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Summary

  • Activist investing is legal and an important part of the markets.
  • Long activism is often looked at in a much different light than short activism.
  • Some regulation could be imposed, but there isn't much that differentiates billionaire shareholders from "mom & pop" shareholders, in terms of rules.

Activist investors are here to stay. If we were to seriously regulate activist investors, we'd be encroaching on the very core of what makes the public markets "public." As long as public companies are held to the same disclosure standards, and all investors involved are playing on a level playing field in terms of material and public information from the company, activism -- and investing according to activism -- is a very healthy, very Darwinist part of the markets.

Whether you're a long or short analyst investor, you abide by the same laws, rules, and regulations as the rest of us. There's never been anything illegal about staking a position in a company and then presenting your case as to why you've invested in such a manner - it doesn't matter whether long or short. In essence, you're trying to sell people on why you think a company is or isn't a good investment.

That is really a macrocosm of what makes the markets. If I'm short Herbalife (NYSE:HLF) and someone else is long Herbalife, we both make our case, and the stock trades according to which side of the case pulls more weight. So far, the longs have had the field day, telegraphing far more support for that side of the coin. Activism is the same thing - taking to Twitter to express your opinion, exercising your rights as a shareholder to vote, and trying to do what is going to ultimately yield the shareholders a better return - it's just done on the billionaire tax bracket level, and not on the "can I borrow $5 for a six-pack" tax bracket that the rest of us are in. As long as you're not a class warrior and realize that we're still all playing by the same rules, you've got to agree that activism is simply a way of life for the markets.

And generally, I find that most activist investors - Icahn especially - are in it to move the stock price in the short term, not the long term. You can tell this by the suggestions that they make to companies generally skew toward freeing up cash on the balance sheet for shareholders, without considering what plans the company has for that cash in the future (i.e. buyouts, innovation, research and development). That's all well and good, even if I don't agree with it. At that point, it's up to investors on the other side of the coin, and the company itself, to defend their position and react accordingly. There is absolutely nothing wrong with give and take between major investors and a company's CEO and Board. That's why public companies have IR on a smaller scale, and that's exactly why the Board is supposed to provide corporate governance and enforce fiduciary duties for executives.

It's not like when Icahn takes a stake and goes on a rant that he's forcing the company to do anything. He's simply pointing out what he thinks is in his, and the shareholders', best interest. Look at how Tim Cook handled him with Apple. He met with him, considered his position, and politely told him to take a walk.

Where my beef lies is that there's a misconception going around, by people that don't understand the true Darwinist nature of the markets, that analyst investors who go short are "evil market manipulators," but those who go long are "trying to build shareholder value."

That's just not the truth. That's not how the stock market works.

The market assigns a value to a company based on the underlying fundamentals and potential for future growth. If those numbers don't command a lofty valuation and a company is trading at a massive multiple, why shouldn't an investor be allowed to point that out? It would be in the same exact vein as when an investor points out that he/she thinks a company is undervalued.

The market makes it possible to be on both sides of any trade. It's not just a forum for betting on companies to go up, it's a forum where, if you have a feeling something will go down, you can bet on that as well. Even the craps table at your local casino has a "Don't Pass" line. Even though it's much smaller than the "Pass" line, it's still there. People that make money when a company goes down are often looked at as evil from retail investors, but in the circle of the financial world, they're known as realists and savvy investors.

This morning, watching CNBC, Jim Cramer was offering commentary on Carl Icahn's current battle with eBay (NASDAQ:EBAY). In one sentence, he acknowledged that Icahn was "slinging mud," but in the other, he pointed out that eBay shareholders were going to benefit simply due to Icahn's involvement in the stock. Great. Activist investing is a good idea, right?

Trust me, Cramer and other analysts know exactly what Icahn is up to. They're old hands at this game.

But then there was this Tweet from earlier in the day:

Was it really, though?

So now, activist investing is bad because Bill Ackman is short the business model of an ultra-fundamentally flawed company?

Let's look at what analysts that are calling today's NY Times article proof of Ackman's "market manipulation" are commenting on:

  • Bill Ackman spent money on lobbying - totally legal, Herbalife did the same exact thing, outspending Ackman 8:1.
  • "Attempted destruction of the company" - anyone that has watched Ackman's original thesis understands that not only is the company operating as a pyramid scheme, but it's likely to eventually destruct on its own.

The very same way that any analyst tells people to avoid or sell out of companies on his very own show is just a microcosm of what Bill Ackman is doing here. And it's not like Ackman doesn't have a case.

When an analyst tells someone not to invest in Cisco (NASDAQ:CSCO), is he/she "attempting destruction" of the company? Many analysts and fund managers, including Cramer, have shorted and shorted hard before.

But, don't you think Icahn's appearance on CNBC at noon CST, where he accuses Ackman of "ranting and raving" to make his point about Herbalife - in the midst of Icahn himself ranting and raving about how eBay is screwing its shareholders - is a bit hypocritical?

Hate to tell you, Carl. But, it goes both ways. You can't have your cake -- i.e. go on major media and pump what you want to happen and your agenda -* and then call Bill Ackman "insane" for him doing the same thing. Then, Icahn comes off as the moral compass in the midst of his indiscernible bilge-filled rant on eBay?

Who is actually losing their mind?

But this article isn't about Carl Icahn, Jim Cramer, or Herbalife - it's about activism in general, and why it's not going anywhere. It isn't. It's just calling "tails" instead of "heads" on the coin flip - that's it. And, those that embrace the fact there are two side of the investing coin before events like the subprime crisis are the ones that didn't lose their a** with the rest of the world who didn't know better.

And it's also about shorts versus longs. Both are important positions to have when investing, and you absolutely cannot say that you're allow to take one, but not the other. They are what make the market Darwinist.

That is not to say that activists can just come out and say whatever they want. I do believe that lies, libelous statements, and blatant manipulation without basis should all be investigated by the proper authorities. But, when an investor takes a stand based on fundamental business principles or public information available through the company's public disclosure, that position is in play.

If we were to regulate it, we'd likely just have to regulate how often and through what media investors can present their case, whether it's long or short. However, it's unlikely that this happens, and it would generally be seen as detrimental to both the market and the first amendment.

Reality check: activist investing is likely here to stay. Do what you can do to work around it, and know that there is such a strategy as following the coattails of large investors, no matter what side of the coin you're on. You have to be aware of it, accept that it's part of the market, and keep your head up.

Best of luck to all investors.

Source: Activist Investing Reality Check 101