Whatever the Truth About Herbalife, Bill Ackman Deserves Our Praise
As is well known now, hedge fund manager Bill Ackman's attempt to expose Herbalife as a pyramid scheme last week came up short. Though he billed his presentation on the nutritional supplements provider as a "death blow" ahead of time, markets disagreed as evidenced by a 25% increase in the value of Herbalife's shares. The New York Post's Sunday edition listed Ackman as one of "This Week's Losers."
"Underpromise and Overdeliver" is a popular phrase in the financial sector, and Ackman mistakenly reversed 'Over and 'Under.' Despite this, his heroic actions vis-à-vis Herbalife very much deserve our praise. Information is what ultimately powers economies forward, and Ackman's so-far unsuccessful attempt to shed bright light on a business concept he deems wanting will help the economy regardless of whether he's right or wrong.
So far the markets say he's wrong, but in his defense, there was a time in the 1980s when Barry Minkow's ZZZZ Best carpet cleaning company was synonymous with booming American entrepreneurialism, and Minkow seen as somewhat of a visionary. Soon enough, however, the former Nasdaq high flyer was revealed as an empty shell of nothingness, and Minkow landed in jail.
Applied to Herbalife, Ackman's information about the company tells him it's a fraud; one defined by "phantom, fictitious customers" a la ZZZZ Best. Who knows if Ackman's correct, but in order to attain what is said to be a billion-dollar short position on Herbalife, Ackman's Pershing Square Capital had to presumably borrow shares of Herbalife, and then to be "short" those same shares, sell them to buyers with an entirely different view of the company's prospects.
It's possible one of those buyers was legendary investor Carl Icahn. Indeed, Icahn has a 17% Herbalife stake, and his position reflects a view of the nutrition company very much at odds with Ackman's. That these two prominent investors have a different viewpoint tells us many things, but applied to the tendency among pundits to talk about Wall Street (example: a recent column on a popular blog, "How to Profit From Stocks Wall Street Hates") in a monolithic sense, the dueling perceptions of Ackman and Icahn reveal the world of finance as anything but one populated by sheep. You wouldn't know it from reading most stock-market commentary, but for a wild-eyed bull to infuse the market with his optimism, a skeptical seller must similarly be allowed to express his bearishness. "Wall Street" trading outfits are where bulls and bears gather to transact.
Ackman hopes to profit from revealing Herbalife as a paper tiger, while Icahn would like to gain by virtue of proving the opposite. The economy is lifted by this battle of differing viewpoints in that price signals provide the broad marketplace with precious information about where capital can achieve its highest return, and also where it should flee from. If Ackman is correct, his billions earned will render the markets infinitely wiser as to how companies perhaps hide their pyramid-like structures, and then the economy will get a boost for many billions of dollars migrating away from concepts that could bring destruction of precious capital.
Assuming Icahn is right, and so far the marketplace says he is, his billions earned will redound to economic growth for similarly providing investors with a greater understanding of where investment is needed. Ackman and Icahn take the big risks, risks that could potentially lose them billions, and for going the intrepid route with capital entrusted to them, they're compensated handsomely when proven correct. The rest of us gain precisely because their willingness to put billions at risk behind their educated guesses means that we can all invest more knowledgeably, and at reduced risk based on the price signals their capital commitments provide.
It's popular among media and politicians to decry the actions of investors as little more than "moving money around" while "not producing anything real," but a rational understanding of basic economics exposes this adolescent form of thinking as rather debased. Per George Gilder's masterful thinking, economic progress is about the "leap," it's about quality information reaching market prices so that investors know where capital is needed, so when people like Ackman and Icahn spar over the prospects of a company in the name of profits, their quest is bringing the economy precious information that will foster greater growth over time.
Taking Gilder's logic further, as he pointed out in Knowledge and Power, for regulators to ban "insider trading" is for them to blind the markets. As it is, Ackman and Icahn's sleuthing about companies represents healthy economic activity for bringing more information - and yes, opinions - into the price of shares. And with the latter in mind, rational people who prefer growth and capital appreciation over stagnancy and capital destruction should be calling loudly for the abolishing of all laws meant to restrict "insider trading."
Indeed, when non-public information reaches the market, whether it's good, bad or neutral, we all gain for price signals reflecting all available information. Not only does such a scenario boost the economy, but it quite clearly aids the small investor who is able to enter or exit a market that for being fully informed, is correctly priced.
Sadly, there's no evidence that vague laws which blind the markets are set to be overturned anytime soon. This is unfortunate on its face, but it speaks yet again to the praise we should shower on people like Ackman and Icahn. Their quest for trading profits means they're enhancing overall market knowledge, and for doing so, their actions ensure more economic growth. Bill Ackman is a hero regardless of whether he wins or loses.