Bill Ackman’s and Howard Marks’ New Favorite Investment Author

One might think that Bill Ackman doesn’t need anyone to teach him investing–let alone a college student. But Bill Ackman is learning investing from a college student. 

Hedge fund mogul Ackman has reportedly been reading books written by Danial Jiwani, a recent graduate of the University of Illinois and the author of Take Stock In This and Buffett’s 2-Step Stock Market Strategy. 

“Bill Ackman emailed me saying that he has read my books,” Jiwani said. I’ve effectively taught him how to invest money.”

Jiwani’s Amazon page lists the following endorsement from Ackman: “[A great book]. Please do [send me a copy].” It also says that Howard Marks thought that Jiwani’s books were “very interesting.”

Ackman isn’t the only one who likes Jiwani’s books. Other readers called Take Stock In This “the best book on investing since The Intelligent Investor,” according to the Amazon landing page.

Built on the cases studies of a handful of successful investors and Jiwani’s personal investment experiences, the book offers best-practices for picking stocks like great investors such as Warren Buffett. The book breaks down investing into a set of 12 different principles to help readers spot undervalued investments and learn to trade stocks.

“This book will not make you rich overnight, nor will it tell you which stocks to buy” Jiwani said. “What this book can do is give you a set of logical principle for helping you decide which stocks are the right investment for yourself.”

Jiwani said that the book is for one type of individual: long-term investors. “Day traders should not read my book [Take Stock In This], Jiwani said. “I repeat, day traders should not buy my book. Only people who admire Warren Buffett’s investment style should read this book.” Take Stock In This promotes a four step process for picking stocks: “buy the right company…at the right price…and maximzie upside…while managing risk.”

The 4-Step “Take Stock In This” Strategy To Picking Stocks

Ackman has an enormous net worth of roughly $9.4 billion, but that doesn’t mean the secret behind his success is that complicated. Take Stock In This breaks down his investment success into just 4 simple steps:

• Right Company: Find the right company to invest in–one that’s so good that no one else can compete against

• Right Price: Invest in the right company when it’s cheap, but at the same time, be willing to pay a premium for quality 

• Maximize upside: Pick companies that have a long runway for growth and can that have the potential to become 10-baggers

• Manage risk: Learn to manage the risk and never take on risks where that you aren’t willing to bear the consequences of

How To Find The Right Company

“The first step of investing is being picky about your investments,” Jiwani says. Only 2-4% of companies in the S&P 500 compound at 20% returns per year, so you can’t pull the trigger unless you’re certain that a company is in the top 2-4% of the market.”

An easy way to find the right company is by investing in “companies that are so good that no one else can compete against,” according to Jiwani. “That’s the gold standard for investing. If you find a company that meets that criteria, you’ll be golden.”

How To Know If A Stock Trades at the Right Price

There are three steps for knowing if a company trades at an attractive price, according to Take Stock In This:

1. Look up the company’s market capitalization, or “purchase price” 

2. Research how much free cash flow or “profit” the company earns

3. Ask yourself, “does the company earn lots of free cash flow relative to its market capitalization?” 

If the company earns lots of free cash flow relative to its purchase price, it’s probably an interesting investment opportunity. If it doesn’t, then it isn’t an undervalued company.

How To Maximize Upside

The third step of the Take Stock In This strategy is to maximize upside potential. There are a couple strategies that investors can follow to maximize their upside potential. 

One way is by investing in industries that are growing. There are two ways for a company to grow: market share growth and industry growth. Companies in the S&P 500 are large dominant companies, so they can’t grow sales further through market share growth. Thus, they are left with one growth lever: industry growth. If you want to find a company that has lots of upside, you’ll need to ensure its industry is growing.

Industry growth is the reason Amazon became a 10-bagger over the past decade. Amazon didn’t grow it market share 10-times over the past two decade. Rather, it benefited from the e-commerce industry growing. So invest in industries that are growing.

A second way is by investing in spawners. These are companies that can found new businesses in emerging markets. These companies are able to sustain above average growth rates since they are able to endlessly expand their addressable market.

Google is a great example of a spawner. It’s been able to grow so much over the past decade because it continuously enters new business. In 2005, Google entered the smartphone market with the acquisition of Android. In 2006, Google entered the entertainment industry with the acquisition of YouTube. In 2008, Google entered the cloud computing market with the launch of Google Cloud Platform.

How to Manage Risk

Warren Buffett’s attitude toward risk is a little interesting. 

Many people hold the belief that Warren Buffett hates taking risk.

But here’s the interesting thing. Warren Buffett is actually a risk taker. At least according to his annual report, Buffett says that he is “quite willing to accept huge risks.” But there’s a catch. He’s only willing to take these huge risks under one circumstance: no matter what happens in his stock portfolio or the insurance business, Berkshire Hathaway won’t go bankrupt:

“We are quite willing to accept huge risks…[But] whatever occurs, though, Berkshire will have the net worth, the earnings streams, and the liquidity to handle [any] problem with ease. Any other approach is dangerous.” 

That’s the sort of attitude you want to have toward taking risks as well.

It’s okay to take risks. 

But you never want to take any risks that could potentially cause you to go bankrupt. You never want to be exposed to low probability risks, or high severity risks that can put your portfolio out of business.