(This is in response to Carl Icahn's interview on CNBC today, which you can stream and listen to in its entirety here).
There are a lot of unfortunate people that fall victim to the promise of riches from multi-level marketing. 96.4% of those, per Herbalife's (NYSE:HLF) Statement of Average Gross Compensation referenced in my earlier article today, are failed multi-level marketing distributors.
Now, we might be adding one of the greatest track record investors of all time. After listening to Carl Icahn's interview on CNBC today with Scott Wapner, it's becoming clear that his disdain for Bill Ackman and fundamental misunderstanding of Herbalife's business model has made him the most recent to be duped.
For a while, usually citing the example of Icahn mispronouncing Herbalife's ticker symbol on the first CNBC battle with Ackman, I've been pushing the argument that Icahn may have simply not done his due diligence.
Today's CNBC interview with Carl Icahn was extremely revealing. Let's look at some of the statements that Icahn has made with regards to his position in Herbalife:
Icahn, when asked if it was his idea to stack the Board, said it was mutual and to lend credibility to the company.
This means, very simply, that there was some part of the company that came to Icahn and either said, "we have directors resigning and not seeking re-election and we need board members" or they could have said, "we've never needed credibility more than we need it now with the FTC investigation looming, some come on."
Icahn said "UHHH" an awful lot.
In general, Icahn simply didn't sound like he had a grasp on how the Herbalife model works. He wasn't able to explain clearly and confidently answers to simply questions, like those asked about the FTC investigation and its potential outcomes.
Icahn said "Herbalife is not a ponzi scheme."
This rivals Icahn mispronouncing "H-A-L-F" has Herbalife's ticker symbol as his biggest bonehead move thus far. Clearly, the accusation is that Herbalife is a pyramid scheme, not a ponzi scheme (although there's some runover between the two). The poor choice of wording here, one again, indicates that Icahn does not have a serious grasp on the intricacies of the controversy surrounding Herbalife right now.
Icahn admitted he wouldn't have looked into Herbalife if Ackman wasn't in.
This is enormous. Icahn is basically saying that the only thing that put Herbalife on his radar was Ackman. He's admitting that this trade is based on a personal vendetta, and did not (at least at first) have anything to do with the fundamentals, products involved, or financials. This is a major admission by the Icahn camp.
Icahn admitted that in the short-term, Herbalife stock could get rough.
Icahn knows that there could be rough seas ahead for Herbalife. If I'm a long and an Icahn supporter, this is a statement I'd pay attention to. The shareholders' fearless leader, simply admitting on air, that Herbalife stock in the short term could be a poor investment.
Icahn admitted that distributors are getting paid to bring in other distributors.
He also failed to name one Herbalife product, with the exception of their "shake". He is betting his entire position on the sales of one Herbalife product, it sounded like.
Icahn said he no longer has beef with Ackman.
This would be the very first thing I would say if I was considering laying down my Herbalife hand or reducing my shares. This is the beginning of a plan for Icahn to potentially not have to eat crow. Too bad Ackman is looking to take this trade "to the end of the earth".
These statements go to serve that Icahn doesn't really seem to have a grasp on Herbalife's business model. As Matt Stewart pointed out, it took Ackman years worth the research to establish his position and it just took Icahn a matter of hours to jump on the other side. He clearly didn't look at Ackman's presentation and clearly failed to do ample due diligence on his end.
Icahn is tipping his hand. He has been out researched by Ackman and duped by the Herbalife confidence game. And, in judging by his tone with Scott Wapner, it might not be long before he figures it out. In November of 2013, I wrote an article called "Herbalife Could Damn Well be the Next MBIA." In it, I also explored the battle between Icahn and Ackman, predicting that the outcome here could mark a sea change of sorts with regard to who the "sharks" were on Wall Street. I wrote:
You have to remember that the best in every industry, no matter what it is, are at some point replaced. Sometimes, it's ceremonious, like the turning over of quarterback passing records in football, or when one hall of famer inducts another into the NFL hall of fame.
Sometimes, it isn't ceremonious, like when Leno's timeslot was replaced by Conan O'Brien.
But, hey, that's Darwinism. And we could very well be witnessing a sea change of massive proportions about to take place here.
What we have here is one 48-year-old hedge fund manager in the fight of his life with the three pictured below [Icahn, Stiritz, Soros], worth tens of billions and weighing in at a combined age total of over 1,000.
Sometimes, not unlike the original aristocrat, C. Montgomery Burns from the Simpsons, guys that have had success their whole lives are less interested in the ethics behind a situation and more interested in simply crushing those who have the moxie to stand up to them. This could very well be a case study in that, and then, the psychological effects of the underdog eventually winning.
One thing you can say about Ackman over all of 2013 and into the Robin Hood conference/interview is that he's kept his head. As a matter of fact, that seems to be one of the things that Carl Icahn hates the most about him. During their original CNBC interview, Icahn alluded to a statement similar to, "no one is more sure of Bill Ackman than Bill Ackman." I don't know about Bill, but I'd take this as a compliment.
Ackman, despite what the bulls will tell you, has really always conducted himself in a classy and respectable manner during interviews and when presenting his case. He's persistent and calm, and rope-a-dopes you over and over with this case.
Ackman was even noted for, against the advice of his lawyer, volunteering much more information than necessary while he was being interrogated by the attorney general and SEC over the MBIA case. He wants you to hear his case - he feels if he can just get the sun to shine on his case, the people will eventually come to the right conclusion. And, I happen to agree with him. His first step was in late 2012, when he finally introduced his case to the world on Herbalife. Now, it's had some time to stew - and stirring the pot is the regulatory agencies and the general public's skeptical eye on the company.
This is because Ackman knows how to separate emotion from his trades, one of my other cardinal rules of investing.
Emotion is what prevents real success for many novice traders. Emotion is the catalyst behind making trades that make no sense on paper. Emotion is why people sell off positions after the crash and why they begin buying at the tail end of rallies. Emotion makes idiotic things run through your head, like:
"This stock may never stop going up! Better get in no matter what cost!"
"This company is doomed! We are going to zero right here, right now, on this crash!"
This may seem like idiocy when you read it now, but even the savvy investors know this voice still comes out in their head when they're in the midst of a rally or crash. Ackman is showing a great example how to ride out emotional situations with resolve and class over 2013 and into 2014.
By bringing attention to Herbalife, he's doing two things - aside from handing regulators everything they could possibly want on a silver platter, he's forewarning potential Herbalife distributors for what they're in for. It's a legal, ethical, two-pronged effect to make his point. And, I'm convinced his point will be made.
Remember the original CNBC interview with Icahn? Ackman was cool and collected, while Icahn sounded like the maniac; screaming, cursing on live television, interrupting, and generally making himself look like a whiner.
I am sticking with this analysis. A legacy that Icahn has is at risk of finishing with possibly one of the biggest blunders in years.
When Herbalife starts to pull back, there is no doubt that Icahn could have his hand on the trigger.
Additionally, Charlie Gasparino reported at 12CST that sources close to Icahn claim that he is "99% sure that it is not a pyramid scheme."
What the hell kind of a comment is that?
Aside from clearly showing he has no clue with regards to how the model works versus what is and isn't legal, why not 100%? For instance, I can come out and say "I'm 100% sure that Apple isn't a pyramid scheme." Further, what if Carl's 1% happens to be the objective truth? Yikes!
Also, Gasparino claimed that Icahn is pushing for more of a buyback - what a great idea! Maybe the company will take on another $1 billion in debt. Additionally, Gasparino repeated that Icahn thinks that Attorney General offices could piggyback on the FTC's investigation and that there is going to be "volatility" in the stock in the short-term.
Following Icahn's interview, the stock - which had been trading at its highs of the day near $53.60, promptly fell down into the $52 region and looks as if it will potentially continue its descent.
On the most unsure I've heard Icahn since taking his stake in the company, I continue to contend that Herbalife is a pyramid scheme that will ultimately be shut down by the FTC, post-investigation.
Best of luck to all investors.
Disclosure: I am short HLF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.