Maintaining a high public profile appears to be important to the execution of your strategy. Why is that?
The press is a necessary element of the strategy. Look at something like Procter & Gamble. We haven’t run a proxy contest. We haven’t made a public presentation. All we did is buy some stock. That became publicly known and immediately the press was all over the company and what they were or weren’t doing right. That saved us a lot of time and energy. On solid, high-profile boards of companies that are underperforming, sometimes the directors just need a little bit of a push. One of the best pushes is a reputational push, which a press spotlight can administer.
That spotlight can be particularly important in our shorts. We don’t short on valuation, but in situations where we believe a company is violating the law, or has misleading or inaccurate accounting, or has a potential regulatory problem. In these cases the attention really matters. If you’re a regulator with any sort of oversight of Herbalife [HLF], how can you ignore it when a reputable investor who has spent 18 months researching it says it is a certainty that the company is a pyramid scheme? Imagine if I’m right and they’ve done nothing on a company that’s in the paper everyday.
In taking such public positions, do you risk being so committed that you’re less apt to recognize evolving flaws in your thesis?
One of the keys to this business is having conviction based on your work that you’re right and the rest of the world is wrong. If you don’t have that confidence, you’ll never buy anything because there’s always something that can go wrong. Everyone thought the idea of buying stock in General Growth Properties right before it went bankrupt in the middle of the financial crisis was the stupidest idea they’ve ever heard of, and plenty of people said so. The stock was at 35 cents a share, down from $63, and we bought 25% of the company. You can’t get much more contrarian than that.
There’s obviously a balance to maintain between confidence and humility. You have to be humble enough to recognize when you’re wrong. I’m willing to look silly. With General Growth, we could have looked very silly. But even if things hadn’t worked out, I still think it would have been a good investment. It was probabilistic, where we thought the upside was high enough and likely enough that we were willing to take the risk of the stock going to $0.
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