Self-Fulfilling Prophecies

During an informational conference call for investors hosted by Herbalife yesterday, Greenlight Capital’s David Einhorn — a noted short-seller — asked Herbalife executives a series of questions about their business. The transcript is available here. Shortly thereafter, Herbalife stock took a major dive.

Imagine that.

Matt Levine offers some excellent (and entertaining) analysis of the situation here (even more here and here). In Levine’s words:

But once you have obtained that track record, why not monetize it, in the lowest-risk way possible? On the long side, this has been Warren Buffett’s business model for years. It’s nice if you keep being right – certainly it prolongs your ability to monetize the reputation – but it’s not completely necessary. Warren Buffett’s investing in a company is to some extent self-fulfilling; so is David Einhorn’s shorting. If you sold Herbalife as soon as he was announced on the earnings call, you are probably grateful to him.

Fans of my alma mater‘s basketball team are familiar with the phenomenon.  Once Coach K is said to be looking, the alleged recruiting experts decide that the being-looked-at player ought to go up in the recruit rankings. And if Duke offers, the player will almost surely become a McDonald’s All-American

To think that people wonder why some of these players don’t turn out to be as good as advertised by the “experts”…?! The again, it makes perfect sense.  There is no career risk in agreeing with Coach K.

6 thoughts on “Self-Fulfilling Prophecies

  1. Sometimes it’s great fun to hopping on the bandwagon, but I’ve sprained my ankle a few times doing it.

    • I have watched with some interest those who claim that Einhorn was doing due diligence on the Herbalife call and wasn’t (yet) short the stock. That’s possible, but I doubt that Einhorn does much of his analysis via public conference call. I suspect (with no knowledge and no position) that he was simply getting the company on the record and that he is already short.

      Thanks for your comments.

      • I totally agree with you. Once a short investor has taken a short position, they are hoping that the “truth” (as they see it) will come out in short order. Asking pointed questions on an open investor call is certainly one way to either get the company to hoist its own petard, or create doubt about the company’s honesty or accounting. As you noted, it is certainly nice to be as well-known and -regarded as Einhorn when asking those questions. And that’s where the self-fulfilling part may come in. A great example is Einhorn’s disrobing of St. Joe Company, at the Value Investing Congress and elsewhere, accompanied by a brilliant deck with his financial analysis and on-site photos. Greenlight did all of that research and took a short position before breathing a peep to anyone else, followed by the very public revealing of their case.

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