See all Lex Fridman transcripts on Youtube

youtube thumbnail

Bill Ackman: Investing, Financial Battles, Harvard, DEI, X & Free Speech | Lex Fridman Podcast #413

3 hours 32 minutes 43 seconds

🇬🇧 English

S1

Speaker 1

00:00

The only person who can cause you more harm than a thief with a dagger is a journalist with a pen.

S2

Speaker 2

00:05

The following is a conversation with Bill Ackman, a legendary activist investor who has been part of some of the biggest and at times controversial trades in history. Also, he is fearlessly vocal on X, FKA Twitter, and uses the platform to fight for ideas he believes in. For example, he was a central figure in the resignation of the president of Harvard University, Claude Dean Gay, the saga of which we discuss in this episode.

S2

Speaker 2

00:36

This is the Lex Friedman Podcast. To support it, please check out our sponsors in the description. And now, dear friends, here's Bill Ackman. In your lecture on the basics of finance and investing, you mentioned a book, Intelligent Investor by Benjamin Graham as being formative in your life.

S2

Speaker 2

00:56

What key lesson do you take away from that book that informs your own investing?

S1

Speaker 1

01:00

Sure. Actually, it was the first investment book I read and as such, it was the inspiration for my career and a lot of my life. Important book. Bear in mind, this is after the Great Depression, people lost confidence investing in markets, World War II, and then he writes this book, it's for like the average man.

S1

Speaker 1

01:19

And basically he says that you have to understand the difference between price and value, right? Price is what you pay, value is what you get. And 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.

S1

Speaker 1

01:37

Makes you a stupid offer, you ignore it. Makes you a great offer, you can take it. And that's the stock market. And the key is to figure out what something's worth and you have to kind of weigh it.

S1

Speaker 1

01:48

He talked about the difference between... He said the stock market in the short term is a voting machine. It represents speculative interests, supply and demand of people in the short term. But in the long term, the stock market's a weighing machine.

S1

Speaker 1

02:03

You're much more accurate. It's going to tell you what something's worth. And so if you can divine 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.

S2

Speaker 2

02:14

In that same way, there's a kind of difference between speculation and investing.

S1

Speaker 1

02:18

Yeah. Speculation is just a bit like buying, trading crypto, right? You're- Strong words. Well, short-term trading crypto.

S1

Speaker 1

02:30

Maybe in the long run there's intrinsic value. Many investors in a bubble going into the crash were really just pure speculators. They didn't know what things were worth, they just knew they were going up. That's speculation.

S1

Speaker 1

02:48

Investing is doing your homework, digging down, understanding a business, understanding the competitive dynamics of an industry, understanding what management's going to do, understanding what price you're going to pay. You know, the value of anything, I would say, other than love, let's say, is the present value of the cash you can take out of it over its life. Now some people think about love that way, but it's not the right way to think about love. But it's, yeah, so Investing is about basically building a model of what this business is gonna produce over its lifetime.

S2

Speaker 2

03:22

So how do you get to that? This idea called value investing. How do you get to the value of a thing?

S2

Speaker 2

03:28

Even like philosophically, value of anything really, but we can just talk about the things that are on the stock market. Sure. Companies.

S1

Speaker 1

03:35

The value of a security is the present value of the cash you can take out of it over its life. So if you think 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. It's very predictable.

S1

Speaker 1

03:53

If it's a US government bond, you know you're going to get it. 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.

S1

Speaker 1

04:02

And a business, a profitable 1, is like a bond in that it generates these coupons or these earnings or cash flow every year. The difference with a stock and a bond is that The bond, it's a contract. You know what you're gonna get as long as they don't go bankrupt and default. With a stock, you have to make predictions about the business.

S1

Speaker 1

04:22

How many widgets are you gonna sell this year? How many are you gonna sell next year? What are the costs gonna be? How much of the money that they generate do they need to reinvest in the business to keep the business going.

S1

Speaker 1

04:33

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. And there are very few businesses that you can have a really high degree of certainty about. As a result, you know, many investments are speculations because it's really very difficult to predict the future.

S1

Speaker 1

04:53

So we, what we do for a living, what I do for a living, is find those rare companies that you can kind of predict what they're going to look like over a very long period of time.

S2

Speaker 2

05:01

So what are the factors that indicate that a company is something, is going to be something that's going to make a lot of money, it's gonna have a lot of value, and it's going to be reliable over a long period of time? And what is your process of figuring out whether a company is or isn't that?

S1

Speaker 1

05:19

So every consumer has a view on different brands and different companies. And what we look for are sort of these non-disruptible businesses, A business where you can kind of close your eyes, stock market shuts for a decade, and you know that 10 years from now, it's going to be a more valuable, more profitable company. So we own a business called Universal Music Group.

S1

Speaker 1

05:42

It's in the business of helping artists become global artists, sort of the recorded music business. And it's in the business of owning rights to sort of the music publishing rights of songwriters. And I think music is forever, right? Music is a many thousand year old part of the human experience.

S1

Speaker 1

06:04

And I think it will be you know thousands of years from now and so that's a pretty good backdrop to invest in a company and the company basically owns a third of the global recorded music that's you know the most dominant sort of market share in the business. They're the best at taking an artist who's 18 years old, who's got a great voice and has started to get a presence on YouTube and Instagram and helping that artist become a superstar. And that's a unique talent, and the result is the best artists in the world wanna come work for them. But they also have this incredible library of, you know, the Beatles, the Rolling Stones, U2, et cetera.

S1

Speaker 1

06:45

So, and then if you think about, what music has become used to be about records and CDs and, you know, 8 track tapes for those of whom, and it was about a new format and that's how they drive sales. And it's become a business, which is like the podcast business about streaming. And you can, streaming is a lot more predictable than selling records, right? You can sort of say, okay, how many people have smartphones?

S1

Speaker 1

07:10

How many people are going to have smartphones next year? There's a kind of global penetration over time of smartphones. You pay, call it 10, 11 bucks a month for a subscription or less for a family plan. And you can kind of build a model of what the world looks like and predict the growth of the streaming business, predict what kind of market share Universal is going to have over time.

S1

Speaker 1

07:30

And 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?

S1

Speaker 1

07:46

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 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.

S2

Speaker 2

08:09

Well, music is interesting because yes, music's been around for a very long time, but the way to make money from music has been evolving. Like you mentioned streaming, there's a big transition initiated by I guess Napster, then created Spotify, of how you make money on music with Apple and with all of this. And the question is how well are companies like UMG able to adjust to such transformations?

S2

Speaker 2

08:35

1, I could ask you about the future, which is artificial intelligence being able to generate music, for example. There have been a lot of amazing advancements with, So do you have to also think about that? Like when you close your eyes, all the things you think about, are you imagining the possible ways that the the future is completely different from the present and how well this company will be able to like surf the wave of that?

S1

Speaker 1

09:00

Sure, And they've had to surf a lot of waves. And actually the music business peaked the last time in like the late 90s or 2000 timeframe. And then really innovation, Napster, digitization of music almost killed the industry.

S1

Speaker 1

09:13

And Universal really led an effort to save the industry and actually made an early deal with Spotify that enabled, you know, the industry to really recover. And so by virtue of their market position and their credibility and their willingness to kind of adopt new technologies, they've kept their position. Now, they of course had this huge advantage because I think the Beatles are forever. I think U2 is forever.

S1

Speaker 1

09:34

I think Rolling Stones are forever. So they had a nice base of assets that were important and I think will forever be. And forever is a long time. But again, there's enormous...

S1

Speaker 1

09:48

There are all kinds of risks in every business. This is 1 that I think has a very high degree of persistence. And I can't envision a world where, beyond streaming, in a sense. Now you may have a Neuralink chip in your head, that instead of a phone, but the music can come in a digitized you know kind of format you're gonna want to have an infinite library that you can walk around in your pocket or in your brain it's not going to matter that much at the form factor you know the device changes It's not really that important whether it's Spotify or Apple or Amazon that are the so-called DSPs or the providers.

S1

Speaker 1

10:23

I think the values really kind of reside in the content owners and that's really the artists and the label.

S2

Speaker 2

10:32

And I actually think AI is not going to be the primary creator of music. I think we're going to actually face the reality that it's not that music has been around for thousands of years, but musicians and music has been around. Like we actually care to know who's the musician that created it.

S2

Speaker 2

10:54

Just like we wanna know who's the artist, human artist that created a piece of art.

S1

Speaker 1

10:58

I totally agree. And I think If you think about it, there's lots of other technologies and computers that have been used to generate music over time. But no 1 falls in love with a computer-generated track, right?

S1

Speaker 1

11:14

And Taylor Swift, incredible music, but it's also about the artist and her story and her physical presence and you know, the The live experience. I don't think you're gonna sit there And someone's gonna put computer up on stage and and then and it's gonna play and people are gonna get excited around it So I think AI is really going to be a tool to make artists better artists. And, you know, I think like a synthesizer, right, really created the opportunity for, you know, 1 man to have an orchestra. Maybe a bit of a threat to a percussionist, but maybe not, maybe it drove even more demand for the live experience.

S2

Speaker 2

11:57

Unless that computer has human-like sentience, which I believe is a real possibility, but then it's really from a business perspective no different than a human. If it has an identity, that's basically fame and influence, and there'd be a robot Taylor Swift, and it doesn't really matter.

S1

Speaker 1

12:14

It's a copywritable asset, I would think.

S2

Speaker 2

12:17

Right, yeah. And then there'll be- Not

S1

Speaker 1

12:19

sure that's the world I'm excited about.

S2

Speaker 2

12:20

That's a different discussion. The world is not gonna ask your permission to become what it's becoming, so. But you can still make money on it.

S2

Speaker 2

12:29

Presumably there'd be a capital system and there'd be some laws under which I believe AI systems will have rights that are akin to human rights. And we're gonna have to contend with what that means.

S1

Speaker 1

12:40

Well, there's sort of name and likeness rights. Yes. Right.

S1

Speaker 1

12:43

That have to be protected. Now, can a name be attributed to a Tesla robot? I don't know.

S2

Speaker 2

12:50

I think so. I think it's quite obvious

S1

Speaker 1

12:52

to me. Okay, so there's more potential artists for us to represent at university. Exactly.

S1

Speaker 1

12:56

Exactly. All right. That's sort of 1 example. Another example could be just, you know, the restaurant industry, right?

S1

Speaker 1

13:00

If you can look at businesses like a McDonald's, right? It's a, whatever the company's like a 1950 vintage business and here we are, it's, you know, 75 years later and you can kind of predict what it's going to look like over time. And the menu is going to adjust over time to consumer tastes and, but I think the hamburger and fries is probably forever.

S2

Speaker 2

13:21

The Beatles, the Rolling Stones, the hamburger and fries are forever. I was eating at Chipotle last night as I was preparing these notes. Thank you.

S2

Speaker 2

13:31

And yeah, it is 1 of my favorite places to eat. You said it is a place that you eat, you obviously also invest in it. What do you get at Chipotle?

S1

Speaker 1

13:41

I tend to get a double chicken. Bowl or burrito? I like the burrito, but I generally try to order the bowl, cut the carb apart.

S1

Speaker 1

13:49

For health reasons, all right. And double chicken, guac, lettuce,

S2

Speaker 2

13:53

black beans. And I'm more of a steak guy, just putting that on the record. What's the actual process you go through?

S2

Speaker 2

14:03

Like literally, like the process of figuring out what the value of a company is. Like how do you do the research? Is it reading documents? Is it talking to people?

S2

Speaker 2

14:15

How do you do it?

S1

Speaker 1

14:16

It's all of the above. So Chipotle, what attracted us initially is the stock price dropped by about 50%. Great company, great concept.

S1

Speaker 1

14:26

Athletes love it, consumers love it. Healthy, sustainable, fresh food made in front of your eyes. And, you know, great, Steve Ells, the founder, did an amazing job. But ultimately, the company's lacking some of the systems and had a food safety issue.

S1

Speaker 1

14:42

Consumers got sick, almost killed the rent. 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 filing.

S1

Speaker 1

15:05

So companies file a 10K or an annual report, they file these quarterly reports called 10Qs. They have a proxy 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.

S1

Speaker 1

15:20

You know, here's how management describes their business. Here's what they say they're going to do. And then you can follow along to see what they do. It's like a historical record of, you know, of how competent and truthful they are.

S1

Speaker 1

15:33

It's a very useful device. And then of course, looking at competitors and thinking about what 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, we'll talk to people in the industry. We'll try to understand, you know, the difference between publishing and recorded music.

S1

Speaker 1

15:55

We'll look at the competitors. We'll talk to, we'll read books. You know, I read a book about the music industry or a couple of books about the industry. So it's a bit like a big research project.

S1

Speaker 1

16:08

And 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 wanna 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 wanna know. And you can learn more by talking to experts about some of the industry dynamics, the personalities. You wanna get a sense of management.

S1

Speaker 1

16:32

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.

S2

Speaker 2

16:39

So in the case of Chipotle, for example, by the way, I could talk about Chipotle all day. I just love it. I love it.

S2

Speaker 2

16:45

I wish there was a sponsor.

S1

Speaker 1

16:48

I'll mention it to the CEO.

S2

Speaker 2

16:49

Don't make promises you can't keep, Bill.

S1

Speaker 1

16:51

I'm not making, I can't. Brian Nichols is a fantastic CEO. He's not gonna spend 1 dollar that he doesn't think is the company's best interest.

S2

Speaker 2

16:58

All right, all I want is free Chipotle, Come on now. What was I saying? Oh, and so you look at a company like Chipotle and then you see there's a difficult moment in its history, like you said, that there was a food safety issue and then you say, okay, well, I see a path where we can fix this and therefore, even though the price is low, we can get it to where the price goes up to its value.

S1

Speaker 1

17:24

So the kind of business we're looking for is sort of the kind of business everyone should be looking for, right? A great business, it's got a long-term trajectory of growth out into the force, even beyond the foreseeable distance. Those are the kind of businesses you want to own.

S1

Speaker 1

17:38

You want businesses that generate a lot of cash. You want businesses you can easily understand. You want businesses with these sort of huge barriers to entry where it's difficult for others to compete. You want companies that don't have to constantly raise capital.

S1

Speaker 1

17:50

And these are some of the great business of the world, but people have figured out that those are the great businesses. So the problem is those companies tend to have very high stock prices and the value is generally built into the price you have to pay for the business. So we can't earn the kind of returns we want to earn for investors by paying a really high price. Price matters a lot.

S1

Speaker 1

18:09

You can buy the best business in the world and if you overpay, you're not going to earn particularly attractive returns. So We get involved in cases where a great business has made a big mistake or you've a company that's lost its way, but it's recoverable. We buy from shareholders who are disappointed, who've lost confidence, selling at a low price relative to what it's worth, if fixed, and then we try to be helpful in fixing the company.

S2

Speaker 2

18:39

You said that barriers to entry, you said a lot of really interesting qualities of companies very quickly in a sequence of statements that took like less than 10 seconds to say, but some of them were fascinating, all of them were fascinating. So you said barriers to entry. How do you know if there's a type of moat protecting the competitors from stepping up to the plate.

S1

Speaker 1

19:04

The most difficult analysis to do as an investor is that. It's kind of figuring out how wide is the moat, how much at risk is the business to disruption. And we're in, I would say, a period, the greatest period of disruptability in history, right?

S1

Speaker 1

19:21

Technology, you know, a couple of 19 year olds can, you know, leave whatever university or maybe they didn't even go in the first place. They can raise, you know, millions of dollars. They can get access to infinite bandwidth storage. They can contract with engineers in low-cost markets around the world.

S1

Speaker 1

19:41

They can build a virtual company and they can disrupt businesses that seem super established over time. And then on top of that, you have major companies with multi-trillion dollar market caps working to find profits wherever they can. And so that's a dangerous world in a way to be an investor. And so you have to find businesses that it's hard to foresee a world in which they get disrupted.

S1

Speaker 1

20:04

And the beauty of the restaurant business, and we've actually, our best track record is in restaurants. We've never lost money. We've only made a fortune, interestingly, investing in restaurants. A big part of it's a really simple business.

S1

Speaker 1

20:16

And if you get Chipotle right and you're at a hundred stores, it's not so hard to envision getting to 200 stores and then getting to 500 stores. And the key is maintaining the brand image, growing intelligently, having the right systems. Now, when you go from a hundred stores to 3,500 stores, you have to know what you're doing. There's a lot of complexity.

S1

Speaker 1

20:38

If you think about your local restaurant, the family's working in the business, they're watching the cash register, and you can probably open another restaurant, you know, across town. But there are very few restaurant operators that own more than a few restaurants and operate them successfully. And the quick service business is about systems and building a model that a stranger who doesn't know the restaurant industry can come in and enter the business and build a successful franchise. Now, Chipotle is not a franchise company.

S1

Speaker 1

21:10

They actually own all their own stores, but many of the most successful restaurant companies are franchise models like a Burger King, a McDonald's, Tim Hortons, you know, all these various brands, Popeyes. And there it's about systems. But the same systems apply whether you own all the stores and it's run by a big corporation or whether the owners of the restaurants are sort of franchisees, you know, local entrepreneurs.

S2

Speaker 2

21:32

So if the restaurant has scaled to a certain number, that means they've figured out some kind of system that works, and it's very difficult to develop that kind of system, so that's a moat.

S1

Speaker 1

21:41

A moat is you get to a certain scale, and you do it successfully, and the brand is now understood by the consumer. And what's interesting about Chipotle is what they've achieved is difficult, right? They're not buying frozen hamburgers, getting shipped in.

S1

Speaker 1

21:57

They're buying fresh, sustainably sourced ingredients. They're preparing food in the store. That was a first, right? The quality of the product at Chipotle is incredible.

S1

Speaker 1

22:06

It's the highest quality food you can get for... You can get a serious dinner for under 20 bucks and eat really healthfully and very high quality ingredients. And that's just not available anywhere else. And it's very hard to replicate and to build those relationships with, you know, farmers around the country.

S1

Speaker 1

22:24

It's a lot easier to make a deal with 1 of the big, you know, massive food producers, and buy your pork from them, than to buy from a whole bunch of farmers around the country. And so it's, that is a big moat for Chipotle, very difficult to replicate. And by the way, another company

S2

Speaker 2

22:39

I think you have a stake is McDonald's?

S1

Speaker 1

22:41

No, we own a company called Restaurant Brands. Restaurant Brands owns a number of quick service companies, 1 of which is Burger King.

S2

Speaker 2

22:48

Burger King, okay, well, it's been a meme for a while, but Burger King is great too, Wendy's, whatever, but usually I go McDonald's, I'll just eat burger patties. I don't know if you knew you could do this, but a burger patty at Burger King can do this, McDonald's, it's actually way cheaper.

S1

Speaker 1

23:05

They'll just sell you the patty.

S2

Speaker 2

23:06

The patty, and it's cheap. It's like $1.50 or $2 per patty, and it's about 250 calories, and it's just meat. And despite the criticism and memes out there, that's...

S2

Speaker 2

23:18

Pretty healthy stuff. It's healthy stuff. And so when I go, the healthiest I feel is when I do carnivore. It doesn't sound healthy, but if I eat only meat, I feel really good, I lose weight, I have all this energy, it's crazy.

S2

Speaker 2

23:31

And when I'm traveling, the easiest way to get meat is that.

S1

Speaker 1

23:33

So you go to McDonald's, you order 6 patties?

S2

Speaker 2

23:35

Exactly, so there's this sad meme of me just sitting alone in a car when I'm traveling, just eating beef patties at McDonald's, but I love it, and you gotta do what you love, what makes you happy, and that's what makes

S1

Speaker 1

23:46

me happy. Okay, we should maybe have Burger King feature in it. What about Flamed World?

S1

Speaker 1

23:49

What's with these fried burgers? We gotta get you to Burger King grilled burgers. Wait, is this like

S2

Speaker 2

23:55

fast food trash? I didn't know, I don't know the details of how they're made. I'm not, I don't have allegiance to McDonald's.

S1

Speaker 1

24:00

I think we got a chance to switch you to Burger King.

S2

Speaker 2

24:02

Great, we'll see. I'm making so many deals today, it's wonderful. Okay.

S2

Speaker 2

24:08

You were talking about most, and this kind of remind me of Alphabet, the parent company. Sure,

S1

Speaker 1

24:14

it's a big position for us.

S2

Speaker 2

24:15

So it's interesting that you think that maybe alphabet fits some of these characteristics. It's tricky to know with everything that's happening in AI and I'm interviewing Sunder Pichai soon. It's interesting that you think that there's a moat.

S2

Speaker 2

24:33

And it's also interesting to analyze it because the consumer is just a fan of technology. Why is Google still around? Like, they've been, it's not just the search engine is doing it all, the basics of the business of search really well, but they're doing all these other stuff. So what's your analysis of Alphabet?

S2

Speaker 2

24:51

Why are you still positive about it?

S1

Speaker 1

24:53

Sure, so it's a business we've admired as a firm for, you know, whatever, 15 years, but rarely got to a price that we felt we could own it, because again, the expectations were so high and price really matters. And really the sort of AI scare, I would call it. You know, Microsoft comes out with chat GPT, they do an amazing demonstration, people are like this most incredible product.

S1

Speaker 1

25:16

And Google, which had been working on AI even earlier, obviously the Microsoft, Microsoft was behind in AI. It was really their chat GPT deal that gave them a kind of a market presence. And then Google does this fairly disastrous demonstration of BART. And the world says, oh my God, Google's fallen behind in AI, AI is the future, stock gets crushed.

S1

Speaker 1

25:38

Google gets to a price around 15 times earnings, which for a business of this quality is an extremely, extremely low price. And our view on Google, 1 way to think about it, when a business becomes a verb, that's usually a pretty good sign about the mode around the business. So, you know, you'd open your computer and you open your search and very high percentage of the world starts with a Google page in a 1 line. We type in your search.

S1

Speaker 1

26:07

You know, the Google advertising search YouTube franchise is 1 of the most dominant franchises in the world. Very difficult to disrupt, extremely profitable. The world is moving from offline advertising to online advertising and that trend I think continues. Why?

S1

Speaker 1

26:23

Because you can actually see where your ads work. They used to say about advertising, you spend a fortune and you just don't know which 50% of its works, but you just sort of spend the money because you know ultimately that's going to bring in the customer. And now with online advertising, you can see with granularity which dollars I'm spending. When people click on the search term and end up buying something and I pay, it's a very high return on investment for the advertiser and they really dominate that business.

S1

Speaker 1

26:52

Now AI of course is a risk. If all of a sudden people start searching or asking questions of chat GPT and don't start with the Google search bar, that's a risk to the company. And so our view, based on work we had done and talked to industry experts, is that Google, if anything, had a... By virtue of the investment they've made, the time, the energy that people put into it, we felt their AI capabilities were, if anything, potentially greater than Microsoft Chat GPT, and that the market had overreacted.

S1

Speaker 1

27:23

And because Google is a big company, global business regulators scrutinize it incredibly carefully, they couldn't take some of the same liberties a startup like OpenAI did in releasing a product. And I think Google took a more cautious approach in releasing an early version of BARD in terms of its capabilities. And that let the world to believe that they were behind. And we ultimately concluded, if any, they're tied or ahead and you're paying nothing for that potential business.

S1

Speaker 1

27:52

And they also have huge advantages by virtue. You think of all the data Google has, like the search data, all the various applications, email and otherwise, and the Google suite of products. It's an incredible data set. So they have more training data than pretty much any company in the world.

S1

Speaker 1

28:09

They have incredible engineers, they have enormous financial resources. So that was the bet. We still think it's probably the cheapest of the big 7 companies in terms of the price you're paying for the business relative to its current earnings. It also is a business that has a lot of potential for efficiency.

S1

Speaker 1

28:28

Sometimes when you have this enormously profitable dominant company, All of the technology companies in the post March 20 world grew enormously in terms of their teams and they probably overhired. And so you've seen some, you know, the Facebooks of the world and now even Google starting to get a little more efficient in terms of their operation. So they've had a low multiple for the business. 1 way to think about the value of the business is the price you pay for the earnings.

S1

Speaker 1

28:55

Or alternatively, what's the yield? If you flip over the price over the earnings, it gives you the yield of the business. So a 15 multiple is about almost a 7.5% yield and that earnings yield is growing over time as the business grows. That's compared to what you can earn lending your money to the government, 4%.

S1

Speaker 1

29:16

That's a very attractive going in yield. And then there's all kinds of what we call optionality in all the various businesses and investments they've made that are losing money. They've got a cloud business that's growing very rapidly, but they're investing basically 100% of the profits from that business in growth. So you're in that earnings number, you're not seeing any earnings from the cloud business.

S1

Speaker 1

29:34

And you know, they're 1 of the top cloud players. So very interesting, generally well-managed company with incredible assets and resources and dominance, and has no debt, it's got a ton of cash. And so, pretty good story.

S2

Speaker 2

29:51

Is there something fundamentally different about AI that makes all of this more complicated? Which is the sort of the exponential possibilities of the kinds of products and impact that AI could create when you're looking at Meta, Microsoft, Alphabet, Google, all these companies, XAI, or maybe startups, like is there some more risk introduced by the possibilities of AI?

S1

Speaker 1

30:20

Absolutely. That's a great question. You know, business investing is about finding companies that can't be disrupted. AI is the ultimate disruptible asset or technology, and that's what makes investing treacherous, is that you own a business that's enormously profitable, management gets, if you will, fat and happy, and then a new technology emerges that just takes away all their profitability.

S1

Speaker 1

30:43

And AI is this incredibly powerful tool, which is why every business is saying, how can I use AI in my business to make us more profitable, more successful, grow faster, and also disrupt or protect ourself from the incomings? It's a bit like, Buffett talks about a great business like a castle surrounded by this really wide moat, but you have all these barbarians trying to get in and steal the princess. And it happens, you know, Kodak, for example, was an amazing, incredibly dominant company until it disappeared. Polaroid, you know, this incredible technology.

S1

Speaker 1

31:23

And that's why we have tended to stay away from companies that are technology companies, because technology companies generally, the world is such a dynamic place that someone's always working on a better version. And Kodak was caught up in the analog film world. And then the world changed.

S2

Speaker 2

31:39

Well, Google was pretty fat and happy until Chaggipati came out. How would you rate their ability to wake up, lose weight, and be less happy and aggressively rediscover their search for happiness.

S1

Speaker 1

31:55

I think you've seen a lot of that in the last year. And I would say some combination of embarrassment and pride are huge motivators for everyone from Sergey Brin, you know, to the management of the company.

S2

Speaker 2

32:10

And Demis Hassabis thrown him into the picture and all of DeepMind teams and the unification of teams and like all the shakeups. It was interesting to watch the chaos. I love it.

S2

Speaker 2

32:19

I love it when everybody freaks out. Like you said, partly embarrassment and partly that competitive drive that drives engineers is great. I can't wait to see what, There's been just a lot of improvement in the product. Let's see what goes.

S2

Speaker 2

32:33

You mentioned management. How do you analyze the governance structure and the individual humans that are the managers of a company?

S1

Speaker 1

32:42

So as I like to say, incentives drive all human behavior. And that certainly applies in the business world. So understanding the people and what drives them and what the actual financial and other incentives of a business are a very important part of the analysis for investing in a company.

S1

Speaker 1

33:01

And you can learn a lot. You know, I mentioned before 1 great way to learn about a business is go back a decade and read everything that management has written about the business and see what they've done over time, see what they've said. You know, conference calls are actually, you know, relatively recent. When I started in the business, there weren't conference call transcripts.

S1

Speaker 1

33:19

Now you have a written record of everything management has said in response to questions from analysts at conferences and otherwise. And so just, you learn a lot about people by listening to what they say, how they answer questions, and ultimately their track record for doing what they say they're going to do. Do they under promise and over deliver? Do they over promise and under deliver?

S1

Speaker 1

33:39

Do they say what they're going to do? Do they admit mistakes? Do they build great teams? Do people want to come work for them?

S1

Speaker 1

33:48

Are they able to retain their talent? And then part of it is, how much are they running the business for the benefit of the business, how much are they running the business for the benefit of themselves? And that's kind of the analysis you do.

S2

Speaker 2

34:03

Are we talking about CEO, COO, what does management mean? How deep does it go?

S1

Speaker 1

34:09

Sure, so this very senior management matters enormously. You know, we use the Chipotle example. Steve Ells, great entrepreneur, business got to a scale he really couldn't run it.

S1

Speaker 1

34:19

We recruited a guy named Brian, helped a company recruit a guy named Brian Nickell. And he was considered the best person in the quick service industry. He came in and completely rebuilt the company. Actually we moved the company, Chipotle was moved to California.

S1

Speaker 1

34:34

And sometimes 1 way to redo the culture of a company is just to move it geographically. And then you can kind of reboot the business. But a great leader has great followership, you know, over the course of their career, they'll have a team they've built that will come follow them into the next opportunity. But the key is, you know, really the top person matters enormously because, and then it's who they recruit.

S1

Speaker 1

34:55

You know, you recruit an A plus leader and they're going to recruit other A type people. If you're a B leader, you're not going to recruit any great talent beneath them.

S2

Speaker 2

35:05

You mentioned Warren Buffett. You said you admire him as an investor. What do you find most interesting and powerful about his approach?

S2

Speaker 2

35:15

What aspects of his approach to investing do you also practice?

S1

Speaker 1

35:19

Sure, so most of what I've learned in the investment business I learned from Warren Buffett. He's been my great professor of this business. My first book I read in the business was the Ben Graham Intelligent Investor, but fairly quickly you get to learn about Warren Buffett.

S1

Speaker 1

35:32

And I started by reading the Berkshire Hathaway annual reports. And then I eventually got the Buffett partnership letters that you could see, which are an amazing read to go back to the mid 1950s and read what he wrote to his limited partners when he first started out and just follow that trajectory over a long period of time. So what's remarkable about him is 1, duration, right? He's still at it at 93.

S1

Speaker 1

35:56

2, takes a very long-term view. But a big thing that you learn from him, investing requires this incredible, dispassionate, unemotional quality. You have to be extremely economically rational, which is not a basic, It's not something you learn in the jungle. I don't think it's something that if you think about the surviving the jungle, the lion shows up and everyone starts running, you run with them.

S1

Speaker 1

36:29

That does not work well in markets. In fact, you generally have to do the opposite. When the lemmings are running over the cliff, that's the time where you're facing the other direction and you're running the other direction, i.e. You're stepping in, you're buying stocks at really low prices.

S1

Speaker 1

36:43

Buffett's been great at that and great at teaching about what he calls temperament, which is this sort of emotional or unemotional quality that you need to be able to dispassionately look at the world and say, okay, is this a real risk? Are people overreacting? People tend to get excited about investments when stocks are going up and they get depressed when they're going down. And that, I think that's just inherently human.

S1

Speaker 1

37:07

You have to reverse that. You have to get excited when things get cheaper and you got to get concerned when things get more expensive.

S2

Speaker 2

37:15

You've been a part of some big battles, some big losses, some big wins. So it's been a roller coaster. So in terms of temperament, psychologically, how do you not let that break you?

S2

Speaker 2

37:28

How do you maintain a calm demeanor and avoid running with the lemmings?

S1

Speaker 1

37:35

I think it's something you kind of learn over time. A key success factor is you want to have enough money in the bank that you're going to survive, you know, regardless of what's going on with volatility in markets, you know, people who, 1, you shouldn't borrow money. So if you borrow money, you own stocks on margin, markets are going down and you have your livelihood at risk, it's very difficult to be rational.

S1

Speaker 1

38:01

So key is getting yourself to a place where you're financially secure. You're not gonna lose your house, right? That's a kind of a key thing. And then also doing your homework.

S1

Speaker 1

38:13

Stock prices, Stocks can trade at any price in the short term. And if you know what a business is worth and you understand the management, you know it extremely well, it's not nearly as... It doesn't bother you when a stock price goes down

S2

Speaker 2

38:28

or

S1

Speaker 1

38:28

it has much less impact on you because you know, again, as Mr. Graham said, you know, the short term, the market's a voting machine, you have a bunch of lemmings voting 1 direction, that's concerning. But if it's a great business, doesn't have a lot of debt, and people are going to just listen to more music next year than this year, you know you're going to do well.

S1

Speaker 1

38:45

So it's a bit, some combination of being personally secure and also just knowing what you own. And over time you build a calluses, I would say.

S2

Speaker 2

38:58

So psychologically, just as a human being, speaking of lions and gazelles and all this kind of stuff. Yeah. Is there some, is it as simple as just being financially secure?

S2

Speaker 2

39:09

Is there some just human qualities that you have to be born with slash develop?

S1

Speaker 1

39:16

I think so. I think, now I'm a pretty emotional person, I would say, or I feel pretty strong emotions, but not in investing. I'm remarkably immune to kind of volatility.

S1

Speaker 1

39:29

And that's a big advantage. And it took some time for me to develop that.

S2

Speaker 2

39:33

So you weren't born with that, you think? No. So being emotional, do you want to respond to volatility?

S1

Speaker 1

39:40

Yeah, and you just, it's a bit, again, you can learn a lot from other people's experience. It's 1 of the few businesses where you can learn an enormous amount by reading about other periods in history, you know, watch, you know, following Buffett's career, the mistakes he made. If you're investing a lot of capital, every 1 of your mistakes is going to be big.

S1

Speaker 1

40:02

Right? So we've made big mistakes. The good news is that the vast majority of things we've done have worked out really well. And so that also gives you confidence over time.

S1

Speaker 1

40:12

But because we make very few investments, we own 8 things today or 7 companies of that matter. If we get 1 wrong, it's gonna be big news. And so the other nature of our business you have to be comfortable with is a lot of public scrutiny, a lot of public criticism, And that requires some experience, I'll call it that.

S2

Speaker 2

40:35

I think we'll talk about some of that. Financially secure is something I believe also recommend for even just everyday investors. Is there some general advice from the things you've been talking about that applies to everyday investors?

S1

Speaker 1

40:50

Sure. So never invest money you can't afford to lose, where it would, if you'd lost this money, and you know, you lose your house, etc. So having, being in a place where you're investing money that you don't care about the price in the short term, it's money for your retirement and you take a really long-term view, I think that's key. Never investing where you borrow money against your securities.

S1

Speaker 1

41:18

The markets offer you the opportunity to leverage your investment. And in most worlds, you'll be okay, except if there's a financial crisis Or a nuclear device gets detonated, God forbid, somewhere in the world. Or there's an unexpected war. Or someone kills a leader unexpectedly.

S1

Speaker 1

41:39

Things happen that can change the course of history and markets react very negatively to those kinds of events. And you can own the greatest business in the world, trading for $100 a share, and next moment it could be 50. So as long as you don't borrow against securities, you own really high-quality businesses, and it's not money that you need in the short term, then you can actually be thoughtful about it. And that is a huge advantage.

S1

Speaker 1

42:04

The vast majority of investors, it seems, tend to be the ones that panic and the downturns get over-elated when markets are doing well.

S2

Speaker 2

42:13

So be able to think long-term and be sufficiently financially secure such that you can afford to think long-term.

S1

Speaker 1

42:21

Yeah, Buffett is the ultimate long-term thinker and just the decisions he makes, the consistency of decisions he's made over time and fitting into that sort of long-term framework is a very educational, let's put it that way, for learning

S2

Speaker 2

42:41

about this business. So you mentioned 8 companies, But what do you think about mutual funds that for everyday investors that diversify across a larger number of companies?

S1

Speaker 1

42:53

I think they're very few mutual funds There are thousands and thousands of mutual funds. They're very few that earn their keep in terms of the fees they charge. They tend to be too diversified and too short-term, and you're often much better off just buying an index fund.

S1

Speaker 1

43:14

Many of them perform, if you look carefully at their portfolios, they're not so different from the underlying index itself and you tend to pay a much higher fee. Now, all of that being said, there's some very talented mutual fund managers, a guy named Will Danoff at Fidelity's had a great record over a long period of time. The famous Peter Lynch, Ron Baron, another great long-term growth stock investor. So there's some great mutual funds.

S1

Speaker 1

43:41

But I put them in the handful versus the thousands. And if you're in the thousands, I'd rather someone bought just an index fund basically.

S2

Speaker 2

43:54

Yeah, index funds. But what would be the leap for an everyday investor to go to investing in a small number of companies, like 2345 companies.

S1

Speaker 1

44:05

I even recommend for individual investors to invest in a dozen companies. You don't get that much more benefit of diversification going from a dozen to 25 or even 50. Most of the benefits of diversification come in the first, call it 10 or 12.

S1

Speaker 1

44:23

And if you're investing in businesses that don't have a lot of debt, they're businesses that you can understand yourself. You understand, actually individual investors did a much better job analyzing Tesla than the so-called professional investors or analysts, the vast majority of them. So if it's a business you understand, if you bought a Tesla, you understand the product and its appeal to consumers, it's a good place to start when you're analyzing a company. So I would invest in things you can understand.

S1

Speaker 1

44:49

That's kind of a key. You know, you like Chipotle, you, you understand why they're successful. You can go there every week and you can monitor, you know, is anything changing? You know, how these new, kind of, how's chicken El Pastor.

S1

Speaker 1

45:03

Is that, is that a good upgrade from the basic chicken? You know, the drink offerings improving, the store is clean. I think you should invest in companies you really understand, simple businesses where you can predict with a high degree of confidence what it's gonna look like over time and if you do that in a Not particularly concentrated fashion and you don't borrow money against your securities. You'll probably do much better than your typical mutual fund

S2

Speaker 2

45:26

Yeah, it's interesting consumers that love a thing are actually good analysts of that thing or I guess a good starting point.

S1

Speaker 1

45:32

By the way, there's much more information available today. When I was first investing, literally, we had people faxing us documents from the SEC filings in Washington, DC. Now everything's available online.

S1

Speaker 1

45:43

Conference call transcripts are free. You have AI. You have unlimited data, and all kinds of message boards and Reddit forums and things where people are sharing advice. And everyone has their own, you know, by virtue of their career or experience, they'll know about an industry or a business and that gives them, I would take advantage of your own competitive advantages.

S2

Speaker 2

46:12

I'm just afraid if I invest in Chipotle, I'll be like analyzing every little change in menu from a financial perspective and just be very critical.

S1

Speaker 1

46:20

If it's gonna affect your experience, I wouldn't buy the stock.

S2

Speaker 2

46:24

Yeah, I mean, I should also say that I am somebody that emotionally does respond to volatility, which is why I've never bought index funds. And I just noticed myself psychologically being affected by the ups and downs of the market. I want to tune out because if I'm at all tuned in, it has a negative impact on my life.

S1

Speaker 1

46:43

Yeah, that's really important.

S2

Speaker 2

46:45

Can you explain what activist investing is? You've been talking about investing and then looking at companies when they're struggling, stepping in and reconfiguring things within that company and helping it become great. So that's part of it, but let's just zoom out.

S2

Speaker 2

47:03

What's this idea of activist investing?

S1

Speaker 1

47:05

I think recently, in the last couple of days, I read an article saying that more than 50% of the capital in the world today that's invested in the stock market's passive, indexed money. And that's the most passive form. Right?

S1

Speaker 1

47:17

So if you think about an index fund, a machine buys a fixed set of securities in certain proportion. There's no human judgment at all. And there's no real person behind it in a way. They never take steps to improve a business, they just quietly own securities.

S1

Speaker 1

47:39

What we do is we invest our capital in a handful of things. We get to know them really, really well because you're going to put 20% of your assets in something, you need to know it really well. But once you become a big holder, and if you've got some thoughts on how to make a business more valuable, you can do more than just be a passive investor. So our strategy is built upon finding great companies in some cases that have lost their way and then helping them succeed.

S1

Speaker 1

48:06

And we can do that with ideas from outside the boardroom. Sometimes we take a seat at, on a board, or, or more than 1. And we work with the best management teams in the world to help these businesses succeed. So when I first went into this business, no 1 knew who we were and we didn't have that much money.

S1

Speaker 1

48:26

And so to influence what was to us a big company, we had to make a fair bit more noise, right? So we would buy a stake, we'd announce it publicly, we'd attempt to engage with management. The first activist investment we made at Pershing Square was Wendy's. I couldn't get the CEO to ever return my call.

S1

Speaker 1

48:44

He didn't return my call. So we actually, in that case, our idea was Wendy's owned a company called Tim Hortons, which was this coffee donut chain. And you could buy Wendy's for basically $5 billion and they owned a hundred percent of Tim Hortons, which itself was worth more than 5 billion. So you could literally buy Wendy's, separate Tim Hortons and get Wendy's for negative value.

S1

Speaker 1

49:07

That seemed like a pretty good opportunity, even though the business wasn't doing that well. So we bought the stake, called the CEO, couldn't get a meeting, nothing. So we hired actually Blackstone, which was at that time had an investment bank. And we hired them to do what's called a fairness opinion of what Wendy's would be worth if they followed our advice.

S1

Speaker 1

49:26

And they agreed to do it, paid him a fee for it. And then we mailed in a letter with a copy of the fairness opinion saying money's would basically be worth 80% more if they did what we said. And 6 weeks later, they did what we said. So that's activism, at least an early form of activism.

S1

Speaker 1

49:40

With that kind of under our belt, we had a little more credibility. And now we started to take things and stakes in companies. The media would pay attention. So the media became a kind of an important partner and some combination of shame, embarrassment and opportunity motivated management teams to do the right thing.

S1

Speaker 1

49:58

And then beyond that, there's certain steps you can take if management is recalcitrant and the shareholders are on your side. But it's a bit like running for office. You've got to get all the constituents to support you and your ideas. And if they support you and your ideas, you can overthrow, if you will, the board of a company, you bring in new talent and then take over the management of a business.

S1

Speaker 1

50:21

And that's the most extreme form of activism. So that's kind of the early days and what we did. And a lot of the early things that we did were, you know, call it a, what we call sort of like investment banking activism, where we'd go in and recommend something a good investment bank would have recommended. And if they do it, we make a bunch of money.

S1

Speaker 1

50:38

And then we moved on to the next 1. And then we realized an investment, a company called General Growth, was the first time we took a board seat on a company. And there was some financial restructuring and also an opportunity to improve the operations of the business, sit on the board of a company. And that was 1 of the best investments we ever made.

S1

Speaker 1

50:57

And we said, okay, we can do more than just be an outside the boardroom investor. And we can get involved in helping select the right management teams and helping guide the right management teams. And then we've done that over years. And then I would say the last 7 years, we haven't had to be an activist.

S1

Speaker 1

51:14

An activist is generally someone who's outside banging on the door trying to get in. We're sort of built enough credibility that they open the door and they say, hey, Bill, what ideas do you have? So welcome, would you like to join the board? We're treated differently today than we were in the beginning.

S1

Speaker 1

51:29

And that is, I would say some people might just call it being an engaged owner. By the way, that's the way investing was done in the Andrew Carnegie, JP Morgan days, 150 years ago. You had these iconic business leaders that would own 20% of US steel. And when things would go wrong, they'd replace the board and the management and fix them.

S1

Speaker 1

51:53

And over time, we went to a world where mutual funds were created like in the 1920s, 30s, index funds with Vanguard and others. And that all these controlling shareholders would kind of gave their stock to society or their children and multiple generations, and there were no longer kind of controlling owners of businesses or very few. And that led to underperformance and the opportunity for activists who were time and activism has done and I think we've helped lead this movement is it restored kind of the balance of power between the owners of the business and The management's of the company and that's been a very good thing for the performance of the of the US stock market actually

S2

Speaker 2

52:33

So the owners meaning the shareholders.

S1

Speaker 1

52:35

Yes, And

S2

Speaker 2

52:35

so there's a more direct channel communication with activists investing between the shareholders and the people running the company.

S1

Speaker 1

52:44

Yes. So Activists generally never own more than 5 or 10% of a business. So they don't have control. So the way they get influence is they have to convince the other, you know, they have to get to sort of a majority of the other shareholders to support them.

S1

Speaker 1

53:00

And if they can get that kind of support, they can behave almost like a controlling shareholder. And that's how it works. So the running of

S2

Speaker 2

53:06

a company is, according to Bill Ackman, is more democratic now.

S1

Speaker 1

53:11

It is, it is. But you need some thought leaders. So activists are kind of thought leaders Because they can spend the time and the money.

S1

Speaker 1

53:19

A retail investor that owns a thousand shares doesn't have the resources or the time, they got a day job. Whereas an activist day job is finding the handful of things where there are opportunities.

S2

Speaker 2

53:30

So on average, is it good to have such an engaged, powerful, influential investor helping control, direct the direction of a company?

S1

Speaker 1

53:42

It depends who that investor is, but generally I think it's a good thing. And that's why, you know, 1 of the problems with being CEO of a company today and having a very diversified shareholder base is the kind of short-term, long-term balance. And you have investors who have all different interests in terms of what they want to achieve and when they want it achieved.

S1

Speaker 1

54:03

And a CEO of a new company, hasn't had, a new CEO of an old company, let's say, hasn't had a chance to develop the credibility to make the kind of longer term decisions and can be stuck in a cycle of being judged on a quarterly basis. And a business, the best businesses are forever assets. And decisions you make now have impact 3, 4, or 5 years from now. In order to make, and sometimes there are decisions you make that have the effect of reducing the earnings of a company in the short term, because in the long term, it's going to make the business much more valuable.

S1

Speaker 1

54:38

But sometimes it's hard to have that kind of credibility when you're a new CEO of a company. So when you have a major owner that's respected by other shareholders, sitting on the board saying, hey, the CEO is doing the right thing and making this expensive investment in a new factory. We're spending more money on R&D because we're developing something that's going to pay off over time. That large owner on the board can help buy the time necessary for management to behave in a longer term way.

S1

Speaker 1

55:05

And that's I think good for all the shareholders.

S2

Speaker 2

55:07

So that's the good story, but can it get bad? Can you have a CEO who is a visionary and sees the long-term future of a company and an investor come in and have very selfish interest in just making more money in the short term and therefore destroy and manipulate the opinions of the shareholders and other people on the board in order to sink the company, maybe increase the price, but destroy the possibility of long-term value.

S1

Speaker 1

55:40

Could theoretically happen. But again, the activist in your example, Joni doesn't own a lot of stock. The shareholder basis today, the biggest shareholders are these index funds that are forever, right?

S1

Speaker 1

55:52

The BlackRock Vanguard, State Street, their ownership stakes are just at this point only growing because of the inflows of capital they have from shareholders. So they have to think or they should think very long-term and they're going to be very skeptical of someone coming in with a short-term idea that drives the stock price up in the next 6 months but impairs the company's long-term ability to compete. And basically that ownership group prevents this kind of activity from really happening.

S2

Speaker 2

56:20

So people are generally skeptical of short-term activist investors.

S1

Speaker 1

56:25

Yes, and they're very few. I don't really know any short-term activist investors. That's a hopeful message.

S1

Speaker 1

56:31

Not ones with credibility.

S2

Speaker 2

56:33

You mentioned general growth. I read somewhere called arguably 1 of the best hedge fund trades of all time. So I guess it went from 60 million dollars to over 3 billion.

S1

Speaker 1

56:47

It was a good 1. All right. But it wasn't a trade.

S1

Speaker 1

56:50

I wouldn't describe it as a trade. A trade is something you buy and you flip. This is something where we made the investment initially in November of 2008. And we still own a company we spun off of General Growth and it's now 15 years later.

S2

Speaker 2

57:04

So can you describe what went into making that decision to actually increase the value of the company?

S1

Speaker 1

57:10

Sure. So this was at the time of the financial crisis, circa November 2008. What Real estate's always been a kind of sector that I've been interested in. I began my career in the real estate business working for my dad actually, arranging mortgages for real estate developers.

S1

Speaker 1

57:26

So I have kind of deep ties and interest in the business. And General Growth was the second largest shopping mall company in the country. Simon Properties, many people have heard of. General Growth was number 2.

S1

Speaker 1

57:37

They own some of the best malls in the country. And at that time, people thought of shopping malls as these non-disruptible things. Again, we talk about disruption, malls have been disrupted in many ways. And General Growth stock, General Growth, the company, the CFO in particular was very aggressive in the way that he borrowed money.

S1

Speaker 1

57:57

And he borrowed money from a kind of Wall Street, not long-term mortgages, but generally relatively short-term mortgages. It was pretty aggressive. As the value went up, he would borrow more and more against the assets and that helped the short-term results of the business. The problem was during the financial crisis, the market for what's called CMBS, commercial mortgage-backed securities, basically shut.

S1

Speaker 1

58:20

And the company, because its debt was relatively short-term, had a lot of big maturities coming up that they had no ability to refinance. And the market said, oh my God, the lenders are going to foreclose and the company's going to go bankrupt, they're going to get wiped out. The stock went from $63 a share to 34 cents. And there was a family, the Buxbaum family owned, I think about 25% of the company and they had a $5 billion of stock that was worth 25 million or something by the time we bought a stake in the business.

S1

Speaker 1

58:50

And what interested me was I thought the assets were worth substantially more than the liabilities. The company had 27 billion of debt and had $100 million value of the equity down from like 20 billion. Okay. And 1 that, you know, sort of an interesting place to start with a stock down 99%.

S1

Speaker 1

59:10

But the fundamental drivers, the mall business or occupancy, how occupied are the malls? Occupancy was up year on year between 07 and 08, interestingly. Net operating income, which is kind of a measure of cashflow from the malls, that was up year on year. So kind of the underlying fundamentals were doing fine.

S1

Speaker 1

59:28

The only problem they had is they had billions of dollars of debt that they had to repay, they couldn't repay. And if you kind of examine the bankruptcy code, it's precisely designed for a situation like this, where it's kind of this resting place you can go to kind of restructure your business. Now, the problem was that every other company that had gone bankrupt, the shareholders got wiped out. And so the market's seeing every previous example, the shareholders get wiped out, the assumption is the stock's going to go to 0.

S1

Speaker 1

59:59

But that's not what the market's seeing.