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As the CEO of Pershing Square Capital Management, the hedge fund he founded, he oversees $19 billion in assets.
But before he became one of the elite, he learned the basics of investing in his early 20s.
He gave a Big Think presentation in late 2012 aimed at young professionals just starting out, as well as those who are more experienced but lack a financial background.
Ackman takes viewers through the founding of a lemonade stand to teach the basics, explaining how investors pay for equity, a word interchangeable with "stock." In the example, the owner starts with $750, with $250 of that coming from a loan.
Here's an income statement tracking the healthy growth of the lemonade business. By year five, the company has seven stands, supported by an increased margin on products, and makes a profit of $2,311 (earnings before tax).
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A business owner can take money from a lender, who profits from interest on his loan, or an equity investor, who buys shares in the company. An equity investor stands to make much more money than a lender due to the level of risk involved — if the company doesn't make money, neither does the investor.
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For instance, an investor makes a small amount of interest from government bonds because the risk is low — the US government is more secure than any corporation. An investor makes a large amount of interest from loans to business owners because the risk is high.
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Equity is a "residual claim" because debt must be paid off before investors can profit. Shareholders may make money from company profits called "dividends."
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When a company has grown significantly, its owner can sell it for a typically large sum of money, in exchange for control of the business and a shot at future profits.
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Instead of growing a business further, an owner can pay himself dividends to put cash in his pocket rather than in the company.
At a moment of strong growth, the business owner can either share profits with a private investor or go public.
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When a business files for an initial public offering (IPO), its owners offer a portion of it to the general public, which raises cash, and the company gets listed on an exchange. It requires being transparent and, in the US, reporting to the Securities and Exchange Commission.
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Ackman's nine tips for successful investing are about minimizing risk.
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Similarly, he recommends that you only begin investing when you pay off debt and set aside an emergency fund.
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And when you do become an investor, Ackman says success requires developing a resistance to the human tendency of following the herd's reactions to short-term market fluctuations.
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If you don't have the time or desire to invest in individual stocks, you can invest in mutual funds, large pools of funds managed by a professional investor.
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You can also outsource your investing to a money manager.
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Ackman says his presentation is just a brief introduction to the world of finance. For a next step, he recommends Benjamin Graham's classic "The Intelligent Investor"), which Ackman says changed his life dramatically after he read it in his early 20s.
YouTube/Big Think
Check out the full video below:
Richard Feloni
Correspondent, Strategy
Richard wrote for Business Insider's Strategy vertical, where he oversaw the Better Capitalism series. He was also the host of Business Insider's podcast "This Is Success."At Business Insider, he investigated Dan Gilbert's multibillion-dollar project in Detroit, analyzed the highly unusual management cultures at Bridgewater and Zappos, and examined Wall Street's love of Transcendental Meditation.In 2016 he helped launch Business Insider Italia in Milan.He joined Business Insider in 2013, and is an alumnus of Boston College and the Columbia University Graduate School of Journalism. He left the company in 2020 to become editorial director at Just Capital.
Introduction: My name is Saturnina Altenwerth DVM, I am a witty, perfect, combative, beautiful, determined, fancy, determined person who loves writing and wants to share my knowledge and understanding with you.
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