 Good day, fellow investors. Today we're going to talk about... Hi, I'm Bill Ackman. I'm the CEO of Pershing Square Capital Management. Thanks, Bill. So let's dig into the annual report that was just released from Pershing Square, analyze the long-term and short-term performance of the fund, discuss the top 10 portfolio holdings and finish with the possible implications for your investment strategy. Let's go. Pershing Square Holdings is a closed-end investment fund run by Bill Ackman. He's very well known because he's a self-made billionaire due to a 25-year record of beating the market. In 2004 he launched his fund and as you can see he has beaten the market by more than double since then. So today is so popular to say, oh, invest in index funds, invest in ETFs, but if you invest in those in index funds, you will be average. And we can see, we constantly see on this channel, Ackman, Buffett and Claremont, Parby, everybody, that there is a way to beat the market constantly over time. You cannot say that those are Sigma events because they do that constantly. So I think that really by doing smart investments, great businesses like Ackman has been doing in the past, he is a little bit more activist, but you can beat the market. That's the whole philosophy of this channel. Ackman's performance was 13.4% for now, a few years ago it was 20% per year, but the S&P in that period delivered 8.7%, so he's still far far ahead. Now there are two types of hedge fund managers, investment managers. There is the passive investment manager like Buffett, who likes to buy a company and not interfere too much with the management, he likes to buy good management. And there is Ackman who likes a good business with bad management so that he can actively replace the management and put in new management to do the job better and unlock the value of the great business. A perfect example of how Ackman operates is his investment in Canadian Pacific Railway. He accumulated a large position, then convinced the board that the management needed to take major changes to the business. When management resisted, Ackman convinced the board to fire the CEO and senior management and replace them with management that was willing to make the changes Ackman prescribed. Needless to say, the stock increased from 46% when Ackman was buying to more than 150% when he sold his position. Ackman was right, the new management made the changes, they were successful, the business thrived and the stock went up more than 300% in two years. Forbes magazine called it one of the great corporate turnarounds in recent memory. Another big winner for Ackman was the short position he took in MBIA, a large mortgage insurer. He discovered in 2002 that MBIA had liabilities of 764 billion against only 5.5 billion in equity, a ratio of 139 to 1. This is needless to say insane and very risky. Ackman was shocked that the bond rating agency had not changed the ratings from AAA. He believed that if he simply brought this to the agency's attention, they should downgrade to debt and when that happened, the company would essentially blow up. What he did not count on was that as we found out in the housing crisis, the ratings agencies were corrupt and bought and paid by for the companies they were rating. So Ackman had to hold his short position in the company all the way from 2002 until the housing crisis finally blew up the company. A 7 year wait. He was ridiculed and pronounced a fool for almost the entire time. But he held to his conviction, he was right and he was rewarded. Big time. So now that we know something about Ackman's past performance, let's dig into the recent performance, which is not that stellar. However, it might be a possibility to invest in his funds or in one of his holdings that fit your portfolio. Let's see. Pershing's return in 2007 was a negative 4%, negative 13% in 2006 and negative 20% in 2015. The reasons behind that were one of his bad investments like valent, herbalife, short etc. And here you can see what his activist activity has been over time. He started with Wendy's by spinning out Tom Horton's, then other companies Sears, Borders, Target, PNG, Chipotle and ADP are the last two. If looking at the 2017 performance, we can see that the underperformance was broad. Across all his holdings he underperformed the SAP500. This also shows that it wasn't just herbalife or valent that hit him. The bulk of his positions were not doing good. So after the underperformance, should you invest with him or in his holdings? Well, he says yes. He believes that this is a particularly attractive time to invest in the fund because the portfolio trades at the widespread to intruistic value with a lot of catalysts that should contribute to value recognition. The shares are currently trading at 23% discount to net asset value. The idea generation engine is intact and productive. They have resolved the liabilities coming from herbalife and allergen and the management fees are reduced because of the higher watermark. So let's discuss about making that decision to invest with or like Ackman or not. What is important? A four-year track record or a 15-year track record? That's the key because if you look at the four-year track record as most investors do and most investors are selling perching square because in the last few years he did badly. But if you look at the 15-year track record he did extremely well. So that's always the key with investing, short-term versus long-term. As we have discussed in a few days ago in Graham's video we are hardwired for the short-term and we make decisions based on the short-term, not on the long-term. And that's very very costly for long-term investment success because investing is about the long-term. So I don't know whether we should write Bill Ackman off or he will re-emerge. We will see and we will follow. So please subscribe to the channel. Let's now dig into the top 10 holdings that Ackman has. So let's dig into perching holdings and see whether they are overvalued, fairly valued, undervalued and whether they are actually great businesses as Ackman describes them. The first company is automatic data processing ADP is a company that is the largest paycheck processor in the world but the competitor Paychex is really eating up the margins and market share and that's huge. ADP's market share has been falling especially in the enterprise segment of the market the biggest and most lucrative and because this segment carries the biggest margins ADP's overall operating margins have been shrinking. Last fall Ackman made a big push to gain activist control of ADP's board to try and force management to make major changes or be replaced. The effort failed and that's key but Ackman believes he still accomplished something important that he got the attention of other ADP investors and that management will now be more responsive to his ideas. Here is what Ackman says about ADP. The status quo is harming the long-term competitive position of the company. The company is losing market share and losing very material ground. The current legacy products and systems are really issues that need to be addressed. The current price to earnings ratio is 29 which is pretty high but ADP has always been considered a great business and that's why it deserves a premium to the market. So Ackman believes that margins and earnings will grow at 7% over time. Operating margins should expand from 19% to 35% and he expects net margins to improve 500 basis points. By 2022 this should lead to an earnings per share of $20 for ADP. We have seen the price now multiply that to a market premium of 25 let's say even if it drops from the current 29 and you are at the price of 500 so the potential return for Ackman is 400% here. But if Ackman's perception is not applied by the management is not seen by the management and he doesn't manage to convince the board that urgent replacements are necessary then ADP might not be a great business anymore, might be just a good business with deteriorating market share and that's not such a promising story. So here is the risk reward. What's my take on it? Definitely ADP was a great business in the past. Ackman is really right on what he's saying if they follow there might be surely positive surprises. We will have to follow what's going on and whether Ackman manages to actively change the management or the actions or directions or not will follow and see. Restaurant Brands International owns three major restaurant chains Team Horton's Burger King and Popeyes. Ackman believes there is much more scalability in their business coming from acquisitions and organic growth. For example, Team Horton's is highly successful brand in Canada but hardly known in the US. The price turning ratio is 22 and the price to free cash flow is 21 so he sees it as undervalued relative to peers which trade at the multiple of 24. Another company that Ackman has invested is Montalaz, the international manufacturer of packaged foods and beverages that include familiar brands like Oreos, Nabisco, Cadbury, Toblerone, Trident Gums and whatever. As you can see from the chart Montalaz has badly out underperformed the market over the past year and a half. It's very interesting to know that short interest has been rising in the stock lately so we'll see how that works out for Ackman. With the PE ratio of 18 times consensus 2018 earnings Ackman says we expect continued acceleration in revenue growth, double digit EPS growth and clarity on the CEO's strategies will cause Montalaz's valuation to rise to levels approaching intrinsic value. The Howard Huge Comparations is Pershing's longest standing portfolio holding. He pitched the company at the 2017 SON conference as his top idea so it is a developer specializing in fully planned mixed development communities. You can check a detailed investment case on the company on their website. Chipotle Ackman believes it's a perfect turnaround opportunity. If I would have one cent for every time I heard that story I would be rich. But let's dig into the company and see what Ackman thinks about what he's doing, he managed to do something and whether that worked. Let's see. So Ackman really helped the management to bring the new CEO Brian Nicoll. Nicoll is the former CEO of Hume's Taco Bell. Ackman believes Nicoll can bring superior knowledge of system efficiency to Chipotle. However, critics believe this is a classic mismatch. A CEO from a company that serves extremely unhealthy food focusing on volume over quality being brought in to run a company whose brand was built on healthy fresh ingredients. The first big idea for the turnaround was bringing a new kezzo deep to the menu. Historically the company said it would never sell cheese deep but now the CEO thought it could be a huge winner. Chipotle spent heavily on promoting this as a big focal point. Ackman personally promoted this on CNBC. Unfortunately it seems the dining public and media did not agree. So this is a case of inept management and poor execution. First they obviously didn't properly test the product before launch, then they made matters worse with a pre-launch media strategy that set expectations in the wrong place. Which led to this embarrassing headline. Chipotle Ackman admits that its main selling point is the kiss of debt for its kezzo. And this became, as this headline put it, a master lesson in how expectations cause failure. With the end result that consumer sentiment remains tepid with the chain noting that 15% of its order include kezzo, a paltry portion in comparison to the 40% that include guacamole. Another position is Fanny May and Freddie Mac. Here the bet lies on the housing reform where Ackman believes the prices will be multiples of the current if that goes true. The investment is a bet and those are usually asymmetrically priced. There is a potential for zero and there is a potential for a much, much higher value. The stock price is also very volatile. Platform specialty product corporation Ackman states that the fair value for the company is 19 because the company generated 7% organic EBITDA growth driven by 4% organic revenue growth and cost savings. The company also refinanced 4 billion of debt significantly lowering interest expense. In August 2017, the company announced that it intends to separate its ag and performance solution business into two publicly traded companies by the second half of this year in order to increase long-term value. So a spin-off is a potential catalyst for the unlock of the value and we can see that the unlocking of the value would increase the price by 100%. We'll follow the company and see what happens. Ackman describes Nike as a high quality business that we expect can compound long-term earnings at a high rate due to strong revenue growth and margin expansions. I must agree with Ackman and so the only thing when investing in Nike is the price and that price exploded I think 30-40% since I made a video about Nike in August 2017 and since Ackman invested heavily in Nike he made about 100 million on that investment and closed the position because he sees better opportunities elsewhere now that Nike is 30% higher. So always check okay great business yes but always check the price and remember just six months ago Nike was under great threats from competitors and now everybody seems to forget about that. It will re-happen again and then you will have another opportunity to buy at the deep don't worry. So Herbalife. Five years ago Ackman began building a short position then publicly showed his presentation and he thought the stock will drop like a rock and go bankrupt. It didn't happen so he was in a fight for five years also with Carl Eichen and he believes that he believes that he was correct in his call but underestimated Herbalife's ability to access that capital and use financial engineering which coupled with Icons share purchases to materially reduce the company's free float has driven share appreciation. So this was a fascinating battle there are a lot of investment lessons there so it deserves a special video which I will make in the future so please subscribe to get noticed when that happens. Ackman exited SAP 500 which he sees as another great business but he was unable to establish a full position due to the stock price appreciation. He also exited his investments in air products, hilton, nomad foods and additional undisclosed positions so we still don't know which one is that and valiant during the year. I have three big takeaways from this story. The first one is Bill Ackman can't stay in cash with a 3% management fee so he has to invest he has to be fully invested no matter the risk reward so he might pick riskier investments where there are no opportunities and thus hurt his long-term performance. So looking at his fees nobody can stay in cash with a 3% management fee why would you pay somebody 3% to do nothing? This is in contrast with what Buffett does because Buffett has huge piles of cash now and he doesn't charge a management fee he used to charge just the performance fee and a 0% management fee when he was managing other people's money in funds in his partnerships. The performance fee was 50% but that's why the management fee was 0 and he could sit in cash if he thought that was the best thing to do. Secondly the most significant risk when investing with Ackman or in his businesses is his activist success so he goes in the company he wants to change the management or make them do certain actions convince the board to change the management or so if he fails to do that then the value won't be unlocked and that's the risk of investing with activist investors. Thirdly we have seen Ackman's poor performance over the short term but huge outperformance over the long term and this is the key with investing. Good active management will always outperform the market however I emphasize good active management because this is what Buffett also says that poor and mediocre managers underperform the market so the key with investing and the key of this channel is to make you or to give you as much knowledge so that you become a good investor and when you are a good investor and a long-term investor you can outperform the market by investing in great businesses over time. So that's the message for today hope you enjoyed the video consider subscribing if you like the content and the mindset feel free to ask your questions in the comments I love those and I'll see you in the next video.