$1B bet AGANST a pryamid scheme (HerbaLife)

[JEDI]

http://money.cnn.com/2013/01/08/investing/herbalife-ackman/index.html?hpt=hp_t2

Ackman, who runs the $11 billion hedge fund Pershing Square, has called Herbalife a pyramid scheme and publicly said that he's betting $1 billion that its stock will fall to zero.

He has made the biggest bet against Herbalife by borrowing 20 million shares to short them. That's roughly 82% of the company's 24.4 million shares currently on loan to short sellers.


wonder why HerbaLife, and not say, Amway?
or add Amway as well?

 

[SMOGZINN]

I wish him luck. Once he kills Herbalife may I suggest he go after Sentsy next?

 

[edro]

I still don't understand selling shorts. (and I have read about it numerous times)

 

[rcpratt]

I still don't understand selling shorts. (and I have read about it numerous times)

You don't understand it technically or philosophically?

 

[edro]

You don't understand it technically or philosophically?

Technically.

How do you borrow a stock for a high price, then re-buy it for a low price and make money?

How do you guarantee a buyer at the low price? Is the company REQUIRED to buy it back at the low price?

 

[actuarial]

Technically.

How do you borrow a stock for a high price, then re-buy it for a low price and make money?

How do you guarantee a buyer at the low price? Is the company REQUIRED to buy it back at the low price?

You don't guarantee a buyer at the low price. Eventually, you have to buy it back from someone to return the stock to the lender.

If the stock price goes up, you lose money on the short since you're forced to buy it back at a higher price than you sold it at. If it goes down, you make money.

When you buy a stock, the maximum downside risk is the stock goes to zero and you lose your initial investment. There is no maximum downside risk with shorting, as the stock price could triple and then you'd lose twice your initial investment.

 

[IronWing]

Shorting human greed and stupidity? Not a wise move.

 

[SMOGZINN]

Technically.

How do you borrow a stock for a high price, then re-buy it for a low price and make money?

How do you guarantee a buyer at the low price? Is the company REQUIRED to buy it back at the low price?

Think of it like a loan.
I own 20 shares of ImanginaryCorp, valued at $10 each. I loan from you $200, the current value of my 20 shares, you hold those shares as collateral, and I agree to pay you back in XX months at an amount of what ever the current value of those 20 shares are worth at the time. So, if the shares double in price I owe you back $400, if they half in price I owe you $100. This is the interest rate of the loan, I'm betting it will be negative, you are betting it will be positive.

 

[dave_the_nerd]

I still don't understand selling shorts. (and I have read about it numerous times)

Let's say you've taken a long term position (you intend to hold the stock for a long time) on Company X that's worth $100 a share right now.

I think it's going to drop in price, I pay you a small fee ($5, say) to borrow it from you, and agree to give you back a share in 90 days.

So I sell the stock for $100.

90 days later, it's worth $60 a share. So I buy a share and give it to you. You now have the same 1 shares you did before, which you intended to have anyway, plus $5.

And I have $25.

If I'm right. If I'm wrong, I'm boned.

Ackman made a good bet. But part of the trick for somebody like that is to publicly run down the company you've shorted so their stock price actually drops.

 

[SagaLore]

I still don't understand selling shorts. (and I have read about it numerous times)

Me neither. Just skimming the replies to you, I STILL don't understand and may never understand.

 

[dank69]

Me neither. Just skimming the replies to you, I STILL don't understand and may never understand.

Borrow 100 shares of stock that is worth $100/share today and sell for $100/share = $10000 for you. Over next month the stock drops to $50/share. You still owe someone 100 shares so you buy them back @ $50 each and return them to whoever you borrowed them from. You just made $5000.

 

[PokerGuy]

Seems like a very very big gamble. Unless Ackman has good reason to believe the FTC will take some action or that there's something big about to go down, he's gambling the entire hedge fund on this...

High risk, high reward, he could make billions..... but he could lose billions just as easily.

Herbalife seems like a pyramid scheme to me, and I wouldn't even consider taking part in it (or buy the products), but I don't know if the FTC will consider it a pyramid scheme and take action.

 

[rcpratt]

I had a response trying to explain it typed up, but then I lost it and don't have the motivation to recollect. Oh well.

 

[edro]

Is it a set amount of time, or can you rebuy at any time you want?
Can he just wait forever? Does he incur losses while he waits for it to drop, or is his only loss the initial investment?

 

[TwiceOver]

That sucks. There's a local place that makes shakes based off herbalife products and I actually like them. I don't get into the whole multi-level marketing aspect of it or buy their products off the shelf or pitch their business to anyone, but I do like my shakes.

 

[kranky]

You don't actually have to find someone to borrow shares from. You and I and thousands of other people keep their stock at a brokerage. If I want to short XYZ Co, I tell my broker to short 100 shares of XYZ. He's holding shares that other people own - that's how I "borrow" them. The shares are sold. An IOU in the computer says I borrowed 100 shares from some nameless person. They are still the rightful owners. Their account agreement states their shares may be loaned to others but they retain full ownership.

So nameless person lent me 100 shares but doesn't know it and doesn't care. If XYZ goes down, that's good for me - I buy 100 shares to replace what I borrowed. Since I paid less than what I sold them for, I made a profit. Nameless person's situation is unchanged. However, if XYZ pays a dividend before I replace the shares, I have to supply the money to give to nameless person so they still get the dividend they are entitled to.

If nameless person decides to sell their 100 shares of XYZ before I replace them, the brokerage house simply moves shares around so my "loan" is owed to a different person who owns shares. It's all done in the computer.

You can wait as long as you want to, as long as you keep paying any dividends.

Some say short-selling is very risky because stock you own can only go down to zero therefore your potential loss is capped. Stock that you short sell conceivably could go up to infinity, making your losses astronomical. That risk is overblown IMHO. You would "cover" your short by rebuying long before your losses were bankrupting you.

There's an event called a "short squeeze" that occurs from time to time. Let's say a stock has tons and tons of stock that was sold short. That means there are heavy bets the stock will drop, but all those shares MUST be rebought some day to replace the borrowed shares. So there is a future amount of stock that must be purchased. Now let's say the stock starts going up. This is creating losses for short sellers. And now let's say the company prospects suddenly become very bright and the stock rises more. This "puts the squeeze" on the short sellers as their losses are going up, and if they cover their short sales now it only increases the demand for the stock, pushing prices even higher. This can cause a very strong upward move in the stock even beyond the normal demand because the short sellers are bailing out by buying back the shares they borrowed.

 

[HumblePie]

Hate pyramid schemes of any sort. Herbalife, Amway, Cutco and the like all need to go away or change their business model.

 

[Jimzz]

Hate pyramid schemes of any sort. Herbalife, Amway, Cutco and the like all need to go away or change their business model.

I agree 100% but as ironwing said "Shorting human greed and stupidity? Not a wise move." this may not work out.

Common sense VS greed and stupidity

 

[KeithTalent]

You don't actually have to find someone to borrow shares from. You and I and thousands of other people keep their stock at a brokerage. If I want to short XYZ Co, I tell my broker to short 100 shares of XYZ. He's holding shares that other people own - that's how I "borrow" them. The shares are sold. An IOU in the computer says I borrowed 100 shares from some nameless person. They are still the rightful owners. Their account agreement states their shares may be loaned to others but they retain full ownership.

So nameless person lent me 100 shares but doesn't know it and doesn't care. If XYZ goes down, that's good for me - I buy 100 shares to replace what I borrowed. Since I paid less than what I sold them for, I made a profit. Nameless person's situation is unchanged. However, if XYZ pays a dividend before I replace the shares, I have to supply the money to give to nameless person so they still get the dividend they are entitled to.

If nameless person decides to sell their 100 shares of XYZ before I replace them, the brokerage house simply moves shares around so my "loan" is owed to a different person who owns shares. It's all done in the computer.

You can wait as long as you want to, as long as you keep paying any dividends.

Or as long as you stay properly margined/capitalized. If the shares continue to go up and you have no other equity to offset (or you do not deposit cash to offset) you can be taken to market and closed out at whatever price they can get in the market.

Happens all the time here.

KT

 

[lothar]

What ever happened to that guy that was shorting Berkshire Hathaway?

 

[preslove]

Let's say you've taken a long term position (you intend to hold the stock for a long time) on Company X that's worth $100 a share right now.

I think it's going to drop in price, I pay you a small fee ($5, say) to borrow it from you, and agree to give you back a share in 90 days.

So I sell the stock for $100.

90 days later, it's worth $60 a share. So I buy a share and give it to you. You now have the same 1 shares you did before, which you intended to have anyway, plus $5.

And I have $25.

If I'm right. If I'm wrong, I'm boned.

Ackman made a good bet. But part of the trick for somebody like that is to publicly run down the company you've shorted so their stock price actually drops.

Very good explanation.

And yeah, big hedge fund managers publicly stating they're shorting a company is fucked up. Saying "this company is ridiculously overvalued and I think its stock will drop, so I'm shorting it" is a self fulfilling prophecy when you are a public figure in charge of a shit ton of capital.

 

[actuarial]

Is it a set amount of time, or can you rebuy at any time you want?
Can he just wait forever? Does he incur losses while he waits for it to drop, or is his only loss the initial investment?

The lender (as said above, typically a brokerage) will provide rules with respect to the lending.

Typically, it is that you have collateral (or margin) to cover the cost of re-buying the stock. If the stock price goes up your collateral requirements do as well. If you can't get the collateral together in time, the brokerage will liquidate your position.

As a note, I'm going off my technical understanding of this but have not shorted myself, nor do I work for a brokerage. IOW - if anyone is considering shorting stock please disregard this information and do better research, but for conversational purposes it's alright

 

[ElFenix]

Very good explanation.

And yeah, big hedge fund managers publicly stating they're shorting a company is fucked up. Saying "this company is ridiculously overvalued and I think its stock will drop, so I'm shorting it" is a self fulfilling prophecy when you are a public figure in charge of a shit ton of capital.

pretty much.

the actual act of shorting increases the supply of shares on the market, thereby tending to lower the price of the shares. if enough people short, the prices will lower quite a bit. and if some shorting wizard says publicly that he's shorting some stock or another, you'll get that big number of people shorting.

 

[Phoenix86]

Hate pyramid schemes of any sort. Herbalife, Amway, Cutco and the like all need to go away or change their business model.

I'm kind of ok with the business model as long as they have an actually useful product (generally a material good, not services). It's the ones selling shit products with an iffy business model that are the real thorn in people's sides.

Think Mary Kay.

 

[Ashenor]

So can anyone does this? So can we do say a 100 shares of this ourself?