Thursday, May 25, 2023

A powerful shift is coming to the markets; Bill Ackman's tweet about Icahn Enterprises; Young Investors in College Clubs Embrace Wild Market Ride; 100 Great quotes from Charlie Munger; Flying in Kenya

By Whitney Tilson

1) A powerful shift is coming to the markets.

And a single shrewd investment – on the right stock, at the right time – could make you 5 to 10 times your money as it unfolds.

To explain this opportunity, I recently sat down with my friend Louis Navellier. We explain everything you need to know to take advantage... including the name and ticker symbol of one of our favorite ways to play it. Check it out here.

2) "He who laughs last, laughs best."

I am reminded of this saying as I read Bill Ackman's commentary about Icahn Enterprises (IEP), Carl Icahn's investment vehicle that activist short seller Nate Anderson of Hindenburg Research targeted. (I covered this story in my May 2, May 11, and May 12 e-mails.)

Icahn took the other side of Ackman's campaign against multilevel marketing firm Herbalife (HLF) a decade ago. The two billionaires had an epic confrontation on live national television on CNBC that nearly halted trading on the New York Stock Exchange (highlights here). Icahn ended up having the first laugh, as he profited on his Herbalife position while Ackman lost $1 billion shorting it.

But now, Ackman is having the last laugh... IEP is imploding, tumbling from $50 to $35 in the immediate aftermath of Hindenburg's report, and in recent days to below $24.

Ackman posted a lengthy tweet last night with his analysis of the situation, which starts:

I have been fascinated by the @HindenburgRes $IEP situation, and there are some interesting learnings here.

For example, one learns from $IEP that a controlling shareholder of a company with a small float that pays a large dividend can cause his company to trade at a large premium to intrinsic value, best approximated in $IEP by its NAV per share.

The premium to NAV creates liquidity for the controlling shareholder by enabling him to access margin loans secured by overvalued shares that can be used to fund investments.

The $IEP premium has been sustained by a large dividend yield, which is not supported by operating cash flows. The yield is generated by returning capital to outside shareholders, which is in turn funded by the company selling stock to investors.

This system has worked for a considerable period of time, but it is highly dependent on the maintenance of the premium and the placidity of Icahn's margin lender(s).

$IEP stock held by Icahn is not a liquid asset as it represents approximately 85%+ of $IEP shares outstanding. The shares also purportedly represent 85%+ of his net worth so he apparently does not have much outside resources to draw upon.

Icahn didn't take kindly to Ackman's tweet and told CNBC's Scott Wapner:

Taking advice from Ackman concerning short selling is like taking advice from Napoleon or the German General Staff on how to invade Russia.

My colleague Herb Greenberg highlighted the key line in Ackman's tweet:

What Herb is referring to is the fact that Icahn has borrowed billions of dollars against roughly 65% of his shares in IEP (of which he owns around 85%). With the stock now down more than 50%, the banks who lent Icahn the money are soiling themselves and may start selling his shares to protect their loan.

This can create a classic run on the bank in which their selling pushes the stock down, triggering more selling. Lather, rinse, repeat, BOOM! The trading in IEP's stock this week leads me to believe that this may already be underway.

Unlike something like Silicon Valley Bank, however, this run on the bank doesn't necessarily end in bankruptcy. So where might it end?

Well, as I calculated in my May 11 e-mail, IEP's net asset value ("NAV") is $15.76 a share. Given that Ackman's closed-end fund trades at a 39% discount to NAV, I think the fair value of IEP, given its terrible investment performance in recent years, is, at best half of NAV, or roughly $8 per share.

But in a distressed or forced-selling situation, stocks crash through fair value. I think the bottom here for IEP is maybe $4, far below yesterday's closing price of $23.94. It could get there quickly...

3) Boy, I wish there had been investing clubs like this when I was in college and business school, as I didn't discover Warren Buffett and Charlie Munger until I was 30 years old in 1996: Young Investors in College Clubs Embrace Wild Market Ride . Excerpt:

Sam Eckert oversees an equity fund that is beating the S&P 500 this year. But he isn't a professional portfolio manager, and neither are his colleagues.

Eckert is a rising senior and the investment committee chair of the University of Chicago's undergraduate investment club, the Blue Chips. It is one of many college clubs where teenagers and 20-somethings are learning about investing by managing tens or hundreds of thousands – even millions – of dollars in assets. In other words, there is more at stake than an econ test.

Young investors are often associated with cryptocurrencies and meme-stock mania. Investment clubs take a different approach.

"A lot of my friends seem to treat their Robinhood account like a slot machine," Eckert said. "What we do is kind of the antithesis."

Investment clubs might not be as ubiquitous as Greek life or intramural sports, but they are fixtures at colleges around the U.S. – big and small, public and private. Lafayette College's club says it is the oldest student-run investment club in the country, established in 1946 with $3,000 and now managing roughly $1 million.

Some clubs got started with donations from wealthy alums; others manage part of the university endowment. Students take on roles such as analyst and portfolio manager, designed to mimic professional investment firms. Members research companies, pitch stocks, make trades – and debate everything from the trajectory of aluminum prices to whether a recession is imminent.

Graduating seniors have already seen quite a lot in their short investing careers. The market crashed during their freshman year as Covid-19 sent students home. Their sophomore year was a market boom. Junior year brought historic inflation, the most aggressive rate increases in decades and another downturn. Their final semester included a banking crisis. Many have learned to be OK with seeing a lot of red in their portfolio.

4) Speaking of Munger, the Compounding Quality blog has done an excellent job of compiling 100 of his best quotes, which you can read here: 100 Great quotes from Charlie Munger. Here are the first 10:

  1. Investing is where you find a few great companies and then sit on your ass.
  2. The big money is not in buying or selling, but in the waiting.
  3. Like Warren, I had a considerable passion to get rich, not because I wanted Ferrari's - I wanted the independence. I desperately wanted it.
  4. We have a passion for keeping things simple.
  5. Assume life will be really tough, and then ask if you can handle it. If the answer is yes, you've won.
  6. Think of the basic intellectual dishonesty that comes when you start talking about adjusted EBITDA. You're almost announcing you're a flake.
  7. If investing wasn't hard, everyone would be rich.
  8. You don't have to be brilliant, only a little bit wiser than the other guys, on average, for a long, long time.
  9. The desire to get rich fast is pretty dangerous.
  10. Those who keep learning will keep rising in life.

5) My parents and I flew down to Amboseli National Park yesterday in my dad's small four-seater plane, a Cessna 182.

I'll send pictures from our safari drives tomorrow, but in the meantime here's a picture of us at the hanger:

Here we are flying:

And here are two video clips I took of our takeoff and landing.

It's amazing that my dad is still flying at age 81 – he's been a pilot for more than 60 years!

The hanger and grass airstrip are in the middle of a tea plantation 15 minutes from my parents' house, which is about 45 minutes outside Nairobi. Here's a picture of their home, with their horses grazing in their yard and the barn in the background:

Best regards,


P.S. I welcome your feedback at [email protected].