do it's close to home I speak the language understand the law we're very well known in the United States I know every CEO in America knows who I am so I pick up the phone and call I'm going to get a return phone call and we do so few things a year you know if we do three things a year that's kind of a big year for us and we have a lot of wood to chop before we need to go far and as much as it's fun to come to Europe I'd rather come here on vacation than to come here up for a proxy contest and if you have a problem by the way so JCPenney was a problem they spent a lot of time in Texas but Texas is a lot closer than you know Japan or or you know Italy and so on it's not culturally yes exactly so you know all of that said and I think the u.s. shareholder activism has become very well known and understood and directors are very responsive to shareholder activists whereas I think Europe is probably 10 years behind in terms of the degree of shareholder activism and how directors respond and precedent and so on so I think it's harder here but I think it's it's an it's going to happen because I think passive investment management as a long-term strategy is not a great long-term strategy other than in in bull markets and so I think the demand for returns to meet pensioners obligations will make shareholders inherently more proactive and unaccepting of underperformance so bill was interviewed on Charlie Rose recently and I watched it in preparation for tonight and one of the questions that Charlie Rose asked you was if you weren't an investor what would you do and after a little bit of throat clearing you said you know I always thought about government so suppose that we follow up on that Charlie Rose question and I can look at some of what you've done is in some sense to recast it as almost like a private regulator you know what you did with MBIA and Herbalife which we'll get to in a second you know I really see you as a private regulator but suppose you were in government what part of government would you be in and what would you be your mandate so not sure I'm ready to go into government a lot a lot of downside associate with that but look there will come a point in time hopefully there will not come a point in time it's a good better way to say it where I'll be so where I won't be frustrated with how our government is run that I'll feel I need to do something about it but I think that the the business community globally has stepped out of government to too great an extent and I think the consequences I mean so I think the typical sort of point of view in the United States has always been well you know our governments not that particularly well-run but you know it's such a great country that it doesn't really matter and I think it's increasingly matter increasingly matters so if you think about you know the United States as a business right we've gone from being very conservatively financed to approaching over-leveraged we the the governance structure is inherently dysfunctional means our ability to make decisions about even meeting our contractual obligations to our bondholders I mean the fact that we've had we had a debt ceiling crisis only a couple weeks ago is a perfect example that the implement you know that we imagine launching a business of appealing to like a hundred million new customers and the website going down the first day and not working for like a month okay imagine if that happened in the private sector you know would would anyone keep their job that worked for that business and I think so I think that you know the our government has not shown itself particularly effective at things business and I think the running of the country a huge part of that is you know the president is the CEO of America and he's responsible ultimately for how the website works it's like Jeff Bezos website goes down you don't blame the CTO you blame Jeff Bezos and I think that you know what I like about what I do is we can work to make business more effective and at some point it would be time for someone to take my spot and the question is whether I can be helpful on government and I don't I don't know what the right role would be but it's tough having been you know the benefit of where I am now is the buck stops with me the question is whether I want to work for someone else and so I guess either have to be CEO or they have to find something else to do okay we're waiting for the post of CEO USA here so that's coming and they should have that post there be the president and there should be the guy runs the business or country or chief operating officer here so will will suggest that next president can shake hands he can attend funerals okay there you go how much you run the country I would be remiss if we spent this time together and we didn't talk a little bit early Herbalife for those of you who don't know and build was going to explain more this is a direct selling scheme which the day I came to see you in New York you were about to or that day you were launched your PhD length report on all the various problems with Herbalife you then had a substantial short position for those of you who don't know finance so that's basically sitting a position such that you benefit with the stock goes down a very public and nasty battle with Carl Icahn and in the last few days I see restructuring your position from shorts and to put options forget about that for those we don't worry about finance and one element of this deal which was extraordinary novel I mean the whole thing was novel was your announcement that you would donate your profits from the trade to charity you explain what's going on at Herbalife and in particular maybe focus on that last piece which will be a bridge to some things on philanthropy you know what we trying to accomplish in and what was this announcement about donating profits from from the trade to charity and why'd you do that okay so as you mentioned earlier so about 11 years ago I came out with a white paper called is MBI a triple-a where I questioned the triple-a rating the company called a I disclosed on page one of that report that I had shorted the stock and bought CD s a kind of an insurance product betting on the company's credit deterioration and caused a bit of a stir with its paper the company did not like the paper and they as the largest guarantor of New York State and city bonds decided they wanted to get back at me and they called up Eliot Spitzer who was the then presiding attorney general in New York and said look there's an evil guy saying that we don't deserve our triple-a rating and you know Moody's and S&P say were triple-a who is this guy and what he's an SP would later lose some credibility after this but the this was a hundred and fifty to one levered company I was guaranteeing a whole sort of very risky subprime sea do-si-do squared CEO cube and so on and so forth and it was insolvent based on the exposures and a good analyst digging deeply could determine that and I came public with this and I was largely ignored and I kept at it some persistent guy and I made a series of presentations see if I remember some of the names of them but anyway so I made a series of presentations and no one was really paying attention the stock was 73 the credit the insurance just kept getting cheaper and cheaper meaning no one believed that we were right and one day at my last presentation I said oh by the way no one ever believes me on this one they say well you're short so how can we believe you because you're going to profit at the decline so I said at a conference I said okay I hereby commit to give away 100% of any personal profit I make from this investment that was that day was the high for the stock and it went from 73 to $3 a share and the credit protection went from 13 basis points to 2,500 we made a billion six or seven hundred million dollars I personally made a hundred and fifty million dollars and 150 million dollars seeded was really the maybe the second or third grand but the big grant that created the Pershing Square foundation so the Oxford program is a indirect beneficiary the failure of MBIA failure the financial system actually has a silver lining I love it so the problem with short selling is it's something that even though it's perfectly legal it's something that people have a degree of discomfort with you know it's almost perceived as unamerican to bet against a company and we by the way only do it in very rare circumstances and only when we believe when it's good for America are good for the world for the company to disappear and so in this case you had a company that was assuming more and more credit risk and had only a tiny capital B had five billion of capital and a trillion dollars worth of obligations they were guaranteeing because they were triple-a rated up banks and other institutions were not holding capital against these exposures because regulators say if it's triple-a rated you don't need adult capital so this was creating in fact in my testimony of the SEC if you actually there's a book called confidence game which is about my battle with the company and if you go to the confidence game website all of my transcripts of testimony to the SEC in the Attorney General actually online you can read them and in there and this is early 2003 timeframe I said there's going to be a credit crisis if you don't shut this company down no one no one paid attention anyway so I came across a company way so the I think the giving away of the the profits made people say look maybe this guy actually believes what he's saying people paid a little more attention and I think that helped it's probably give the money away anyway so it's easy to give away when you don't have it after you receive one hundred fifty million then it's really okay so the second time round of consequence is a company called river life and Herbalife is a company that's ported lis in the nutrition business they sell protein powder shakes they sell vitamins they sell herbal tea they sell some nitric acid type things that's supposedly good for your heart these are all commodity products they're made by five six ten different manufacturers you can buy them at your local pharmacy you can buy them at your local G and see if they have that here you can buy them at your local supermarket the price you paid your supermarket is about a quarter to a third of the price you pay for the Herbalife product so who in the right mind would buy this overpriced stuff and the Herbalife number one product is called formula one you know no one's ever heard of formula one other than the race and it competes with a product called slim fast which I guess many people in room may have heard of it the product made by Unilever slim fast sells 100 million hundred fifty million a year Herbalife ostensibly sells two billion of the same product how is it that slim fast sales have been coming down every year and the Herbalife product is been growing it sold what the bike what they call direct selling model and the way that works is your name is Mary Ann so Mary Ann to me and she says bill don't I look terrific I've been losing weight I've got this product I've been using and I said well you look fantastic and chef would you like to try it sure friend approaches me you know and said hey until you try it and then she says hey would you like to make a little money on the side and in this economy who wouldn't want to make a little money on the side and she convinces me to become an Herbalife distributor and she tells me that if I sign up five friends and each of them sign up five friends and each of them sign of five friends pretty soon I'll be collecting royalties and I can retire rich or if I'm less ambitious I can make some little money on the side and is a unsophisticated unemployed low income person which is the target audience for Herbalife this kind of pitch from someone I trust sounds appealing and the unfortunate thing is that something in order of 99% of the people lose money they're about 50 that make five or ten million a year they're about a thousand that make a few hundred thousand a year and the other three point six million lose you know anywhere between three hundred dollars and three eight ten twenty thirty thousand dollars and it's really a money transfer scheme it's a pyramid scheme it's like a chain letter when you got one when you're a kid you know send a dime to the following eleven people on the mailing list and then in three weeks you'll have a thousand dollars if you think about what a Ponzi scheme is it's a money transfer scheme without a product a pyramid scheme is the money transfer scheme of the product and they do smart things like put the Herbalife logo on football jerseys of famous soccer stars and they back various teams that's very appealing to the Hispanic community which is actually the target audience that they've been very successful with now unfortunately our fortunately pyramid schemes are illegal now here's a pyramid scheme it's got a seven billion plus market cap it trades in the New York Stock Exchange has been in existence for 33 years how is it possible that this company could be a pyramid scheme the answer is it is and in fact they've used their tenure as a public company and the New York Stock Exchange listing and the imprimatur of noble a Nobel laureate they paid 50 million dollars to to serve as representatives of the company and lacks regulatory regime in the u.s. to allow this pyramid scheme to grow to an enormous size and the profit pyramid schemes is they run out of victims and they inevitably collapse and I can actually prove to the audience very quickly that this is a pyramid scheme and I'll do that by asking you a question so Herbalife entered the UK in 1983 thirty years ago Pepsi weighs been in the UK for a longer period of time but after 30 years Pepsi had a good quarter last quarter and they grew their sales at 3% in the UK what do you think Herbalife grew their sales last quarter in the UK at let's let's have a guess in the audience raise your hand it's no risk of being wrong yes 1% okay someone else 140 percent is interesting okay 20 30 percent the answer is sales grew 92 percent last quarter and how is it possible that I mean maybe people getting fat at an incredible rate here I mean but but absent that the reason why I grew very quickly is they found the new immigrant population to go after and this is a product that where there is a boom as people get recruited and then when very quickly when the population gets saturated saturated it collapses right now they have you know the UK business grew enormously and then collapsed and now it's beginning to grow enormously I don't it's maybe the Vietnamese population you know I was with when my investors and said you know I think the women who work cleaning the office are Herbalife distributors and I met with them and people are convinced to become Herbalife distributors that you have to buy 3000 dollars worth of inventory in order to start getting these royalties and what it is is effectively an inventory loading type scheme so anyway the very that's the what the business is we did you know probably 18 months worth of work before we came public we hired one of the best law firms in the country Sullivan & Cromwell to do their own independent evaluation if I'm going to say publicly a come to the pyramid scheme I certainly would like the legal backing of one of the top law firms in the country and both we in Sullivan concluded there was a pyramid scheme and on December 20th and made a public presentation and there's a website called facts about Herbalife you can watch the presentation there's lots of other data there and so far so good until Carl Icahn came along and bought 16% of the company said it was totally wrong and every eye seems like every day he goes on CNBC and says what a great company it is and every time he says that the stock goes up another couple of dollars and in the meantime that company's reporting very good financial results but I'll make a prediction and I don't know if I'm back here in a year maybe Adam invite you back that can okay this business will be shut down okay this business will collapse I can't give you the precise date but we will have made progress to that in that direction within 12 months so that's my prediction for today and the profits will go to the Pershing Square Foundation and maybe Peter was some other idea for another Oxford program there you go which is a great segue so bill you know you and Karen are kind of you know if you sign the gates Buffett giving pledge your family's made a substantial commitment to giving away your money and we can talk about that in general terms but let's make it more personal here you were kind enough to fund these 1+1 scholars the whole point of these is you know people are going to study depth and breadth and then go off and change the world 25 years from now you'll be in your 70s I think I hate to admit that yes okay fine 72 to be exact there you go so you're still young enough to be on the stage 25 years from now we have a stage full of one of Pershing Square graduate scholars what will they have accomplished what do you want these people that you're funding to have done in the world so what's interesting is there's an enormous leverage in people that in a single person all right there are people that change the world and a good example of that I'll give an example of someone who might go to the program someday or in someone like this so we were talking about Wendy Kopp earlier - Wendy Kopp founded something called Teach for America I was at the organizing meeting for Teach for America in 1990 friend invited me to come and she got a group of friends together talked about the education system in America about how you know the best and brightest have not been going into teaching for a very long period of time how she wanted to change that how she had an idea to solve the problem and she wanted to start something called teach America wasn't actually Teach for America back then until they decided to form this thing and then I don't six months in someone else had the name teacher teach America that so they changed it to Teach for America anyway so Wendy Kopp has built a massive organization that recruits you know tactics something or an order of 10,000 kids right out of college to go into teaching for a couple of years typically in very difficult neighborhoods and they teach math and they teach science and they teach you know something related to their undergraduate degree they get exposure to teaching they meaningfully improve the teaching quality for you know many of the schools they participate in and a very high percentage something like 65 percent of them go on to careers and whether in teaching or in managing schools or in just the education field generally so if you think about the multiplier effect of what Wendy Kopp has achieved I think it's been a very big thing for our country and she's now doing something called teach for all and she's launching Teach for America in China and in other countries around the globe so I think that's a great example of someone that might again scaling a business like that and that's a business even though it's a not-for-profit business it's something that when he had no experience in whatsoever and she was fortunate and having good board members and directors and teaming up with the right people but there are a lot of people that have incredible ideas on how to change the world but no experience and you know some of the people with the best ideas have the least amount of experience and you know the idea behind you know an MBA program is to try to give you in a short period of time real world experience that you can then apply and so when he's a good example another example might be a guy that we've backed named Andrew Yoon and Andrew Yoon started something called the one acre fund and Andrew was in Kenya I think on a holiday and he noticed all of these one acre farmers who are basically women mothers that feed their family you know nine ten months out of the year based on the output of the one acre of land the government gives them and then their family starves the other two to three months the year because the crop output is is not sufficient to feed the family and they use very primitive farming techniques and they use very primitive seed technology and very primitive fertilizer and the result is a very inadequate crop year after year what Andrew said was what if we could teach people better farming techniques better irrigation techniques get them access to better seeds that more viral virus resistant and so on and he built an organization called the one acre fund and he's now trained a hundred and thirty or forty thousand of these one acre farmers and he and he's actually built an organization that has a field you know it's got an organizational structure like a big company that's servicing these 130,000 farmers he's grown at something in order of 50 percent compounded for the last five years one of the fastest growing businesses and it's law it's almost a he's self financing because what he does is he so you take the initial output your average output was whatever many bushels of corn and he says look I will provide you with better seed technology better fertilizer better access to markets and you give me half of the increase in output as compensation for what I give you and the farmers sign up for this deal so they're able to reinvest the profits from these more profitable farms into helping more farmers and we provided what amounts to a work a revolving working capital loan that he uses to to buy seeds and fertilizer and then he recovers the capital when you know when the crop is done again brilliant idea and growing at an enormous league rapid rate he's got a shot for the Nobel Prize I think so that's another potential imagine what he could have accomplished with his Syed degree absolutely and let me give you one more example because not all of these are going to be not-for-profits and one quick thought of not-for-profits I think not-for-profits are generally a worse way to approach a business problem than a for-profit if you think about the typical not-for-profit it generally has people who were under compensated they they don't have a profit motive so it's actually in many cases difficult to a fine define success to judge the progress of the business the boards of directors tend to be less attentive they tend to be too big they tend to not pay as much attention there tend to be a lot of other companies in the same sector pursuing the same areas but there's no M&A activity so it's not a you know the typical not-for-profit is a dysfunctional dysfunctional business so the way we approach things in the Pershing Square Foundation is we say look is there a for-profit solution to this problem if so we fund that one and only if there we can't conceive of a not-for-profit solution and we think the idea is a good one the management is talented and they're using business principles what we back a not-for-profit but so let's just think for for-profit example and I someone who starts a company that can take waste there's a guy named Dean Kaman Dean Kaman is an inventor he mented the Segway he's also invented a device the size of a relatively small refrigerator that you could put any kind of fuel in whether it's oil or natural gas or dung or algae and it will convert that algae into energy so it will produce electricity and it will produce heat and his idea is basically a you take this energy a little mini plant you take a some solar panels and you combine it with internet access and a few other things that you might need in a small little town you put them in a shipping you know one of these containers and you just drop it in sub-saharan Africa and it becomes oh and he also has a device that treats the Fallas water and converts it into fresh water so you have energy you have heat generation and you have you know solar and then you have internet access plus clean water and Dean Kaman you know the issue for Dean came and he's a brilliant inventor he hasn't figured out a business plan to get these devices introduced around the world and they actually this this device that converts the creates clean water he made a deal with coca-cola and coca-cola is actually disseminating these water treatment little mini plans around Africa just starting as we speak and there are big red things a lot healthier than the typical coca-cola drink but I think their thesis is we start them on water then eventually we're going to sell them coca-cola so you've given us lots of inspiration for what you all can do over the next 25 years I'm gonna ask one more question and you should be thinking about the questions that you want to ask to Bill because that's what comes next I'm going to preference students first and we'll you know since we started a little bit late we'll probably run over a few minutes so bill I would like to welcome you to the Oxford family you know this is not your home University you'd spent a lot of time in crimson as I did but I'd like you to think about this as your family but this is not your real family so I know that I hosted you and your wife this summer you are a doting parent and your dad is sitting over there so what influence has your family had both your parents and your other family your own family on the person that you are and the work that you do so let's start with dad because in the room so my dad told me that I should never never work for anyone else because they'll never pay me when I'm worth and then he tried to convince me to work for him and I worked for my dad for two years and then I went to business school I didn't go back and he was upset about that but ultimately I think so I'm that was a bit of the inspiration for being an entrepreneur and I was an entrepreneur as a kid and I had my car waxing business and I have my ditch-digging business and you learn about the relative metric measures of different businesses and only some we did dishes you can dig yourself and so on and so forth so I had a very early business education which I think was very helpful to me and a lot of that I thank my dad for my mom you know I described myself as the most persistent person in America but actually that belongs to my mother and it's usually when she wants me to do something that she behaves that way but the my mom when I was probably 13 years old she was very unhappy with the quality of the rail service to our hometown I lived in a suburb of New York City and we had these old 1950s diesel locomotives that were always late and literally had rusted holes in them and and my father would never get home in time for dinner and the commute would take you know very long period of time my mother was very frustrated by this and she joined this sort of necen but failing a kind of grassroots organization to improve the rail service and then she made it into something and she ended up running a petition drive she got down Oh 17,000 signatures which is a lot for a petition went to Albany and ultimately ended up getting something like a 700 million dollar grant to redo the entire rail system into an electric kind of modern day system and my mom ended up going on the board of the Met you know the MTA which is the Metropolitan Transportation Authority in New York City and you know people wanted her to run for government and everything else but she decided to stay to raise her kids and be a mom but you know I think this pretty inspirational thing for a kid to watch and so I had to from a lot of inspiration from mom incredibly persistent unbelievably competitive I'm a tennis player but my mom is the most competitive tennis player so you learn competitiveness from mom entrepreneurship from dad the other thing I would say is actually I'll tell you the most significant I think I'm like of course my life what are the most significant moments my dad won't remember this but my my dad's car the tire it had a tire that you know lost its inflation and he asked me to change the tire and he's standing right next to me and our driveway was kind of like this it was on a decline and my my dad's likely you know go change the tire said dad I'm not gonna change the tire with a car on a no no it's just a very slight slope it's not a problem I want you to go change the tire that no dad is it really I think it's a really dumb ideal I want you to do this right now and I'm lion-o 14 years old my dad tells me to do something so I got the jacket at the back I jacked up the car I start to undo the tire but to remove it and the car gradually collapses fortunately I get out of the way just in time I'm now I'm alive I didn't lose anything but it was a very significant moment in my life because even though he was my dad you know ultimately you have to make your own decisions and so that was a very significant moment for me I'm in 12 and remember when it was but that was sort of the moment when you realized okay dad's fallible okay he can't complete can't completely rely on him I'll give you one other I'm giving away all these familial secrets let's leave it there to be continued so bill we thank you but well thank you in a minute um this is your opportunity to ask questions you won't get this many opportunities to get somebody of bills character here and we're delighted he's spending this time here in Oxford so there's mics with the people with the mics there we go so since you were used as a prop in the in the conversation even though you're not a student even though she well okay please right and there are preference for students but since I call this person you always you can always say I'm a student of life I'm not sitting how be nice or anything I can't hear you my question is very quick I was wondering a lot of critics say that some activist investors sell companies and make a profit for the short term and not really for the long term what do you what is your response to that sure first of all I would say there are lots of different kinds of shareholder activists but I think the ones that are successful because again we don't buy control of businesses we buy a minority stake and if you think about what an activist does we buy eight or we only bought 14 percent of Canadian Pacific so you know 86 percent of the shares are held by others the only reason why we were able to get and have the influence we had is because the other shareholders back to us the other cheryl's are big institutions that are not in it for the short term their you know major index funds and others who don't aren't looking for a quick 3-month profit and they backed us because we have a track record of creating of doing things to companies that create long term value and so we've made a lot of money in Canaan Pacific we've sold some of our stock simply because it went from being at you know 11 or 12 percent position to being a 28% position because appreciation but we've only sold stock because of portfolio management and you know if you were to ask all the changes have been made to the company's credit rating and you know has improved significantly our credit metrics and improved significantly the profitability is improved significantly the companies made for the first time in its history it has deals with all but one union you know five-year long term contracts the employees are happy the railroads function more effectively their customers are happy you know these are changes that are a nerd of the benefit of the company long term if an activist investor simply goes around buying a stake in a company and saying you know sell yourself I just think that's a distraction and I think most businesses you can create more value staying as public companies than you can by taking them private I think businesses should only be taken private if they've reached the end of their strategic life meaning that they've grown as far as they can grow and there's no more value that can be created as an independent company and then it should be combined with some other business but if you think about what private equity does they make changes to management and make changes to strategy cost structure capital structure all of these things are available in the public markets in fact I think it's a failure when a company sells itself to private equity it means that the company itself the management the board and its shareholders couldn't figure out how to create the value on their own so I think good shareholder activism creates long-term value bad shareholder activism you know pushes for short-term things that might create a bump in value on the short-term but destroy a long-term value sorry how about the person in the middle right yes you question given your relationship when you worked with 3G capital and Burger King what was your initial reaction when 3G teamed up with Berkshire Hathaway to buy Heinz in February this year my REE initial reaction was they're gonna make a lot of money just from the fact that there are 15 top-line businesses that make over 100 million or from selling those off or more of no look the way three if you an interesting thing to do would be on a student trip I don't even make it all the way to Miami but if you were to go to the Burger King headquarters and you get off on like the 8th floor there's no reception desk get off the elevator and you walk straight out and the first desk which is a desk you might see in a third grade classroom or just a flat desk with four legs you could probably buy it at Kmart or something is the CEO and then about four paces to his left is the CFO and four paces to his right is the chief marketing officer and literally the entire senior management team is in a completely open space no offices behind his desk is a sheet of paper it's got the five key things he needs to accomplish that year it's got green yellow or red dots based on his relative progress this is the CEOs progress in each of the senior reports all around the office have their own metrics on things they need to achieve with commentary so that everyone can see them the printers are all set automatically to print on both sides you're not allowed to print color they won't allow the never allowed presentations where the background is black and the letters are white because it consumes too much ink and the ink cartridge I mean the all the executives fly coach they share rooms at you know cheap hotels if you think about that kind of culture compared to the typical big American corporation of private jets and really a lack of regard to expenses they're just going to find you know I think the if I remember the company had did something like two billion dollars of operating income and had something like 9 billion dollars worth of sgna my guess is that 9 billion dollar number becomes 7 in relative short order and the 2 billion of you know opera income becomes 4 billion of operating income and they bought the company with a lot of leverage even though it was a junk bond issue I think they borrowed money at 4% interest so I think the the total capital structure was something like 50% debt which was at 4% and Buffett put up this 9% perpetual preferred stock and then the equity was only about a third of the total capital structure so when you buy a business like that with as much leverage as they did and the leverage is long-term and on average very low-cost and safe you know the well the 9 percent is a big coupon if they can't afford to pay it there's no penalty for them paying it it just accumulates and you apply you know a cost driven restructuring of the company you're going to double and triple the value of that equity over time so I think they're going to make a fortune and since I'm friends with them they very nicely allowed me to invest in the deal ok let's see maybe up a little bit further yeah right by you Victoria okay Victoria I have a question during our times who do you think is the greatest investor and why I think I mean I hate to be boring on this I do you think Buffett is the greatest investor and the reason why I believe that is you know just that this is a 50 odd year it's a 60 year track record of compounding at 20 plus percent with a very modest amount of leverage you know in the form of principally insurance float and I just don't think there's a record that compares and I also think that what he does actually creates value for the world you know I think George Soros is an incredible investor but I think what he does as investor creates no value for the world no I think what he does as a philanthropist I think is he creates a lot of value but so I think Buffett has the benefit of I mean I think Heinz will be a much better business by the time you know as a result of Buffett's ownership you look at what he did with Geico since he bought it I think he's been he's created an enormous he's bought businesses well but not incredibly well as he's gotten to be quite large but he's made those businesses much more valuable and I think he's also created a lot of messaging that's affected the way people think about executive compensation and derivatives so I think he's made an enormous contribution so I think it's a combination of long term you know kind of long attitude me you know and the and the accomplishments he's had so I think he's the one by far the best okay maybe two more questions or happy more well I just won't run out of energy up to you all right so we're probably going to have to piss so let's someone else wants the room yeah something else wants the room bill how about this young man over here okay I'll have a really hard question what do you got I'll try I'll try um you spoke about how dealing with failure has defined you had you not failed how do you think your decision processes would have been compromised and can there ever be long-term value in engineering failure okay hard question look I I don't know that I've you know every day you know in the course of your existence you make various mistakes whether it's socially or whether it's in business but the ones you really remember are kind of the bigger ones so the JCPenney one certainly got a lot of you know the problem with our strategies we're very concentrated we managed 11 or 12 billions of capital so when we make a mistake it's going to be really big right the numbers are in we lost 500 million dollars in JCPenney that was 4% of our capital now that that sounds a little smaller but that's not how the press is going to present it but it's very very helpful to have mistakes that you notice and so I wouldn't run run around engineering mistakes what I would do instead is very you know is to value them right I think the natural tendency we make a mistake as to try to forget it as quickly as possible when the what you should do is the opposite you should study it and you know business schools you know the case method is largely about that a lot of cases are you know what should you do in light of a failure or a mistake and that's why it's the best kind of mistakes are ones that you can practice without you know theoretically but the ones you really really learn are the ones where you feel you know something in your stomach or in your wallets or some combination of the two look I think one of the biggest mistakes our generation is making raising kids I don't know how many people in the audience are at that stage yet is you know I think that an ability to deal with stress you know what people call grit for example is a bit lacking in our kids generation because I think it's a bit of a tendency in the part of the parents to keep saving our kids when they were about to fall everything from the way playgrounds are designed you know where if you fall it's cushioned you know but it's kind of an extreme example I mean you don't want daggers lying around on the ground yeah but the I do think that we're cushioning a bit too much our kids and we should allow them you know my wife is a landscape architect and you know some of them the kids love the players in a playground called the adventure playground in Central Park which would never get built today because the you know the litigation plaintiffs you know probably have a field day with it but you know the kids love it because it's it's actually challenging and so I think I don't know about engineering mistakes but I do think not saving your kit you know they're they went into a class this year and they end up with their they have no friends and they're they hate their teachers well you could move them to another school or you could do that but you know making them suck it up or they're on the you know the volleyball team and the coach never plays them you know you go to the head of school and get them to fire the coach or do you say hey you know the life can be like that and you know you have to deal with it so I think that yeah I think that Kalia we need a little bit more Darwinism all right so all right one last question Darwin was right by the way right the woman in red in the back well this is I can tell us a risk-taker this is the only person in red in the entire audience hello I want to ask you like as a hedge fund manager how how do you define h1 in the most simplest term and what's your opinion on insider trading okay so the hedge fund is actually it's a it's really a incentive structure so a hedge fund manager compared to a institutional manager is compensated largely based on the profits so we get 20% of the profits from managing capital now what a hedge fund manager does is very very broad it's everything from being an activist shareholder to being a commodity trader to being a macro trader to being a short seller so it's it's really a compensation structure as opposed to an asset class and people sort of make that mistake my thoughts on insider trading you know it's I think it's very bad for the hedge fund industry to have a story every day in the newspaper about some hedge fund manager who's either accused of insider trading or as committed insider trading I think that's an unfortunate thing and there's some interesting debates as to whether there should be something other people have made the argument that insider trading should be legal in fact that would increase the chances that security price is accurately reflected their value if all the inside information was allowed to come into the market by participants I think the problem with those kind of arguments is that if people believe the markets are unfair or a rigged game then the largest source of capital markets which is the retail investor will basically step out of the market and so I think the rules are generally the right rules the problem I have with a lot of the regulation at least the way it works the United States is there's a lot of people who are accused of a crime where that accusation is made in a very public way it's leaked by a regulator etc and that puts enormous pressure on the individual to settle and you know and also harms them reputationally in their business and otherwise and the government has enormous power versus any individual and I think that dynamic is a bit of a dangerous one and I think all investigations should be private and if ultimately someone's adjudicated to have committed a crime then fine it should be in the newspaper but I think this notion of using the press and again I I don't know Steve Cohen well at SEC Capital but if you followed the press on SEC capital ultimately with respect to Steve Cohen himself there was never any evidence presented at least publicly that he was guilty of anything but there was enormous pressure brought to bear on him you know to settle and it destroyed his business and we'll never know you know it takes years to find out whether someone's guilty or not so I think that whole dynamic is a very unfortunate one bill thank you very much from convertible preferred to parenting from investing to philanthropy to what government should do thank you for giving us a window into your life and your thinking and thank you for making somebody out here and some of us given the ability to change the world by being a scholar in the name of Pershing Square thank you so much and I can tell you as a professor to see your students succeed beyond all of your wildest expectations is probably the highest accomplishment that you know an educator can ever have everything I know I learned from Peter excellent you

Channel: Saïd Business School, University of Oxford

Views: 434,500

Rating: 4.9159694 out of 5

Keywords: Bill Ackman, Oxford (City/Town/Village), University Of Oxford (College/University), Saïd Business School (College/University), MBA (Degree), Entrepreneurship (Field Of Study), Hedge Fund (Industry), Pershing Square, Finance (Industry), Peter Tufano, Chief Executive Officer (Project Role)

Id: Lnh0TmyVG9A

Length: 68min 12sec (4092 seconds)

Published: Tue Nov 05 2013

Reddit Comments

[u/billyjoerob]

Interesting. He's still delusional about HLF.