8 Investment Principles of Billionaire and Investor, Bill Ackman

Renowned billionaire and legendary investor, Bill Ackman
Renowned billionaire and legendary investor, Bill Ackman, is celebrated for his distinctive investment strategy, focusing on a concentrated portfolio of carefully selected stocks rather than spreading investments across a wide array of assets.

Renowned billionaire and legendary investor, Bill Ackman, is celebrated for his distinctive investment strategy, focusing on a concentrated portfolio of carefully selected stocks rather than spreading investments across a wide array of assets. This targeted approach not only allows him to wield significant influence over invested companies but also often results in active participation in their management and strategic decisions.

As the founder of Pershing Square Capital Management, Ackman has built a prominent reputation as both a hedge fund manager and activist investor. Throughout his illustrious career, he has made noteworthy and successful investments in various companies, including Chipotle Mexican Grill, Hilton Worldwide Holdings, Target Corporation, and General Growth Properties.

His success over the years has solidified his standing as a prominent figure in the investment community. Today, I am excited to share with you the eight timeless investing principles that Bill Ackman values and incorporates in his investment approach, principles that have also shaped our investment firm, Flowwealth.

  1. Simple and Predictable Businesses:

Ackman favors businesses with straightforward and understandable models, operating in industries he comprehends. This preference for simplicity aims to reduce vulnerability to sudden disruptions, ensuring stable revenues and consistent demand.

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He believes that having a thorough understanding of the business and industry you want to build or invest in is crucial for making informed and successful investment decisions. Without this understanding, it becomes challenging to assess the competitive landscape, evaluate a company’s financial health, and identify potential risks and opportunities.

Having in-depth knowledge will allow you the business owner or investor to make well-informed decisions based on the fundamentals of the business rather than relying solely on market trends, short-term fluctuations, and popular sentiments.

You need to do lots of research and due diligence around the business since these are fundamental aspects of responsible investing, helping to reduce the element of uncertainty and increase the likelihood of making sound investment choices.

In my opinion, however, it’s essential to remember that while simple and predictable businesses can offer stability, they might not provide the same level of growth potential as more dynamic or innovative companies. Hence, the need for diversification in managing risk and achieving a balanced portfolio.

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2. Free Cash Flow (FCF) Generative:

Ackman emphasizes the importance of free cash flow (FCF) over mere user numbers or profits. Focusing on a holistic view of FCF helps assess a company’s ability to generate cash for various purposes, promoting financial stability and rewarding shareholders.

“If we can’t predict the cash flows, we don’t know what it’s worth.”

Bill Ackman

This holistic view on free cash flow (FCF) is crucial for both entrepreneurs looking to start a business and investors evaluating potential investment opportunities. FCF goes beyond revenue and profit growth to reveal a company’s ability to generate cash that can be used for various purposes, including reinvesting in the business for future growth, reducing debt to improve financial stability, or rewarding shareholders through dividends and share buybacks.

For entrepreneurs, focusing on FCF can help ensure that a business is not just growing but also generating the necessary cash to sustain and expand operations.

For investors, it’s a valuable metric to assess the financial health of a company, its resilience during economic downturns, and its capacity to seize future opportunities.

3. Dominant Market Position:

Ackman encourages the adoption of a dominant market position, underscoring its benefits such as pricing power, competitive barriers, market control, brand recognition, and economies of scale. Establishing dominance is a key consideration for long-term growth and profitability.

This means that a particular business holds a substantial share of the market within its industry, often far surpassing its competitors in terms of market size and influence.

Pricing Power: Companies with a dominant position can often dictate pricing and have the ability to charge higher prices for their products or services.

Competitive Barriers: Dominant players may establish high barriers to entry, making it difficult for new competitors to challenge their position.

Market Control: They can influence industry trends, set standards, and have a greater say in shaping the direction of the market. In Ghana, MTN can be used as a case study.

Brand Recognition: A dominant company usually enjoys strong brand recognition and customer loyalty. Anytime you enter a supermarket, your choices are mostly influenced by the brands you trust. Price is usually an afterthought.

Economies of Scale: They can achieve cost efficiencies and economies of scale that smaller competitors find challenging to replicate. A dominant market position is a key consideration for most investors as it often translates into sustainable profitability and long-term growth.

“For entrepreneurs, building a company that achieves market dominance is easier said than done. Regardless if you are a great shaper, give it a shot! —Benny Lloker

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4. Large Barriers to Entry:

Similar to Warren Buffett’s concept of an economic moat, Ackman highlights the importance of substantial barriers to entry, whether in the form of capital requirements, regulatory hurdles, intellectual property, or brand reputation. These barriers protect profits from potential new entrants.

Capital Requirements: Some industries demand significant upfront investments in equipment, technology, or infrastructure, making it hard for newcomers to compete. In Ghana, people say that agriculture is capital-intensive. It’s true because that’s where the opportunity is!!

Regulatory Hurdles: Compliance with government regulations or industry-specific standards can be complex, requiring time and a great deal of resources. Don’t let that stop you!!

Intellectual Property: Patents, copyrights, or proprietary technologies can protect established companies from new entrants. I am not convinced how this plays out in Ghana as opposed to the Western world but If you are building a company here in Ghana, you can look into this https://en.wikipedia.org/wiki/Copyright_Act_(Ghana)

Economies of Scale: Larger companies often enjoy cost advantages due to economies of scale, which smaller competitors might struggle to match. Similar to what I explained earlier (DOMINANT MARKET POSITION). You can draw data from Ghana’s telecommunications, insurance, and banking institutions.

Brand and Reputation: Established brands and customers’ trust can be challenging for new entrants to replicate. Unless you are an “Elon Musk”, it’s difficult to effect change, especially without technology and innovation.

Distribution Networks: Companies with extensive distribution networks can have a competitive edge, making it tough for newcomers to access customers.

Network Effects: In industries where the value of a product or service increases as more people use it (e.g., social media platforms), established players have a significant advantage.

These barriers can create market dominance for existing companies but may also limit competition. From an investment perspective, industries with high barriers to entry can be attractive because they often offer more stable and sustainable profit opportunities for established players. However, it can also lead to concerns about monopolistic behavior and regulatory scrutiny. Large Corporations in the United States can be used as case studies. This article may be insightful https://www.investopedia.com/…/history-of-us-monopolies/

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5. High Return on Capital:

Measured by Return on Invested Capital (ROIC), a high return on capital indicates a company’s efficiency in generating profits relative to its investments. This metric is attractive for investors and business owners alike due to its implications for resource efficiency, competitive advantage, and sustainability.

Efficient Use of Resources: A high return on capital suggests that the company is effectively using its assets and capital to generate more profits.

Competitive Advantage: It may indicate that the company has a strong competitive position, allowing it to earn above-average returns in its industry.

Attractiveness to Investors: Investors are often drawn to companies with high returns on capital, as it can lead to potentially higher dividends.

Sustainable Growth: Companies with a consistently high return on capital are better positioned to finance and support growth initiatives.

Risk Mitigation: A high return on capital can provide a buffer against economic downturns or industry challenges.

It’s important to note that the make-up of high return on capital investments can vary between industries, so comparisons should be made within the same industry to assess a company’s relative performance.

In addition, I think (of course this is my own opinion) that if you are a business owner or desire to establish a business in an industry of your choice, the high return on capital you perceive or generate must be sustainable over time to be truly valuable for investors potential investors.

6. Limited Exposure to Non-Controllable Extrinsic Risks:

Ackman advises reducing exposure to external factors and events beyond a company’s control. By doing so, businesses can maintain consistency, attract investors, plan for the future, and protect against losses.

This means looking at investments that are not going to be materially drained by factors like government regulations, natural disasters, laws, economic conditions, or geopolitical instability.

Managing these risks often involves strategies like diversification, insurance, contingency planning, and compliance with regulations. By mitigating exposure to non-controllable external factors, businesses, and investments can enhance their overall sustainability and success. When the COVID-19 pandemic struck the world, companies that were well-positioned emerged unscathed. It’s important to pay attention to the fundamentals of your business and the Economy you operate in.

7. Strong Balance Sheet with Minimal External Capital:

A strong balance sheet, allowing a company to operate independently without heavy reliance on external capital, brings financial independence, lower risk, flexibility, attractiveness to investors, and resilience against unexpected challenges.

Financial Independence: The business can operate without the constraints and costs associated with external debt or equity financing. I will talk more about equity financing, its pros and cons in my upcoming posts. You can also follow FLOWWEALTH for daily insights on financial education.

Lower Risk: Reduced dependence on outside capital means less exposure to interest payments, dilution of ownership, or potential debt-related issues.

Flexibility: The company has the flexibility to invest in growth, undertake strategic initiatives, or weather economic downturns without being overly reliant on external financing.

Attractiveness to Investors: A strong balance sheet is often an attractive feature for investors, potentially leading to higher stock prices and valuation.

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Resilience: It can provide a buffer against unexpected financial challenges and market volatility.

Maintaining a strong balance sheet typically involves prudent financial management, efficient capital allocation, and profitability. It’s a sign of a financially healthy and well-managed organization.

8. Excellent Management Teams and Good Governance:

Ackman emphasizes the pivotal role of excellent management teams and good governance in the success of businesses and economies. These factors provide a solid foundation for informed decision-making, risk management, adaptability, and the trust of stakeholders.

With effective leadership and sound governance practices, businesses and economies are better equipped to make informed decisions, manage risks, adapt to changing circumstances, and maintain the trust and confidence of investors, employees, and other stakeholders. This solid foundation is essential for achieving long-term objectives and creating value for all parties involved.

This is exactly what we are continually seeking to achieve at Flowwealth: Excellent management teams and good governance.

Successful entrepreneurs, businesses, and economies do not succeed by chance. They work their way and follow principles. Unlike laws, principles are immutable.

Benny Lloker

At Flowwealth, we’ve embraced these principles in our pursuit of excellence, aspiring to build a solid foundation for long-term growth and value creation. Investing is an art, and these principles serve as a timeless guide to navigating the dynamic landscape of financial markets.

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Remember, there’s no one-size-fits-all strategy in investing, but these principles, tried and tested by Ackman, offer valuable insights for those looking to think and invest better. Follow Flowwealth for daily insights on financial education and join us on the journey to help the world invest better.”

Article by

Benny Lloker

Finance and Investment Expert.

Email: Bennylloker@gmail.com

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1 Response

  1. March 21, 2024

    […] Business Read; 8 Investment Principles of Billionaire and Investor, Bill Ackman […]

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