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I spent my professional life ā€“ more than 45 years ā€“ working for and with large well-known investment management and investment banking firms. Iā€™ve served at various times as an analyst, portfolio manager, senior investment executive, senior business executive and corporate director. On the buy... More
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  • HLF: Response To Recent SA HLF Board Comments

    This is in response to a Comment from FrankArabia in a Bear article by -- guess who -- QTR

    seekingalpha.com/article/2349955-herbali...

    I am long HLF. I have been since December, 2012. Despite after-market action today, I remain long.

    Frankly, I believe this might be one of Ackman's last chances to cover!

    I simply can't understand QTR's obsession about Icahn and when he is going to sell. I haven't counted but my guess is that QTR has written at least a dozen or more articles focusing on how "This is Icahn's last chance to sell". Why should Icahn be looking for a chance to sell? It is much more reasonable to suggest that Ackman can't wait for a chance to cover! Hasn't QTR ever heard of "Cut your losses and let your profits run"? As of now almost all long investors in HLF have a profit -- AND ALMOST ALL SHORTS ARE LOSING. Anyone who followed Ackman is losing money, probably big time especially if leveraged. That doesn't make the shorts wrong -- maybe eventually they'll be right. But, for now they couldn't possibly be more wrong in the only thing that counts -- which is making money in the stock.

    And, despite QTR's Icahn obsession, if you look you will discover a very long list of serious institutions who are long the stock and, other than Ackman, almost no serious shorts. That doesn't make the shorts wrong, it just means they are out on a limb all by themselves and there is a large number of serious institutions with serious research capabilities who have very large positions on the other side of the trade. Yet, the rants from these pages makes you think it is just Ackman against Icahn. Actually, it is Ackman against a very large group of other serious investors. That doesn't make QTR, MS or Ackman wrong, it just makes them in a very small minority group. But, their personal ad hominem attacks continue, or did they decide that after all their rants to the contrary an "old" billionaire might just be as right as a "young" billionaire?

    Personally, I have an unleveraged double. Maybe it will go down tomorrow. Maybe it's all over. I don't think so. I've done my own analysis and I believe the pyramid scheme allegations are just wrong.

    I've followed, laughing all the way, as the shorts' focus changed from item to item to item as a reason the stock was going to zero. First it was a pyramid scheme; then it was laughing at Icahn and Stiritz because they were just "old" billionaires not young billionaires; then it was the California injunction until everyone learned that a simple plain reading of the injunction had nothing to do with what the shorts pretended it said; then it was the Belgian court -- until after the Appeals Court threw out the lower court decision decisively, and then it wasn't the Belgian court because that didn't matter anymore; then it was PriceWaterhouseCoopers until PWC paid exactly zero attention to Ackman's legal threats, the audit was completed, it didn't do what Ackman wanted and then it didn't matter; then it was that all distributors were going to leave once they discovered the cost of shipping and handling (remember that joke?); then it was a presumed killer presentation by Ackman that ended when he had nothing to say but cried about his poor immigrant parents (Ackman grew up in one of the wealthiest families in New York, BTW; talk about being disingenuous). Now, it is a .02 miss when as recently as yesterday that didn't matter one bit. etc. etc. etc. I must have left out something that was "the end" that turned out not to be the end at all.

    Other's of my favorites are the times shorts made the "religious" argument. Remember: "Ackman on the side of the angels"? Sometimes it was arguing that the anyone on the other side of the trade was immoral; can you believe that anyone would buy or sell stocks because of their religion, and, essentially, become a religious fundamentalist because you not only believe you are right but insist that the others are wrong (i.e. others follow an impure religion because they are immoral because they are on the other side of your trade). Let's get this straight: Ackman is short HLF for one reason and one reason only: to make money for his investors. Not a single Pershing Square -- not one -- has money at Pershing Square because he wants to join Ackman on a religious crusade to rid the world of companies Ackman thinks are immoral. For Ackman and all of his investors, it's ALL about the money. That's not a bad thing; just don't try to hide your motives behind religious zealotry. It's unbecoming to otherwise serious people.

    Are Ackman, QTR, MS, Michele Celarier and other acolytes a stopped clock, destined to be right one day? Maybe. And, then again, maybe not.

    Now to the main reason I spent way to much time writing this. Your claim that absolutely no one on the long side has any financial acumen could be one of the most incorrect comments ever on this SA board. You can't believe you are the only smart guy in the room, can you? Are you even a smart guy? No smart guy's I've ever met assume everyone on the other side of a trade has no financial acumen and is not a smart guy. Ackman is brilliant. I don't know him, but for all I know QTR might be a smart guy, too. But, you know, you can be brilliant and also wrong: JC Penny, Borders, Gotham Management. Pershing Square Fund IV, a special purpose fund to invest ONLY in Target that over-leveraged and literally went to zero, losing 100% of Ackman's investors' money. Of course, he has had grand slams, too. And his biggees have been bigger than his disasters. But, he's had disasters nonetheless.

    Oh, BTW... I don't remember Gotham being mentioned on this board before. You should check it out on the internet. Or ask me; I've done a personal research report on it for my own use. In brief: Ackman's first post-business school firm was Gotham Management, started with a business school friend of his. For the first few years, they did a brilliant job and grew assets dramatically -- various reports put the peak at $300 to $500 million. Then Ackman bought a money losing golf course and used it to do a roll-up of eventually over 20 golf courses. He leveraged it dramatically. Then it couldn't pay its debts. And then Mr. I'm Going to Save the World from Charlatans Ackman tried to pull a financial fast one by using the cash in one company he controlled to save Gotham, until the minority shareholders lawsuits ended that. Then, Ackman's funds literally went to zero (Target, anyone?) and he was forced to close Gotham.

    Back to the point...

    No one with any financial acumen on the other side of the trade? Take a look at the totally public list of institutional investors who own the stock and the size of their positions. No one with any financial acumen?

    Oh, and BTW, I don't hold myself out to be the smartest guy in the room, but I am long and I DO have a bit of financial acumen; look at my profile. And, BTW, I might very well be wrong, too.

    But please don't believe only Ackman and those on his side of the trade do any serious research or understand anything about companies, markets or stocks. Gimmee a break!

    Tags: HLF
    Jul 29 5:14 AM | Link | 2 Comments
  • HLF: ON THE SUBJECT OF "RETAIL SALES"...

    There is not now, nor has there ever been, any requirement by any regulatory agency for HLF to track retail sales. The fact that a huge short seller and his acolytes demand it is in no way reason enough to do it. And, as they say in court, it would be a massive fishing expedition....

    "We want you to collect data no one else has asked for so we can analyze it, put our own spin on it and then use whatever you say to help destroy your stock".

    There is no hard and fast law on the subject of "retail" vs. "self" consumption, and different courts and different cases have had different results. No court or regulatory agency has ever even asked HLF to produce that data, so, if HLF doesn't need the numbers itself, and no regulatory agency has in more than three decades asked them for it, why should the company subject itself to a short-sellers' "legitimacy test" that no one except short sellers has ever asked them to do?

    At the beginning of the Ackman attack, as you might recall, the shorts insisted that the very old California Injunction "required" HLF to produce and disseminate all that data. In fact, if you read the Injunction (I did), it said very clearly that HLF was to make available any data that it -- HLF -- decided it was going to produce in the normal course of its business. The injunction specifically did NOT require the company to collect any new data at all, of any type. The injunction said the equivalent of: "If you have it, give it to us." Repeat: It did NOT require any specific data collection at all.

    Plus, even if the company made a good faith effort to collect the data -- which it is not required to do by anyone other than the shorts' demand -- it would be impossible in the real world. Why?

    o These are all small business people dealing in a cash business. Do they report all their income to the IRS? I obviously don't know for sure, but I'd certainly guess many do not.

    o They can manipulate their numbers and client lists at will. If they need 5 retail clients, they will list 8. Etc. Who's a "retail client"? If I sell some to my Aunt Becky, or my son-in-law or sell it at a very deep discount (say, cost?) to my nephew, is that a retail sale?

    And, most importantly, where is the army of auditors that would be needed to discuss and argue about those issues with the tens or hundreds of thousands of such tiny businesses? The IRS doesn't have them. No one else does either. Oh, wait.... I'm certain the shorts would demand that HLF hire an army of auditors to make sure their tens of thousands of distributors are telling the truth.

    Demanding so-called "retail" sales is a red herring. Just another ploy of the shorts to create a fire where there is none -- not even smoke. Remember, despite what Ackman said in his first and subsequent presentations, defining "retail" sales is both not simple and it is not required of HLF.

    And here's why... In some other cases of true pyramid schemes, the companies involved were selling "one time" purchases -- i.e. a subscription to Directv. It's easy to see whether or not those subscriptions are actually sold or there is just a an illegal pyramid.

    It is totally different when selling a consumable. In HLF's case, they are clearly selling billions of dollars of a consumable real product. SOMEONE is using the stuff, and using it regularly. What difference does it make WHO is using it? None. Is there any evidence of inventory loading. Despite $50 million and 1-1/2 years of trying to find any evidence of systematic inventory loading, Ackman can't find any. Well, I guess he's found a handful of people who have ALLEGED they were coerced or misled or whatever. In 100% of the handful of cases Ackman has discovered all he's found are ALLEGATIONS that are, again in all cases, TOTALLY UNSUBSTANTIATED by any fact. In the context of tens of thousands of distributors, all he's found -- after $50 million of investigation, including who knows how much for direct payments for testimony -- is, effectively, nothing! About all Ackman can allege is his -- totally unproven -- belief that there is inventory loading -- even though he can't find any -- because it is, in his opinion, too difficult to return product for a 100% refund. That just doesn't make logical sense, especially since it's pretty easy to do a return!

    Conclusion: Until the FTC asks for it, or until the shorts get themselves appointed as regulators, the shorts' ongoing demands that HLF produce "retail sales" data is a red herring.

    Tags: HLF
    Jul 29 5:12 AM | Link | 3 Comments
  • Herbalife: More Than You Ever Wanted To Know About Bill Ackman -- Part 1

    Herbalife: More Than You Ever Wanted To Know About Bill Ackman -- Part 1
    About:HLF

    Summary

    • Bill Ackman claims to be the smartest guy in the room. He is certainly one of them!
    • Pershing Square funds are concentrated, and they have produced excellent long-term investment performance by generating huge profits on some individual stocks, partly offset by astounding losses in other stocks.
    • Ackman may have gotten the idea that HLF is going to zero through his personal experience. Twice in his career Funds he's managed lost 100% of clients' money.
    • .

    Disclosure: I am long Herbalife (NYSE:HLF). I initiated my position in December 2012, shortly after Bill Ackman's presentation to the Sohn Investment Conference. I am a natural contrarian, and when I heard about his 342-slide presentation, his public announcement that his firm was short more that 20 million shares of Herbalife worth over $1,000,000,000 my natural instinct was to research the other side. Since then, I've periodically added to my long position

    Although I have no present plan to buy or sell HLF in the short run, I may do so at any time.

    Other than my position in HLF, I have no relationship with any of the firms or individuals mentioned in this report.

    I wrote this report myself, based on my own research, and none of the material herein is in any way related to any of the businesses with which I am associated.

    If you are interested, I urge you to read my recently revised and expanded SA Profile. It will help you understand my perspective on and approach to investments.

    --------------------

    Part I - More Than You Ever Wanted To Know About Bill Ackman

    Introduction to Part 1

    Summary

    Early Life - Before Wall Street

    Gotham Partners

    Pershing Square Management

    Pershing Square Profitability - How B.A. Became a Billionaire

    B.A.'s Investment Record - How Has He Done For Clients?

    INTRODUCTION TO PART 1

    If you are invested in HLF, long or short, you are either riding the coat tails or competing with Bill Ackman (B.A.) and his firm, Pershing Square (PS). I don't know him personally, but I've been on the other side of his Herbalife trade since shortly after he announced it in December 2012. Since then, I've found it useful to try to build a profile of him, as I believe the more I know about him, the better opportunity I have to be able to predict his future actions and properly manage my HLF investment.

    Underneath his routine bombast, B.A.'s actions have often varied from what he was actually doing. I've studied public information about his background, personal life, business life, promotional methods, his successes and his failures. I've done it all with the idea of trying to figure out what he might do with his HLF position and when he might do it.

    SUMMARY

    1. B.A. grew up in a wealthy New York suburb. It was obvious from an early age that he was a star.
    2. Today, he tries to come across as the smartest-guy-in-the-room. Among those in the rarefied atmosphere of his high-profile hedge fund competitors, he may not be the smartest guy in the room, but he is certainly in the group!
    3. B.A. first learned his real estate and deal making skills working for his father, the 2nd generation owner of a very large commercial real estate financing company.
    4. B.A.'s first firm, Gotham Partners LLC, had substantial early successes from a very small base. His success bred a huge influx of new investors leading to a several hundred million dollar increase in Gotham's Assets Under Management (AUM). But, 10 years after B.A. started Gotham he invested in illiquid money-losing assets. When he levered up he created a liquidity crisis for Gotham's funds. At about the same time, he was investigated for potential civil and criminal violations. He lost a major lawsuit and had massive client defections. He and his partner were forced to shut down the Gotham funds, they had to close down their management company and they spent several years liquidating assets to pay investors what was left.
    5. Bouncing right back after the Gotham failure, in 2002-2003 B.A. founded Pershing Square Capital Management (PS). Starting with $54 mm of seed capital, it is widely reported that PS's assets under management are now approximately $11-$13 Billion.
    6. Ackman/Pershing Square (A/PS) manages a large, non-diversified, highly concentrated portfolio as an "activist" investor. He tries to present himself as an individual focused on the public good by helping companies protect their future but reality is he is focused 100% on making profit for his clients and himself. He is universally intensely disliked in corporate America but Wall Street attitudes toward him are binary - you either love him or hate him.
    7. There is no public information to prove B.A. is a billionaire, but it is almost certain he earned that much - and more!
    8. A/PS makes public the investment results of his its various funds. The long-term results are mostly excellent. On the other hand, Pershing Square IV, a $1.8 Billion fund organized for the sole purpose of investing in Target, lost 93% of it's value because the fund was highly leveraged on the long side when Target's stock went down.
    9. His investment performance consists of a combination of dramatic winners, partly offset by equally dramatic losses. And the monthly/quarterly results are highly volatile.

    EARLY LIFE - BEFORE WALL STREET

    B.A. grew up in Chappaqua, NY, a wealthy town in Westchester County, just north of New York City. To give an example of the population profile, President and Mrs. (before she was Secretary of State) Clinton purchased a house in Chappaqua for $1.7 million in 1999. Over the years Chappaqua has been the home of many celebrities, business people and other wealthy individuals.

    B.A.'s father, Lawrence Ackman, was the son of one of the founders of Ackman Ziff, a real estate firm involved on a large scale in all aspects of commercial real estate, with a special focus on real estate finance. Two Ackman brothers founded Ackman Ziff in 1927. Lawrence joined the firm in the 1960s, became President in 1968, CEO in 1977 and Chairman in the 1990's.

    B.A. was born in 1966 and grew up in this wealthy environment. By all accounts, he was an academic and personal star his entire young life. B.A. graduated from Harvard College in 1988, having earned a Bachelor of Arts degree, Magna Cum Laude. Subsequently, in 1992 he graduated from Harvard University, Graduate School of Business Administration (commonly known as Harvard Business school). As is typical - almost required - at Harvard, B.A. took a two-year hiatus between college and business school. During that time, he worked at his father's real estate firm. His responsibilities included arranging and structuring equity and debt financing for commercial real estate investors and developers.

    GOTHAM PARTNERS, LLC

    After business school and a short period at Ackman Ziff, B.A. and David Berkowitz, classmates at Harvard Business School, founded Gotham Partners, LLC. They had $3 Million of seed financing from Marty Peretz - who provided half a million dollars - and a few others. Peretz is an alumnus of Brandeis University, a Harvard professor for several decades and in 1974 purchased "The New Republic Magazine", where he became Editor-In-Chief and an outspoken supporter of Israel.

    Gotham managed public and private equity portfolios, priced with the typical management fee plus carried interest structure. Gotham focused on real estate investments, but would invest away from that focus as well. Early investment performance was so good that Gotham attracted investors representing a "Who's Who" of Wall Street big hitters, including Michael Steinhardt, Seth Klarman, Leon Levy, Jack Nash, Whitney Tilson and the Ziff Family. Various reports peg Gotham's peak assets under management at between $300-$500 Million.

    Joining a crowd of private equity fund investors, most notably KK&R, in 1997 B.A.'s Gotham Partners acquired a money losing golf course operator. They created a new entity, Gotham Golf Corp. (GGC) based in Hershey, PA. They used GGC as a vehicle to embark on a rapid roll-up and financed it with the specially created Gotham Golf Partners L.P. plus a mountain of debt. GGC was a golf course ownership, acquisition, and operating company and by September 2001 B.A.'s GGC owned 26 golf courses. In 2001 GGC was buried under a mountain of debt it couldn't pay. B.A. also controlled N.Y.S.E.-listed First Union Real Estate Equity and Mortgage investments; he was the Chairman of First Union's Board of Trustees. First Union was cash-rich. So, in an effort to save GGC, in September 2001 B.A. tried to merge First Union and GGC. B.A.'s idea was to use First Union's cash to save GGC. Obviously, B.A. and Gotham were on both sides of the deal, a classic conflict of interest. First Union's minority shareholders sued in NY State Court, alleging GGC was using the merger to raid First Union's cash. B.A. and Gotham lost.

    At about the same time, Gotham Partners was under criminal investigation by N.Y. Attorney General Elliot Spitzer and an informal investigation by the S.E.C. The investigations revolved around Gotham's trading and research practices. Gotham issued multiple enthusiastic recommendations of Pre-Paid Legal Services. Subsequently, Gotham and Pre-Paid insiders sold off shares just before the stock price dropped sharply. Neither agency reported any findings or initiated any legal action against Gotham.

    The Ackman/Berkowitz Gotham Partners was in deep trouble. Its investors were losing money quickly and most demanded return of what was left of their money. With no liquidity left, B.A. was forced to shut down Gotham Partners. B.A. and Berkowitz spent the next several years liquidating what was left of Gotham Partners' assets to pay down debt and repay left-over money to Gotham's investors. Reuters reported on the details of the story, linked here.

    PERSHING SQUARE CAPITAL MANAGEMENT, L.P.

    B.A. bounced right back. In 2003-2004 he founded Pershing Square Capital Management L.P. (PS or A/PS). He began A/PS with $54 mm, reportedly with seed money from Leucadia National's WMAC Investment Corporation division, his own money and two smaller outside investors. The firm has grown dramatically since then and currently various reports say A/PS' manages about $10-13 Billion of Other People's Money (OPM). A/PS runs multiple portfolios in multiple structures with multiple fee schedules, including some SPV (Special Purpose Vehicles) created to invest in a single opportunity.

    A/PS portfolios tend to be concentrated in a few large investments. Diversification is not part of their style or promise to investors. A/PS says it does intense research on all its ideas and makes huge concentrated investments, usually long but more than occasionally short, in the stocks of each of the companies in it's overall portfolios.

    A/PS describes itself as an "activist" investor". In practice, that means A/PS engages in intense tactics to control the destinies of each of the companies underlying its stock investments. A/PS is almost always a "hostile" investor. That means B.A. will aggressively try to force the companies to do whatever A/PS believes will maximize the value of its investments

    In it's pursuit for profit, A/PS will do almost anything possible to force the companies to do its bidding. That can include anything from hostile proxy wars, takeovers, demands for board seats, forcing mergers, takeovers or asset sales, replacing management teams, changing operating strategies or anything else B.A. and his team decide will maximize their profit. Regardless of public pronouncements to the contrary, B.A.'s goal is always 100% focused on making money for himself and his investors. His investors have no interest in having their money used for social ends; the only thing they care about is profit. If B.A. was using his own money, his pronouncements about making his investments to drive social good might have some semblance of credibility, but there is no public indication he has used his own fortune to make investments for that purpose.

    In baseball terms, A/PS plays "long ball". Every time it steps up to the plate by making a huge investment, it expects to hit a grand slam home run. It hits lots of them, but it strikes out a lot, too. Its investment performance record consists of dramatic and highly visible massively profitable investments, partially reduced by equally dramatic and highly visible massive losses.

    The A/PS client list is not publicly available. But, given the nature of the firm it is possible to make a reasoned guess about a typical client's profile. That profile would be about like this: The client would be a very large tax-exempt institution. It might be a corporate pension fund, a "public fund" such as the California State Retirement Funds, a private or public union pension fund, an endowment fund or other such large investment institution. Each investment fund would typically manage tens of Billions of dollars for its beneficiaries. Each would have at least $50 million invested in A/PS funds, and many would have several hundred million. There are likely a hundred or fewer investors in total.

    From time to time some financial news media mention some A/PS clients by name. So, for example, The State of New Jersey Pension Fund, with $77 Billion in assets, has over $200 Million invested in A/PS funds,

    PERSHING SQUARE PROFITABILITY - HOW B.A. BECAME A BILLIONAIRE

    In choosing to invest with or against B.A., it is important to understand his A/PS business model. By all reports (see Forbes as one example) he is reportedly a Billionaire. I don't believe B.A. publishes his personal balance sheet anywhere, but it is possible to make a calculated guess about his income statement. That, in turn depends on understanding the A/PS business model.

    It's pretty easy to do an analysis that leads to a near-certainty that he earns several hundred million dollars a years just from A/PS operations, without considering his outside personal investments.

    A/PS is almost certainly immensely profitable. The first question is: how much of A/PS does B.A. own?

    Ownership guesses: It is unlikely that B.A. owns 100% of A/PS. When A/PS was formed, Leucadia National's WMAC Investment division and two un-named investors were the primary providers of the $54 million of seed capital. As a result, WMAC and the other investors probably own a significant share of the company. Also, in the business, it is not unusual for firms like A/PS to give a small equity and/or profit interest to key employees, either in the overall company or in deals generated by those employees or both. My best guess is that B.A. owns 60-80% of the total profits generated by A/PS.

    Revenue guesses: With current Assets Under Management (AUM) widely estimated at around $11-13 Billion, A/PS is almost certainly amazingly profitable.

    On the revenue side, A/PS, and firms like it, typically generate revenue from annual Management Fees and Carried Interest on Realized Profits. Industry reports put A/PS annual Management Fees at 1-1/2% of assets - a typical amount. In addition, A/PS gets a Carried Interest of 20% of realized profits - also typical. A/PS has multiple funds of different types and objectives and their pricing structures may vary somewhat, but I found an article that says Fund II is prices at 1.5/20, so it is a fair guess that his other funds are comparably priced.

    So, as a rough guess, on $11-13 Billion of AUM, annual Management Fees would be about $180 Million. Typically, the important revenue comes from Carried Interest. For one example, it has been reported widely that A/PS' realized a $1.1 Billion profit for its clients on its investment in MBIA. That would translate to approximately $880 Million for the investors and $220 Million for A/PS.

    On the cost side, people are typically the dominant expense of A/PS-like firms. It has been reported that A/PS has a small staff -- various reports put the number at around 50. As is typical for hedge funds, PS has a very small staff compared to its AUM. A typical large mutual fund organization has much larger staffs relative to AUM and will typically have a profit margin of about 30%. My guess is that A/PS has a profit margin in excess of 75%.

    So, at current levels of AUM, P.S. - likely owned primarily by B.A. - earns several hundred million dollars every year. Of course, in PS's early years the numbers were lower, but, no matter how you cut it, it is pretty clear that A/PS and B.A. personally has earned substantially more than a Billion dollars.

    Outside of Pershing Square, all reports indicate that B.A. is a major philanthropist. Also, he has occasionally donated portions of his share of A/PS profits to the Pershing Square Foundation that supports a number of other non-profits. Some reports indicate he gives away as much as $60 million a year to charity - a laudable use of his money. But, just for perspective and not to cast any aspersions - that generosity has another side. Almost all of his donations go into the Pershing Square Foundation, which, in turn, makes donations to other non-profits. But B.A. controls the Foundation also. So, he is giving away lots of money to a non-profit he controls and every donation he makes reduces his tax bill substantially. In the case of HLF, B.A. has pledged to donate any personal profit he makes to charity. The thought is that his pledge demonstrates that he doesn't care about profit but instead only wants to rid the world of a company he is certain operates illegally. That may be part of his motivation, but there are un-advertised side benefits. First, he doesn't give up any control of the money as it is going to a foundation he controls. Second, he is making that donation with $.45 dollars, because if he did not donate the money to his foundation or another 501c-3, he would be paying around 55% or more in taxes on those dollars. Third, and perhaps even more important, any huge gain on his HLF position would increase P.S. AUM, which, in turn, would mean even more annual revenue to P.S. Having said all that, B.A. is still being very generous with his money.

    HAS B.A. DONE A GOOD INVESTMENT JOB FOR HIS CLIENTS?

    Gotham Partners, LLC

    Performance records are not available for Gotham. But, as previously noted, from its inception in the early 1990's with $3 million of seed capital, Gotham various reports indicate that Gotham grew to a range of $300 to $500 million. I infer that early investors enjoyed excellent investment performance, and that performance drew a bevy of new clients who made very large investments in the firm's funds.

    For any particular client, the realized investment performance was totally dependent on timing; if a client redeemed before the end he might have done well. But, if a client stayed around until "the end", he discovered that "Past Performance Does Not Indicate Future Results". B.A.'s Gotham clients' investments WENT TO ZERO because he bought illiquid money-losing investments, over-leveraged them, and couldn't pay his debts. Maybe his familiarity of making his own clients' money go to zero is why he is so certain HLF stock will go to zero.

    Pershing Square Capital Management, L.P.

    It is almost certain that A/PS has done a very good job for most of its clients. Currently, A/PS has four funds -- Pershing Square L.P, Pershing Square II, L.P., Pershing Square International, Ltd. and Pershing Square Holdings, Ltd. A fifth fund, Pershing Square IV, L.P. went to zero - well, down 93% -- the second time in his career B.A. has lost ALL of his clients' money.

    Here's the A/PS track record, as of September 2013…

    (click to enlarge)

    Note: The chart is from Pershing Square's October 2013 letter to clients describing Q3:2013 investment performance. Although the data is not current, it is sufficient to demonstrate the points below.

    A very early investor in any of the four PS funds still in existence who still has his investment should be extremely happy. Except for Pershing Square Holdings, L.T.D. , long-term investment performance doesn't get much better than what PS has produced, even after very high fees.

    But, performance has been highly volatile. For just one example, Pershing Square Holdings, L.T.D. had a horrible year in 2013, lagging the market by 2,000 to 3,000 basis points (depending on whether the benchmark is the S&P 500 or the NASDAQ Composite. On the other hand, the fund is reported at +26% 2014 Y.T.D. , ahead of the market but still substantially behind over the most recent 18 months.

    It should be noted that the overall outstanding performance has been created with some outstanding stock picks but reduced by some of the most horrific stock picks imaginable. BA does a great job of building his reputation by focusing on his winners. But, on the other hand, consider some of the losers:

    1. Pershing Square Fund IV, L.P., doesn't even show up in A/PS performance reports any more. B.A. launched that fund to invest solely in Target Corp. The stock went down substantially, and A/PS lost a vicious proxy fight to try to take over the company's board. He lost that fight. So, B.A. sold the stock and went home. But, similar to what he did with Gotham's investments, B.A. put huge leverage on Fund IV's investment in Target. Fund IV lost $1.8 BILLION of client money, which was 93% of their investment. A/PS liquidated the fund. Here's a news report about B.A.'s letter of apology to Fund IV investors.
    2. He has had other huge losers: Borders, J.C. Penny and, at least to date, Herbalife are notable examples.

    As a result, it is highly unlikely that ANY A/PS clients actually received the investment performance shown in the table. Those results show the equivalent of a "Buy and Hold" strategy from the first day the funds were open. It is highly unlikely ANY client actually did that. The real world doesn't invest that way. And, then there was Target… According to the A/PS client letter apologizing for the Target/Fund IV disaster, B.A. mentioned that many of the investors in Fund IV were also investors in the other funds. As Fund IV went to zero and cost A/PS $1.8 Billion, any client invested in both the "other" funds and Fund IV would recognize investment performance significantly less than show in the table.

    And, again, for any individual client, the investment performance produced by A/PS would depend entirely on the timing of the investment and the choice of specific funds.

    General Conclusion on A/PS investment performance:

    1. If a client's timing and fund selection was good, A/PS has likely produced outstanding investment performance.
    2. If a client invested in Fund IV in addition to some or all of the other PS funds, results will be significantly less than those indicated in the long-term chart above.
    3. B.A.'s great long-term record has been produced with huge performance swings month-to-month and quarter to quarter.
    4. A/PS' long-term performance consists of many outstanding stock picks partially offset by some of the worst picks imaginable. And, his gains and losses have typically been magnified because he often uses derivatives to leverage the stocks he buys or shorts.
    5. B.A. has been a great investor. BUT, BLINDLY FOLLOWING HIS INDIVIDUAL STOCK PICKS CAN BE DANGEROUS TO YOU WEALTH.

    Disclosure: The author is long HLF. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

    Additional disclosure: See additional disclosure in body of article.

    Disclosure: The author is long HLF.

    Tags: HLF
    Jul 23 10:21 AM | Link | 1 Comment
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