I have been watching with some interest the scrag fight that surrounds Herbalife (HLF). Before going into the details of this brawl it is instructive to look at a chart of HLF and pick which direction you would have preferred to have been facing for the past year.
On one side of the HLF dust up you have William Ackman a very successful hedge fund manager who oversees about $12 billion (and falling). Arrayed on the other side have been the likes of Dan Loeb who is hedge fund manager best known for his letter writing. Carl Icahn an uber wealthy old white bloke and George Soros a well known uber wealthy old white bloke.
This clash of the titans over HLF has arisen because Ackman is of the belief that HLF is a pyramid selling i scheme and will eventually fall over hence, his short position. On the other side of the ledger we have everyone else and the market who don’t seem to share the same conviction. Ackman originally wagered $1 billion that HLF would collapse and is apparently sitting on a paper loss of around $500 million. As a result the position -has been pared back to $500 million with an accessory short position via put options.
As can be seen from the above chart of HLF it has been going up for a year, this raises the question of when do you admit that you are wrong? Granted, someone with $12 billion under management probably has a higher pain threshold than most. However, at some point in time you reach your threshold for pain or rather your backers reach their threshold.
My reading of this little dust up is that it seems to have become a personal issue where Ackman is obviously convinced that his belief is correct and he has defended it vigorously in public. Those on the other side of the ledger have done likewise – as such we seem to have a pissing contest involving the extremely wealthy with each side emotionally invested in the outcome. Ackman has even promised to give whatever profit he generates from the trade to charity. This has been widely reported as an attempt to take the monetary incentive out of the clash but in my eyes it may also be an attempt to appear more righteous than the other side.
The interesting thing about this encounter is that all the emotional foibles that smaller traders demonstrate are being played out on a grand scale. it seems that extreme wealth does not inoculate you against hubris.
As Gary Schilling the investor and commentator said – Markets can remain irrational a lot longer than you and I can remain solvent.