Bill Ackman learns costly lesson over Herbalife – keep it simple for fickle investors of Wall Street

Global outlook: As Herbalife strenuously denied the allegations of billionaire hedge fund manager Bill Ackman that the company is a pyramid scheme and an “incredible fraud”, the nutritional products company called Mr Ackman “the worst of Wall Street” and said that the facts were on their side.

The truth is that this description could be applied to a few more of the players in this increasingly morose morality play of lucre, hubris and ego that may yet become the defining story of this particular bull market.

Herbalife sells nutritional shakes and supplements through an army of independent distributors in more than 80 countries. Mr Ackman says he is so convinced that the company – with a stock market value $6.5bn (£3.8bn) – is a pyramid scheme that his Pershing Square hedge fund has made a $1bn dollar bet short- selling the company’s shares so that the fund would make a massive financial gain if the company’s stock collapsed.

Mr Ackman has also tried to claim the moral high ground by promising to give away any personal profit he makes on the bet to charity, although his fund clients would still win big.

Another billionaire, the old corporate raider himself, Carl Icahn, disagrees with Mr Ackman. Mr Icahn made a huge “long” bet on Herbalife, buying up its stock to become its biggest shareholder with almost 17 per cent of the equity, and has several of his people on the company’s board.

George Soros’s fund management firm also has a stake in Herbalife, as do many mainstream mutual fund companies like Fidelity and Vanguard, according to the fund research firm Morningstar.

But Mr Ackman is taking on The Street.

This past week, the Herbalife tale became surreal when Mr Ackman told financial TV channels late on Monday he would present new, extensive evidence on Tuesday morning that would prove once and for all that Herbalife is an “incredible fraud”.

“You are going to learn why Herbalife is going to collapse,” Mr Ackman said. Herbalife shares fell about 11 per cent on Monday night. “We won’t disappoint.”

He disappointed.

In his pitch, Mr Ackman made long, detailed and drawn-out allegations of “fictitious customers” surrounding Herbalife’s “nutrition clubs”, which involve many people with low incomes.

His story was too complicated. Even his supporters were scratching their heads.

Mr Ackman made the mistake of thinking that Wall Street would be morally outraged at his story. Er, no. When God was giving out the moral outrage, Wall Streeters were inventing credit-default swaps.

During his presentation to 500 people, with 10,000 watching online, Mr Ackman choked up with emotion. Wall Street was unmoved. Herbalife stock rose 25 per cent. Mr Ackman’s bet that the stock price will collapse is looking endangered.

The FBI, the US Federal Trade Commission and the Securities and Exchange Commission are investigating Herbalife. Mr Ackman may yet win, but the odds have certainly stacked up against him in recent days. The $1bn bet could end up costing a fortune.

Usually, when a Wall Street morality play gets to this stage, there is no right and no wrong – there are only winners and losers.

Facebook and Mark Zuckerberg, its founder, are having a laugh at the sceptics among us who sneered at the social network during its patchy first year as a public company.

Facebook had a botched IPO two years ago, was slow to embrace mobile technology, and its stock traded well below its float price for over a year. It went public at $38 and fell as low as around $18 before starting a slow but steady climb to today’s price around $75. Since those dark days for Mr Zuckerberg, Facebook has embraced the mobile world – it even paid $19bn, what many considered funny money, for the messaging service WhatsApp.

Today Facebook has a stock market value of around $190bn – higher than Coca-Cola and Disney. This past week helped explain why.

The company’s quarterly revenue increased by 61 per cent to $2.91bn in the three months ended 30 June – helped hugely by a strong performance from its mobile advertising business.

Facebook’s mobile advertising accounted for 62 per cent of all its advertising revenue – up from 41 per cent in the same quarter of last year. Revenue from all advertising was $2.68bn – a 67 per cent increase on the same quarter last year. Facebook’s net income was $791m, up from $333m in the same quarter of 2013.

Its daily active users were 829 million on average in June, up 19 per cent year on year.

More importantly, its mobile daily active users were 654 million for June – an increase of 39 per cent year-on-year.

These were strong numbers all round and proof, if it were required, that Facebook is all over the mobile market.

The company still has to convince a large proportion of the public that it can be trusted 100 per cent on privacy issues, where it has made a number of clumsy mistakes. But in ways that benefit investors – for now at least – Facebook appears to have grown up.