A Defense of Bill Ackman
A hedge fund manager takes a billion dollar short position in a company and then does everything within his power to ensure that the company fails:
Corporate money is forever finding new ways to influence government. But Mr. Ackman’s campaign to take this fight “to the end of the earth,” using every weapon in the arsenal that Washington offers in an attempt to bring ruin to one company, is a novel one, fusing the financial markets with the political system.
How bad is this?
I don’t think this is as bad as the New York Times would like us to believe. It might even be good.
The commonly sold narrative of short sellers is that they identify nice but vulnerable companies that are literally minding their own businesses and push their stock lower through unfounded accusations.
The means employed by Bill Ackman certainly cause uncomfortable squirming; the article describes how he appears to have gotten a number of organizations and a congresswoman to speak out against Herballife, the company he targets (which sells vitamins and such through distributors who have to buy in). These facts, however, have to be viewed in light of two other unacknowledged facts.
Unacknowledged fact #1: The actions of long investors is often uncontested, highly promotional, and doesn’t get criticized by the New York Times.
When an investor is long a stock (the opposite of short), he shows up CNBC and waxes on about the company’s waxing financial future. Business journalists don’t do independent financial research. Instead, they report what others have to say. Most of the time, this means that the company’s narrative about how it is doing great goes unchallenged and is further reinforced by its investors, who have every reason to publicize the company’s strengths. Independent research does little to quell the rampant optimism. Ratings agencies sail on Lake Wobegon where all the companies are rated outperform.
As an individual investor, the only way to survive in such an environment is to severely discount anything good I hear about a company and look carefully for what isn’t said so as to infer the bad. It’s similar to reading a dating profile. “Smart and tall” means obese. “Smart and skinny” means short. “Tall and skinny” means idiot. It has taken me years to learn the refined pessimistic art of inferring the worst of what is left unsaid. Most investors I meet are ignorant of this skill. People are perfectly willing to embrace a sexy narrative about a stock.
Given this imbalance, should we be critical of someone who is actually willing to say something negative about a company—even if he’s a hedge fund manager with much to gain? If so, why do we let CEOs who have every incentive to portray themselves and their companies in the best light possible go on TV and make technically true statements with tactful omissions that are perfectly legal but practically speaking deceptive? Why silence the only voices that challenge them?
Unacknowledged fact #2: Short targets are not chosen at random.
I have an incentive to promote the companies I am invested in. In theory, I could buy a company, write about how great it is here, and then sell it to take advantage of the promotion. This is what is known as a “conflict of interest”.
But think this through a bit deeper. Which stock should I self-servingly promote? I should probably choose a stock that I genuinely feel is undervalued anyway and about which I can write a convincing promotional post. I should buy an undervalued stock, understand the reasons it is undervalued, promote it by explaining those reasons, and then sell out of my position. This means that despite the conflict of interest, I am still incentivized to promote stocks I have a genuine belief in.
Similarly, Bill Ackman did not target Herbalife at random. He sought out a company that he believed was unsustainable. Indeed, that’s a much better way to make money as a short seller than launching smear campaigns against random targets. Short sellers target the vulnerable, which tend to be suspected frauds and bubbles, not stable, properly valued businesses.
What’s the alternative?
Should Ackman not speak out against a business he seems to genuinely believe is taking advantage of people? Should Congresswoman Linda Sanchez ignore information that her constituents might be negatively affected by Herbalife simply because she heard about it from a hedge fund manager? Should civil rights organizations similarly ignore the claims that the people they are supposed to be advocates for are being taken advantage of? Should Ackman not let them know?
The power a hedge fund manager can wield is limited. After Ackman very publicly attacked the company, George Soros and Carl Icahn took up long positions in the company against him. Far from being victimized, by Ackman, Herbalife ended up with the strongest endorsements available short of Warren Buffett.
If Ackman has instigated a witch hunt, Herbalife need only continue to run its business profitably, and Ackman will go hungry. If Herbalife isn’t sustainable, then Ackman should be commended for calling public attention to it. While the methods employed seem icky, I see little to be gained by silencing him or discouraging the use of such tactics.
Photo Credit: insider_monkey