Who Is Bill Ackman Trying To Fool?

Ackman the saint vs. Ackman the sanctimonious.
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Back in his Harvard Business School days, Bill Ackman had already developed that lovable wit that has won him so many admirers today: “Let’s face up to what HBS represents,” he wrote in the student newspaper, defending the rowing team’s decision to emblazon their oars with dollar signs. “We spend 90% of our studies at HBS pursuing the maximization of the dollar.”

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That youthful anecdote, relayed in a massive, 9,400-word New Yorker piece on the Manichean drama that is Ackman-vs-Herbalife, provides a telling glimpse into the Ackman that was: a kid who doesn’t give two shits. That’s a fine quality for a hedge funder, but it happens to contrast with the image of a principled crusader Ackman has cultivated around his Herbalife short, about which he evidently does give a shit, if not two. From the profile:

“This is going to sound goofy,” Ackman told me recently, when we met at his midtown offices, “but we try to do things that we think are good for America.”[...] “There’s a good-for-America reason to do that, and there’s also an economic reason to do that,” he went on. “It’s much easier, if you’re an activist, if you’re on the right side of things.”

There’s nothing new in that posture, which so nauseated Carl Icahn that he built up a $1.3 billion Herbalife stake out of pure spite (and, perhaps, out of resentment over a certain bottle of red). Icahn’s views on the matter are by now well known: “Don’t be holier than thou and say, ‘Look, I’m doing this for the good of the world, and I want to see sunshine on Herbalife.’ I mean, that’s bullshit.”

Icahn is basically who Ackman would be if he grew up to be an exact embodiment of his grad-school op-ed. So what happened in the intervening years? The real question is whether Ackman is trying to convince everyone else he’s moral, or if he’s just trying to convince himself.

Let’s take the former case. Ackman makes a show of righteous fury, but it’s all an act. This could be justified on pragmatic grounds. As Ackman told the New Yorker:

“What short sellers do is identify the problem, because they’re economically incentivized to do so. But if you don’t tell anyone about it, you know, nothing necessarily is going to happen.” By shorting, he maintained, an investor can find that rare opportunity to profit handsomely while also providing a public service. “If you can find a really crooked company that’s causing harm to poor people? The government’s going to be a lot more interested in that company than some other kind of fraud that’s ripping off rich people.”

To make the short work, the activist has to get people to care. It helps if you can present a tidy little drama with clear victims and a sense of ethical certitude. The only drawback is if you piss off your fellow investors, whose bullshit detectors are often more finely tuned than their moral compasses (see: Icahn). Thus Ackman’s complaint:

“Unfortunately, Wall Street for the most part is amoral,” Ackman said when I asked him about it. “So, with Herbalife, people saw an opportunity for profit—my friend Carl was going on TV once a week saying, ‘This could be the mother of all short squeezes!’ Which was kind of a call to arms for people to buy the stock and restrict the supply of the stock, to cause the stock price to go up—figuring I would have to cover—and laugh all the way to the bank.”

But there’s a less cynical reading here: that Ackman really truly cared – or at least tried to convince himself he cared – about all the small-town strivers who ruined their lives by buying into the Herbalife hype, abandoning their community college degrees and opening their own failing nutritional supplement outlets. This Ackman thought he might do good and do well at the same time. This Ackman wanted to give back.

This Ackman also held onto his precious thesis despite losing some $20 million a year on the short, arguably enduring past the point of no return. In doing so, Ackman has shown himself lacking in one of the most important traits for a hedge fund manager: knowing when to cut your losses and change your mind. Emotions are no help on this front (just ask Ray Dalio).

The Ackman-actually-really-does-care hypothesis has one glaring flaw, however: Valeant. The same stubbornness Ackman has displayed in the Herbalife saga characterizes his ongoing travails with Valeant – which, as New Yorker reporter Sheelah Kolhatkar notes glibly, Ackman probably should have shorted instead of betting the house on. That he would cling so ferociously to a company accused of cooking the books, dispensing kickbacks and gouging patients on life-saving drugs suggests that an abundance of virtue isn’t Ackman’s major weakness.

His stake in Chipotle is another matter entirely.

Financiers Fight Over The American Dream [New Yorker]

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