William Ackman: Everything You Need to Know About Finance and Investing in Under an Hour | Big Think
Big Think・2 minutes read
Investing involves forming a corporation, raising capital through debt or equity, valuing a business, and understanding risk to achieve long-term success and growth while avoiding significant losses and ensuring diversification for a balanced portfolio. It is crucial to prioritize long-term investing, avoid high-risk decisions, and conduct thorough research before making investment choices, considering factors like company stability, product uniqueness, and potential growth.
Insights
- Debt is considered a safer investment with a senior claim on assets, offering lower interest rates for better security, while equity holders take on more risk with higher expected returns and residual claims after debt payment.
- Successful investing involves avoiding significant losses, earning attractive returns, maintaining consistency over time, and prioritizing long-term ownership in public companies with unique products, low capital intensity, and minimal external impact.
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Recent questions
How can a business raise capital?
To raise capital, a business can sell shares to investors, borrow money through loans, reinvest profits, pay dividends, sell the company, or go public through an IPO. Each method has its advantages and considerations, with selling shares diluting ownership, borrowing incurring interest payments, and going public requiring regulatory compliance and shareholder representation. The choice of capital-raising method depends on the business's growth stage, financial needs, and long-term goals.
What factors determine a company's value?
A company's value is determined by comparing it to similar businesses, analyzing stock prices, shares outstanding, and earnings multiples. By examining these factors, investors can assess the company's financial health, growth potential, and market position. Valuing a business accurately is crucial for making informed investment decisions, as it provides insights into the company's worth relative to its industry peers and market conditions.
Why is diversification important in investing?
Diversification is crucial in investing because it helps mitigate risk by spreading investments across different assets or securities. By diversifying a portfolio, investors can reduce the impact of a single asset's performance on their overall returns. This strategy helps protect against market volatility, economic downturns, or industry-specific risks. Diversification is a fundamental principle in building a resilient investment portfolio that can weather various market conditions and uncertainties.
What are the key considerations for stock market investors?
Stock market investors should prioritize thorough research, long-term investment horizons, avoiding borrowing for investments, and limiting leverage. Understanding the psychology of investing, focusing on disciplined decision-making based on long-term business value, and maintaining a financial cushion are essential practices. By following these key considerations, investors can navigate the stock market effectively, manage risks, and pursue sustainable growth over time.
How can individuals start investing wisely?
Individuals can start investing wisely by prioritizing paying off high-interest debts, maintaining a financial cushion for emergencies, and understanding the fundamentals of investing. Reading recommended books, seeking advice from financial experts, and considering options like mutual funds or money managers can help beginners make informed investment decisions. Starting early, diversifying portfolios, and focusing on long-term growth are key strategies for building a successful investment portfolio.
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Summary
00:00
"Building a Business: From Idea to Profit"
- Bill Ackman, CEO of Pershing Square Capital Management, discusses finance and investing in an hour.
- To start a business, form a corporation by filing with the State and naming the business.
- Raise money by selling 500 shares at $1 each to an investor, who will own a third of the business.
- Initial business worth is $1,500 with $500 in the bank and $1,000 for the idea.
- Borrow $250 at 10% interest instead of selling more stock to retain more ownership.
- Balance sheet shows assets of $1,750 with $500 cash, $250 debt, and $1,000 goodwill.
- Invest $300 in a lemonade stand, $200 in inventory for 50 gallons of lemonade.
- Balance sheet updates to show $500 cash, $300 fixed assets, $200 inventory, and $1,000 goodwill.
- Income statement reveals revenue of $800, costs of $530, and a profit of $10 before interest.
- Over five years, business grows to seven stands, revenue increases to $8,000, and profit to $2,300.
11:19
Investment Basics: Debt, Equity, and Valuation
- Debt is considered a safer investment due to having a senior claim on a company's assets and coming in various forms like mortgage debt, senior debt, junior debt, mezzanine debt, and convertible debt.
- The interest rate on debt is inversely related to security, with better security leading to lower interest rates and vice versa.
- Equity includes preferred equity and common equity, with equity holders receiving what remains after debt is paid off, known as a residual claim.
- Lenders accept lower returns on debt due to the security it offers, while equity investors expect higher returns as they bear more risk.
- Risk in investing should focus on the likelihood of permanent loss rather than short-term stock price fluctuations.
- Government bonds are considered low-risk investments, with a 10-year Treasury bond offering a 3% return annually.
- Lenders charge higher interest rates for riskier businesses like a startup lemonade stand, aiming for a significant return above government bond rates.
- Equity investors expect higher returns for riskier businesses and receive dividends rather than interest.
- Options for raising capital include reinvesting profits, paying dividends, selling the company, or taking it public through an IPO.
- Valuing a business involves comparing it to similar companies, looking at stock prices, shares outstanding, and earnings multiples to determine its worth.
22:19
"Strategies for Successful Long-Term Investing"
- The company initially had 1,500 shares outstanding, valued at $30,000 when multiplied by $20 per share.
- To raise $4,000, the company could sell 200 shares at $20 each, reducing ownership from 67% to 53%.
- Selling shares in the market would make the stock liquid, allowing for easier trading and potential future fundraising.
- The IPO would necessitate a board of directors to represent shareholders' interests and ensure proper treatment.
- Starting investing early is crucial, as illustrated by the example of saving $10,000 at 22 and earning a 10% return, resulting in $600,000 in 43 years.
- Earning a higher return, like 15%, could lead to over $4 million in the same scenario.
- Avoiding significant losses is key, as illustrated by a potential drop from $25 million to $1.8 million due to risky decisions.
- Successful investing involves avoiding losses, earning attractive returns, and maintaining consistency over time.
- Investing in public companies, understanding businesses, reasonable pricing, and long-term ownership are essential strategies.
- Businesses that sell unique products, have little debt, and possess barriers to entry are ideal for long-term investment success.
34:04
Key Tips for Successful Stock Market Investing
- When choosing a company to invest in, ensure they offer a product or service that is difficult for competitors to replicate, fostering customer loyalty.
- Opt for businesses that are not heavily impacted by external factors like commodity prices, interest rates, or currency fluctuations.
- Companies like Coca Cola, with a long history of consistent growth despite global events, are ideal for long-term investments.
- Look for businesses with low capital intensity, where minimal reinvestment is required for growth.
- Avoid high capital intensity businesses like the auto industry, where substantial investments are needed for expansion.
- Businesses that earn royalties on products sold, like Coca Cola or American Express, are preferable for investment.
- Invest in public companies that are not controlled, as controlled companies may pose risks to minority shareholders.
- Before investing in the stock market, prioritize paying off high-interest debts like credit cards and student loans.
- Maintain a financial cushion in the form of savings to cover expenses in case of job loss before committing to stock market investments.
- Understand the psychology of investing, recognizing the short-term volatility of stock prices and the importance of disciplined decision-making based on long-term business value.
43:29
"Stocks vs. Bonds: Investing Essentials and Tips"
- Bonds offer a known coupon rate, such as 3% annually for 10 years, while stocks' coupon is the fluctuating profit, making stock investments riskier due to unpredictable earnings.
- The decision between buying bonds or stocks hinges on ensuring the stock's earnings yield (earnings per share over price) is higher than what bonds offer, with a growth potential over time.
- Businesses with high profit growth rates may command higher stock prices, reflecting investors' expectations of future earnings growth.
- Key advice for stock market investors includes doing thorough research, investing for the long term, avoiding borrowing money for investments, and limiting leverage.
- Before diving into stock market investments, it's crucial to read recommended books to gain a deeper understanding of investing principles.
- Outsourcing investment decisions to money managers or mutual funds is an alternative for those averse to individual stock investments, with mutual funds pooling investors' money for diversified portfolios.
- Selecting a mutual fund or money manager requires understanding their investment strategy, ensuring integrity, focusing on value investing, and considering their track record and consistency.
- Diversification is essential in building a stock portfolio, with a recommended minimum of 10-15 different securities to mitigate risk, while investing with money managers should involve spreading investments across multiple funds for further diversification.
