A couple of weeks ago, I heard a conference call held by noted hedge fund manager Bill Ackman (Pershing Square Capital) and broadcast over Bloomberg radio. I didn’t listen to the entire call, but two things I heard have been rolling around in my mind since then.
a fifty year investment horizon…
1. Mr. Ackman said that what distinguished him from other investors was that he takes a longer view than most in analyzing his potential investments. His time horizon? …the coming 50 years.
Virtually every investment manager seeking clients will say that two factors differentiate him from rivals: that he does more meticulous research; and that he has a longer investment horizon, which makes him more resistant to the periodic panics that beset the stock market. So in one sense, Ackman’s assertion is right out of Marketing 101. In addition, it certainly sets him apart from the crowd. And it’s possible that he sincerely believes what he’s saying–although I think that, if so, there’s a wide disconnect between what he thinks he does and how he actually makes money.
But does a fifty-year time horizon make any sense?
I don’t think so.
For one thing, all the available evidence shows that professional securities analysts can’t accurately forecast company financials even one year ahead, let alone fifty.
…when everything is in flux
For another, let’s consider what the world of fifty years ago was like:
–there was no Internet. So, no Google, no Amazon
–there were no cellphones
–there were no video games (Nintendo was making decks of playing cards); there was also almost no color TVs to play them on
–there were no personal computers, and not that many corporate mainframes, either
–there were no microwaves, no copiers, no fax machines (people used manual typewriters, carbon paper and the post office. They warmed stuff on the stove)
–there was no Civil Rights Act. Women and minority group members could do little more than menial labor
–air travel was in its infancy and the interstates were still being built. People traveled by boat and train.
I could go on, but the point is that life fifty years ago was mind-bogglingly different from life today. It’s almost impossible for us to imagine what it must have been like, even though we have all the historical data, as well as access to people who experienced it first-hand. It’s also hard to find companies that have survived during the entire period, and even more difficult to locate within that small group ones that haven’t had to change radically to do so.
How much harder, then, to project fifty years into the future, where we will likely continue to see equally surprising twists and turns?
Mr. Ackman’s reply, apparently, is that he invests in real estate, and buildings and land can easily stay around for a half-century. I guess the argument is that the practice of entering into long-term leases means that real estate only responds slowly to changes in economic circumstances. Still, it seems to me that real estate remains subject to the same forces of flux that anything else in the economy is. Cities or states may move in and out of favor (think: Detroit, the Motor City in 1960 vs. now), as do neighborhoods and sections of cities as circumstances change. Real estate still needs to be traded, depending on changing economic fortunes.
2. Mr. Ackman also described the first time he entered the Apple Store on Fifth Avenue in Manhattan (no date given, but the store opened in mid-2006. Even with its recent swoon, AAPL shares are up 6x since then). He was deeply impressed and knew there must be an investment idea based on his experience.
Others might have bought AAPL stock.
Not Mr. Ackman, who knew it ‘s impossible to predicts fifty-year timeline for the company. Instead, Ackman decided to hire away fellow Harvard MBA, Ron Johnson, the head of the Apple Store division, and put him in charge of turning around J C Penney, where Pershing Square and allies had a controlling ownership position.
In moving from the store visit to hiring Johnson, Ackman must have made several other judgments that connect the dots:
–that Steve Jobs, one of the biggest micro-managers of all time, had no role in the location, design or layout of the Apple Stores. It was all, or mostly, Johnson
–that the the fabulous success of the Apple Stores was due to Johnson, not to the quality of the Apple merchandise or the company’s truly immense marketing budget, and
–that the skills needed to run a chain of specialty boutiques selling very upscale consumer electronics products are the same ones needed to run a mid- to down-market clothing-oriented department store.
How has this worked out so far?
…a string of mammoth same-store sales declines by JCP, a large net loss and a decision by insider Vornado Realty Trust to dump 40% of its shares. JCP stock has lost over half its market value since Mr. Johnson took over, a period when the S&P is up almost 30%.
I’m sure Mr. Ackman would tell you that you can’t judge a 50-year plan based on a mere 2% of that time. Still, for me the whole conversation had a certain through-the-looking-glass air about it.