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Want to Be a Billionaire? Don't Follow the Herd

October 26, 2011, 5:25 PM

What's the Big Idea?

William Ackman isn't known for following the herd. The herd tends to want to follow him, and for good reason. A "Wall Street superstar," Ackman runs billion-dollar funds as CEO of Pershing Square Capital Management, one of the most successful hedge funds in the country.

In Ackman's Floating University lecture, entitled "If You're So Smart, Why Aren't You Rich?" Ackman argues that to be a successful investor, "you have to be able to avoid some natural human tendencies to follow the herd." And yet, that's easier said than done. According to Ackman, you need to have quite a stomach "to withstand the volatility of the stock markets."

Watch an excerpt from Ackman's lecture here:

What's the Significance?

Whatever your goals are in life, a smart investment strategy will help you to achieve them. We all want to be financially stable and enjoy a well-funded retirement, but we don't want to squander our hard-earned money on poor investments.

When the stock market is going down, Ackman explains, "every day your natural tendency is to want to sell. When the stock market is actually going up, every day your natural tendency is to want to buy, so in bubbles you probably should be a seller.  In busts you should probably be a buyer, and you have to have that kind of a discipline."

Discipline means thinking long-term. According to Ackman, the stock market is a "voting machine," and an extremely fickle one at that, which is subject to  "the whims of people in the short term." In today's global economy, all sorts of events may occur that scare investors, but as Ackman points out, stock prices are affected by many things "that really have nothing to do with the value of certain companies that you’re investing in."

So what is a smart investor to do? For one thing, Ackman says you need to be "financially comfortable." That means carrying a manageable amount of debt. You also want to have enough money in the bank to be comfortable with the amount of risk you're taking on the market. Most importantly, Ackman advises that the companies you invest in ought to be the kinds of businesses you really understand. Then you can start to think, as sophisticated investors do, about how much money a company will generate over a long period of time.

Follow Daniel Honan on Twitter @DanielHonan


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