On Herbalife And The Slow Death Of Value Investing

By Francine • Aug 3rd, 2013 • Category: Audit Quality, Food for Thought, Regulators, Laws, Standards, Regulations

Big egos make shares move by waving wands. That makes picking stocks based on fundamental analysis more than slightly anachronistic. You can pick ‘em, ya see, but you’re unlikely to be able to take a rational walk down Wall Street afterward.

Those of you who count on others to do the right thing with your investments in pension funds, 401ks, and government and university retirement plans have, I hope, put together a plan B. Why do share prices go up and down? As a result of the self-fulfilling prophecy driven by Carl Icahn, Dan Loeb, George Soros or some anonymous computer program at a high frequency trading firm that decides, in a millisecond, based on its own self interest, to make the market move.

Good luck with that.

Here’s my take on the latest share price ups and downs at Herbalife. It’s an excerpt from a piece I published yesterday at Medium.com.

Icahn’s and Soros’ trades aren’t driven by real audited numbers. Herbalife’s numbers for the last three years and the most recent 10-Qs are now unreviewed and unaudited by an independent certified public accounting firm after the scandalous resignation of auditor KPMG in April because of insider trading by its partner in charge. In other words, all bets on financial reporting integrity and completeness are off. Icahn and Soros are simply swinging big sticks to move the market their way.

Maybe Soros and Icahn just want to bet against William Ackman, the head of hedge fund Pershing Square who holds a 20 million shares short position. That’s primal enough. Ackman’s trade, a gutsy move too, required selling borrowed shares on the expectation that the price would fall and the borrowed shares could be repaid with cheaper ones. That’s a $1 billion bet that is based on fundamental beliefs— Ackman feels strongly that Herbalife is a pyramid scheme, a fraud that investors will soon abandon and regulators will eventually shut down. Herbalife says it spent approximately $15.1 million after-tax in the first six months of 2013 to respond to Ackman’s allegations.

In the meantime, Icahn’s and now Soros’ investment pushed the stock price higher and made it hundreds of millions more expensive for Ackman to unwind his trade, assuming he has not already begun to reverse course.

There’s more at, “What’s Really Driving the Herbalife Surge? (Hint: Forget About Value Investing)”.

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One Response »

  1. You’re so dead-on in your analysis. The worst part is not that most people don’t have a plan B, it’s that they don’t even understand their own plan A. Love the site!! will be adding you to my regular reading for sure!!

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