The Alpha Masters: Unlocking the Genius of the World's Top Hedge Funds (22 page)

Always energetic, Ackman morphs from aggressive, when dealing with stubborn executives of underperforming companies, to charming and benevolent when dealing with his partners and employees, whom he considers like family. But Ackman understands the dynamic between him and the embattled executives of the companies he targets. He likens a company’s board of directors to a club, to which he’s been reluctantly invited. “Do you really want to invite in the outsider who’s barging his way in the door because he bought a bunch of stock in your company? That’s how some directors think about it,” he explains. But that doesn’t stop him from doing his job with laser-like focus.

Ackman had gone to Wharton that fall day to give a lecture on failure—something the billionaire knows a thing or two about. The memory of his past failures keeps him grounded, as grounded as he could be at this point in his life. For all of his money, Ackman still drives a Volvo, although that is not to say he doesn’t make use of his private plane for business trips. Ackman also keeps a Ferrari, bought on a whim, parked in his upstate New York country home. After an almost 20-year-long career running his own hedge fund—first Gotham Partners and then Pershing Square—he had made it into the billionaire’s club, but not without his fair share of challenges and hardships along the way.

“Raising money for a start-up hedge fund is a lot like blind dating,” Ackman says. “You meet someone you’ve never met before, you have a limited time in which to make the pitch, and then you try to close the deal. Charm matters,” he says with a chuckle. “And sometimes people with the best ideas aren’t very good at blind dating. When I decided to run a hedge fund out of school, I’d meet with 100 people before one or two would finally agree to invest with me. In order to be successful, you have to make sure that being rejected doesn’t bother you at all. So for example, in college when I was dating and a girl didn’t like me, I didn’t get upset. I thought that if she didn’t like me, then she clearly wasn’t right for me. You should surround yourself with people that believe in you, in life, and in business.”

Bright Beginnings

William Albert Ackman was born May 11, 1966, the younger of the two children of Larry and Ronnie Ackman. Raised in the affluent suburban town of Chappaqua, New York, Ackman was an ambitious, blunt, competitive, not to mention confident student at Horace Greeley High School. Ackman captained the tennis team and made it to the New York State quarterfinals. Ackman still managed to balance work with play and graduated fourth in his class. He even had a $2,000 bet with his father that he would earn a perfect score on the SATs, although his dad withdrew the bet the night before the exam for fear that he would lose. Though he didn’t get a perfect score, Ackman’s confidence and ability got him quite close.

His older sister, Jeanne, entered Harvard in 1983; Ackman followed her a year later. Jeanne would go on to Yale Medical School and then practice medicine in Boston after completing a fellowship at Brigham and Women’s Hospital. Her younger brother would come back to New York after school and follow a very different path.

“I was a pretty confident kid,” he admits, laughing as he remembers his time as an undergraduate at Harvard. “I’m an optimistic person, and I thought I would be really successful. I once made the argument that my net worth has really never gone up, because when I was younger, I assumed that I would do really well, and I have always had the present value of whatever I was expecting to earn over time. As each year goes by, my net worth accretes to what I expected it to be over time,” he laughs again. “I wanted to be successful.”

Already entrepreneurially minded, Ackman came up with an idea for a book while he was a freshman in college. Seeing firsthand how competitive the application process for Harvard College had been, Ackman wrote a book on how to write a college admission essay and included 50 or so successful application essays as well as interviews with admissions officers from Ivy League colleges. He presented the idea to an author friend of the family who attempted to sell it to several publishers, but he didn’t end up getting a deal. “I sent the book to seven publishers pitching my idea and came back with six rejections and a job offer from Workman Publishing.” Not long after, Ackman was surprised to find out two Yale graduates came out with a remarkably similar book, which ended up becoming a
New York Times
bestseller. “Two guys at Yale heard about the idea and copied it. I vowed then never to get discouraged into thinking my ideas weren’t worth pursuing,” says Ackman.

It was at Harvard that he met Whitney Tilson, who would become a lifelong friend. He would follow Ackman into the world of investing, launching his own fund, T2 Partners. Tilson met Bill when they were both teenagers, and they worked together as advertising salesmen for the
Let’s Go
series of travel books during the summer of 1986, when they were students at Harvard College.

“Bill was a hell of a salesman,” Tilson said. “He was very smart, very persuasive, and he was a very savvy businessman even as a teenager. He clearly had a passion for business and investing at a young age. It is a profession where experience matters a lot. There is no doubt he was at the top of the experience curve at a young age.”

Running his own firm is particularly satisfying for Ackman, who says the biggest driver of his early life was independence. “I wanted to be able to say whatever I wanted to say,” he recalls. “I wanted to be able to do whatever I wanted to do.” Nothing in particular inspired this desire in him; he was a typical kid, expected to obey his parents no more or less than usual.

“From the time I started investing, I’ve always been a fixer.” In fact, Ackman’s knack at rehabilitating troubled companies extends to his personal life relationships as well. He took an awkward college roommate under his wing, getting him contact lenses, taking him to the dermatologist to cure a bad case of acne, and prodding him to have a healthier diet and exercise regimen. “He was a character.” After the makeover, the friend became more confident. One night Ackman and a group of roommates took him to Wellesley, where he met a girl whom he eventually married, a story Ackman tells with a smile.

Ackman’s first insight into value investing came at a cocktail party at his parents’ Upper East Side apartment where he met a successful investor named Leonard Marks, who introduced Ackman to the investing world. Eager to learn, he followed Marks’s recommendation that he read
The Intelligent Investor
by Ben Graham, the book famous for having inspired Warren Buffett. For Ackman, reading his first investment book, he says, was like reading Jean-Paul Sartre’s
Essays on Existentialism
in college: “Either it inspires you or it doesn’t. And
The Intelligent Investor
made sense to me.” He was drawn to investing due to the frustration he felt in the real estate brokerage business. While he liked earning a fee for every deal he did, he couldn’t help but notice that the entrepreneurs did a lot better, and had more fun. Ackman thought he was at least as capable as the clients he worked for in the brokerage business, so he decided he would become the principal, the person making the investment decisions.

Ackman went on to read a library of books on investing while at Harvard Business School, including Seth Klarman’s
Margin of Safety
right after its publication. Impressed, Ackman contacted the author, the founder of the Baupost Group. “Hi, I’m a Harvard Business School student, and I just read your book,” Ackman recalls saying to Klarman. “I’m not looking for a job. But I’d love to learn from you. You mind if I come in and share some ideas?” The two established a relationship that lasts to this day. At the time, Ackman had about $40,000 saved from the real estate business that he considered “extra” money: his tuition in investing. If he lost those funds, he reasoned, it amounted to one more year of business school tuition, room and board. “I went to business school to learn how to be an investor. This is what I wanted to do as a career.”

Shortly after arriving at Harvard Business School (HBS), he opened up a Fidelity Brokerage account in October of 1990 and bought Wells Fargo, his first stock. Another early investment was Alexander’s, a department store chain that filed for Chapter 11 in 1992. At the time, Vornado Chief Steve Roth owned 27 percent of the company. When it filed for bankruptcy, Ackman bought 2,000 shares for $8⅜, an investment that made up about a third of his personal wealth at the time. While the company had closed all of its money-losing stores, it owned a number of very valuable real estate assets, including its crown jewel property located at 59th Street and Lexington Avenue in Manhattan. The company ultimately converted to a REIT and the stock eventually reached more than $400 per share.

Less than a year after he bought the stock, Ackman sold it for about $21, and it proved to Ackman that you can invest in the stock of a bankrupt company and still make money. He also learned that by selling early he might be leaving a lot of money on the table. He discovered that as long as a company was solvent—or had assets that were worth more than its liabilities—even in bankruptcy, you could create value for shareholders. The experience had a big impact on the young investor. “I made a nice profit,” he remembers. “Had I lost half my money, I might be a lawyer at this point.”

Two of the most influential, and what Ackman perceives as formative, experiences that he had at Harvard Business School were hearing Warren Buffett and Richard Rainwater speak to students. “I was expecting Buffett to teach us how he values companies, but he didn’t,” says Ackman. “He spoke to us about character. Buffett said one can immediately obtain the qualities that make for a good reputation by just making good everyday life decisions. He also reminded us that your reputation can be lost overnight and to therefore protect it with your life. I never forgot that,” says Ackman.

Richard Rainwater, however, gave Ackman the courage to start his own fund. An investing legend who had largely stayed under the radar, Rainwater had reportedly turned $50 million from the Bass family in Texas into billions of dollars in a relatively short time. Ackman stood in line to speak to Rainwater, and when he reached the front, the confident Ackman invited the billionaire investor out to lunch. There Ackman asked Rainwater if he thought it was a stupid idea for him to start his own fund right after graduating. “He said to me, ‘You don’t have to be old to be right.’” That was the only reassurance Ackman needed. From that point forward, he decided that he would start his own fund.

Getting Gotham Going

“Everyone told me it was a really stupid idea to start my own hedge fund right out of business school,” says Ackman of the idea. “That’s how I knew that it was a good idea.” His father was opposed to the idea and encouraged him to get some more experience before starting his own fund. It didn’t matter what anyone said, Ackman was going to do it anyway. He was “daring to be great.” Almost 20 years later, in 2011, he’d give Ron Johnson the same speech while convincing him to leave Apple and become JCPenney’s CEO in an effort to completely transform the retailer.

One of his classmates, David Berkowitz, an MIT-educated engineer, was always asking interesting questions and giving insightful comments during class, and Ackman wanted him on his team. They began a two-member investment club and began analyzing and investing in stocks after class. After working together for little more than a year, the duo decided to partner on launching their own fund.

As graduation approached, Ackman and Berkowitz started seeking investors. Marty Peretz, the editor-in-chief of the
New Republic
magazine and Ackman’s thesis adviser from his days as an undergraduate, became their first investor, with a $250,000 commitment. “From day one,” remembers Ackman. “I was always unafraid to ask someone to invest because, I thought that, while capital was a commodity, good investment ideas were rare assets.”

Ackman and Berkowitz continued to shop around for investors, using every contact and resource they could muster. They even landed a million-dollar client introduced by Ackman’s future mother-in-law, real-estate broker Marilyn Herskovitz. They eventually scrounged up $3 million and set up shop in a windowless office in the Helmsley Building that they leased from brokerage firm Furman Selz.

“Investing is one of the few things you can learn on your own,” says Ackman, explaining why he felt the need to go off on his own rather than apprentice for a well-known investor. “I felt I had the basic skills to be a successful investor, and if you think you’re Picasso, you’re not sure you want to learn from another artist. I had an unlevered strategy, doing plain-vanilla value investing—not something complicated or particularly risky. I thought, in the worst case, if I fail, I’ll be able to get a job,” he says. So Ackman started Gotham Partners in 1992, at age 26, straight out of Harvard Business School.

The School of Rock

Prior to HBS, after getting his undergraduate degree, he had spent two years working for his father’s real estate brokerage firm, Ackman Brothers & Singer, as a broker arranging financing for real estate owner-developers. The sale of Union Center Plaza, an office complex in Washington, D.C., was Ackman’s first big deal shortly out of college in late 1988. It was a complicated deal and a formative experience for Ackman, where he learned to think about complex interests in real estate, knowledge that would prove invaluable for what lay ahead. “If I hadn’t worked on Union Center, I wouldn’t have been able to understand the first thing about Rockefeller Center Properties,” he says referring to his bid to take over and restructure the New York City landmark in 1996. Even though Ackman didn’t win control of Rockefeller Center, his active pursuit and brilliant plan put the young 28-year-old on the map in the eyes of the world’s biggest real estate tycoons and landed him a coveted spot on the
Crain’s New York Business
“40 Under 40” list.