A 10,000-word interview with Bill Ackman: If you can't afford to lose, don't invest, understand the corporate moat "above all else"

In February this year, billionaire and renowned hedge fund tycoon Bill Ackman, known for his aggressive investments, appeared on the well-known American podcast hosted by Lex Friedman.During this lengthy three-and-a-half-hour interview, Bill Ackman started from the basics of investing and shared his investment experiences in music and restaurants. He emphasized long-term investment, stating that investors should focus on the long-term growth potential of companies rather than being swayed by short-term market fluctuations. Regarding the recent AI trend, Ackman also discussed his views on Google and Open AI, believing that AI brings significant disruptive risks and opportunities, and companies need strong adaptability and excellent management teams to remain competitive in this transformation.Ackman advocates for a prudent, long-term, and research-based investment strategy, emphasizing the use of modern and rich information resources such as conference call records, SEC filings, and AI analysis to make investment decisions based on in-depth research.Key points from the conversation are summarized as follows:▲ Many investors caught in bubbles are actually pure speculators. They do not know the value of these things, they just know they are rising. Investing requires homework and in-depth exploration, such as understanding a company, understanding what the management has done in the past and what they intend to do, understanding the competitive dynamics of an industry, and the costs involved.▲ Never borrow money to invest, avoid investing money you cannot afford to lose; ensure financial security when investing, avoid excessive leverage, and ensure you have enough funds to weather market fluctuations.▲ Investing usually starts with reading documents from the U.S. Securities and Exchange Commission. Understand what the company's top management is saying and doing; then, look at its competitors and consider what can defeat this company.▲ As an investor, the most difficult thing is "to figure out how wide the moat is." Taking the restaurant industry as an example, restaurants need to reach a certain scale and operate systematically. In terms of supply chain management and procurement, product quality must be ensured to make it difficult for competitors to replicate.▲ Despite facing competition in the field of artificial intelligence, especially from Microsoft's ChatGPT, Ackman believes that Google has solid moats in online advertising and YouTube franchising, these businesses are highly profitable and difficult to disrupt.▲ AI is the ultimate disruptive technology, making investment risky. Even a highly profitable company may lose its profitability due to the emergence of new technologies. Therefore, every company needs to find ways to utilize AI to enhance profitability, accelerate growth, or protect itself from the impact of new technologies.▲ One big thing learned from Warren Buffett is that investing requires emotional restraint, cultivating immunity to market fluctuations, and not letting emotions affect investment decisions.Full text below:The value of anything is the cash you can extract from it during its lifecycleLex Fridman 00:36In your talk on the basics of finance and investment, you mentioned a book, "The Intelligent Investor" by Benjamin Graham, which had an impact on your life. What key lessons did this book teach you about your investments?Bill Ackman 01:00Actually, it was the first investment book I ever read. Therefore, it is the inspiration for my career and my life. It's a very important book. After the Great Depression, during World War II, people lost confidence in market investments. Then he wrote his book. It was prepared for ordinary people. Basically, the author says you must understand the difference between price and value. Price is what you pay, value is what you get. He says the stock market is there to serve you. It's a bit like a neighbor coming over every day to make an offer to buy your house. If he gives you a silly offer, you'll ignore him; if he gives you a great offer, you'll accept it.That's the stock market, the key is to figure out the value of something, you have to weigh it a little. The book also talks about the difference between the two, the stock market is a voting machine in the short term, representing speculative interests and people's supply and demand in the short term. But in the long run, it is a weighing machine, which is more accurate. It will tell you the value of something. So if you can define the value of something, then you can really take advantage of the market, because it can indeed help you. That's the message conveyed in the book.Lex Fridman 02:14Similarly, there is a difference between speculation and investment.Bill Ackman 02:18Yes, speculation is a bit like buying short-term trading cryptocurrencies, maybe they have value in the long run. But many investors caught in bubbles are actually pure speculators. They don't know how much these things are worth, they just know they are going up.Investing requires homework, in-depth research, understanding a company, understanding the competitive dynamics of an industry, understanding what management wants to do, and understanding what price you have to pay. I would say, the value of anything—except love—is the cash you can extract from it during its lifecycle. Some people think about love this way now, but that's not the right way to think about love. In short, investing is basically about building a model that shows the results the company will generate during its lifecycle.Lex Fridman 03:22How do you achieve this idea of investment value? How do you determine the value of something, even as philosophical as the value of anything, especially in the stock market?Bill Ackman 03:34The value of a security is the cash you can extract from it during its lifecycle. For example, a bond pays a 5% coupon rate. You'll find it split in half once or twice a year, which is very predictable. If it's a U.S. government bond, you'll know it's something that's easily valuedStocks represent ownership in a company. A profitable company is like a bond because it generates dividends, returns, or cash flow every year. The difference between stocks and bonds is that bonds are a contract. As long as they do not default or go bankrupt, you know what you will get.With stocks, you have to make predictions about the business. You need to know how many small parts they sold this year, how many they can sell next year, what the costs will be, how much capital they generated, reinvested in the business to sustain operations. This is more complex. But what we do is try to find highly confident companies where we know these cash flows will continue for a long time. However, companies that you can be highly certain about are very few, so many investments are speculative because predicting the future is really difficult. So what we do is find those rare companies where you can predict what they will be like for a long time.Lex Fridman 05:01So what factors indicate that a company will make a lot of money, have a lot of value, and remain reliable for a long time? What is your process for assessing a company's situation?Bill Ackman 05:19Every consumer has different views on different brands and companies. What we are looking for are businesses that are indispensable. In a company, if you close your eyes and the stock market is closed for ten years, you can still believe that it will become a more valuable and profitable company in ten years.So we have a company called Universal Music Group. Its business is to help artists become global artists, a bit like the record music industry. Its business is to own the music publishing rights of songwriters. I think music is eternal. Music is a part of human experience a thousand years ago and will still exist thousands of years later. So this is a very good background for investing in a company. The company basically owns one-third of the recorded music market globally. They have the most dominant market share in the industry. They cater to artists who are 18 years old, have a good voice, and are starting to make a name for themselves on YouTube and Instagram, helping them become superstars. This is a unique talent. As a result, the best artists in the world want to work for them, but they also have extraordinary artists like The Beatles, The Rolling Stones, U2, and more.So, if you think about the evolution of music, it used to be about records, CDs, and tapes, and now it has become a podcast business like streaming. Streaming is easier to predict than selling records, right? For example, how many people have smartphones, how many will have smartphones next year, over time, the global penetration rate of smartphones will increase. You pay $10 or $11 a month for a subscription, or buy a family plan. You can build a model of the world, predict the growth of the streaming business, predict over time what market share Universal Music Group will have. But you cannot get an exact value, you can get an approximation. This brings us back to Ben Graham, who introduced the concept of a margin of safety. You want to buy a company at a price where if you think its value is wrong and find out that its value is 30% lower than you estimated, you paid a big enough discount that you can still acceptThis is about investment. A key part of investing is not losing money. If you can avoid losing money and then have a huge success, over time, you can do very well.Lex Fridman08:08Music is interesting because music has been around for a long time, but the ways to make money from music have been evolving, like you mentioned streaming. I think there's been a huge shift, first with Napster and then with Spotify. The question is, how can companies like Universal Music Group adapt to this change? I want to ask you about the future, such as artificial intelligence being able to generate music, there have been amazing advancements. So, do you also consider that? Like when you close your eyes, you think of all things completely different from now. And how to ride that wave?Bill Ackman09:00We have to surf a lot of waves. In fact, the music industry peaked in the late 90s or 2000s. And true innovation, Napster's digitalization of music almost killed the entire industry, Universal Music Group indeed led the effort to save the entire industry and reached early agreements with Spotify, truly reviving the industry. So, with their market position, reputation, and willingness to adopt new technologies, they have maintained their position.Of course, now they have this huge advantage, because I think bands like The Beatles, U2, and The Rolling Stones are timeless. So they have a very good foundational asset base, I think that will always be the case. And forever is a very long time.But you know, every industry has huge, various risks. This is one that I think requires a lot of resilience. I can't imagine a world where, in a sense, it transcends streaming, where you might have a Neuralink chip in your mind now instead of a phone. But music can appear in digital form. You would want to have an infinite library that you can carry around in your pocket or brain. If the form changes, that's not so important, whether it's Spotify, Apple, or Amazon, the so-called DSP or supplier, that's not so important. I think the true value lies with the content owners, the artists and labels.Another example might be the restaurant industry. Look at companies like McDonald's, like an antique from the 1950s, and 75 years have passed, you can predict how the menu will evolve over time, how it will adjust according to consumer tastes, but I think hamburgers and fries might be eternal.Lex Fridman13:21The Beatles, The Rolling Stones, hamburgers, and fries are eternal. Yeah, I had dinner at Chipotle last night, started taking notes.Bill Ackman13:29Thank you.Lex Fridman13:31Thank you. Yes, it's one of my favorite places to eat, and you obviously have invested in it. What do you get at Chipotle?Bill Ackman 13:41I tend to buy a double chicken.Lex Fridman 13:43Or a bowl or a burrito?Bill Ackman 13:45I usually go for the bowl to reduce carbohydrates. It includes double chicken, avocado sauce, lettuce, and black beans.When researching a company, I usually start with documents from the U.S. Securities and Exchange CommissionLex Fridman 13:54What is the actual process you go through? Like how do you research the value of a company? Is it through reading documents or talking to people?Bill Ackman 14:16What initially attracted me to Chipotle was that its stock price had dropped by about 50%. It's a great company with a great concept. You know, every athlete loves it, consumers love it too, with healthy, sustainable, fresh food. The great founder Steve Ells did a great job. But ultimately, because these companies lack some systems and have food safety issues, losses almost killed all the rent. But the reality of the fast food and fast food service industry is that almost all fast food companies have food safety issues, and the vast majority have survived. We say, look, it's a great concept, but it's far from my deal.We usually start by reading documents from the U.S. Securities and Exchange Commission. Companies submit a 10K or annual report, or a 10Q quarterly report. They have a proxy statement that describes the company's governance, board structure, conference calls, all of which are public. Understanding their story from five years ago, how management described their business, what they said they were going to do, you can continue to see what they have done. It's like a historical record of their capabilities and authenticity. This is a very useful step.Then, look at the competitors and think about what can beat this company. Then we will talk to them, if it's an industry we don't know much about - we know the restaurant industry, the music industry very well - we will talk to people in that industry. We try to understand the difference between publishing and recording music. We look at the competitors. We read books about the music industry, or a few books about the industry. So it's a bit like a big research project, with this so-called expert network, you can almost contact anyone, and they will talk to you about aspects of the industry that you don't understand, public documents from companies usually give you a lot of information, but not everything you want to know. You can also learn more information by discussing industry trends, that is, personalities with experts. I like to watch podcasts, if the CEO is doing a podcast, or an interview on YouTube, you can learn about them.Lex Fridman 16:40For example, going back to Chipotle, by the way, I could talk about Chipotle all day, I just love it.Bill Ackman 16:51Brian Niccol is a great CEO. He won't spend $1 on a company that doesn't meet his best interests.Lex Fridman 16:58When we look at Chipotle, we see that it had a difficult moment in its history, like you said, there was a food safety issue, and then you said, okay, I see a path to solving this problem. So, even if the price is low, we can raise its price to its value.Bill Ackman 17:24So the business we are looking for is the business everyone should look for. A great business, with a long-term growth trajectory, you know, even beyond what is foreseeable, these are the businesses everyone wants to own: able to generate a lot of cash, easy to understand, no barriers, strong competitiveness, and you also want a company that doesn't need to raise funds. These are some of the great businesses in the world, but people have found that the stock prices of these companies are often high, and their value is usually based on the price you have to pay for the company. So we can't get returns by paying a very high price, price is very important. You can buy the best companies in the world, but if you bid too high, you won't get particularly attractive returns. So we will intervene in a case like this: a great company makes a big mistake, even loses its way a bit, but it is recoverable. That is, we buy stocks from those disappointed shareholders who sell at a relatively low price, and then we try to help fix the company.A Company's "Moat"Lex Fridman 18:39You talked about entering barriers, you talked about many interesting qualities of companies. How do you know if there is a moat that can protect itself from competition?Bill Ackman 19:04As an investor, the most difficult thing is to figure out how wide the moat is and how much risk of disruption the business faces. I want to say, we are in the most disruptive period in history. You know, a 19-year-old can leave any college, or maybe they never went to college in the first place. They can raise millions of dollars, they can get unlimited broadband storage, they can contract with engineers from low-cost markets around the world. They can build a virtual company. And they can disrupt businesses that seem mature over time.Most importantly, large companies worth trillions of dollars are doing everything they can to find profits. So for an investor, this is a dangerous world.So you think, you have to find a business that is very difficult to disrupt. The beauty of the restaurant industry is that - in fact, our best performance records are in restaurants, we have never lost money - a large part, if you understand Chipotle correctly, and you have 100 stores, then it is not difficult to imagine expanding to 200 stores, and then to 500 stores. The key is to maintain brand image, develop wisely, and build the right systems. When you go from 100 stores to 3500 stores, you have to know what you are doingHowever, there are few operators who own multiple restaurants and operate them successfully. The fast-food business is about systems and establishing a model that allows someone unfamiliar with the restaurant industry to enter and build a successful franchise.Now, Chipotle is no longer a franchise company. They actually own their own stores, but many of the most successful restaurant companies operate on a franchise model, such as Burger King, McDonald's, Tim Hortons, and Popeyes, all of which are about systems. Whether you own all the stores and are operated by a large company, or whether the restaurant owner is a franchisee, the same system applies.Lex Fridman 21:32So, if a restaurant reaches a certain scale, it means they have found a viable system. And developing this system is very difficult, so this is a moat.Bill Ackman 21:41A moat is what you achieve when you reach a certain scale and succeed. The brand is now recognized by consumers—what's interesting about Chipotle is that their achievements are very difficult, right? They don't buy frozen burgers, they buy fresh, sustainably sourced ingredients. They are the first to achieve incredible product quality. You can enjoy a hearty dinner for under $20, eating very healthy and high-quality ingredients. Making deals with large food producers that are much cheaper than buying pork from farmers. This is a moat for Chipotle and is hard to replicate.Lex Fridman 22:38By the way, another company you own is McDonald's?Bill Ackman 22:42We own a company called Restaurant Brands, which owns many fast-food companies, one of which is Burger King.Lex Fridman 22:49Yes, Burger King. It's been a meme for a while now, usually I go to McDonald's and just eat the patties. I don't know if you can do that, but Burger King's patties can. McDonald's is actually much cheaper. Each patty costs about $1.5 or $2, about 250 calories, and it's just meat. Despite being a criticism of the meme, it's a healthy thing. So when I go, I feel healthiest when I'm a carnivore, which sounds healthy, but if I only eat meat, I feel really good: I lose weight and have so much energy, it's crazy. The easiest way to get meat when I travel is like this.Bill Ackman 23:25You go to McDonald's and order 6 patties.Lex Fridman 23:35Exactly. So there's a sad meme where I sit alone in the car when I travel, eating beef patties and McDonald's. But I like it, you have to do what you love, that's what makes me happyBill Ackman 23:46It should be, maybe we will have the specialty of Burger King. What about Flame World? What's up with those fried burgers? We have to take you to eat Burger King grilled burgers.Lex Fridman 23:53I don't know how they are made. I'm not sure. Let's wait and see. This reminds me of Alphabet.Bill Ackman 24:13Of course, this is an important investment for us.Bullish on Google, every company needs to use AI carefullyLex Fridman 24:15It's tricky to understand everything happening in artificial intelligence. I'm about to interview Sundar Pichai soon. Interestingly, do you think there is also a moat here, analyzing this point is interesting because consumers are just fans of the technology. Why does Google still exist as before, because it is not just a search engine, but has done well in all the basics of the search business, and they are doing other things as well. So what is your analysis of Alphabet? Why are you still positive about it?Bill Ackman 24:53Of course. We have admired this company for 15 years, but rarely reached a price where we felt we could own it because people have high expectations for it, and price really matters. I call it the AI panic.Microsoft launched ChatGPT. They did an amazing demo. People love this incredible product. Google, earlier on, was dedicated to artificial intelligence, obviously, Microsoft is a supporter of artificial intelligence. This is their chat, ChatGPT gave them some market position. Then Google made a rather disastrous demo. The whole world said, oh my god, Google is falling behind, artificial intelligence is the future. Google's stock was crushed, priced at about 15 times earnings, which is a very low price for a company of this size. Our view on Google is that when a business becomes a verb, thinking about its way is usually a good sign of the business model. So, you turn on the computer, and open the search, a large part of the world starts from Google and the line you enter to search. Google's ad search, YouTube franchising is one of the most dominant franchises in the world, difficult to disrupt, very profitable. The world is shifting from offline advertising to online advertising. I think this trend will continue. Because you can see the impact of your ads. These are about ads, you know, I spent a lot of money and don't even know which 50% is effective, but you just spend money because you know it will eventually bring customers. Now through online advertising, you can understand in detail where I spent the money, when people click on search terms, eventually buy things and pay, you know this is a very high return on investment ad, they really dominate the business.Of course, if people suddenly start searching or asking questions to ChatGPT instead of starting from the Google search bar, artificial intelligence is a risk, which is a risk for the company. So our view, based on the work we have done and discussions with industry experts, Google - if they have it - with their investments, time and effort,If it is possible to be better than Microsoft's ChatGPT, then the market reaction is excessive. Because Google is a large company, global corporate regulatory agencies have scrutinized it very carefully. They cannot have the same freedom as a startup like OpenAI when releasing products. I believe Google took a more cautious approach in releasing early versions, which made the world believe they were behind. We ultimately conclude that if there is any, they are on par or ahead, and you don't have to pay any fees for this potential business, they also have a huge advantage, because you think of the data Google has, like search data, all applications, emails, etc., similar to Google's suite of products data, this is an incredible dataset. So they have more training data than any company in the world. They have incredible engineers, they have huge financial resources. So this is a bet, we still believe that, in terms of current returns, this may be the cheapest among the seven major companies. At the same time, this is a business with great efficiency potential. You know, sometimes, when you have this profitable dominant company, after March 20th, all the teams of tech companies in the world are growing rapidly, they may overhire. So you have seen some companies, like Facebook, now even Google is starting to improve operational efficiency.So we bet a lower multiple on this company, one way to consider the enterprise value is the price you pay for earnings, or what the earnings yield is. If you compare price and earnings, you get some kind of return on the enterprise.Then all the investments and businesses they make are losing money, we call it selective. Their cloud business is growing very rapidly, but they are investing almost 100% of the profits into that business and growth. So you don't see any profits from the cloud business. You know they are one of the best cloud computing players. So it's very interesting, usually well-managed companies, with incredible assets, resources, and dominant positions, and no debt, have a lot of cash.Lex Fridman 29:51Are there fundamental differences in artificial intelligence that make all of this more complex? When you see Meta, Microsoft, Alphabet, Google, they may create exponential products and influence. Will the possibilities of artificial intelligence bring more risks?Bill Ackman 30:20Absolutely. That's a great question. Business investment is about finding companies that won't be disrupted.Artificial intelligence is ultimately a disruptive asset or technology, which is why investing becomes risky. Because you have a profitable company, and if you want, management can enjoy it, and then the emergence of new technology will only take away all their profitability. Artificial intelligence is a very powerful tool, which is why every company is talking about how to use artificial intelligence in our business to make us more profitable, more successful, grow faster, or protect ourselves from incoming influencesIt's a bit like Buffett talking about a great business, like a castle that wants to be surrounded by such a broad moat, but all these barbarians are trying to get in and steal the princess, and it happens. You know, like Kodak, before it disappeared, was an amazing, dominant company. Until Polaroid came along.That's why we tend to stay away from tech companies, because generally speaking, the world is a dynamic place, and people are always looking for a better version. You know, Kodak got stuck in the world of analog film, and then the world changed.Lex Fridman 31:44Before ChatGPT came along, Google was already very wealthy and happy. How do you evaluate their ability to wake up, lose weight, be less happy, and actively rediscover where to find happiness?Bill Ackman 31:55I think you've seen a lot of this in the past year. I mean, from Sergey Brin to the management team, embarrassment and pride are huge motivators.Lex Fridman 32:09Demis Hassabis has integrated them, all the DeepMind team and the unified team and all the restructuring. Yes, it's messy but interesting, I like it. Like you said, part of it is embarrassing, part of it drives engineers' competitive drive. I can't wait to see what improvements there are. You mentioned management issues. How do you analyze a company's governance structure or individual managers?Bill Ackman 32:42So, as I like to say, incentives drive all human behavior, and that certainly applies to the business world. Therefore, understanding employees, what drives them, and the actual financial and other incentive factors of a company are very important parts of company investment analysis. You can learn a lot. A good way to understand a company is to review all the articles written by the management about the company ten years ago, see what they have done over time, and see what they have recently said. Conference calls have actually only recently emerged. When I started doing business, there were no records of conference calls. Now, there is a written record of everything management says when answering analysts' questions in meetings and other occasions. By listening to what they say, how they answer questions, and the record of what they ultimately do, you can learn a lot about them. Do they promise too little, deliver too much? Or do they promise too much and deliver too little? Do they do what they say they will do? Do they admit mistakes? Have they built an excellent team? Are people willing to work for them, or can they retain their talent? To what extent do they operate for the benefit of the company? How much of their operations are for their own benefit? This is the analysis you do.Lex Fridman 34:03Are we talking about CEOs, COOs? What does management mean? How deep does it go?Bill Ackman 34:09So senior management is very important. Take Chipotle as an example, Steven Ell is a great entrepreneur, and the business has grown to a scale that he can't manage. Later, we recruited someone named Brian, who is considered the best manager in the fast-food industry. He came in and completely rebuilt the company. We relocated the company. Chipotle moved to California. Sometimes, one way to redo the company culture is to change the geographical location, and then you can redo the business. But great leaders have strong followers. In their careers, they will have a team they built themselves, following them into the next opportunity. But the key is that senior executives are really important, and then the people they recruit. You recruit an A+ type leader, they will recruit other A type talents. If you recruit a B-level leader, you won't recruit any outstanding talents below them.Don't let emotions affect investment decisionsLex Fridman 35:05You mentioned Warren Buffett. You said you admire him a lot. As an investor, what do you find most interesting and powerful about his approach? What aspects of his investment method have you practiced?Bill Ackman 35:19Most of what I have learned in the investment industry, I learned from Warren Buffett. He is a great professor in this industry. The first book I read in this industry was Benjamin Graham's "The Intelligent Investor". But soon, you will understand Warren Buffett. I started reading Berkshire Hathaway's reports and letters. Finally, I got the Buffett Partnership Letters, which is an amazing read, tracing back to the mid-1950s, reading the letters he wrote to limited partners when he just started his business, and following that trajectory for a long time.One big thing I learned from him is that investing requires an incredibly calm emotional quality. You have to be very rational economically. This is not basic, nor is it something you learn in the jungle. If you think about it, surviving in the jungle, when a lion appears, everyone starts running, and you run with them. This is not good in the market. In fact, you usually have to do the opposite, right? When the lemmings run off the cliff, you turn in the other direction, meaning you are intervening, you are buying stocks at very low prices, Buffett is a great professor in this regard, it's an emotional or non-emotional quality. You need to be able to look at the world calmly and say, well, is this really risky? Are people overreacting? When the stock market rises, people tend to get excited about investing, and when the stock market falls, they get depressed. I think this is just human behavior. You have to reverse it. You have to be excited when things get cheaper, and worried when things get more expensive.Lex Fridman 37:15You have been involved in some big battles, some big losses, and some big wins. So this is like a roller coaster. So how can you not let yourself collapse in temperament and psychologically? How do you maintain a calm demeanor, avoid running with the lemmings?Bill Ackman 37:36I think this is something you will learn over time. The key to success is to have enough money in the bank so you can survive. No matter what fluctuations occur in the market, you can survive.First, you shouldn't borrow money. So, if you borrow money to hold stocks on margin, if the stock market is falling, your livelihood is at risk, and you will find it hard to be rational. So the key is to put yourself in a financially secure place where you won't lose your house, right? This is a key factor.Secondly, do your homework, including stock prices. Stocks can trade at any price in the short term. If you know the value of a company and understand its management, then you will know it very well. When the stock price falls, it won't bother you. Because you know it has little impact on you, you know, as Mr. Graham said, in the short term, the market is a voting machine, a group of lemmings voting in a worrying direction. But if it's a great company, with little debt, and people will listen to more music next year than this year, then you will do well. So this is a combination of personal security and guiding yourself on what to have. Over time, you will grow calluses.Lex Fridman 38:59So psychologically, like a person, talking about lions and antelopes and such. Is it as simple as just financial security? Are there qualities that you are born with or develop?Bill Ackman 39:17I am a very emotional person, or I can feel strong emotions, but not in terms of investment. I am very immune to some fluctuations, which is a big advantage. I have spent some time developing it.Lex Fridman 39:34Isn't it innate? Do you want to react due to emotional fluctuations?Bill Ackman 39:40It's not innate. You can learn a lot from other people's experiences. This is one of the few industries where you can learn a lot from reading about other historical periods. Look at Buffett's career, the mistakes he made. If you invest a lot of money, each of your mistakes could be significant, right? So we made some big mistakes. The good news is, if most of what we do has a good effect, over time, this also gives you confidence. But because we invest so little, you know, we now have eight or seven companies like this. If we make a mistake, it will be big news. So another nature of our business is that you must be able to adapt to a lot of public scrutiny, a lot of public criticism, which requires some experience.Lex Fridman 40:33I believe financial security should also be recommended to ordinary investors. Are there any things you talk about that are applicable to ordinary investors?Bill Ackman 40:51Of course. So never invest money that you can't afford to lose, if you lose that money, you know, you lose your house, etc. So, in a place where you invest money that you don't care about short-term prices, this is your retirement money, and you have a long-term view, I think that's key, never invest borrowed money. So, as long as you don't borrow against securities, you own truly high-quality companies, and in the short term, you don't need money, you can seriously consider this, which is a huge advantage. When the market is doing well, most investors seem to panic, and during economic downturns, they become overly excited.Lex Fridman 42:13So you need to be able to think long term and have enough financial security so you can think long term.Bill Ackman 42:22Buffett is the ultimate long-term thinker. The consistency of the decisions he makes over time, and integrating into this long-term framework, is very educational.Lex Fridman 42:42You mentioned 8 companies, but for everyday investors, what are your thoughts on diversifying investments across more companies in common funds?Bill Ackman 42:53I think there are few mutual funds. There are thousands of mutual funds here. Few can sustain upgrades by charging fees. They are often too diversified, too short-term, and buying index funds is usually better. If you look closely, many of them are not much different from the underlying index itself, and often pay higher fees.Lex Fridman 43:54For an ordinary investor, what leaps can be made by investing in a few companies like two or three?Bill Ackman 44:05I even recommend individual investors to invest in a dozen companies. From a dozen to two dozen or even fifty, diversifying investments will not bring more benefits. You know, most of the benefits of validation come from the first one, called 10 or 12. If the companies you invest in don't have a lot of debt, and you understand their business, in fact, individual investors do better analysis of Tesla than so-called professional investors or analysts. So, if you buy a Tesla, you will understand the product and its appeal to consumers. You know, when you analyze a company, this is a good start. So I would invest in something you can understand. This is key. You know, you like Chipotle, you understand why they are successful. You can go there every week, you can monitor any changes, from basic chicken to beverage supply, store cleanliness.Bill Ackman 45:12I think you should invest in companies you truly understand, simple businesses, where you can confidently predict what it will look like over time. If you do this in a way that is not particularly concentrated, and you don't borrow against your securities, then your performance will be much better than a typical mutual fundLex Fridman 45:27This is interesting, consumers who like something are actually good analysts of that thing, which is a good starting point.Bill Ackman 45:33By the way, there is a lot of useful information now. When I first started investing, someone faxed us the SEC filings from Washington, D.C., now everything can be found online. Conference call transcripts are free. Now there is artificial intelligence, you have unlimited voicemails and Reddit forums, where people share advice based on their professional experience in an industry or a company.Lex Fridman 46:12I'm just worried that if I invest in Chipotle, I will analyze every small change on the menu from a financial perspective and be very picky.Bill Ackman 46:20If it affects your experience, I wouldn't buy that stock.Lex Fridman 46:24Yes, I should also say, I am someone who emotionally reacts to volatility, which is why I have never bought an index fund. I just noticed that I am psychologically affected by market fluctuations. I want to get out because if I fully accept it, it will have a negative impact on my life.Bill Ackman 46:50That's really important.The biggest lesson: Maintain financial stability and avoid over-leverageLex Fridman 01:24:16So we talked about some big wins, but you mentioned there were some big losses. So, what was your biggest loss?Bill Ackman 01:24:26The biggest loss in my professional career was a company called Valeant Pharmaceuticals. The business we invested in did not align with our core principles. The pharmaceutical industry has issues, and as far as I know, there are many issues. It's a very unstable industry, right? It's based on drug discovery, predicting future drug revenues before the patent period, and we thought we had found a pharmaceutical company to own because the founder's approach to the business was very unusual. The board had a radical member responsible for managing and overseeing daily decisions. We ended up making a passive investment in this company. Before that, we really didn't make passive investments. The company made a series of disastrous decisions. Then we intervened, trying to solve the problem, this was my first time joining a board, the level of chaos was much greater than I realized from the outside, and then I got a little trapped. It's a confidence-sensitive strategy because they built the business by acquiring pharmaceutical assets, and they often issued shares when acquiring targets. So, once the market lost confidence in management, the stock price took a hit, weakening their ability to continue acquiring low-cost drugs. We lost $4 billion.Lex Fridman 01:25:55$4 billion! I was very nervous throughout the entire conversation, whether it was about victory or defeat, and the stakes involved.Bill Ackman 01:25:59By the way, this kind of loss will also trigger other losses, which I call market-to-market losses. It's so high-profile, massive in quantity, and catastrophic in the media. And then people say, well, Bill is going bankrupt, so we need to bet against everything he has done. We know his entire investment portfolio, and we shorted a company called Herbalife - by the way, we only truly shorted two companies, the first one was a book, and the second one was a movie. Well, we are no longer shorting companies - so people drove up the price of Herbalife, which is disastrous when you are a short seller. And then they also shorted the other stocks we held. So, this huge loss resulted in an overall value loss of our investment portfolio of over 30%. The loss is real and tangible. We eventually sold this position and took the loss.Most of the other losses are what I call market-to-market losses, they are temporary. But many people go bankrupt because, as I mentioned earlier, of the significant price fluctuations. If investors are redeeming, or if you have leverage, it can bankrupt you. If people think that if we go bankrupt, we will have to sell everything, or cover our short interest, it will make the damage even worse. So Wall Street is a bit ruthless.Lex Fridman 01:27:17Can they make money out of this whole thing? So, they take this opportunity to try to destroy your reputation, and then take full advantage of it to make money? This is a terrible place. How did it feel to go through that?Bill Ackman 01:27:34It was quite terrifying. It may even be worse because I personally have a lot of things to do as well. So, these things are often related.These mistakes happened when I was considering getting married. The problem with hedge fund business is that when you reach a certain scale, the CEO is like the chief marketing officer, and I am indeed an investor rather than a marketer. But when investors give you billions of dollars, they want to see you for an hour, but if you have hundreds of such people, you will find yourself flying to the Middle East and Asia, traveling all over the world. This was before ZOOM, it takes you away from the investment process, you have to invest more. That's what caused the mistakes.So we lost a lot of money on Valeant Pharmaceuticals. My ex-wife and I were discussing separation, I put off the divorce for now, I didn't want to make decisions in a crisis, things were getting worse. When we lost a lot of money, we were also sued, but we were sued by a shareholder because when the stock price falls, shareholders sue. Besides making a big mistake, we didn't do anything wrong. But your investors are pulling out their money, I am going through a divorce, and my ex-wife's lawyer's expectation of my net worth is about three times my actual net worth. I remember that lawyer saying, you see, Bill, we estimate your net worth to be X, but don't worry, we only want one-thirdHowever, X is 3 times. So one third is 100%. Then I got a lawsuit. In fact, this has never been publicly disclosed, and now I am sharing it with you. We have a listed company with about one third of our investment portfolio, called Berkshire Hathaway.You know, over time, I tried to learn from Buffett, you could say, this is permanent capital. The beauty of the hedge fund issue is that people can take out money every quarter. Buffett owns a company where people take out funds, they sell stocks, but the funds stay. So we established a similar structure in October 2014. A year later, the Valeant incident happened. A year later, we were still in chaos, just like in mid-2017, we were in litigation. And another activist investor, a company called Elliot Associates, run by a person named Paul Singer, held a large position in our listed company, they shorted all the stocks we owned, betting that we would be forced to liquidate. Then they would make money, you know, the trading price of our listed company was lower than the price of all securities. So they bought this listed company, they shorted these securities. Then they came to us, trying to force us to liquidate. I imagined that the divorce had exhausted most of my resources, my permanent capital was eventually liquidated, and another activist in my industry bankrupted me.It was at this time that I met Neri Oxman, and I fell completely in love with her. I imagined a world where I went bankrupt, the judge found me guilty, and I found myself in incredible chaos. I decided I didn't want things to end that way. So I did something I had never done before. I had always said, don't borrow money, but in this chaos, I borrowed $300 million from Morgan Stanley. I gave great credit to Morgan Stanley for their insight. I had always been a good customer, like a handshake bank. They dared to bet that I would succeed. I took this money and bought enough shares of my listed company to prevent the takeover by the activists. And effectively took control of the listing rights of the small company. I did it.I knew this was a turning point. Then I resolved the divorce issue, resolved the litigation issue. Then I bought a lot of our stocks in the market. I remember one day I received a call from Gordon Singer, he is Paul Singer's son, who runs part of the business in London. He said, "Bill, did you buy that block?" I said, yes.He knew that once I succeeded, they would have to leave. From then on, we achieved incredible results.Lex Fridman 01:32:51Can you still protect your reputation from the impact of Valeant's failure?Bill Ackman 01:32:56This is an industry where you will make mistakes. Reputation with the media is a complete disaster. But I am not a quitter. In fact, the key is that we have never really written down our core investment principlesWe discussed it at the meeting. Since then, we have achieved it, and we have had the best six years in history.Lex Fridman 01:33:45So, we need to focus on the basics again.Bill Ackman 01:33:49Love helped me. I met Neri during my low period, our first date was on September 7, 2017. After I met her, this situation lasted for several months. Another factor is, one day I received a call from Neri. She said, "Bill, guess what?" I thought, what? She said, Brad Pitt is coming to the media lab, he wants to see my work. I thought, that's great, dear, I didn't know Brad Pitt was so interested in your work.Action. Obviously, he is really interested in architecture. Neri said, now he and I chat on WhatsApp every day, Brad Pitt shows up in my lab at 10 o'clock every morning, chatting with me in the morning. I messaged Neri to see how things were going, but I didn't get a response all day. Finally, Neri called me at 10:30 in the evening and told me how great Brad Pitt is. Yes, so I imagined a scenario like this, the judge would find me, we would lose the lawsuit, all my assets would disappear. Then Brad Pitt would steal my girlfriend.Lex Fridman 01:35:09Brad Pitt is your competitor!Bill Ackman 01:35:11Yes, this is the lowest point in my life. I don't want to lose to a radical, nor do I want to lose my girl to another man.Lex Fridman 01:35:22Brad Pitt stands out and becomes a winner in all aspects with you.Bill Ackman 01:35:26I am a very lucky person. Very lucky.Lex Fridman 01:35:31You mentioned some technical issues, but psychologically, like what you do alone at night.Bill Ackman 01:35:38That was a difficult time because I was separated from my wife and children. I lived in a regular apartment, and I had to find a place to live like a bachelor. I didn't want to leave my children. I moved 10 blocks away, I couldn't see them, and they didn't like it either. So I ended up buying an apartment I didn't like, in the same building as my children, so I could be close to them.But I was alone at home at that time. I had a dog named Baba, he was a black Labrador. I got him when he was 6 weeks old, and he would accompany me. I also started meditating. I meditated for 20 minutes in the morning and 20 minutes in the evening. I also believe in exercise, weightlifting, and I like playing tennis.It wasn't the first time I had faced disaster. There was another moment in my career, like in 2000. I learned how to deal with such moments, that is, you make a little progress every day. So today I wake up, I want to make progress, make progress in litigation, make progress in my investment portfolio, I will make progress in my life, progress is a bit like compound interest in moneyIn the initial weeks, you may not see much progress, but after 30 days, there may be some progress. Just like you can't look up and see the mountaintop you're on, because then you might give up. Right? After 90 days, you will say, I have reached the mountaintop. Just keep progressing, progressing, and progressing. Progress can really compound. One day you wake up and think, wow, I've come so far, it's amazing.If you look at the chart of our company at Pan Xing Plaza, you can see the absolute low point, and you can see where we are now. The huge drop feels like a completely unbelievable disaster. It looks like a small bump on the curve, but it can really change many things, you just need to go through it. The key is, I have always been very lucky, with mental health, nutrition, sleep, exercise, a little progress every day. I also have good friends and family, walking with friends every night, and a sister who loves me.By the way, another thing to consider is that when you recover from such things, you are really grateful. And many media outlets like stories of successful people falling. When you recover from failure, it's a bit like an American story. Think about how many failures great entrepreneurs went through before they succeeded. Do you know how many times SpaceX's rockets exploded on the launch pad before they saw success? That's why Musk is so admired