Bill Ackman's Biggest Warnings: Leverage, Margin Calls, and Zero-Day Options

Nicole Lapin (0:00)

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Nicole Lapin (0:41)

So if you haven't heard by now, I recently sat down with Bill Ackman, the one, the only, and you know what, I don't have a vision board for Money Rehab per se, but if I did, his face would be right there in the middle. I have wanted him on the show for years, and he finally came on. If his name is new to you, by the way, here's the cliff notes. He runs Pershing Square. He's one of the most watched hedge fund managers alive, and in some years, he has posted returns north of 50%.

He also saw the 2008 financial crisis coming years before Wall Street did, and there was a big ROI for being right. It is a really juicy good story. So I'm not going to tell you the full thing, but I'll give you the short version. Back in 2002, Bill zeroed in on a company called MBIA.

If you've never heard of it, that's kind of the point. MBIA was a bond issuer, one of those really boring, behind-the-scenes companies. The problem with MBIA was that it slapped its AAA rating on other people's debt to make it look safer. Bill looked under the hood and decided that AAA rating was basically fantasy. So he did two things. First, he shorted the stock, and then he bought credit default swaps. Think of credit default swaps like insurance that pays out if the company blows up. Then he published a tear down called Is MBIA AAA, laying out exactly why he thought the whole thing was a house of cards. It got really juicy in financial circles. At the time, though, no one took it seriously. MBIA's stock actually went up the day his report dropped, and then the SEC opened an investigation on him, not the company.

All right, fast forward to 2008, and Bill was right. MBIA cratered, and Bill finished closing out the trade in 2009 for about $1.4 billion on a bet that cost him around $64 million, I will say, to put up. All of this to say, Bill has the kind of track record on Wall Street that make people lean in when he talks. When he came on the show, he was super generous with his time. He gave me an hour, and I'm linking the entire episode in the show notes if you haven't seen it yet. But today, I'm gonna tell you the things that he said that I am honestly still thinking about and why it matters for you. Here's where I think we should start. PE stands for Price to Earnings Ratio. It's the price of a company divided by the profit the company earns per share. So a PE of 20 means you're paying $20 for every $1 of annual earnings. I've done a few episodes all about this, so I'll link those in the show notes as well. But Bill makes a different point. He says flip the PE ratio upside down instead. What percentage are you earning here? To use the same example, $1 of earnings is 5% of your $20 investment. That's your earnings yield. Basically the interest rate the business is paying you right now on your money. That's where the comparison to a bond comes in. And no, investments are not bonds. They are not guaranteed in the same way that bonds should be. But the comparison really underpins the Ackman philosophy. He wants businesses where that 5% yield gets bigger every single year, run by companies so dominant that nobody can knock them off. And he has a name for them. Durable Compounders. These are the boring but unkillable businesses, the Amazons, the Metas, the Microsofts, that don't need a hot new product cycle to keep printing money. And compound is the keyword here because compounding is the closest thing to magic that finance has. This is why the most powerful thing that an investor owns isn't capital, it's time. And Bill said it himself. And he also gave some cautionary tales, which really stuck with me because honestly, I was a bit surprised. So leverage is rich person speak for debt and it cuts both ways. It can multiply your wins and multiply your losses. Bill specifically warning about borrowing against stocks that you already own. And this really surprised me because it goes against the buy, borrow, die strategy that has been associated with billionaires like Jeff Bezos. The goal of buy, borrow, die is exactly that. You basically grow your wealth while sidestepping taxes for forever.