“The best investments are the ones where we’re confident we’re right, and everyone else is wrong. There’s a difference between arrogance and confidence. If you’re arrogant in investing, you’re going to get killed. If you’re not confident, you’ll never make an investment. So you have to do a sufficient amount of work to be confident enough to have the conviction to do something that’s contrarian,” he Ackman in a speech, whose video is now available on YouTube.
Ackman is the founder and CEO of Pershing Square Capital, and is famous for betting against popular companies by going short, and for buying unpopular stocks. He is an investment manager known for his contrarian and activist strategies, and aims to drive change through his investment positions.
Ackman lists out 10 rules that investors can follow to achieve success in investing.
Ackman says in the investment world there are always going to be ups and downs and even the most successful people in the world have major failures from time to time. He feels their ability to bounce back from adversities is what makes them special and successful. So,.however tough the times may be, Ackman advises investors to hang in there and patiently wait for the better times to come.
“When you look at the most successful people in the world, there aren’t many that haven’t had a major failure. If you read the stories of the financially successful people you know they’ve had failed businesses and they’ve lost everything and they’ve hung on. There are lots of examples of people who had huge adversity and how you deal with adversity is what determines your ultimate success as opposed to how you deal with success determines your ultimate success,” says he.
Learn about investing
Ackman says in order to be a successful investor, it is important to learn about successful investing. This can be done both by reading about great value investors and following their investment philosophies and also by watching their videos and listening to their words of wisdom.
Ackman feels before investing in a business, it is important to understand that business thoroughly, as a successful investor needs to possess an important skill of distinguishing between a great business, a good business, a fair business and a bad business.
He advises young investors to work for a business they are interested in investing to get a sense of the quality of business. “Investing can be learnt by reading. You read everything Warren Buffett has ever written and watch every YouTube video he’s ever appeared in. That’s a great way to learn about investing,” he says.
Ackman says investors should try and invest intelligently and avoid businesses whose prospects are not well known. “You don’t need to make a hundred per cent a year to have a fortune, you just need to invest at an attractive return of 10-15 per cent over a long period of time and your money will grow very significantly,” says he.
Ackman feels investors should avoid risky investments and invest in publicly listed companies that trade in the stock market, because those businesses tend to be more established and have to meet certain hurdles before they go public so they are safer investment bets.
He says one should invest in businesses that are easy to understand and that are available at reasonable prices. “There are lots of businesses in which you don’t understand how they make money. Even if they’ve had a great track record, I would avoid them. Another very important criteria is that you would want to invest at a reasonable price. It may be a fabulous business that’s done very well over a long period of time but if you pay too much for it you’re not going to earn a very good return,” he says.
He advocates investing in businesses that can theoretically be owned forever. “If you’re going to compound your money at 10 or 15 per cent over 40 years, you would really want to invest in businesses that you can own forever. You don’t want to constantly have to be shifting from one business to the next,” he says.
Ackman advises all investment managers to keep a direct approach while discussing an investment opportunity. Keeping an open communication, raising valid points with superiors and peers even if that might offend them is very essential.
“You’ll run the risk of offending various people over time, but you’ll have much better relationships. If you tell people the truth, first of all it’s not typical. A lot of people in the interest of politeness or fear of confrontation or it’s just uncomfortable do not speak the truth,” he says. Ackman feels there are lots of examples of super talented people who have the ability to prevent a company’s crisis, but do not do so because they are not willing to confront their CEOs, as they don’t want to offend others.
Ackman says investors should have the confidence to stick with the investments they believe are right. They should stop the urge of listening to others and get swayed by their inputs. But, Ackman warns investors against arrogance and urges them to accept any mistakes that they commit as there is a very thin line between confidence and arrogance. “The investing business is about being confident enough to know that you’re right. Yet you have to be humble enough that you recognize when you’ve made a mistake,” he says.
Keep Calm and Deal with Criticism
He believes a successful investor will always have his share of fans and also some critics along the way. But it is important for investors to keep calm under all circumstances and learn how to deal with criticism. They should keep their focus on their jobs and not get influenced by these distractions. “You have to have a thick skin to be in this business. If you end up in a very public situation you should expect to have fans and critics and you just should try to focus on what your job is and forget the rest,” he says.
Learn the Craft of Investment
Ackman is of the view that before investing actively it is essential for investors to learn how to become a good investor. This can be achieved by conducting proper due diligence before making any investments. “Investing is one of the few things you can learn on your own. You can learn investing by reading books, annual reports and also by having your own portfolio and investing a minimal amount to get a practical experience of investing. You can learn the business on your own unlike many other businesses,” he says.
Avoid Following the Herd
Ackman believes that it is important for investors to avoid following what other investors are doing or saying and they should trust their instincts. “To be a successful investor you have to be able to avoid some natural human tendencies to follow the herd. When the stock market is going down every day your natural tendency is to want to sell. When the stock market is going up every day your natural tendency is to want to buy. But in bubbles you probably should be a seller. In busts you should probably be a buyer – you have to have that kind of discipline. You have to have a stomach to withstand the volatility of the stock market.” he says.
Ackman feels the key to becoming more experienced and knowledgeable about the investment world is not in avoiding mistakes but in learning from them the first time. “Experience is making mistakes and learning from them. In order to be successful, you have to make sure that being rejected doesn’t bother you at all,” says he.
Look for Long-Term Investment
Ackman feels investors should look at making investments keeping a long term perspective in mind which can help in eliminating the fears of getting caught up in short term market volatility. “Short-term market and economic prognostication is largely a fool’s errand, we should invest according to a strategy that makes the need to rely on short-term market or economic assessments largely irrelevant,” he says.
(Disclaimer: This article is based on various videos of Bill Ackman available on YouTube)