From WSJ blogs:
So you want to be a short-seller (or an activist). Here are some lessons gleaned from Pershing Square Capital founder William Ackman at our Deals & Deal Makers conference Wednesday.
Do your homework: Ackman said he gets most of his ideas not from sophisticated tips but just by "brute force" just from reading annual reports and looking for ways in which companies are undervalued by the stock market. Then he can pull just a few simple levers to boost the companies' stock valuations to where he believes it should be.
Find a theme and export it: Ackman says he invested in Sears and Sears Canada because the retailing companies financed their credit-card receivables on its own balance sheet, which wasn't well-understood by the markets. He used the same kind of thinking to tackle Target, which he believed was strong company with a solid debt profile and also one of the only retailers to still finance its credit cards in-house.In the case of Sears, Ackman evaluated it as its component parts, including Sears Hardware, Home Services, Sears Canada, Land's End and Sears Mexico, all of that is before you get to the company's extensive real estate value. "The only thing wrong is the stock price," he said, a line that drew laughs, because Ackman acknowledged later, it bore a similarity to the old joke about "other than that, how was the show, Mrs. Lincoln."
Operate unlevered: Ackman's hedge fund doesn't use debt. (A co-investment vehicle uses non-recourse leverage, which are loans that don't require collateral). "We're never exposed to market fluctuations and our prime broker doesn't make margin calls," he boasted. Without worries about debt, market panic is "just noise," he said. "It's all opportunity."
Don't get emotional: Ackman described himself as a totally rational being "at least when it comes to investing." He said it was the same with his continuing battle with MBIA and other bond insurers. Though to outside observers the MBIA clash has seemed especially personal, he says it was a matter of seeing that MBIA had a triple-A rating and was levered 140 to 1, which didn't make sense in his eyes. (Still, he mentioned at the WSJ's Deals & Deal Makers conference Wednesday that MBIA had done much to discredit him, personally. Ackman even interpreted MBIA's retention of PR veteran George Sard as a way to control the damage from Ackman's remarks.)
Dive into the deep end: "We don't do anything unless we do it in a big way. We're not the kind of firm that buys 1%, puts our toe in the water, and buy another few percent more," he said. Because he targets liquid, large-cap companies, there are risks, naturally: "The hard thing is to figure out how the market is going to reactâ€¦ I don't disagree with the fundamental view of our investments that that this is a difficult business at a difficult time. I just disagree with what the underlying outcome is going to be."
Be persistent: Ackman once described himself as "a persistent cuss," and that perhaps is the trait of many short-sellers and activists. (Current Lehman Brothers Holdings scourge David Einhorn started talking about Lehman last year.) On MBIA, Ackman said, "it took five years for the rest of the world to come around to my point of view. There was some painâ€¦.You have to be convinced you're right and everyone else is wrong, which is not easy. But if you're not confident you'll never pull the trigger." He did say he is in a business where too-much self-confidence can lead a person to ignore the facts. There are a lot of good analysts who can run models and spreadsheets. But temperament is a big part of" success, he noted. Berman asked Ackman whether vindication on MBIA felt good â€“whether, in the words of Henry Clay, Ackman would rather be right or be president. Ackman, smiling, took a pass on the answer, coyly demurring, "I don't know what you mean."
Appreciate your dad: Ackman brought his father Larry to the Deals & Deal Makers conference, much to the delight of participants who saw Ackman's seatmate stand up to ask a follow-up question after Ackman himself. Prompted by the moderator to introduce himself, the questioner revealed that he was "Larry Ackman, Bill Ackman's father." Ackman credited his father for his seemingly impenetrable self-confidence, saying that his father told him early on that he could do anything, and he chose to believe it. However, there is a limit to family connections. Though it was his mother-in-law that triggered his idea to invest in Target, "I'm not sharing my profits with her," Ackman quipped.
Get out of the office: Ackman noted that his best epiphanies come when he's away from his desk. "This is not a business where you want to spend 24 hours a day in the officeâ€¦.The key is not working 80 hours a week."