Value Investing

Mistakes Were Made, But Not By Me

Article by Puzhong Yao, LinkedIn

I finally had the chance to meet Bill Ackman yesterday at Pershing Square Holding’s London Investor Meeting. Since Jason showed me the benefit of meeting the investing legends at the GSB, I have totally fallen in love with it. Not to mention Mr. Ackman was the idol of probably most MBAs who look to go into a career of investing. He was aid to be top of his HBS class, launched Gotham Partners before graduation and just never looked back, eventually being labelled as the next Warren Buffett by the Forbes magazine. Mr. Ackman kindly shared his thoughts on investing, his current portfolio and his learning from the past few years with the audience. But my biggest learning from the meeting is one that puzzles me a long time, why is investing simple but not easy?

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When I read Christensen’s article—How will you measure your life on HBR, one idea I found interesting was that he said it is easier to hold to your principles 100% of the time than it is to hold to them 98% of the time. It is a bit counterintuitive initially but when I thought about it a bit more, I found it probably true, although I didn’t know exactly why.

More recently, I found a possible answer in a book called: Mistakes were made, but not by me. One view of the book is that humans, in order to avoid pain, have to somehow justify our previous actions so that we don’t need to admit any mistakes. In particular, the book gave an example of how a US congress leader accepted a trip to legendary St. Andrews golf course in Scotland from a corrupt lobbyist then under investigation. It sounds bizarre for someone to risk his reputation and career for such a trip and if offered out of blue, most politician would firmly decline it. But if we see how it happened, it made a lot of sense: one step at a time.

It probably started from a harmless lunch next to the Capitol with the agenda of discussing some current event, a standard practice widely accepted in D.C.. Then it moved on to a follow-up lunch at some upscale place nearby, nothing more than finishing the discussion. Then next time, what about a new opening by the same restaurant in NY which is supposed to be really good and it is not that far away from DC anyway. After all, we have had a couple of lunches and we seem to quite enjoy the company of each other. And finally why not the St. Andrews in Scotland, weren’t we part of the same country not that long ago ?

So after a few of small steps, each quite sensible given all the previous steps, our politicians committed to something he would likely never agreed to in the first place. As C.S. Lewis observed, the safest road to hell is the gradual one! And in Christensen’s language, 98% is not really a choice as once we make a tiny step away from our principle, we will find it ever easier to continue that pass till we reach the very bottom. It is really a choice between 100% or 0% as there is no stop in the middle.

So back to the Pershing Square meeting, it is not an easy one for Mr. Ackman at all: Since Pershing Square Holding was listed, return has been poor, resulting in not only a drop in NAV during a strong bull market but also the share price trading a large discount to the NAV, a treble whammy to the shareholders. Questions being asked were sharp and focused on the mistakes, turn-around plans and even Mr. Ackman’s failed marriage. It also seems to me that Mr. Ackman had to do things that he didn’t particularly enjoy doing. For example, he had to spend a large percentage of his time meeting with his investors and he really missed the time when Pershing Square were just 4 people and he could spend all his time on investing. Furthermore, due to the annual redemption demand by intuitional investors to meet their spending commitment, Pershing Square is forced to keep raising new fund to keep a constant size and therefore afford to keep the employees. And finally, he could not be like Berkshire and get rid of the 2 & 20 fee structure even though he is wealthy enough himself not to charge anything, his junior staff in the fund are not there yet.

The result is the current Pershing Square organization who really has no other easy choices except keep going forward in current form. But I cannot stop wondering is this the life Mr. Ackman aimed for when he started Gotham two and a half decades ago? Buffett, his mentor, has repeatedly given the career advice of doing something one likes and doing it with people one admires. And he set the example of never charging a management fee and later on giving up the incentive fee as well so that he can have those freedoms and never be put under this kind of pressure and unpleasantness. Being a follower of Mr. Buffett for so long, doesn’t Mr. Ackman know these by heart?

Or is that a similar story of slippery road as the politician in the book? Maybe Mr. Ackman started Pershing Square with just investing in mind. Even though the fees were higher than the Buffett partnership, it was fair compared to other funds and even more so compared to the return the fund was generating. Once the first analyst and support stuff was hired, adding more made sense as well, especially giving the larger asset under management. And once the first meeting with a say $100 million investor was scheduled, the rest naturally followed through. Soon enough, Pershing Square as an organization took a life of its own, kidnapping Mr. Ackman with it and making him do things he probably never included on his original plan. If this is the case and people as intelligent as Mr. Ackman could deviate from Buffett’s teaching, no wonder investing is simple but not easy.

However, whether this is what actually happened or merely my speculation, I would never be able to figure out. As the book said, we humans are so good at justifying our actions and twisting our memories to fit our preferred narratives that, even the protagonists themselves would find it hard to figure out what really went through their mind. But I firmly believe I am right with my speculation. After all, I have just spent a couple of days reading this book (so it must be good) and I made the trouble to go to London for the meeting (so it must teach me something) and how can such an obvious link between those two things, observed by a rational thinker like myself, be wrong??? Absolutely impossible. Mistakes were made, but not by me.