One of the more interesting characters in the Herbalife (HLF) story is Mr. Bill Stiritz, Chairman and CEO of POST (POST) Holdings. By all accounts, Mr. Stiritz has a long and storied business career. Evidently, this career has also made Mr. Stiritz a very wealthy person.
It is hard to say. Still, while people like Bill Gates dedicate their net worth to social causes in trying places like Africa Mr. Stiritz has allocated a significant chunk of his own net worth to a long position in Herbalife.
Whether or not these two capital allocation decisions are moral equivalents or not is for wiser minds than me. Still, what we can say categorically is that Mr. Stiritz and his family members own in excess of $500 million worth of HLF common equity or 7% of the company.
Mr. Stiritz has gone on record referring to Herbalife as a "national treasure." Otherwise, we do not hear much from this gentleman in the media.
Frankly, I am not sure if I had $500 million jingling around in my pocket I would consider a concentrated long position in HLF common as my utility maximizing moral choice but as the French say - chacun son gout. (To each his own)
Carl Icahn is also in on the Herbalife bandwagon with a 17% stake of his own. Those who read about Mr. Icahn's story as an investor may find it interesting to learn that Mr. Icahn was a very talented poker player as a young man.
Poker is a fascinating game. It is a game of probabilities, a game of odds, a game of implied odds, a game of reading your opponent's behavior/tendencies, and it is also a zero-sum game.
In order to win at the game of poker somebody else at the table has to lose.
Those who play Texas Hold 'Em know that the strongest pre-flop hand in poker is Pocket Aces - also known affectionately as Bullets or American Airlines. If you end-up with Pocket Aces before the flop you are supposed to go "all-in" if pushed by your opponent with an aggressive raise.
The reason you go "all-in" is simple. In the long run, the odds of AA winning the hand are roughly 80% of the time give or take. Of course what this also means is that 20% of the time the AA will lose and the player with this hand will lose his entire chip stack to his opponent if "all-in".
A similar dynamic is at play with the game of Russian Roulette. A single bullet in a six chamber gun gives the player a 5/6 chance of "winning". 1/6 of the time the gun kills the player. So, 83% of the time you live to fight another day.
Losing all of your chips in a poker hand is not the same as losing your life, of course, but the mathematics behind these games of chance are similar. Investing in Herbalife at the moment is similar, perhaps, to playing Texas Hold 'Em or Russian Roulette.
Ostensibly, Mr. Icahn appears to be "all-in" on his Herbalife bet. He owns 17% of the company. His position is far larger than Mr. Stiritz. He appears to be exposed to the greatest loss if Mr. Ackman is correct. Except for one thing. At this particular poker table, Mr. Icahn is likely what is known as the "Big Stack". While Mr. Icahn has placed a large sized bet on the Herbalife hand it represents a relatively small percentage of his overall net worth and the net worth of his investors in Icahn Capital.
Mr. Ackman is also a "big stack" at the table. Mr. Ackman manages in excess of $10 billion for his investors and has a personal net worth far in excess of $1 billion we are told. At first blush, his Herbalife position looks like a big bet but when compared to the size of his stack it looks manageable by comparison.
This, of course, leads me to Mr. Stiritz. Mr. Stiritz is investing his personal capital. He is not acting as a fiduciary maybe? He is not the steward of a fund. How large is Mr. Stiritz personal bankroll? Hard to say but $500 million is not chump change for anyone's personal account.
As an observer of this Herbalife saga and someone who enjoys the game of Poker myself, I am fascinated that Mr. Stiritz would place such a large bet even if he believes he holds Pocket Aces in his hand.
As investors we can actually handicap what Mr. Market is telling us about probable outcomes for Herbalife common. If we use a simple binary scenario the math is quite simple.
Mr. Ackman thinks Herbalife is worth $0. That is to say he believes that the present value of the future cashflows that will be delivered to HLF common investors over time will amount to a big fat donut because the company is an illegal enterprise.
Mr. Stiritz thinks Herbalife is worth in excess of $100 per share. Conservatively, let's use simple math and call it an even $100. Today, Herbalife common trades for $66 or so.
What the stock market is telling us is that investors seem to believe that Mr. Stiritz has a 66% chance of being right while Mr. Ackman has a 34% chance of being right.
How do we get there?
Where EV = Expected Value
EV (X) = Probability Mr. Ackman is right at $0
EV (Y) = Probability Mr. Stiritz is right at $100
Z = Current Share Price
$66 = $0 + $100
$66 = $100
Y = 66%
X = 100% - 66% = 34%
As we sit here today, Mr. Market has seemingly perfect information about Herbalife. Investors have discounted-in the buyback, the levered recap, the names and faces of all of the players, the court cases, the calls for investigations, the 13Ds etc.
Effectively, the market has now handicapped this trade. What is certain is that the market has not picked a clear winner. Only upon the revelation of further evidence will we find out who has the winning hand.
Only once investors get to see "The Flop", "The Turn" and "The River" card will the Herbalife tragedy resolve itself. Of course, as each new card is played the market will recalculate the probabilities accordingly. Already we have seen newsflow move this stock around with great volatility over the past year.
Q. When do you go "all-in" with AA?
Prudent card players know the answer in spades. Prudent card players know that managing your chip stack is not the same as managing your bankroll.
Risking a manageable percentage of your bankroll on an AA hand is a prudent decision. In the long run your opponent's hands will pay you off.
Risking a large percentage of your bankroll on an AA hand is likely foolhardy. Why?
Even if you lose 20% of the time you end-up losing a huge percentage of your net worth in the process.
Admittedly, I do not know what Mr. Stiritz' net worth is. Still, common sense leads me to believe that his Herbalife position is a big one in personal terms. Common sense implies that Mr. Stiritz position is likely a larger percentage of his bankroll than it is of his ally Mr. Icahn or his opponent Mr. Ackman.
Warren Buffett once said to paraphrase "the definition of insanity is risking something you have and need for something you don't have and don't need."
Pushing "all-in" on HLF common at $66 per share market players are telling you that your AA is likely to win the pot 2/3 of the time. 1/3 of the time you will lose all of your chips.
Being convinced that AA is the best hand isn't the same as gaming the probabilities. I am confident Mr. Ichan knows this as a seasoned poker player himself.
Whether or not they play cards in St. Louis? I guess time will show us who wins on "The River".
Finally, all investors should remember this simple poker axiom: "If you don't know who the patsy is at the table in all likelihood you are the patsy."
Herbalife Common: Buy, Sell or Hold or Buy, Sell or Fold? At $66 per share, what percentage of your life savings would you risk on your thesis - even if you were convinced you held Pocket Rockets?