With his billion dollar battle royale against Herbalife entering its fourth year, Bill Ackman is starting to sound a bit punchy. Last week, during an Interview for Bloomberg TV, he likened short-selling to “brain damage” and declared “there are easier ways to make money.”
All I can say is: I feel your pain, Bill!
I don’t bet against powerful corporations with billions in market cap. By and large, the companies I short are beaten down and headed for bankruptcy. But the stocks of sickly firms can stay just as stubbornly high as Herbalife’s has, and they often spike higher for brief spurts even as their underlying businesses erode. Living through these rallies might not cause brain damage, but it’s definitely a major headache.
The best performing short in my fund’s portfolio these days has taken two maddening, migraine-inducing years to fall to its present, all-time low. (I wrote about why naming this holding would hurt my returns two months ago.) Last week, the company released another terrible earnings report and lost half its value in a single day. I expect it to hit zero sooner than later. This business has clearly been doomed for a long time–it relies on an obsolete product for the vast majority of its revenues–and yet, until recently, there were still plenty of buyers willing to take a chance on it.
Ackman has taken a lot of heat for shorting Herbalife. His motives have been questioned. That is deeply unfair, in my opinion. The old saying “nobody likes a bear” still holds true–and too many people simply don’t understand how short-selling increases the efficiency of our markets. I don’t know for sure if Herbalife is a pyramid scheme and a “criminal enterprise,” as Ackman has alleged, but I admire the transparency and intellectual conviction he has displayed in laying out his case against the company.* Unfortunately, those are rare attributes in our business. Most investors, even many professional fund managers, fail because they don’t bring real intellectual rigor to their work. Instead, they overtrade, chasing market moves and quick profits. This myopic, hyperactive approach is not only tax inefficient (especially in high tax hellholes like California), it makes them susceptible to asset bubbles and wishful thinking.
Successful, as opposed to stubborn, intellectual conviction is a byproduct of intellectual curiosity. That means reading, thinking, and reflecting throughout a lifetime–not running four minute miles or being a winning lacrosse or hockey player. Those athletic activities are structured, repetitive, and unthinking–the exact qualities that, more often than not, lead to investment failure instead of investment success.
*Postscript: To me, the sketchiest part of Herbalife’s business isn’t its multilevel marketing, but the dubious health claims it makes about its products. Twenty years ago, I visited the company’s headquarters in LA. I asked its COO to name the ingredients in its supplements and explain how they worked. I thought he was going to throw me out of his office. As I write in my book, he told me if I wanted proof that Herbalife’s products increased longevity, all I had to do was look at how healthy and vital its founder was. The COO was right. Herbalife’s founder was a fit looking guy. Unfortunately, he died a few years after that meeting. He was 44-years-old.
Despite my doubts about Herbalife’s practices, and the efficacy of its products, I could never bring myself to short its stock. Betting against a large company with lots of cash in the bank and lots of ill-educated, often poor, customers around the world didn’t seem like a productive use of my investors’ capital–or my brain cells.
[note: this post originally appeared on my Yahoo! Finance contributor page]