The Herbalife short

In 2012 Bill Ackman, an American investor and CEO of Pershing Square Capital Management decided to bet against Herbalife. He shorted 1 billion dollars against Herbalife.

What is shorting? In simple words, shorting or short selling is when an investor borrows a stock, sells the stock, and then buys the stock back to return it to the lender.

For example, if an investor thinks that ITC stock is overvalued at ₹500 per share, and is going to drop in price, the investor may "borrow" 10 shares of ITC from their broker, and sell it for the current market price of ₹500. If the stock goes down to ₹400, the investor could buy back the 10 shares at this price, return the shares to the broker, and keep a net profit of ₹100 per share. However, if the ITC price rises to ₹600, the investor would lose ₹100 per share.

Why did Bill Ackman short Herbalife?

Herbalife, according to Ackman was a pyramid scheme disguised as a nutritional products company which called itself a legal multilevel marketing company. Keeping that in mind, he accumulated a short position of about $1 Billion.

He believed that Herbalife would influence everyone to become one of their sellers. After a person decided to become a seller, they would buy a ton of Herbalife products and try to sell them to customers in their network. Unable to sell such large amounts of products, this seller would convince another person to become a seller and then dump all of the products on them. This becomes a sort of multiplier effect where the seller keeps convincing other people to become sellers.

With this scheme, only the top 0.1% of the people would be able to earn more than $150k a year whereas the res would earn below minimum wage.

In 2016 there was also a documentary made on this scheme called "Betting on Zero"

So what happened to this $1 Billion in short?

Ackman had expected the stock to tank further over time, enabling him to make a good profit through a short sale. But the strategy backfired after his nemesis, billionaire Carl Icahn, took the opposite position against Ackman, and build up his stake in Herbalife to 26%. This bearish position taken by Carl Icahn caused the stock price to continuously increase, not giving any opportunity for Ackman to short his stock

This was famously known as "The battle of the Titans". The two billionaires also went head to head on national television where things got ugly between them as they exchanged a few unpleasant words. The stock kept rising and finally, in 2018 Bill Ackman decided to cut his losses and exit his short position.

Even today people wonder if Bill Ackman was right. Maybe he was, but the strong position Carl Icahn held over the stock prevented him from shorting it, or maybe he was wrong about the whole scheme and lost over a billion dollars trying to short it.