Losing Everything Because of a Tweet
Losing everything because of a tweet is a very dramatic thing to say. I realize that but at the same time, in no way shape or form is it impossible. I think we can all acknowledge the fact that the landscape in which we communicate and do business has changed. Big time. It is not necessarily a bad thing in my opinion. However, I think it can be very dangerous for those who say, “But, the fundamentals”.
I want to tell a story that actually happened in real life. Keep in mind this article is NOT investment advice, it’s just me breaking down a historical event.
At one point or another, we all have either participated in or been asked to participate in a pyramid scheme. God knows I downed the whole pitcher of Kool Aid before I had got into the insurance business. The story I want to share is about a company that most people have heard of called Herbalife. This whole ordeal was such a shit show that a documentary called, “Betting on Zero” came out on Netflix. First, we should define what a pyramid scheme is. A pyramid scheme is defined as a form of investment in which each paying participants recruits further participants, with returns being given to early participants using money contributed by later ones according to el dictionario. Basically though, money never physically leaves the distribution channel and the people at the top get all the money. So, with that, I am not saying multi level marketing, I’m saying pyramid scheme. Don’t be pissed if your part of a legit MLM group because there are some legit ones.
This story all started with a guy named Bill Ackman in 2012. For those who have no idea who that is, he is an investor from New York who got his MBA from Harvard in 1992 (Ackman Profile, harvard.edu). Smart dude. Bill has been in the money game ever since he left Harvard. He was also one of the big players in calling bullshit on the real estate market in 2007-08. When you have an investment firm or a hedge fund, a common practice of generating returns is ‘shorting’, which means to bet against a stock, index, company, ect. All it takes is to be right on one or two of those shorts and before you know it, you are the all knowing wizard of poorly designed companies. Or so it would seem. I don’t want to digress too much on the shady nature of betting against companies in the market but I do want to say there is almost always more that goes into those deals than just simply looking at the fundamentals. Any who, Ackman had gotten it right. The perception was he knew his shit. So, in 2012, when he decided to put Herbalife in his crosshairs, he took to every platform warning everyone Herbalife was a pyramid scheme and people were and are getting hurt. My man even dropped $50 mil on PR campaigns against Herbalife according to U.S. News & World Report. So, I guess that’s a little more than just a tweet but to a guy of his magnitude it might as well have been. Okay, quick recap of where we are so far, we have Bill, successful investment manager, thinks Herbalife is a pyramid scheme and has made a billion dollar bet against the company’s value.
It doesn’t matter if we're talking about kids with book reports and pop quizzes or high level businessmen. Rivalries exist. The concept of rivalry cracks me up but for what ever reason, we have them. Ackman is no exception, his rival is named Carl Icahn. Another very wealthy man who didn’t go to Harvard but did go to Princeton. He started as a stock broker in 1961 then had success in options trading with his own company in 68 (Icahn Bio). Shortly after starting his own company he began playing his real life version of Monopoly. Becoming the “corporate raider” according to Time he acquired an airline, pharmaceutical companies, and many others by way of hostile takeover. No doubt a successful man. In 2015, right in the middle of the Herbalife drama, Icahn pledged $150 million to push corporate tax reform by forming a Super PAC (New York Times). In 2016, Icahn endorsed Donald Trump. Once elected, Trump would hire Icahn to be Treasury Secretary (Washington Post). Here is why this is relevant. Back in 2003, Ackman and Icahn had a deal where if Icahn made x percentage of profit within a specified period of time, he would split those profits with Ackman. Well, basically what happened was Icahn honeydicked Ackman by owing Ackman’s investors around $4.5 million. Naturally, Ackman sues and we have the Biggie and Tupac of business. Eight years later (2012-13), the courts forced Icahn to pay $4.5 million plus 9% interest according to Business Insider. So, to recap again. We have Bill Ackman, successful Harvard guy, in 2012, saying Herbalife is a pyramid scheme. We also have his rival, Carl Icahn, successful Princeton guy, is ordered to pay $4.5 mil plus interest in the same year. Probably is not very happy. In 2013, the two duked it out on CNBC where Icahn called Ackman “a cry baby in the school yard”. Ackman betting against Herbalife while Icahn betting on Herbalife. In the same year Icahn announced his Super PAC (2015), U.S. District Judge dismissed the suit against Herbalife alleging it was a pyramid scheme. Herbalife and FTC settled on Herbalife paying $200 million and forced to restructure the business model. “FTC investigations found Herbalife had misled distributors with ‘deceptive’ claims about the business opportunity in selling the company’s products” (Fortune). If you add the words “but rather in recruiting distributors” to that last sentence it would be for sure the definition of a pyramid scheme. The problem with the FTC (Federal Trade Commission) properly labeling Herbalife as a pyramid scheme in 2016, was the Treasury Secretary of the US was in a billion dollar pissing contest with his rival who was spearheading these claims.
The point of this story isn’t to give my opinion on Herbalife, Ackman, or even Icahn. It is to show you that the system of Wall Street that we all love so much, is not about real value but rather perceived value. Also, there is always a bigger picture of what is going on, whether it be personal or political. In the grand scheme, fundamentals don’t mean a thing with today’s media and politics. If they did, Ackman would have won and Herbalife would be no mas. Instead, Ackman lost a billion dollars and Icahn stepped down from his Treasury Secretary job a billion dollars richer after just 7 months but not before dodging a 31 million dollar bullet by selling down holdings in “steel-price sensitive” stock days before Trump announced a 25% tariff on steel imports. It is a messy business up there, I must say.