Key Takeaways
- • Bill Ackman prioritizes strong and sustainable earnings-per-share (EPS) growth over valuation multiples as the primary driver of long-term returns, challenging traditional value investing metrics that emphasize low price-to-earnings ratios.
- • Many of Pershing Square's current top holdings trade at valuations near or above the S&P 500 average, demonstrating Ackman's willingness to pay market prices for companies with superior earnings growth trajectories.
- • Ackman's thesis applies Ben Graham's principle that "in the short run the stock market is a voting machine; in the long run, it's a weighing machine"—illustrating how short-term multiple compression can be overcome by sustained EPS growth over extended holding periods.
- • Mathematical modeling presented by Ackman demonstrates that even a 10% compression in earnings multiples can be neutralized by consistent quarterly EPS growth rates of 5% (20% annualized), with long-term returns ultimately driven by earnings expansion rather than valuation expansion.
- • The investment philosophy reflects alignment with Warren Buffett's approach, broadening the investable universe beyond traditionally defined "value stocks" while maintaining the fundamental principle of buying businesses with durable competitive advantages.
Summary
Bill Ackman has articulated a revised framework for long-term equity investing that de-emphasizes valuation multiples in favor of sustainable earnings growth, according to his recent shareholder letter. As head of Pershing Square Capital Management, Ackman has repositioned the fund's portfolio toward companies trading at valuations proximate to or exceeding the S&P 500 average, a notable departure from traditional value investing playbooks that prioritize deeply discounted entry points.
The core thesis rests on a fundamental principle inherited from Ben Graham's value investing canon: while stock prices reflect short-term "voting" behavior from market participants, long-term returns are determined by underlying earnings power. Ackman illustrates this dynamic with concrete mathematics: a company growing earnings 5% quarterly (equivalent to 20% annualized growth) could experience a 10% compression in its earnings multiple while still delivering a net positive return of 5.5% to shareholders. This framework repositions earnings growth as the dominant variable in multi-year investment returns, with valuation multiples serving as a secondary consideration rather than the primary investment criteria.
The implications for portfolio construction are substantial. Rather than restricting opportunities to bargain-priced equities, Ackman's approach expands the investment universe to include companies trading at fair or even premium valuations, provided they demonstrate durable competitive advantages and consistent earnings expansion. This methodology maintains philosophical continuity with Warren Buffett's evolution toward quality-driven investing while operationalizing the principle that long-term investors should prioritize businesses capable of compounding earnings growth over extended periods.
Ackman's reconceptualization does not dismiss valuation as irrelevant; rather, it subordinates valuation analysis within a hierarchy where earnings power and competitive positioning take precedence. The approach aligns with his stated investment philosophy that investors should focus on businesses "theoretically owned forever," suggesting an orientation toward compound growth and durable market positions rather than mean-reversion opportunities dependent on multiple expansion or market sentiment shifts.
The core thesis rests on a fundamental principle inherited from Ben Graham's value investing canon: while stock prices reflect short-term "voting" behavior from market participants, long-term returns are determined by underlying earnings power. Ackman illustrates this dynamic with concrete mathematics: a company growing earnings 5% quarterly (equivalent to 20% annualized growth) could experience a 10% compression in its earnings multiple while still delivering a net positive return of 5.5% to shareholders. This framework repositions earnings growth as the dominant variable in multi-year investment returns, with valuation multiples serving as a secondary consideration rather than the primary investment criteria.
The implications for portfolio construction are substantial. Rather than restricting opportunities to bargain-priced equities, Ackman's approach expands the investment universe to include companies trading at fair or even premium valuations, provided they demonstrate durable competitive advantages and consistent earnings expansion. This methodology maintains philosophical continuity with Warren Buffett's evolution toward quality-driven investing while operationalizing the principle that long-term investors should prioritize businesses capable of compounding earnings growth over extended periods.
Ackman's reconceptualization does not dismiss valuation as irrelevant; rather, it subordinates valuation analysis within a hierarchy where earnings power and competitive positioning take precedence. The approach aligns with his stated investment philosophy that investors should focus on businesses "theoretically owned forever," suggesting an orientation toward compound growth and durable market positions rather than mean-reversion opportunities dependent on multiple expansion or market sentiment shifts.
Go deeper than the headline
Research every firm in this story, track the ones that matter and get the daily briefing — free for 7 days.