The Herbalife Trade:
Ackman’s Costly Billion-Dollar Lesson
Ego, Emotions, and Errors: The Story Behind Ackman’s Loss
Let’s talk about Bill Ackman.
Founder and CEO of Pershing Square Capital, with a net worth of approximately $10 billion, he’s pretty much nailed the hedge fund game.
But even the best aren’t immune to mistakes… and Ackman’s infamous Herbalife short trade is proof of that.
Let’s break it down, learn from his mistakes, and most importantly recognise that even the best in the world get it wrong sometimes… (so no need to beat yourself up over that missed fill.)
THE HERBALIFE SHORT TRADE
In 2013, an analyst from Pershing Square pitched Ackman the idea of shorting Herbalife, a company selling dietary supplements, like shakes, bars, and the like through multi-level marketing (MLM).
For context, MLM involves individuals selling products while recruiting others to do the same, earning commissions from both their own sales and their recruits.
Here’s how it works: I buy a batch of shakes at wholesale, sell a few tubs to you, and then recruit you to do the same with your friends. You sell a few, sign up some of your pals, and they repeat the process with their own circles.
The cycle keeps going, relying on a steady stream of new recruits to keep the money flowing.
It’s not illegal, but it can sometimes push boundaries, depending on how the structure is set up.
Anyway, back to the trade… Ackman alleged that Herbalife:
- Made misleading claims.
- Operated an unsustainable business model.
- Preyed on vulnerable communities.
So, he publicly announced a large short position, backed by research, hoping media attention would enhance his trade.
And at first, it worked… The stock dropped, and Ackman looked like a genius.
Enter Carl Icahn.
Years earlier, Ackman had made an enemy of Icahn, another billionaire fund manager with a reputation for aggressive tactics.
Smelling an opportunity for revenge, Icahn built a massive long position in Herbalife and publicly mocked Ackman’s short.
The beef escalated when the two faced off live on CNBC, trading insults and calling each other names like schoolboys on national television.
(Watch the clip on YouTube, it’s surreal!)
In the end, Ackman’s position dragged on for years, and he eventually had to cut the trade, walking away with over $1 billion in losses.
ACKMAN’S MISTAKES
Ackman later reflected on what went wrong:
Naked Shorting
He typically used Credit Default Swaps to limit his downside, but here he shorted the stock directly, exposing himself to unlimited losses. (was this his biggest mistake?)
Emotional Involvement
Once Icahn got involved, it became personal… a battle of egos rather than a trade idea. (TBF Icahn played a blinder here, he knew how to turn the screw)
Blinded by Bias
Ackman became so emotionally invested that he couldn’t see the trade clearly. He was convinced Herbalife should fail and refused to consider he might be wrong or that the trade was mistimed.
Despite being proven right eventually, poor timing and emotions turned this bad boy into a costly mistake.
(Check out Ackman’s full breakdown of the trade in this Lex Fridman interview. It’s worth a watch.)
LESSONS FOR US TRADERS
Even after losing a billion dollars, after clearing the decks Ackman bounced back, posting a 58% return in 2019 and an astounding 70% in 2020.
So, what can we learn from this?
The best make mistakes.
Even seasoned pros aren’t immune to breaking rules and making bad trades, accept it and move on.
Control your emotions.
When emotions rule, logic fails.
Stick to your golden rules.
Ackman broke his own rule by shorting stock directly. If he hadn’t, the trade might have ended differently.
Don’t get married to a position.
When the thesis changes, so should you.
Clear the slate.
Sometimes, closing out everything and starting fresh is the best move.
Trust your process.
Your strategy exists for a reason… don’t abandon it.
And while none of us will likely lose a billion dollars on a trade (yet… I know there are some pretty ambitious traders reading this, give them a decade or so), the principles remain the same, no matter your account size.
Trade smart, stay disciplined, and remember: mistakes are part of the journey… but only if you learn from them.