Here’s a story about two hedge funders who hate each other. It’s also a story about whether or not a multi-billion-dollar nutrient company is actually a pyramid scheme.
Back in December, activist investor Bill Ackman gave the Powerpoint presentation to end all Powerpoint presentations — it was 342 slides long — about why he thought Herbalife, a company better known for weight-loss shakes and other assorted non-goodies, was doomed. The 1-slide version of his argument is that its web of distributors make more from recruiting new distributors than they do from actually selling products, making it less an Amway-style legal pyramid scheme, and more an illegal one. Ackman went short the stock — in other words, he bet its price would go down by selling high and trying to buy low — and very publicly said he expected it to go to zero.
Betting against a stock is a bit more involved than betting on it, because you can’t exactly bet against something you own. Short-sellers have to first borrow the stock, then sell it, and hope to buy it back later at a lower price before returning it to the original owner. It’s a risky game — the stock can only go down so far, but it can go up an unlimited amount — and Ackman seems to be playing a particularly risky version of it. He’s short roughly 20 percent of the outstanding shares, which means he’ll have a lot of stock to buy back that he might have trouble finding if, say, the price goes up and he tries to cut his losses.
That brings us to the billionaire battle. Activist investors aren’t always the best of friends, and that’s certainly the case when it comes to Carl Icahn and Bill Ackman. The two of them fought a seven-year legal battle over whether Icahn owed Ackman $4.5 million, a relative pittance in the rarefied air of Hedgistan, from the 2004 merger-sale of a real estate company — a battle that Ackman ultimately won. That bad blood has carried over to Herbalife. Icahn thinks Ackman is just using his big media profile to make an easy buck manipulating the stock down, and that he’s doing so in a way that could leave him very exposed. If other investors buy the stock for the express purpose of hurting his trade, Ackman might have to cover his large short position, which would send the stock racing up in a so-called “short-squeeze”. Now, it’s not clear Icahn is doing this … but it certainly seems like a good bet.
Another good bet is that watching the two of them got at it on live television would be magical. It was.CNBC had the pair on, as you can see in the video below, and Icahn did not disappoint. This was tough, but here are his seven craziest quotes.
“[Ackman's] like the crybaby in the schoolyard. You know, I went to a tough school in Queens, and they used to beat up the little Jewish boys. And [Ackman] was like one of these little Jewish boys, crying that the world was taking advantage of him.”
“I want to say what I want to say, and I’m not going to talk about my Herbalife position because you want to bully me … So let’s start with what I want to say. Ackman is a liar.”
Discourse even more elevated.
“He wanted to have dinner once with me, and I had dinner with me. And I’ll tell you, I laughed. I couldn’t figure out if he was the sanctimonious guy I ever met in my life or the most arrogant.”
Do these have to be mutually exclusive?
“I wouldn’t have an investment with Ackman if you paid me to do it; if Ackman paid me to do it …. As far as I’m concerned, the guy is a major loser. You know, Disraeli once said, Disraeli once said about somebody that spoke in the Parliament, a young guy that spoke in the Parliament, ‘Young man, I’d be happy if I could be as sure about one thing in my life as you are sure of everything.'”
“Ackman did it, look at the timing. Ackman did it with a week to go, or a month to go before he had to show his results. His results were bad for 2012, and this got his results up double, so he could get fees for himself. And then he talks about [giving these profits to] charity. That’s complete bulls***.”
Oops, live TV!
“I never said that I want to be friends with you Bill. I wouldn’t be friends with you. And you said to me, you’d like to be friends so we could invest together …. I wouldn’t invest with you if you were the last man on earth.”
“I appreciate, Bill, that you called me a great investor. I thank you for that. Unfortunately, I can’t say the same for you.”
Give this man a mic to drop.
Okay, that was fun, but it’s time for a serious point. Markets are mostly efficient, except when they’re not. As Keynes, who knew a thing or two about picking stocks, pointed out, the market can be a bit like anewspaper beauty contest where you pick the six prettiest faces from a list of 100, and the winner is the one whose picks come closest to the most popular of the combined picks. But this means your optimal strategy is picking the faces you think other people think are the prettiest, not the ones you think are the prettiest. In other words, you’re betting based on the crowd, and not the “fundamentals”. It’s the same with stocks, even before we consider hedge fund billionaires using a nutrient supplement company’s stock to settle their grudge match.
Or, as Disraeli might have said, there are lies, damn lies, and efficient markets.