A Great Company Is One You Could Ignore for 20 Years
The test is shaping the long term bets made by part of Norway's fund.
In Good Company with Nicolai Tangen · Friday Wrap-Up: Inside Active Strategies and Learning from Bill AckmanDaniel Balthasar, a co-chief investment officer for active strategies at Norway's sovereign wealth fund, described a test for a great company: you could own it for 20 years without worrying and still expect a good return.
Asked what makes a company good or great, investor Bill Ackman gave that answer. There are not too many such companies. They have a strong moat around the business, what investors generally mean by a lasting edge, such as a brand customers stick with. They generate very stable and very predictable cash flows over the long term.
Balthasar learned the difference between a cheap stock and a great business the hard way. He had bought shares in Air Products, which he saw as operating in a healthy industry with good long-term prospects. The stock looked cheap, so he saw an opportunity. It kept falling through repeated profit warnings until he gave up. Ackman then bought in, engaged with the board and made some changes, and doubled his money in a relatively short time.
In his account, he had waited for improvement, while Ackman stepped in to bring it about.
The comparison reminded him of Chris Horn, another long-term investor he counts with Ackman among the best at investing for the long term. Inside his operation, the department closest to that style is called Active Equity, built around a long time horizon. His team tries to implement this approach as well. Separately, the team invests to benefit people not yet born.
Questions people ask
What does a 'moat' mean for a company?
A moat is any durable advantage that stops competitors from stealing a company's profits. It can be a strong brand that customers trust, patents or licenses, high costs to switch to a rival, or a business that gets more useful as more people use it.
What is Norway's sovereign wealth fund?
Norway saves its oil and gas revenues in the world's largest sovereign wealth fund, now worth more than $1 trillion, to benefit future generations. Most of its money tracks global markets, but a smaller active team tries to beat the market by picking companies and owning them for a long time.
Does he really mean you cannot sell for 20 years?
Twenty years is shorthand, not a rule that you must lock money away. Ackman means the business should be so predictable that short term market swings do not matter. If the company needs constant monitoring or quick selling, it fails his definition of great.