Bill Ackman — The Knowledge Project #82

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The Knowledge Project

Legendary activist investor, Bill Ackman shares his big trade that went from 26 million to 2.5 billion, the lessons he learned growing up, what drives him, how to overcome failure and learn from mistakes, his sleep and nutrition routine, and so much more. 00:02:36 Lessons Learned from his Parents 00:04:50 What Drives Him 00:05:24 Overcoming Failure 00:06:16 Lessons From Mistakes 00:07:32 Getting Incrementally Better 00:08:17 The Single Most Important Thing You Need To Understand 00:08:35 Why He Admires Elon Musk 00:08:55 What Does Success Mean? 00:09:19 Overcoming Setbacks 00:11:52 Divorce 00:13:02 Sleep, Exercise, and Nutrition 00:15:40 Last Show on Netflix he Loved 00:16:17 What he Reads Regularly 00:18:12 Where Investment Ideas Come From 00:27:34 The Role of Index Funds and ETFs 00:33:12 His Heroes 00:41:52 Herbalife 00:44:57 Dealing with Haters 00:46:46 CNBC hell is Coming Interview (26m to 2.6 Billion Trade) 00:56:00 Explanation of Credit Default Swaps 01:00:27 Economic Implications of COVID 01:09:13 How To Handle the Bailouts 01:12:08 Are Malls Dead? 01:14:38 Leverage After COVID 01:17:00 How he Views Berkshire Hathaway 01:22:18 Lessons from Warren Buffett and Charlie Munger 01:26:20 Pershing Square in 10 Years 01:27:34 How the SEC should Run ✩THREE THINGS✩ 1. Follow us on Instagram HERE: https://www.instagram.com/farnamstreet/ 2. Subscribe to The Knowledge Project Podcast (Apple Podcasts: https://apple.co/3fz6u4X | Spotify: https://spoti.fi/2SSgCvT | Google Podcasts: https://bit.ly/2Wjw7iy) 3. Check out the full show notes: https://fs.blog/knowledge-project/bill-ackman/ AND ONE MORE THING ... 4. Over 300k people read my weekly newsletter. Sign up now https://bit.ly/2xP7tNt OTHER INVESTING RELATED EPISODES: Howard Marks: https://www.youtube.com/watch?v=jZMbKvJqEVo Stephen Schwarzman: https://www.youtube.com/watch?v=7zIhVJ3cEYI Mike Maples: https://www.youtube.com/watch?v=EgYxeca6xbc Jason Calacanis: https://www.youtube.com/watch?v=KL97y2Of3cA -------- #TheKnowledgeProject #ShaneParrish #BillAckman --------

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So I've always had this view that success is not a straight line up and you know if you read the stories of successful people almost every successful person has had to deal with you know some degree of hardship and I've always have a view that how successful you are is really a function of how you deal with failure and if you deal with failure well and you persist you know you have a high probability of Being successful so I've always kind of had that view and then I've had to apply it to myself you know certainly a few times hello and welcome i'm shane parish and you're listening to the knowledge project a podcast dedicated to mastering the best of what other people have already figured out this podcast Center website FS dot blog help you better understand yourself in the world around you by exploring the methods ideas and Mental models from some of the most incredible people in the world before we get to today's show a disclaimer you'll see why the disclaimers necessary after the disclaimer shane parish is the CEO of Farnam Street media all opinions expressed by me and podcast guests are solely their own opinions and do not reflect the opinion of Furnham street media or its parent company or its affiliates this podcast is for informational purposes only and should Not be relied upon as a basis for investment decisions or anything else shane Furnham Street or friends of Shane may maintain positions and securities discussed in this podcast neither Furnham street nor its affiliates and/or subsidiaries warrant completeness or accuracy of the opinions expressed herein and they should not be relied upon as such ok so why is all that necessary well today I'm talking with legendary investor Bill Ackman bill Is an investor and fund manager as well as the CEO of perishing Square Capital Management in this in-depth interview we're gonna talk about what drives him the lessons he's learned from his parents coming back from failure more than once information consumption and ideas are saying the role of ETFs facing criticism nutrition kovat the lessons he tries to teach his kids and of course stocks it's time to listen and learn [Music] Bell I'm so glad to have you on the show well thanks for having me what are some of the lessons you learned from your parents it was interesting to speak about my parents because I've been living with them now for I think about six weeks and haven't done that for good thirty years so it is an interesting time to talk about lessons learned from parents but my father is I like to scribe myself as the most persistent person in America but actually my father Is the most persistent person in America so I certainly live in a home where you learn never to give up on pretty much anything and so I think that's a big take away and you know Mom and Dad you know hardworking motivated educated people high ambitions for their kids always talked about setting an example I learned a lot of things my parents talking about philanthropy I think of philanthropy as something that is not genetic it is learned and something that My dad reinforced pretty much from the time I was a kid how do you think about the role of giving back I think the the easiest way to think about it one of the more influential classes at college I read John Rawls theory of justice and he talked about you know how do you how should the world be organized well his argument is you should organize the world not from your perspective but from the perspective of not knowing where you end up in the genetic lottery And in the geographic lottery you know where are you born in New York City - you know well-educated parents and a upper-middle class home or are you born in sub-saharan Africa and you know you don't get to decide where you end up and in that sort of world you should design the world from that position the perspective of not knowing where you can end up and you know I I always expected to be successful and I had sort of a business plan and I said to myself that If I'm very successful then I'm going to make sure to return the favor and that's what I've tried to do that's Rawls the veil of ignorance right yes and you have been incredibly successful what drives you so I think one of my biggest drivers from the time I was a kid was independence here as much as I love my parents I did not want to be reliant upon them so everything from financial independence to the Independence to say what I think the independence to you know live the life I wanted to live and so that's been a huge driver you've come back from failure or at least the brink of disaster twice in your career you've had to shut down your first fund and after Valiant you lost a lot of assets but it doesn't seem to faze you at all how does this affect you personally so I've always had this view that success is not a straight line up and you know if you read the stories of Successful people almost every successful person has had to deal with you know some degree of hardship whether that hardship is you know personal hardship health-related hardship or a business issue and I've always had the view that how successful you are is really a function of how you deal with failure and if you deal with failure well and you persist you know you have a high probability of being successful so I've always kind of had that view and Then I had to apply it to myself you know certainly a few times and I always like to say that experience is making mistakes and learning from them and I've had the benefit of having made a lot of mistakes what are some of the lessons that you've drawn from from those experiences you know it's interesting in my first fund had a partner who remains a very good friend and the stress of the ending was enough for him that he just didn't want to continue and do it again Where I was excited to kind of rebuild and go forward and my business plan was just to make a little progress every day and if you make a little progress every day eventually that compounded progress will dig you out of the hole and what is difficult is you find yourself in whole whether it's an investment whole or in your personal life or otherwise it seems incredibly daunting to get back to you know if you will where you were and you're looking up at this peak where you Were before and it's just you're never gonna get there but if you don't focus on the peak and just focus on you know one step at a time you know making progress eventually you know as the week's go by just make a series of smart thoughtful decisions use good judgment stay healthy eventually you climb your way out of the hole most people look at that peak and then they make a I would say more emotional or irrational decisions in Order to get back like how do you ground yourself in the moment of the day to day and just getting incrementally better I think having good friends being in a loving relationship having a supportive family and staying healthy you know huge believer in exercise good nutrition sleep as a way to deal with stress my first business reversal if you will was the most difficult because I hadn't had to experience that before I mean it's sort of the speech I give them I go to Speak it's you know business schools you go to speak at Harvard Business School and you're in front of a audience of students and they've done you know top of their class in high school and they went to a great college and they've done great at summer jobs they have great recommendations from their teachers and I've never failed you go to Harvard Business School and they're then they're about to go out into the real world and the problem with that approach is the Single most important thing you need to understand is how to deal with failure and the vast majority of people who got to Harvard Business School or pick your favorite you know top business or law school has not had to deal with failure and that is the determined I think of success now look at a lawn musk he's been on the brink of failure however many times and it's I think why he's beloved by many hated perhaps by some but I really admire the guy in terms of How he's dealt with you know near catastrophe and I just think there are many many examples of people you know what does success means it success means you have a very good ability to deal with inevitable failure mistakes and the you know life issues that emerge over time what lessons would you give people on how to deal with failure I mean it's got to be more complicated than sort of like how do you learn from it like do you reflect is there a Process that you go through how do you reset yourself and go forward yes for me it is literally just a bit of a plotting one step at a time you know we had you know my sort of life trajectory was you know did well in high school I went to a good college from there good work experience Harvard Business School started my own hedge fund with a partner we had five years of really incredible success and then you know some challenges and then success and then Challenges and it's just sort of the rhythm of being a concentrated investor certainly and also the rhythm of life and I just think you just have to stay sane and stay balanced people have always told me Bill you deal with stress incredibly well and I think it's really about being you know healthy going to the gym playing sports you know having the perspectives that comes from spending time with you know people that you love and you know going for a walk During my first most challenge reversal I used to go for a walk every night with a good friend you know around Manhattan we'd go walk to the Hudson River we talked and I was just nice knowing you know a supportive friend was looking out for me wanted me to succeed and nothing as dramatic happened the second time around because you know I I'm very fortunate in being in a wonderful marriage and relationship which I think helps enormously and also surrounded by Work colleagues that I you know like and respect and you know enjoying what I do and also what the kind of reversal we're talking about here is very very different than the kind of reversal someone experiences for lose their job lose their job and have no form of economics report or they have a you know a very very serious illness that threatens their existence so in my case you know I've done very well my family is well taken care of Very nice roof over my head so to speak so I don't really view this as anything like the kind of challenges that people deal with when they get cancer for example or they have you know they lose a job that they need for their you know to support their family to pay for health care for their kids you know that kind of thing so I just try to keep perspective you did go through a divorce though right yes I mean the most challenging moment From a business standpoint was not the most recent challenges are losing money on a big investment is disappointing but it happened it was coterminous with challenges in my and perhaps correlated with challenges in my personal life it is it can be very distracting to be contemplating whether one should stay married while of running a business that requires you know a lot of judgment and clarity of thinking and you know i altom utley made some failures of judgment in My business and i am quite sure that the personal challenges I was facing at the same time made things worse and then I had to deal with the business challenges at the same time I was in the midst of normal challenges of divorce and resolving things with the former spouse and kids and you know so it was it was a challenge period you mentioned sleep exercise nutrition are really important to you can you go into a little bit about your routine and sort of like how You view those things sure so on the sleep side have always been a good sleeper so that that helps I do think it is related to you know taking care of yourself generally so you know I work out pretty intensely you know I really I play tennis just in addition to a workout it allows your mind so it's almost a form of meditation for me and that it completely takes me out of whatever work-related issues are on my mind And then I've learned a lot about nutrition over the last decade or so that's I think helped maybe 10 to 15 years and I had a completely I thought like wrong idea or nutrition I would say until more recently I will walk me through that what are you what do you think now I think now is one we start with I think sugar is poison so you know minimizing your sugar consumption I think helps tremendously I also think for me personally although I think Everyone is different genetic makeup and how they respond to various things I think you know I'm better off with kind of a higher fat higher protein lower carbohydrate diet you're eating real foods as opposed to foods that come out you know anything that comes out of a package or is processed I generally avoid so real food kind of higher fat you know avocados nuts things like that but I eat you know meat and fish and I've really done my best to cut back on Sugar consumption and in carbohydrates and that served me you know sort of well I feel better I think think better also able to manage my weight much more effectively you know I come from a family where managing your weight has not been an easy thing you know for my father's side of the family let's say and I feel like I finally I finally figured out what the issue is and just you know at least our genetics we have a super high sensitivity to sugar intake Or carbohydrates are you at three meals a day kind of guy or you snack all day or I've become a bit of an interim faster you know so I generally don't eat before noon and I usually finish dinner by around 8:00 I'll have nuts for snacks occasionally but not you know that's about it oh and do you have a normal bedtime routine or is it like you go to bed whenever or are you like you start winding down at a certain time like what does that look Like yeah read a lot in the evening spent a lot of time with Neri in the evenings you know occasionally we watch a movie occasional stay up and watch something interesting but you know no formal routine what's the last movie you watch that you loved I watched a a series on Netflix a four-part series called unorthodox just in the last couple of nights and I don't watch many Netflix series I thought it was Excellent it was a very sort of in-depth look at life in the kind of ultra-orthodox Jewish community but very well acted and very real I'm curious as to you mentioned reading sort of a lot at night I'm curious as to what your information intake looks like like what publications do you read regularly books blogs specific authors memos what does that look like sure so you know read a lot of traditional media sources you know Wall Street Journal Financial Times New York Times Economist fortune Forbes grants interest rate observer and beginning sort of as I got deeper into coronavirus I started using Twitter actually as a newsfeed and found it to be very very helpful to interesting almost having the experience of reading the news a couple of days before you read the news and the rest of the media Bloomberg and Bloomberg News of course and then I just you know I go where the you know the facts sort of take me and Then you know I don't regularly listen to read blogs although I'm starting to understand the benefits so I'm a late but sort of recent adopter of finding more interesting curated news sources is there information you avoid like information that everybody else has not really I think it's helpful to have kind of the conventional perspective and you know I don't think we have um you know have some particular access to you know some inside secretive news source that's Valuable you know there are people that I talked to I talked to for perspective on things like the economy in business just people in business leader type people that I respect and compare notes with you know what's really going on in China that kind of thing that can actually be quite quite helpful but you know get a lot of you know reading basic media Financial Times economist Atlantic New Yorker how do you source your investment ideas like Where did the where do the ideas come from like how does that process work is it you is it your team of analysts is it sure so I would say the early days of Pershing I would generate the ideas and the team would help me analyze them and as the business has matured and I really think it's a credit to the team and the maturity of the business many ideas are sourced by members of the team and my role over time has become one you know setting the sort of the framework for Things that are likely to be interesting you know whether and whether something fits within the framework or not and then I'm usually the 20% person on every idea so 80% of the work is work led by a two-person subset of the investment team and 20% of the work you know the reading public filings conference call transcripts work that I do the 80% work a lot of that will involve conversations with experts to understand matrix of businesses and that's work that's Largely done by other members of the team and then the team overall discusses whether something merits inclusion in the portfolio so some combination of a couple of people work very very hard and vote a lot at the last you know perhaps a couple of months looking at an idea one person myself that's but not nearly as much time but knows enough to be dangerous and then you know another call it four members of the team that have not done real work on the idea but are Economically incentivized to make sure that you know we make the right decision and that's sort of the composition of how we get to an idea that makes sense traditionally you said that you guys do more work on any investments than anybody else and you know it better than often the people that are running the company is there a point where or or at what point does that become self-reinforcing like you've done so much work that you it's hard to walk Away from this like how do you build it that into your process yeah I don't know that I don't know for a certainty we don't do more work than anyone else so I wouldn't I wouldn't say that but because we manage a very concentrated portfolio we have the benefit of going very very deep on something and we don't need to make a decision there's no time pressure generally to make a decision so the benefits of concentration the benefits of being a Long-term owner of companies if there isn't we might add one or two new ideas a year which means we can have we have the luxury if you will of doing more work than many many other investors but we only want to do the work that is necessary to determine that an investment makes sense in the portfolio we don't we don't have some view that we have to exhaustively spend six months in order to make a decision in fact if you have to spend a large amount of time and It's not obvious it's probably not a good investment and we have made investments and some of our most successful investments the amount of work that was done was in the hours as opposed to even in the days or weeks months I mean the just most recently our heads that we put on to protect the portfolio I guess I wasn't specifically doing work on that investment at all but I was thinking about the ramifications for example the coronavirus then came to A conclusion this was something we want to hedge and that it was really an our discussion among the team before we decided to implement the hedge in that form and in a way one of our more successful investments if you look at the the risk versus the reward the amount of time spent was minimal can you take me behind the scenes on an investment decision that you've made and sold so nothing currently in your portfolio like what does that process Look like to bill ackman how do you think about it how do you walk through it so it starts with the framework of what we're looking for so the most important thing for us is that the business quality is extremely high and by business quality I mean we with number one we want it to be both high-quality business and one that we can predict with a very high degree of confidence so it's it's got to be what we call a simple predictable free cash Flow generative business and the reason for that methodology is you know the the value of a financial asset is the present value of the cash that you can take out of it over its life and particularly in a low interest rate environment you know you need to be able to predict the cash flows for many many years in order to figure out you know approximately what the business is worth and for many companies we have no idea Because the complexity of the business means we don't know what the cash flows will be three years out let alone you know years four through fifty which which matter in terms of determining what the business is worth so we look for sort of simplicity sort of and then durability and predictability so it's got to fit that screen and you know we can talk about Starbucks for example so we made an investment Starbucks a couple of years ago you mean not quite a couple Years ago and what we saw was a simple predictable free cash flow business good cash flow generated business that we could understand and so it met the first screen we think about coffee you know people have their coffee habit Starbucks has built a week than our view of very durable franchise they are in very high returns on you know every store that they build and it's a it's a habit that people don't like to break and so we had confidence in the durability and you Know the benefit of the quality restaurant business is once you understand the economics of one box and then you have a company that's built you know thousands of boxes over time it becomes more predictable and easier to understand what that business will look like over a very long period of time and so it Starbucks met the business quality threshold and then the next most relevant consideration is price and price what matters here is that there's A wide gap between price and value and so once we understood the business and we could model the business we could look at where it was trading and compare those two and at the time of our investment there was uncertainty because the recent same store sales had constant flattened and this was a company that had delivered consistent sort of mid-single the same store sales over a very long period of time and our analysis of the Kinda crux the analysis was is this a blip is this an indication of things about to go awry and that's really where we spent our time so you're looking at Starbucks and then but there's millions of people looking at Starbucks where does that edge come from I think a big part of the edge comes from we're not gonna do a better job predicting next quarter earnings then people who focus on that and we just don't focus on that at all What we focus on is what is this business worth over its life and do the the markets generally overreact to short-term information and noise because many stocks are traded on the basis of you know the marginal buyer and seller is a short term investor trying to predict where the stocks going to go up or down on the quarter and we you don't spend any time trying to figure that out and that kind of activity whether it's driven by quantitative traders or Computers or you know fast fast money so to speak moves securities around occasionally to crazy prices and Starbucks was trading as if the business had fundamentally changed and our view as it happened and that the company was taking all the right steps to address you know some of the performance related issues that they had both in the US and that they had you know a lot of opportunity for growth and they were becoming a more focused better Companies they were actually taking you know normally we look for a great business that had lost its way we try to figure out what they had done wrong and then we'd recommend serious changes after buying a stake in the company that's sort of our core business but in the case of Starbucks they were already doing all the things that we would have recommended that they do to fix the problem and so it was a bit of an activist investment where the management Had already become activist in their own company and so we thought I think a big part of our advantage is we didn't have to think about next quarter earnings you know big part of our competitive advantage today comes from the fact that our capital structure compared to a typical investment firm is very different you know 85% of our capital is in the you know comes from a public company and as a result we have very very long duration money and we don't To worry about this quarter or this year in making decisions and that I think is a huge advantage in a world in which most other investors have their they give their investors either daily or monthly or quarterly liquidity having you know permanency to a very large percentage of our capital base allows us to make a very long-term decisions and that that time arbitrage is a big part of our advantage time arbitrage is like a hard one to go Away because there's always going to be the short-term pressure and so I like the structural sort of like our approach to addressing that problem how do you see the role of ETFs and index fund investing and how does it impact our effect investors like yourself so the the impact on investors who care about governance in particular sort of activist investors is you know over time as you know index funds effectively come to control corporate America you know Their vote can be the deciding factor you know in a contest and so that's one way that index funds play a major role the other side of that is index funds are also because of their growing influence under a fair amount of pressure from their shareholders to oversee the businesses that they own people thought about the index fund investment business as a business almost without governance where governance was not a focus at all and then they're Increasing ownership of corporate America global you know global securities puts more pressure on them to be thoughtful now they don't have the the resources to lead an activist campaign I think that requires more entrepreneurial type investor so you know there's in a way there has to be a partnership between activist investors and you know index funds to make sure that we're governing companies correctly and you know seem a Number of the top firms over time take these issues much more seriously and and we've had a good experience working with with most of these major owners the problem with the index fund business is it's really a commodity business you know if you run an SP 500 index fund the only way that you can compete with other SP 500 index funds is by lowering your pricing and you know the pricing is now in the few basis points in fact there are index funds today that charge no Fees and it's hard for them to scale at scale up to have the government's resources necessary to make thoughtful decisions about about running businesses you know if you think about it if you managed ETFs and index funds you have to vote you call it ten fifteen twenty thousand proxies you know right around the same time most annual meetings or call it you know in the May soar timeframe so by February imagine Blackrock gets you know tens of Thousands of proxies in the mail and they have to make a decision on each of them which directors to vote for which initiatives to support which not to support it's an impossible hurdle for them particularly as their revenues you know asymptotically or the fees that you are Jassim tonically go to zero so that is a problem that needs to be addressed actually I made a small investment in a company called say which is a business that wants to put the vote Back into the hands of the owner and one of the opportunities for a Blackrock to differentiate themselves from for example a fidelity or for Vanguard is to transfer back the right to vote to the underlying holder in this company say sort of has a technology that enables that to take place now you wouldn't want a person investing in an S&P 500 index fund who's got a thousand dollar investment broken up in 500 you know piece you know two dollar pieces to have To think through 500 different proxies there you still have a problem but they may have certain principles that they operate under that they would want you know Blackrock to you know vote on for them and this company would enable that to take place and perhaps there are a few high-profile elections proxy contests etc with the underlying shoulder reflect to votes that's an interesting potential change in governance yeah that's a that sounds Like a pretty cool technology do you think that we end up with bigger swings as a result of more and more people being invested in index funds like do you think the highs are higher and the lows are lower or do you think it really has no impact like I imagine a lot of people right now are getting their March statement in the mail and looking at that going what just happened to generally ignore the market yeah I think the premise your question is Correct I think now if you think about index funds and constant inflows of of money you know each with each paycheck when people take a portion that's good invest in the foreign 401k that's been a major support you know for the stock market and index funds really in a way they they take more and more of the float out of a out of a security so the marginal trader can move a stock more because there's less float if that makes sense it's almost like having having Index funds as major holders of securities in stable market conditions actually reduces the liquidity of companies and it means that sort of hedge funds and a more active investors who are making day-to-day buy and sell decisions actually push securities around more some of the volatility you know that you've seen I think can be you know is somewhat due the fact that there is you know limited you know less liquidity in securities today because There's you know the greater percentage of shares that are held by index funds now you know if that were to reverse if index fund performance underperforms active management for a you know a meaningful period of time you could see instead of constant additions to you know the index fund you could see constant reductions of capital which could would be a big you know overhang on the securities that are held by index funds but that trend has sort of Continued be interesting to see what the impact of recent events have on it who are some of your investing heroes or actually who are some of your heroes not investing heroes but who just generally are some of your heroes sure so just briefly on the investment side you I got into this business because someone tipped me off about Warren Buffett early on so he's certainly obviously a hero to investors I learned a ton for over the course of my career we're kind Of supportive of me early on I named Joe Steinberg just likes being out of the headlines and his partner in coming ran a company called Leucadia national corporation you know a very interesting investment firm I learned a ton over time but you know I admire people like Elan musk you know I admire people who take on unbelievable challenges and and succeed you know the notion of building a car company to compete with the big car companies is something that on its Own I think it's fairly remarkable and if you want if you do that at a time when you're building a company you know - you know launch rockets into space you know I think it's even more remarkable so he's someone I have enormous respect for the world needs more people like Elon do you feel do you feel those people are better served in private roles as CEOs or as public company CEOs you know a lawn mosque who's been the ideal public company CEO I think had a Challenging period there with with his tweet I guess that's why my team's worries a little bit as I've used Twitter a little bit more than last month or two but I don't know that look I think that a lot of companies have stayed private too long and so I'm actually a fan of the public markets and a fan of public company governance versus the kind of governance that you've seen certainly in many of the Metro backed companies we work being Perhaps the the kind of most public sort of egregious example but you know the the governance structures of private companies venture backed businesses their capital structures all these service funky preferreds with liquidation preferences and you know I would not rely on the market values of many of these venture backed companies and I think the soft banks of the world that have allowed them to stay private I don't think I've done them a service can You can you elaborate a little longer or a little more on why they've stayed private too long and what effect or impact that has on capital markets or the company itself sure so there is a certain discipline that comes from being a public company you know today public companies have to you know report on a quarterly basis the SEC does a pretty good job in various requirements of the disclosures you need to make most companies have adopted a Quarterly conference call format where you can ask questions of management and I think there's a lot of just inherent transparency in that process and whether you're on one chair or millions of shares everyone gets the same information in the private sort of venture back markets and I'm a relatively small investor in startups and and I do it for fun I do it because you occasionally make a good investment and and also it helps me see the future In terms of what potential threats are coming that might disrupt either a business we own or a business we're looking at so I do find it to be an interesting thing but you know the quality of the information you get the lack of disclosure the how these boards sort of operate is far from ideal particularly when you compare them with their public company equivalents I mean the you know we work I just think was the sort of first opportunity for people Really to see what's been going on but I don't think we work is a typical of many venture backed companies where you know the founders become almost godlike figures who were handed control by you know the venture partners and they may be talented entrepreneurs and they may have been the right person to start and build a company from scratch but the business may now be at a stage where it needs more professional you know management and it can't happen or it's Difficult for that to take place in a in a private context and so Softbank injecting you know a hundred billion dollars in marking up the value of companies and giving them capital than they could use to postpone going public I think I think it's fundamentally been a disservice to the capital markets and probably to those businesses the as you know your you cannot public company shareholders for being too short term but there are real benefits that Come from the disclosure and the you know input that shareholders can bring to kind of a public enterprise do you think that these sort of like mark to investment valuations that seem to translate into some form of a public market are realistic or do you think it's just a game almost like yeah you know the problem with many venture funds is because of the life expectancy of many companies you won't know whether a venture capital firm does well for a Decade and venture capital funds particularly startup venture funds tend to be small and the founder really can't make a living until you know their first fund starts to generate some realization events and that can be years out and so the incentive on the part of many of these sort of earlier stage funds is to have markups in the portfolio because it's a way of showing to your investors that you're making business progress and I think it does encourage you know Certain kinds of behavior that's not ideal and a lot of this dynamic between the desire for the early venture fund investors to you know show a markup to their underlying investors and the desire for a new investor to come in you know at the lowest possible valuation and the way those issues are generally solved by creating these sort of funky securities that give the later investors you know preferential rights over the earlier investors and I think a lot of Times those features are not accurately considered and valuing different around a versus around C or D and so I think there are games that are played that are you know ideal and you can't really short them write it so talk to me about the role of short selling is that good for the world is it bad for the world is there a line where it becomes you've gone too far or how do you see that sure so I think I think short selling is a essential And generally positive function for markets I give a lot of credit to the folks of muddy waters with an earth a meaningful number of fraudulent companies and have yet to find an example of a regulator a finding a fraudulent company it's either a journalist often being fed by a short seller or a short seller that has been is you know the one to identify fraud because they have a huge economic incentive to define bad companies or Certainly fraudulent businesses so I think that function is a great function for the capital markets and I think if you know if I were running the SEC I would make sure that my enforcement division was talking closely with the best short sellers hearing their favorite ideas and that would be the best way for the SEC to uncover fraud so I think that is a very effective and good thing whereas a negative is the problem with being a short seller if you All you do is short stocks you want your companies to fail no matter what and you know some short sellers will take steps to actually cause harm to a business as a goal you know in order to make their short unsuccessful and so that's where it crosses the line and I you know I sort of followed the whole again never been an investor in Tesla you know long or short but you know you do see example you know again companies that complain about chores I usually look at those Management teams skeptically but in the case of Tesla you know I do think you know some of the short sellers went beyond the role of identifying overvaluation and their attempts to actually harm a company and that's where I think it goes beyond the pale I want to come back to the Twitter comment about Elon and you you're both I don't think it's a surprise you're pretty polarizing when you make comments they make news how do you judge that before Going on Twitter you know I wasn't particularly controversial I don't sink and the the media was generally pretty supportive until I went publicly short Herbalife and then Herbalife using their PR machine has done everything they possibly can or did everything they possibly could to try to discredit me you know in the press and what's fascinating to me actually if you were to google now we have not been Short Herbalife for you know very long time Herbalife is still running a negative campaign about me personally which I find it's fairly remarkable the way you can see this this week Google my name I don't if you want to do this right now what will pop up is an advertisement and it the advertisement is paid for by Herbalife and it talks about find out how you know billionaire you know funded this this movie called betting on zero Betting on zero yeah it's the first link yeah what does it say what's the subtext paid for by a billionaire hedge fund manager okay that is entirely false okay mother when my picture comes up you see there's paid for by billionaire hedge fund manager then you see a picture of me and any reasonable person would assume that ad you know that I paid for this movie betting on 0 the facts are that a documentarian I never heard of called me up one day and said finding This whole Herbalife thing fascinating we'd love to follow you around and I met with him and liked him decided I would trust him and I thought it would be helpful in getting the story out of the company and I participated in the film by agreeing to be interviewed a number of times and he followed me around a number of times the film was financed by actually a hedge fund manager not me his his name is escaping me for a moment but it's if you google it you can find out His name but I played no role whatsoever in financing funding directing literally all I did was appear in the film because he videotaped me at various presentations but the fact that a public company SEC registered company continues to put out completely false information about me personally tells you tells you something so this Herbalife thing was very very polarizing people felt that we were way too aggressive in our or some people at least did in our sharing our Views but you know ever since then I think I've become even if you will even more polarizing but it doesn't affect my thinking in terms of what I say publicly or write publicly or what I say in a letter unfortunately particularly today the more visible your profile the more lovers and haters you're gonna have it's just the nature of the beast but walk me through that a little bit because you're you know you seem way more in touch with Your emotions than most people and yet you're putting yourself out there in a way that people love or hate there doesn't seem to be a lot in the middle how do you how do you deal with that do you just ignore it do you even look at it do you does it affect you at all you know I just AM myself you know recently I was becoming more and more concerned that our government was not taking the coronavirus seriously you know I was gravely concerned a few months ago and You know took steps both to protect my father whose immune compromised my family the firm our investors with a hedge etc and then I you know by you know call it mid-march I said well there's just a really straightforward simple answer we just need to shut down the country and once we do that we can reopen carefully and go back to rebuilding an economy and rebuilding a country and I kept waiting for the president to go on TV and Nick and say Okay guys we're shutting down the country and it wasn't happening so I figured okay that's when I went back to Twitter for the first time and I wrote a tweet saying look here's the simple answer and it went pretty viral and I got a call from CNBC and said would you come on and I had I had forsworn going on TV you know for a couple years but I thought this issue was important enough that I should make a public case for a countrywide shutdown which I did and Unfortunately I had a whole bunch of people right after I went on making you know the case that I was doing this for some market manipulative reason or to benefit me personally and so it's frustrating it's disappointing but I still thought it was important to make my case and I was very happy the next day when California you know the first stage shut down and following day when New York State shut down and then here we are you know we didn't get there the Way I expected I was expecting the President to basically order a countrywide shutdown but you know living in a federal system with the states make these decisions I'm happy we finally got there although it took longer than I would like let's keep going on this co-ed theme you disclose publicly I don't know if what day it was but it was like March 4th that you had done this through your website that you put this Hedge on and yeah that it surprised me because nobody nobody noticed it seemed like everybody was caught up with all this other media and then you could see through the weeks because you release your weekly nav on Wednesdays right and you could see through the weeks that your asset value was going up well the market was going down so clearly they were a symmetric in nature look yes and then you went on you had sold them what was the timing around that like I don't Quite know what happened but you went on CNBC and you sort of like said we need to do more and you were you were will you walk me through that yeah so basically we put the hedge on in maybe the third week in February and by March 12th the hedge had gone from being worth nothing to being worth you know two point seven billion dollars and the markets had dropped at around twenty five percent or so at that point in time and we said you know what we've got this Massive division in a hedge which maybe has the potential of double if that's you know credit spreads widen to where they were during the financial crisis but if they don't and the government takes the right steps you know this heads could be worth zero and the stock mark and go right back up to where it was so we made a decision to exit the hedge and so we started selling the hedge and we started aggressively buying stocks on the 12th I went on CNBC At 12:30 on the 18th and the reason why I know these details is because you know I wanted to respond to some of my detractors we've invested two billion fifty million between March 12th and March 18th or 12:30 in the stock market buying you know addition adding to our portfolio blinds pre-purchasing Starbucks we had sold half the hedge for a billion three hundred a little more than half the hedge for a billion three hundred million So we were three billion you know three hundred fifty million more long stocks if you will then we were on March 11th and bear in mind this was a firm with total assets you know total equity of about seven seven a half billion dollars so adding three billion dollars of risk you know we were much longer than we were even before we had the hedge on so we were we had no short positions that's when I went on TV so I went on TV to give a very bullish message which was You know look I think markets are going to soar we just need to stop the virus there's a really simple solution stopping the virus it's locked down the country for 30 days you kill off the virus you open carefully continue to practice social distancing but you know the stock market is a discounting machine it will look forward and as soon as we do this the markets will recover and that's why we're buying stocks and that's why we're buying stocks we've Been buying stocks over the last you know week and we're buying stocks today and here are the stocks I'm buying so it's rare that someone goes on TV and makes their case and says explains which securities are actually purchasing which we did and after I got off I noticed other commentators coming on and also on Twitter people saying I'll build drove down the market not what they forgot was the stock market was already down almost 7% by the time raid I went on birdie and You know an hour later was down more so simply because the market went down after I spoke didn't mean I call it the market to go down I mean it's a market a gun up that I was I the cause for the market going up the answer is you know yes but now I have later I put out a tweet basically saying look making sure people understand my message yes if the government ignores the virus and just allows it to continue to propagate and we don't shut down the country we're Gonna end up in a very very dark place however if we shut the country down for 30 days which is what I expect to happen we'll kill the virus Marcus will cover and that's why we're buying securities so it was a bullish message delivered with there is a fork in the road I know we're gonna take the right fork and that's the bet that we're making but if we don't it could be bad but I believe it strongly enough that we've invested you know three billion dollars In the last week buying stocks so many questions I have here I just want to for the context of listeners date this interview it's April 13th just so whenever it comes out people have an idea of when we were recording why didn't you sell everything instead of the hedge why the hedge so we are a long tour investor we get to know our companies and their management teams well we often play a role and putting the CEO in the seat so in Tripoli we put Four directors on the board reform eight directors when we joined the company and we helped to recruit Brian Nichol to become CEO of the business and we've been a supportive shareholder of the company so we still have a director or representative of the firm that's sits on that board so one it's not a very supportive thing in the midst of a crisis to if you will abandon companies that you've supported and helped build and that's really true for many of the Companies we own so the one I don't love doing that the second thing is you know our view was if you looked at what was going on in China there is a straightforward solution to how to deal with you know pandemic you know China did it they've been able to manage their cases and deaths and again you have to question some of the data of China but I don't think the data is materially different from what they've described our assumption was the we would you know As the viruses made its way west you know it'll you know Italy Spain everyone's adopting a shutdown approach I'm sure America is gonna get there and if we do Marc is gonna recover and we own big you know somewhat illiquid positions and the companies that we are shoulders out because of our degree of concentration so you know we could sell everything and then you know wait for the markets to go down buy everything back there's a lot of frictional costs Associated with that we you know what if the stock market doesn't decline as much as we think it might and what if it declines very briefly and we don't we're not we don't have an opportunity to rebuild stakes and these great businesses we've owned we incur a huge amount of tax liabilities because we have you know big embedded gains and the companies that we own so there are a number of reasons why we just didn't like the idea of of selling and the Hedging is kind of elegant because if nothing happened we would have lost very little money but if we expected to happen and we would you know the hedge would become very very valuable we could cash it in the more the market went down the more valuable the hedge becomes we could cash it in hopefully at the bottom or as close to the bottom and redeploy the money buying companies that we like and that's what we chose to do we would have Had better results in the short term you look at these funds that are dedicated you know so called Black Swan funds that all they do is put on these kind of hedges waiting for disaster and they're you know some of them are up a thousand percent you know some the smaller ones are of a thousand percent in the last month or so we would have had you know extraordinary short term results but we would have impaired our relationships with companies and management teams and I think our results again over time even over the course of the next year or two you know maybe better than they would have been had we tried the alternative approach so those were some of the thoughts that we appreciate you going into such detail how did your staff react when you put the hedge on so actually the wave came down is I had been getting more and more concerned about the coronavirus and you know interestingly the organization started To think I was losing it even some of my friends thought I was overreacting and that of course made me more concerned because when people I really respect and like think I'm being extreme and I think I'm not you know taking every day that goes by without our you know in effect shutting down the firm I felt you know taking more and more risk that maybe that much more concern and you know one Sunday night I think it was maybe the third week in February you know I called An investment team conference call which I very rarely do and I talked through the economic implications of the virus which I felt very few people were focused on and we fairly quickly you know over the course that conversation the team agreed that this was a you know reasonable probability of the kind of case that I laid out for what would happen and then we spent the time talking about how we would hedge this and we kind of came to a group decision That you know it happens to be a really interesting time in which to hedge credit risk because credit is sort of at the tightest or sort of you know the pricing of credit is at the lowest it's almost ever been and so it became a relatively easy decision to put on a large hedge because the inherent asymmetry was about the most attractive had never been and that if we were completely wrong about the economic implications of the virus it Would be of no moment very limited downside compared to assets I think you only had 21 million or 26 million in total invested yes although if that really understates it it's not credit default swaps are not like options so a CD as contract is a commitment to make payments over time and we at the peak had 70 billion actually 71 billion of notional insurance that cost about an average of 70 basis points per annum so about 500 million dollar committed to Make 500 million dollars a year right okay in payments for five years so that's you know two and a half billion dollar commitment again for a seven half billion dollar enterprise you know it's it's not a small number and that's why it's something that an individual really can't do right thanks won't do CD s contract Charlie with with individuals so but the way we thought about the risk is you know there are two forms of risk one for risk is just the premium were Committing to pay and the moment you unwind the contract you stop paying the premium and this was one of the few cases in my life where I had a very negative view on where the stock market would go and I also had a very good sense of the timing you know I had a very very few back in oh seven and before of where things were headed in terms of and I thought we could be headed for credit crisis I just didn't have a good sense of timing here I Thought the timing was weeks away and so that made the commitment to make premium payments a much lower risk commitment I mean we're gonna have this thing on for five years let alone one year I thought it was you know worst case we'd be taking it off in 90 days so I thought about that as not a five hundred million risk but rather you know we're gonna spend you know hundred and you know twenty five million dollars right because they would play it you would Know if you were right in the next sort of ninety days that's right and so I viewed as one hundred twenty five million dollars in the context of 7/9 even two percent of assets so that seemed not to be an unreasonable risk the other risk was that credit spreads tightened because when you go to unwind the credit spreads go from you know an average of seventy again it was a mix of both investment grade where we paid around fifty basis points and a High-yield CD s where we paid about three hundred three hundred and thirty basis points but the blended average was around seventy basis points if it went from 70 to 50 we could lose about a hundred basis points times the notional amount of the contracts we could lose a big number you know theoretically we could lose call 700 million dollars which is you know almost you know call it nine percent of show over assets but my view was the probability of credit Spreads tightening and again you have to look it's easiest to look at it by splitting between by blending that the cost of high-yield and investment bread it really is misleading so the investment grade CD s was trading around fifty the previous all-time tightest levels were just under 40 basis points so a ten basis point tightening and I could not see a scenario in which the coronavirus would lead to a tightening of credit spreads and the all-time tight Levels were achieved at a time that there were artificial subsidies that caused credit to be very tight there were these things called synthetic CDOs and bond insurers were writing synthetic CDOs creating this huge supply of cheap you know very inexpensive spreads and that that had really gone away during the credit crisis so I just it was really a one-way bet and the biggest risk was how long we have it on and we ended up spending 27 million in premium Because we built a seventy billion dollar CD s position beginning in the third week of February you probably had it completely on by the earlier first few days of March and we started taking it off March 12th when it hit you know that 2.6 billion dollars in value and it took us know call it 10 days to unwind the whole thing just because of the size of the position but to the aggregates of the position is very small so we end up spending very very little for the it's a Little unfair to say we invested 27 to make 2 and 1/2 billion Deportes explode this is just the headline numbers I'm glad you explained that behind the scenes that's really insightful thank you walk me through some of the economic implications you see today like we can't do this for 18 months are we gonna enter a depression like how do you handicap that how do you see the risk sure so my concern about the virus I was less concerned about the health implications Because I thought it would affect relatively small percentages of people and for the most part people who were already obviously every life is an important life particularly to the close friends and family but the economic implications I thought could be much more harmful even in the health implications and that's because the only way to stop a virus is to shut down the economy and I had never in my lifetime seeing what a an intended shutdown of an Economy look like and as that rolls around the globe or what are the implications but I think the difference between a depression and a intended but short-term shutdown if it's managed correctly the economic implications are nothing like the Great Depression so I am NOT concerned about a great depression like event taking place really for a couple reasons one that this is sort of an intended somewhat artificial temporary shutdown not driven Like economic reasons but driven by health-related reasons just to stop the spread of the virus so that's a very important distinction the other thing is that governments around the world of taking this incredibly seriously not just the health implications but the economic implications and the government is basically stepping in to provide economic support to everything from a you know low wage or unemployed worker to you know businesses as a bridge to Get us through the crisis and the the bridge doesn't need to last eighteen months because the entire globe is basically in shutdown so I think we can start reopening this country you know beginning in June type timeframe and the other thing that's going on is you have the entire world working on solutions to the problem you know I got it just yesterday I read a piece saying you know there's 70 different you know vaccine related and therapeutic trials That are underway you know as we speak and you know so you have the world's best global biotechnology pharma companies looking for solutions and so I think that increases the probability that there's a therapeutic that is available sooner rather than later and that there's a safe vaccine with an original period of time so that makes the economic disruption a shorter period of time the the negative however is that you know small businesses that certainly Can get destroyed in a several month shutdown and it takes time for them to rebuild you know think the small restaurant the small corner store and there is a lot of friction and disruption but I do think that governments are going to do everything they can and communities are do everything they can to help rebuild you know if you think about New York City I think the moment that people can go out to eat again you know going out to eat In New York City is you know sort of part of what it means to live in New York restaurants gonna be reopening that actually had an idea maybe we start a venture or a private equity fund to back the reopening of restaurants in New York and you can see that happening in you know cities around the country and it could be one a good investment into good for you know the community and so I think you're gonna see a lot of some combination of for-profit and Philanthropic related investment to help restart a lot of small businesses so I don't think it's a you know as I say a v-shaped recovery I think it's a little bit slower kind of coming out of this but there is an end date where we're back to normal I think within a you know reasonable period of time and back to normal could be a year it could be it could be eighteen months but there an end date whereas the depression you know you go back to the 1930s it's it's Sort of unending how does this affect real estate because a lot of people aren't paying rent right now commercial property values are probably affected like walk me through how you think of that sure so again it's a very similar kind of analysis you know if you own a street retail in New York City you're probably not getting rent today but as soon as your tenants gonna be open and operating they'll start paying rent again I talked To a friend at one of the major real estate private equity firms and what they're doing is in cases of hardship they are giving tenants a you know up to a several month kind of holiday we're kind of a rent holiday where it's really they're deferring the rent and my guess is they'll end up spreading it out over time to kind of recover what they've what they didn't collect at least for commercial tenants and maybe it will give sort of someone lost their job for Example you know maybe look at that person a little bit more of a break you know again it's a temporary business disruption and then we grow out of it as opposed to a permanent impairment for the vast majority of the economy what would cause you to change your mind on that via look what's permanent what's permanent is we're adding a lot of debt to you know sovereigns governments and that's a burden that will exist for a long time so that's a that's a negative And that that will hold back you know somewhat the global economy I guess what would cause me to change that view would be we can't be back the virus and we're constantly shutting down you know the the globe and I think the the way we solve that issue is really just testing and there are a lot of testing you know companies and just yesterday I learned about this pregnancy like test that's in sort of a emergency authorization mode where you can prick your finger and in Five minutes find out whether you have antibodies or not I think once you have something like that we'll be able to see where the virus is people can start going back to work so I just think technology is going to help a lot here you know the Google Apple sort of apps that you have on your phone you know that combined with testing you know hopefully we can start going back to a more normal lunch the inspiring I guess silver lining in this is for the first Time ever we're probably all faced with the same problem it doesn't matter what country you're in or what race you are what socioeconomic status you are the best and the brightest people are gravitating towards working on this yeah I mean just the economic motives to coming up with the solution but now it's been more importantly that the the reputational benefits in ER to the person who comes up with the person or company who comes up with the drug that Saves us all or the vaccine that saves us all and so I think you know I talk a lot to scientists as part of my philanthropic work we're doing and we had a call with 35 heads of major institutions and scientific researchers who normally focus on cancer research and basically all of them have redirected their work to corona bars and so you've had this huge migration of talent focused on a global problem and I'm sure the same things too in every Country what industries do you think are gonna come out stronger benefit from this Amazon Amazon we don't know an Amazon but I do think that you know obviously they're gonna have the greatest several months in their history but I do think they're they're gonna change a lot of behavior people who used to shop in a normal fashion obviously its nursing these video technology companies cloud-based software companies will be beneficiaries of this you know Long term although I will say that pretty much everyone I speak to is completely sick of video conferencing and would like to get and actually this whole work-from-home thing it's not so great because you know here I'm talking to you from the den you know I'm hearing you know buy her my wife and baby in the kitchen mom and dad are constantly walking into that of and there is no break you know one of the nice things psychologically about Going to an office is that you go you focus and then when you come home it's easier to leave it behind and it's much hard to do that when your office phone is in the TV room so I definitely relate to that how would you handle the bailout it's like is there who would get what and is there a way that you can think of realistically to direct capital to capable hands and away from just prolonging economic failure or is that not the way that you would handle this Or walk me through that sure look I think there are businesses that prior the coronavirus were structurally challenged you know sinc department stores so the notion that you'd want to save these businesses I don't think makes a huge amount of sense to me that you it makes sense to take taxpayer money and try to save a otherwise dying business so think about businesses that are in structural decline this would you know likely put them out of business but I wouldn't spend any taxpayer resources on them you know the way that you know big companies the only thing that happens when a big company goes through a disruption like this is that the owners and you and there isn't quote-unquote in government you know bail out if you will is that the owners change right if you're an airline and you run out of cash what happens is you know the bondholders end up becoming you know converting into equity you know Through some kind of either prepackaged or other restructuring process they end up being the owners and you know I I am receptive to this notion that you have airlines that have spent a billion zuv dollars buying back stock you know why should taxpayers come in and affect support the shareholders that were beneficiaries of buybacks and had they retained that capital for a rainy day they wouldn't need a government bailout so that that concept to me makes a lot Of sense and it you know airplanes are not gonna stop flying because airlines go bankrupt what will happen is you know the owners of the planes the lessors of the plans and/or the bondholders will end up you know controlling airline so I you know if I were making these decisions I wouldn't we have scarce resources I would save the money you know for a well let's put it this way any capital that was injected into an airline or Another business the government should earn an adequate return on that capital and get equity upside for business recovers you know I just think that you know Boeing needs to be saved you know Boeing had issues prior to this Boeing spent many many tens of billions of dollars on Cherry purchases I do think you know if Buffett doesn't want to the government shouldn't come in on terms that are more favorable than where Warren Buffett would provide the company With capital I guess it's I guess it's my point and I respect the CEO recent CEO of Boeing saying he's not gonna take money from the government and I don't think he should so I don't think the government should be bailing out companies unless it's done on aren't arms-length economic terms it shouldn't be free money by any means and we shouldn't be afraid to let companies that are over levered pre-crisis you know file for a Prepackaged reorganization where the creditors end up owning the equity that that's how the process is supposed to work I think it was Munger Charlie Munger who said capitalism without failure is religion without hell she's better with words or not but it's do you think we'll end up going just to the Amazon comment for a second do you think we'll end up going back to malls or malls effectively just dead now I actually think that People will be that much more desperate for human connection after this experience than they were before and the issue with malls you know malls are located at the intersection of you know very highly trafficked roads they've got big parking lots they're you know big physical pieces of real estate the problem is that the tenants have not innovated as quickly as the markets have changed and the result is you have old-line department stores that have Been around for 100 years that haven't sufficiently innovated to attract customers and I do think that malls for many communities are public gathering places and they just have to have tenants that are interesting enough to inspire people to come together and you know either shop or you know be entertained and I do think that innovation is happening it's just not happened as quickly as you know the kind of legacy tenants And so that's why malls are challenged but I do think that you know for every community having a place where people can come and you know gather and have fun and bring their kids I think is important and so I think the real estate you know long-term is probably fine the problem is the the capital cost to take an old-line old-fashioned shopping mall with you know Sears and a JC Penney and the Macy's and make it into something that's gonna be exciting for the next Generation is you know wasn't contemplated when they put a mortgage on it and that was equal to 80% of its value you know five years ago and so again you'll see restructurings where the lender to the mall ends up with the asset someone entrepreneurial decides you know what we don't need this much retail when they can see with a hospital medical facility office apartments and then they'll be this great you know foodcourt restaurant entertainment movie Theater you know type of thing but I do think people will desperately want to go out to have a drink go to a cafe go to a restaurant go to a movie be entertained and they'll be desperate to do it as soon as it's safe to do so I think one of the byproducts of this is like we feel less like we're part of something that we used to before right we're less attached we're more attached to our family but less attached to our community less attached to our sort of City less attached to our state or country in some ways even though we're all going through this we're feeling very isolated do you think we come out of this on the other side being more prudent financially with leverage yes I do think this is a depression or a moment in the sense psychologically the same way that the generation of people that went to the depression thought very different about some differently about financial leverage you know then the Generations that came after them I think the same thing we Tru here and I think it would be true for for corporate America you know the because shareholders are diversified they generally put pressure on companies to quote-unquote optimize their balance sheets but optimization is generally designed for the short term shareholder who has a diversified portfolio of other such companies it's not designed for the portfolio of Ie you know the board and this management that you know oversee that company for the benefit of you know the employees and the other stakeholders and I think it does lead to an over leveraging of corporate America and I think every business has to have capital put aside if you will for the rainy day and you know the companies that live on edge to kind of maximize their return on equity and then die the businesses that will be the shoulders we heard the most From this period will be the companies that just were too aggressive in the way they finance themselves going into the crisis and I think that will cause boards to rethink you know super aggressive capital structures this is like a dreamlike opportunity for them in some ways you could say with all that cash and prudent leverage and sort of the ability to take on multiple big elephants if you will exactly yeah so I think I think Berkshire I'm surprised They haven't done anything yet that's visible but my guess is they've been buying stocks a lot and and actually the big opportunity for Berkshire is Berkshire itself prior to the coronavirus crisis wasn't cheap stock yeah when they looked to hundreds you know in the 180s it's you know real bargain and so I would expect Buffett to have I hope that he's purchased a lot of his own shares and I hope he's deployed capital and other companies as well walk Me through how you see berkshire hathaway like without hitting price targets or anything just walk me through how you see the structure of the company like how you view it sure so so bursar is really principally insurance company but half of the quality trinsic value of the business is an insurance company that was built beginning with a company called national indemnity many many years ago that's the first I think I think it was the first Insurance company he bought for again yeah whatever eight 18 million dollars or something like that in the in the 1960s and then over time we built the most profitable best capitalized unique business and if you know for certain kinds of insurance Berkshire is the only place you can call and so it's a you know I don't like to use the word monopoly but it's a very unique very profitable business and he structured it in a way Both legislatively you know being a omaha-based insurer where he has the flux and and enlighted the the diversified nature of the overall company that unlike many insurance companies that have to keep their assets and something very close to risk-free or in a very highly rated corporate bonds he deploys and the flow from the insurance business and yours allowed to invest in equities and that's an you know generally an enormous Advantage but in this interest rate environment and even greater advantage so you have the obviously the most advantaged insurance company in the world that has grown its insurance float over time at a nice you know higher single-digit I think something like eight percent compounded rate over time and the cost of that insurance float has been has been negative meaning the most insurance companies lose money on insurance and make money and flowed in This interest rate environment they you know they lose money on insurance and they can't hurt any money on on their investing the Buffett is really making money on both sides so that's the worry someone should really spend a lot of their time if you want to understand the company and then in the asset side of the insurance company really the you know the equities that you read about you know Apple and and so on the rest of Berkshire is a collection of serve Wholly owned or 80% owned subsidiaries like the Burlington Northern Railroad Precision Castparts businesses that Buffett has collected over time for their you know durability and quality and it's a mixed bag the biggest one generally are the highest quality businesses offering a lot of stability you think the utility energy utility part of his operation in the railroad a very durable big profitable businesses and then businesses he's just collected And held on to over many many years so which have have been great and remain great businesses like these can the others you know if you go back and read the Berkshire Hathaway annual reports he was glowing about the World Book Encyclopedia and you know other businesses that have disappeared Dexter shew he was you know skipping into work thinking about you know the Dexter shoe company the worst investment Probably he ever made so even mr. Buffett makes mistakes which is instructive and of itself the good news is when you buy things as opposed to short things your mistakes become smaller it's really some part decent chunk of the business is industrial company you know small pieces and retail and other you know smaller manufacturing and other diversified businesses and the large majority is is in a kind of unique extremely profitable insurance business And do you see this as like a long-term holding or as a proxy for cash or how do you think about that yeah you know I don't I think it's a really cheap interesting stock you know run by the best investor in the world we think you know Buffett's taken an approach toward really all of his businesses that's extremely hands-off and that's worked very well for many of those companies but other parts of the portfolio you in our view underperform the competition in Terms of their you know profitability or growth etc and I think the as the generational change happens at Berkshire it appears to us the next generation is getting much more focused on you know extracting the most from the businesses Berkshire owns I mean just looking at the Burlington Northern Railroad you know a lot about railroads by virtue of our experience at Canadian Pacific it's the largest you know it should be the most profitable highest margin grower in The world it's not and I think a bit of that is its warrants very you know kind of his reluctance to get to actively involved with businesses that he owns but I do think that over time that it's also you have this very well capitalized company controlled by you know great investor CEO and a portfolio of businesses many of which have opportunities for improvement and you know I think that's interesting I don't know how long we're gonna own it Now we we always retain the right if we find something better to do with our money just sell something Lyon but in the meantime we think we bought more that lower prices in the last few weeks what are some of the lessons that you've learned over the years from Warren Buffett and Charlie Munger so a big part of my education as an investor came from reading everything Buffett's written you know watching watching from speak he came to Harvard Business School and I Was a student there one of the most influential things he said to me and I say to me because it was me and the other 300 people in the audience was you know if you want to be successful all you need to do is look around the room and think about the classmate or classmates you most admire and what qualities they have and just decide to adopt those qualities and if you do that your chances of being successful go up enormously and it was incredible advice And his basic point was you know if you want to play the violin you know it and you're not yo-yo ma and you haven't practice your entire life it's gonna be hard to pick up the violin tomorrow or cello tomorrow and India virtuoso but character and the qualities that enable you to be successful in business you know hard work discipline returning phone calls promptly after you receive them showing up at meetings on time being you know honest and Straightforward fair-mindedness these are all things you can have to if you don't already have them you can have them tomorrow by just deciding that you're gonna adopt these characteristics I thought that was a very powerful thing to say that was one and then you know just how to think about investing in the stock market and you know all the the been graham isms that he's reinterpreted in and presented all that stuff super helpful and just thinking you know even The way he built his business over time yeah buffett started out in the mid 1950s as an activist hedge fund manager right he had a partner Jib he charged a 25% incentive fee over a 6% return and he was quite active he would buy steaks and businesses he would push for liquidations of of companies that had large security portfolios relative to the market value of their of their business he was really an activist investor and Then 15 years in he had a hundred million under management I think 25 million if it was his anywhere does investors the letter and said okay you can have all your money back or you can have stock in this crappy textile company and I'm gonna take stock in the textile company but I'm gonna be a little less motivated than what's in the past I've made a lot of money markets aren't that attractive I can't promise anything but happy to have you If you want to go long take your money if you if you want your money back and you know as I like to say some number of people Larry Tish apparently withdrew four hundred thousand dollars back then from the partnership which today would be home and you know whatever four hundred million probably more probably four billion and some people you know rolled their capital and what's interesting is Buffett gave up the twenty five percent share of the profits For the right to run what he called a crappy textile company with a 40 million dollar market cap for a hundred thousand dollar salary but what he got was stability permanency of capital and that was not lost on me and so we've basically you know our business plan was basically to do the same thing over time and we're you know largely there today so I mean you're gonna waive your fees but with the face no current plans to do that you know unlike Buffett who you Know runs read really a one-person operation and you know as an accountant and a couple of assistants you know the way we've built our business is you know I've hired a lot of super talented highly compensated people you've actually charging fees enables me to incentivize and pay the people I work with but yes Buffett is a better bargain than we are because we do charge these oh wait I want to get to that in a second but where do you think Pershing Square will be in ten years I think in ten years you know we're we now have a pretty clear path right the vast majority of our capital today it's 85% in overtime that will be 90 or 95 or eventually 100% of our capital will be in a public enterprise that were the largest shareholder of we own 22% of our of our public company Pershing Square Holdings today and our goal is to compound Pershing Square Holdings at a high rate over a long Period of time by investing in you know the kind of businesses we invest in today and over time we'll become bigger shareholders of these kinds of companies will be a very long duration holder I think we'll do similar things to the things that we do now then hopefully we'll do them better but I think you know I'd love to have you in terms of ambition you know the goal is to have one of the best investment records ever you know Buffett's got a 55 year or 16 Year advantage and you know Persians been in business for 16 years so we've got a lot of work to do how do you do you think you'll ever get into buying complete companies yes I think that's possible or at least controlling interests in companies bill what would you do differently if you're running the SEC in detail I would I would lean on short sellers to be sources to help me determine where my look I think the SEC is generally got a very very good job And they have a very difficult job and they have limited resources so let's let's start there my one area of disappointment with the SEC having been on very rare occasions short seller is that how slow it takes the SEC to you know come to conclusions about companies operating illegally or irresponsibly or fraudulently I'd like to fix that you know getting back to my Herbalife example before we went public and said among other things about Herbalife that They were operating in China illegally as China does not allow multi-level marketing companies to operate and they were using but they were using the same compensation scheme the same methodology but they were doing it in a sort of hidden misguided way and they inaccurately described how they were doing this and their public lands so and we made a two-hour public presentation about this four years ago something like that the Company comes out and says you know Pershing again is materially misleading investors accuses us of all kinds of market manipulation etc in the last six months and you can google it Herbalife pay to settle with the SEC for twenty million dollars for misleadingly describing their China business and their public violence because it actually the compensation scheme is precisely the same as and the business model is the same as their core business The United States exactly what we said years ago about the company and my disappointments are one took the SEC however many years to come to the same conclusion that we had identified and they slapped on the wrist with a twenty million dollar fine that investors could ignore and so I yes I have been disappointed by you know super belies by the way is a pyramid scheme okay it's continuing to operate and caused enormous harm the stocks actually Not that up that much from the price we shorted it be sure that split adjusted $23 and share and today it's probably 30 or something like that so it's not been a great investment for for anyone if they had you if they had bought the stock when we made our presentation but I do think it's a company that's causing enormous harm and the government you know the the FTC launched an investigation shortly after our presentation it took them a couple years And they settled with the company to for two hundred million dollars and let them continue to operate and now the SEC has you know slept on our wrists again and it does seem like if you're a well capitalized company backed by a you know a very large shareholder and you've got a lot of good lawyers you can outwit the SEC and cause on and so that is my biggest frustration when yes to see what I do differently I would pay much more careful attention to in short sellers And I would work more quickly and be more aggressive companies that are causing causing harm I like that there's people in you in the world that do this but I also simultaneously question why you do it like the return on brain power or energy expended for you is so small yes I'm short selling I've like forsworn short selling for the reasons you described the calculus I think I invented this phrase that you seem to be adopting but I called a return on invested brain damage and return on invested brain damage for short selling is is quite challenging and public short selling is the worst because you know unfortunately if you go public and say a company is violating the law everyone hates you you know the shareholders hate you the management takes you the employees hate you you have no friends and that's why I've you it is a kind of a noble pursued and I admire you know The the muddy waters and the and the Jim Janice is when they come out you know with detailed work about you know problematic businesses I'm I'm less interested in companies that are overvalued that that that I don't think does so much service to the world to point out whether you believe a company's overvalued or not just systemically like this shouldn't exist yeah identifying fraud is a very important thing for markets and short Sellers provide a very valuable service and you know generally when there are markets that you can't short prices get to extremes and investors lose lots of money in the housing market was a market that you could not short until the invention of synthetic CDOs and some it was really you know the John Paulson trade if you will was he was just going short the housing markets and housing worker was allowed to get to extremes because there were not short sellers and There were no no one had any incentive to blow the whistle on overvaluation the the market you can't short today is basically are difficult to short today is the is the venture back market and that's why you your you're going to see that's why the we works in the world are allowed to happen and billions of dollars money is wasted so I do think short sellers per Ford we're very valuable service now that I'm 53 and I just had a baby and you know and in the Life's too short kind of point of view you know we're done with public short-selling it's just not our thing anymore but I'm pleased to see other people doing it I do think it is a public good do you think that there's a problem with just large institutions like did the CDC and the w-h-o fail us in this current pandemic and that the problem is the institutions and not the people or how do you think about that you know the what's Interesting about this period is it's really been an education in in the what's good about living in a you know democracy and what's bad democracy so you look at how China now the negatives of China is they you know the the government officials the local government officials were too afraid to go public with what was going on or when they did they got you know whether you were a doctor or a public official you got you know shut down by by the system You know that allowed the virus to propagate to it became a serious issue in China the good news is the dictatorship allowed them to very aggressively you know shut down the virus you've watched you know I've made my public case for a countrywide shutdown and the president instead sort of allowed the states to take the lead I mean governor by governor one by one we got to almost to the place where we should have and it took instead of 24 Hours it's taken you know 30 days or 45 days you know had we Ryan and Rashad down you know March 1 for 30 days the outcome would have been you know meaningfully different than you know starting on march 19th and rolling out over you know 30 days and we're not even you know we're still not in a countrywide shutdown and the degrees of shutdown or different different places so I do think it's it shows that you know the wonderful things about a Democracy and that you know people are generally not afraid to come public with issues and we have a very well functioning media that's not afraid to surface problems you know the the downside is we could not we did not take the extreme measures that China took as quickly as they did and I wish we had so that's sort of the up down a bit but you know CDC I think you know I would have thought they would have taken a much more forward leaning public approach Here and it's just not clear what role the CDC has played you know you see the coronavirus team led by the Vice President dr. felching dr. Burks etc you haven't seemed like capable people but you know the CDC has not been these particularly visible as far as I've seen in making recommendations you know where was the CDC in terms of recommending a national shut down it's not right I didn't unless I missed it I Didn't see it yeah I think like the post talk on this is going to be super interesting in terms of how they look at it you mentioned you have four kids I think right and you're you're 53 what are the lessons the and you have quite the aged ranch right so you go from one - how old's the oldest 20 to 22 that what lessons do you try to teach your kids or instill in your kids so yeah there's a lot of the obvious ones you know hard work pays off education is Really important treat other people the way you want to be treated yourself a basic perhaps somewhat biblical type type things you know persistence you know that we started the interview asking what I learned from my parents and and both mom and dad are super persistent and you recognize the wonderful qualities of persistence and then when you live with your parents for six weeks you there are sometimes associated with those Qualities but you try to teach your kids about that try to keep teach your kids about the value of money and you know saving and you know minimizing waste and then also you know what more difficult topic is you're trying to keep teach kids about nutrition that's a very high-risk subject to talk with your guilty pleasure do you have chocolate in the house yeah I am a big dark chocolate fan I like this one it's called endangered species 88% and it's amazing 88% just seems too good to be true this it's sort of very very good so I that's definitely on my list this is my weakness tea I'm gonna run out and get some of that bill thank you so much for your time this has been amazing yeah enjoyed it I really appreciate it you can find show notes on this episode as well as every other episode at F s dot blog slash podcast if you find this episode valuable share it on social media and leave a review to support the Podcast go to FS dot blog slash membership and join our learning community you'll get hand edited transcripts of all the podcasts and so much more thank you for listening [Music]

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