Trust your reason and common sense

By DAVID MOON, Moon Capital Management, LLC
January 20, 2013

Several years ago, two high ranking US government finance officials were quoted within days of each other in two different national newspapers. One warned of coming inflation and higher interest rates. The other outlined a case for deflation.

These two individuals were responsible for many of the decisions affecting interest rates. They were in the interest rate management business. If they couldn’t agree on the likely near-term changes in rates, you and I don’t have a chance.

Therein lies the danger of blindly adopting the opinion of a public figure.

Nutritional supplement and network marketing company Herbalife has increased its revenue at a double-digit rate for seven of the eight years since going public in 2004. With the exception of 2009, the company’s earnings per share have increased between 20 and 50 percent each year.

That’s why successful hedge fund manager Daniel Loeb owns almost nine percent of the company. He calls it a “classic compounder.”

Outstanding investor William Ackman, however, makes a very compelling case that the company is simply a Ponzi scheme that uses predatory practices to attract under-educated people with false promises of becoming millionaires. He argues that an inordinate amount of the company’s sales are simply made to distributors, with very little retail sales actually occurring. His bold prediction is that federal regulators will eventually shut down the company.

The two managers on the opposite sides of this trade are both smart people. They have a history of earning outstanding rates of return for their clients and each is considered among the best in the investment business.

Daniel S. Loeb’s Third Point manages over $10 billion. His Master fund has returned 17 percent annually over since its inception in 1996. His firm is so successful that it does not accept new clients.

Bill Ackman’s Pershing Square Capital Management manages 7.8 billion. Ackman spotted danger before famously forecasting the stock price collapse of bond insurer MBIA. Ackman is an activist shareholder, unafraid to duel with company executives. His efforts have proven successful; over the past eight years his funds have returned 24 percent annually.

If you are going to blindly ride the coattails of someone on CNBC, either of these men would be outstanding choices.

One of them, however, is wrong.

The obvious problem with blindly riding coattails is that no one’s coattails are infallible. In our society we tend to think that people who communicate well or are public figures are more competent than mere mortals.

It is a terribly false premise. I know; I’ve been on CNBC a number of times.

Therein lies the risk of being swayed by a casual exposure to the opinion of someone who enjoys either a high profile or even outstanding accomplishments.

Around 500 BC, Gautama Buddha advised that no man should believe anything, no matter who said it, unless it agreed with his own reason and commons sense.

CNBC did not exist in ancient Nepal.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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