My Meeting With Bill Ackman

Sometimes I feel like I’m the modern-day Charlie Bucket, the kid from Willy Wonka. He won the last of five golden tickets to tour the highly secretive, wonder-filled chocolate factory.

I felt this way three years ago, when I got to shake hands with the now-late investment and real estate legend Sam Zell. That was a once-in-a-lifetime experience.

I got to have a similar experience this past Friday, when I stepped into a tightly guarded office building. It was the offices of Pershing Square, an enormous and influential investment holding company. I was there to meet its founder and CEO, Bill Ackman, a man worth around $9.3 billion.

Ackman is someone I respect for his intelligent investing. We both have real estate backgrounds. And we both saw our fair share of adversity.

For me, it was losing everything in a bad partnership, and then losing everything again in the 2008 crash. For Ackman, it was taking a $4 billion hit when he bought out Valeant Pharmaceuticals… an investment that almost cost him his entire company. But we both recognized those experiences as educational.

Bill Ackman used the experience of that loss to build up a better business with more durable investments.

Exactly like the one I went there to talk to him about…

The Warren Buffett Way of Doing Business

In a recent interview with Steve Forbes, Ackman described his comeback story in a way that really resonated with me. And I hope it encourages you as well.

“My method was just trying to make a little progress every day,” Ackman explained. “If you make 0.1% progress every day, it doesn’t sound like a lot – but annualized?”

Annualized, it adds up nicely.

Small efforts often do when given the right amount of patience and wisdom. The same applies to small investments, which leads me to the primary reason I met Ackman last week.

He and I are both interested in the same company right now: Howard Hughes Holdings (HHH). It’s a little-known pure-play real estate development company that owns both income-producing assets – such as offices, retail, and multifamily units – and residential plays like condos, communities, and developable land.

Ackman has big plans for Howard Hughes. He wants to make it “a much more valuable business over a long period of time.”

Pershing Square Holdings has owned shares of HHH for 14 years now, so he’s long since seen their value. But earlier in May, Pershing Square increased its holdings of HHH with a $900 million investment. Pershing Square now owns 46.9% of shares outstanding. And Ackman was named chairman of the HHH board.

So, what’s the plan?

Ackman and Pershing Square believe Howard Hughes can be turned into a diversified holding company – much like Warren Buffett’s famed Berkshire Hathaway (BRK-A)(BRK-B).

What many people don’t realize today is that, originally, Berkshire was a textile business. And it was a struggling one.

By 1967, Buffett had controlling ownership of Berkshire Hathaway. And he knew he needed a cash cow to optimize all the overhead and capital expenditure he’d accrued. He needed a suitable business that would generate predictable cash flow.

After careful research, he decided the best option would be an insurance company. One that generated a higher return on equity (“ROE”) rate than the average investment.

Essentially, he needed something that was about as far from textiles as possible.

Plus, Buffett knew that by owning an insurance business specifically, Berkshire would receive premiums held in reserve that could be invested to generate even more income.

That’s why he bought 99% of National Indemnity – a property and casualty insurance company founded in 1940 – and its affiliate, National Fire & Marine, for $8.6 million.

It was a decision that changed Berkshire Hathaway forever.

By 1985, Berkshire Hathaway had closed its last textile mill. By 1996, Buffett had added Geico to his insurance investments. And then he bought into General Reinsurance two years later.

Today, Warren Buffett’s business model is centered around investing in high-quality businesses that earn high returns on capital. It’s one of just 10 trillion-dollar companies. Shares have compounded 20% annually for a total return of some 6 million percent since 1965.

And it all started with an insurance investment.

Ackman’s Vision for Howard Hughes

The real brilliance of Berkshire and Buffett was using premiums from the insurance businesses to fund several of the firm’s best investments.

It’s clear to me that Ackman has the same blueprint for Pershing Square Holdings and Howard Hughes. He informed me that he was planning to add insurance products to the latter, explaining how an “irreplaceable” real estate asset and a “well-known” insurance company could soon merge.

If that is the plan, it makes perfect sense. The float from an insurance business could be used to fund other income-generating investments, something Ackman has a good track record of. I also wouldn’t be surprised if some of the income generated from the real estate portfolio is also used for that purpose.

I’d always known and respected Ackman as an investor. And spending some time with him only solidified that opinion. The man truly understands the value-creation process.

We’ll be taking a closer look at Howard Hughes Holdings. We’ll be conducting granular analysis on all its current holdings, with specific emphasis on valuation and future cash flows. Readers will be the first to hear what we uncover.

One way or the other, I already consider my trip to see Ackman a success. And there may be an intriguing opportunity with HHH going forward. Once again, be on the lookout for more in the days and weeks ahead.

Thanks for reading and happy SWAN investing!

Regards,

Brad Thomas
Editor, Wide Moat Daily