Bill Ackman, CEO and Portfolio Manager of Pershing Square Capital talked about his strategy in creating great value, evaluating management teams, and other investment topics during a recent interview with Graham & Doddsville, student-led investment publication of Columbia Business School.

Bill Ackman On Creating Value, Evaluating Management Teams

During the interview Bill Ackman revealed that he decided to learn how to become an investor at Harvard Business School (HBS) after reading the book, The Intelligent Investor by Benjamin Graham, the father of value investing.

How Ackman started investing

Ackman said when he got to HBS, there were no classes really focused on investing since the first year was set program. He thought the best way to learn investing is by doing it. He started investing on his own, and the first stock he acquired gained.

When asked if he had mentors back then, Ackman said he had very few actual mentors because he didn’t really know anyone in the business.

[drizzle]He considers Seth Klarman as a mentor because he is someone he looked up to. He bought Klarman’s Margin of Safety, which was published during his first year at HBS. Ackman says the following about Klarman:

In a sense, he was a mentor because he had graduated from Harvard Business School ten years earlier and started a hedge fund right out of school.That’s what made it seem possible. I don’t know if he was a mentor per se – a mentor is someone you have more interaction with, but he was certainly someone that I looked up to.

He also considers Warren Buffett as a mentor even if they didn’t know each other. He said, “You can still learn a lot from people without ever meeting them.”

Bill Ackman ’s investment philosophy

According to Bill Ackman, his investment philosophy evolved in four phases over the past 22 years. He started from classic value investing and then he learned recognizing the difference between businesses of different quality, understanding the impact of activism, finding a great business, and switching out a mediocre management team.

He emphasized, “you can create a great value if you can find a great business and switch out a mediocre management team for a great one.”

Bill Ackman manages a concentrated portfolio, and he is a “big believer of concentration.”

When asked about the inherent risks in a concentrated portfolio, the activist investor emphasized that analysis along with other factors provide protection.

“If you invest in super, high-quality, durable, simple, predictable, free cash flow generating businesses; that should protect you as well,” explained Ackman.

According to him, it’s hard to lose money if you pay a fair to cheap price for a quality business. Bill Ackman added, “The key is you have to be a good analyst” to determine whether a business is truly great.

Criteria in evaluating management team

According to Bill Ackman, he evaluates management teams the same way he judges people who wants to join Pershing Square. He looks for character, energy, intelligence, and relevant experience.

He mentioned Seifi Ghasemi of Air Products and Hunter Harrison of Canadian Pacific Railway as examples of the kind of leaders he is looking for.  Both executives have 50 years of experience.

Bill Ackman said his firm has affection for older CEOs, who has been successful and driven by legacy, and the fund they have. He thinks “old CEOs are best.”

See full PDF below.

[/drizzle]