Bill Ackman's net worth currently totals close to $3.7 billion, according to Forbes. His Pershing Square Capital Management hedge fund has been a big winner since Ackman founded it in 2004.
What's Ackman's secret to success? It really isn't such a secret. The billionaire has never shied away from discussing his approach to investing. Ackman explained his eight "basic commandments" of investing in an interview released last week on The Julia La Roche Show podcast. And there's one artificial intelligence (AI) stock that could check off all of them.
Ackman's eight commandments
During the podcast, Ackman held up his commandments, which are engraved on stone tablets and sit on the desks of the Pershing Square team. They detail his criteria for selecting the best stocks.
While Ackman gave a brief explanation in the interview last week, he has shared all eight commandments in the past. Here they are:
-
The business must be simple and predictable.
-
It must generate free cash flow.
-
The company must have a dominant market position.
-
There must be large barriers to entry for rivals (i.e., the business should have a moat).
-
The company must generate a high return on capital.
-
The business must have limited exposure to uncontrollable extrinsic risks.
-
The company must have a strong balance sheet without needing access to capital to survive.
-
It must have excellent management and good governance.
Ackman summarized his investment philosophy in one statement, "We want to buy the best businesses in the world." He also stressed the importance of buying them "at attractive prices."
Checking all the boxes?
The obvious question for investors who aren't billionaires is: Which stocks meet all of those criteria? Ackman doesn't seem to think there are many. His Pershing Square Capital Management hedge fund owns only eight stocks. Two of them are the class A and class C shares of the same AI leader -- Google parent Alphabet (GOOG -1.94%) (GOOGL -2.03%).
Some might quibble with the view that Alphabet's business is "simple and predictable." While it's true that the way that the technology the company uses isn't simple, its underlying business model actually is quite straightforward.
There's certainly no question about Alphabet fulfilling all of Ackman's financial commandments. It generated free cash flow of more than $68 billion over the last 12 months. The company's return on invested capital is over 26%. Alphabet's balance sheet is exceptionally strong, with a cash stockpile of more than $118 billion.
Alphabet clearly dominates most of the markets it's in, especially online search. It also has demonstrated a solid moat, as evidenced by the difficulty that even deep-pocketed rivals have had in gaining market share.
As for excellent management, some would simply point to Alphabet's track record. The stock has delivered a 6x return over the last decade and is up more than 50% so far in 2023.
A couple of controversies
Not everyone would agree that Alphabet checks off all of Ackman's eight commandments, though. Two key areas of controversy are the company's governance and its potential risk of disruption by AI.
Institutional Shareholder Services' (ISS) most recent score of Alphabet's governance indicates a high level of governance risk for the company. ISS and another shareholder advisory firm, Glass Lewis, have pushed Alphabet for governance changes this year, including calling for replacing two members of the company's board of directors.
Others argue that Alphabet faces a huge threat from AI. They think that generative AI could eliminate the need for search and potentially crush Alphabet's advertising revenue.
Ackman, though, believes those fears are way overblown. In his view, generative AI will enhance Google Search. He sees Alphabet's massive amount of data related to consumer behavior and online searches gives it great training data for AI apps. The billionaire also points to Alphabet's track record of AI leadership and significant investments in AI.
His bet on Alphabet has paid off nicely so far this year. Ackman and his Pershing Square team continue to predict "significant upside" for the high-flying stock.
