William Ackman: Everything You Need to Know About Finance and Investing in Under an Hour | Big Think
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Published 2012-11-27
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Bill Ackman is one of the top investors in the world, and he's said that he's aiming to have "one of the greatest investment track records of all time." As the CEO of Pershing Square Capital Management, the hedge fund he founded, he oversees $19 billion in assets.
But before he became one of the elite, he learned the basics of investing in his early 20s.
This Big Think video is aimed at young professionals just starting out, as well as those who are more experienced but lack a financial background.
Ackman takes viewers through the founding of a lemonade stand to teach the basics, explaining how investors pay for equity, a word interchangeable with "stock." In the example, the owner starts with $750, with $250 of that coming from a loan.
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WILLIAM ACKMAN:
William Ackman is founder and CEO of Pershing Square Capital Management. Formed in 2003, the hedge-fund has acquired significant shares in companies such as JC Penney, General Growth Properties, Fortune Bands and Kraft Foods. Ackman advocates strategies of "activist investing," the practice of using stock shares in publicly-traded companies to influence management practices in a way that benefits shareholder interests.
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TRANSCRIPT:
Hi, I'm Bill Ackman. I'm the CEO of Pershing Square Capital Management and I'm here today to talk to you about everything you need to know about finance and investing and I'm going to get it done in an hour and you’ll be ready to go.
How to Start and Grow a Business
So let’s begin. We’re going to go into business together. We’re going to start a company and we’re going to start a lemonade stand and now I don’t have any money today, so I'm going to have to raise money from investors to launch the business. So how am I going to do that? Well I'm going to form a corporation. That is a little filing that you make with the State and you come up with a name for a business. We’ll call it Bill’s Lemonade Stand and we’re going to raise money from outside investors. We need a little money to get started, so we’re going to start our business with 1,000 shares of stock. We just made up that number and we’re going to sell 500 shares more for a $1 each to an investor. The investor is going to put up $500. We’re going to put up the name and the idea. We’re going to have 1,000 shares. He is going to have 500 shares. He is going to own a third of the business for his $500.
So what is our business worth at the start? Well it’s worth $1,500. We have $500 in the bank plus $1,000 because I came up with the idea for the company. Now I'm going to need a little more than $500, so what am I going to do? I'm going to borrow some money. I'm going to borrow from a friend and he’s going to lend me $250 and we’re going to pay him 10% interest a year for that loan.
Now why do we borrow money instead of just selling more stock? Well by borrowing money we keep more of the stock for ourselves, so if the business is successful we’re going to end up with a bigger percentage of the profits.
So now we’re going to take a look at what the business looks like on a piece of paper. We’re going to look at something called a balance sheet and a balance sheet tells you where the company stands, what your assets are, what your liabilities are and what your net worth or shareholder equity is. If you take your assets, in this case we’ve raised $500. We also have what is called goodwill because we’ve said the business—in exchange for the $500 the person who put up the money only got a third of the business. The other two-thirds is owned by us for starting the company. That is $1,000 of goodwill for the business. We borrowed $250. We’re going to owe $250. That is a liability. So we have $500 in cash from selling stock, $250 from raising debt and we owe a $250 loan and we have a corporation that has, and you’ll see on the chart, shareholders’ equity of $1,500, so that’s our starting point.
Now let’s keep moving. What do we need to do to start our company? We need a lemonade stand. That’s going to cost us about $300. That is called a fixed asset. Unlike lemon or sugar or water this is something like a building that you buy and you build it. It wears out over time, but it’s a fixed asset. And then you need some inventory. What do you need to make lemonade? You need sugar. You need water. You need lemons...
Read the full transcript at bigthink.com/videos/learn-to-invest-and-start-a-bu…
All Comments (21)
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0:12 Bill Ackman 0:23 Lemonade Stand Example Starting A Business (1:03) 1:17 Form A Corporation • 1,000 shares of stock, Investor invests for 500 shares 2:18 The Balance Sheet Assets = Liabilities + Stockholders Equity 3:08 Fixed Assets and Inventory 4:19 The Income Statement 4:38 5:49 Growing The Business 8:05 The Statement of Cash Flows (SOCF) 9:05 Evalutating Value 10:26 Equity Investor took more risk, e.g. Equity Investor made more returns on investment 11:08 Debt and Equity 11:58 13:06 Assessing Risk 13:40 Government Bonds (Low Risk investment) 14:53 Profiting As An Entrepreneur 17:34, 17:50 Valuation: Determining A Company’s Worth 19:33 Selling Shares, Board Of Directors 20:36 Benefit of IPO 21:03 21:39 Investing 22:59 Interest Returns 24:00 The Importance of Not Losing Investment Money (Avoid Losses) 24:53 Keys To Successful Investing - Don’t Invest In Startups + Invest In Public Companies + Invest In businesses you understand how they make money + Invest at a reasonable price + Invest In a company that you can own forever 27:26 A business you can own forever Coca Cola, McDonalds 28:58 • A product people need • Unique • Brand Loyalty 29:48 30:23 High barriers to entry 31:57 Low Reinvestment Cost Controlled Company 33:26 Investing 34:41 The Psychology of Investing 35:45 1. Be Financially Secure 2. Don’t get spooked by short term fluctuation 3. Do your own work 4. Invest at a reasonable price 36:38 • Mutual Fund 38:05 • A Good Money Manager Can Explain What/Why They Invest In + Good Reputation + Value Approach + 5 Year Track Record + Consistent Approach • Hedge Fund 40:25 Recapping 41:20 This is just an Introduction 42:27 Invest In Your Future
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Banc of California had $10 billion of assets at the end of March, making it less than a quarter of the size of PacWest. But it saw relatively small deposit outflows in the first quarter, and its 17% stock drop this year through Monday was mild compared with PacWest’s 54% plunge. Investing in stocks is not that easy these days because of the uncertainties
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I know these things work, but it's sad how difficult things have become in the present generation. I was wondering how to utilise some money I had. I used some of it for e-commerce business, but that sank. I'm thinking of how to use what's left to invest, but I don't really know which way to go.
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Currently I'm just being smart and frugal with my money, I'm in the green 47% over the last 23 months and l've accumulated over $70K in pure profits from DCA’ing into stocks, ETFs, dividends and futures. However I’ve been in the red for a month now. I work hard for my money, so investing is making me a nervous sad wreck. I don’t know if I should sell everything, sit and just wait.
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I just want to invest in tax advantaged accounts. I just saved up $100,000 this last quarter, and i plan to invest in the stock market
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Thanks so much sir for such a wonderful explanation. The problem sometimes is not actually purchaing a stock but how to understand the market strategies in terms of entries snd exits of the market. Quite impressive and i have opened up my portfolio base on how important and interesting i have seen trade also very much astonishing the gains one can actually derive from it if the steps are well followed. In a case like this how do one challenge the market and make more gains? (Regarding the entries snd exits)
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As an lnvesting enthusiast, I often wonder how top level investors are able to become millionaires off investing. . I’ve been sitting on over $545K equity from a home sale and I’m not sure where to go from here, is it a good time to buy into stocks or do I wait for another opportunity?
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The stock market rally started Thursday strong but reversed solidly lower, undercutting the lows of the prior few days. It's a reason to be cautious in the very short term. But the pullback could be setting the stage for another solid advance. Tesla (TSLA) continued to climb Thursday, even though the EV giant pared intraday gains. TSLA stock has now more than doubled from its Jan. 6 bear-market low,I'm still at a crossroads deciding if to liquidate my $238k stock portfolio, what’s the best way to take advantage of this bear market?
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This is quite educational. It's crucial for newcomers to keep in mind that the financial markets are highly irrational in the short run. You should constantly be ready for the unexpected. That is how chance operates. Because of the inherent risks in the market, I always favor long-term investments.
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Investing in the stock market has HISTORICALLY provided higher returns than other forms of investment. According to Morningstar, the average annual return for the S&P 500 index, which measures the performance of 500 large-cap stocks, was approximately 10% in the last decade
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Glad I came across this video , As an lnvesting enthusiast, I often wonder how top level investors are able to become millionaires off investing. . I’ve been sitting on over $545K equity from a home sale and I’m not sure where to go from here, is it a good time to buy into stocks or do I wait for another opportunity?
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I am regretting not investing in stocks ever since but still grateful i kept money in the money market. With about $200k maturing soon, i plan investing in the stock market. What stocks should I look into as a newbie to safely grow my money?
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I was waiting for the part when he recommends shorting the lemonade stand
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I began my investment journey at the age of 27, primarily through hard work and dedication. I am to share that my passive income exceeded $100k in a single month for the first time. This success reinforces the importance of the advice mentioned earlier. It is not about achieving quick wealth, but rather ensuring long-term financial prosperity.
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Stocks extended their year-to-date rally following the CPI report, with the S&P 500 last up 0.8% in afternoon trading. but I don't know if stocks will quickly rebound, continue to pull back or move sideways for a few weeks, or if conditions will rapidly deteriorate.I am under pressure to grow my reserve of $250k.
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Just what I needed to watch. My wife and I are directors of our farm business and own property, plus small pensions. I am nearly 55, my wife is 52. We have started to save to retire from the farm, and possibly live on rental income, I'd really appreciate you go LIVE and talk about how to earn passive income online and retire comfortably, let’s say $1M.
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Understanding personal finances and investing will most likely lead to greater financial independence. By being knowledgeable about money and investing, individuals can make informed decisions about how to save, spend, and invest their money. A trader made over $350k in this recession influenced market
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As an investing enthusiast, I often wonder how top level investors are able to become millionaires off investing. I’ve been sitting on over $455K equity from a home sale and I’m not sure where to go from here, is it a good time to buy into stocks or do I wait for another opportunity?
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I wish people would understand the information that is being shared instead of trying to find faults in the information. This presentation is extremely valuable information and I am sorry for the negative comments certain people are saying. Thank you for the valuable information. Thank you thank you. And to the comments about grey hair and a few dollars off, and pink lipstick...please control you're childish behavior. Some people are trying to learn and you are trying to ruin a good thing.
