Best To Avoid These Hedge Fund Publicity Stunts

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

William D. Cohan, the author of "Money and Power: How Goldman Sachs Came to Rule the World," recently wrote on Bloomberg that he thinks hedge fund managers talking up their trades is akin to insider trading. He called out such well-known money managers as David Einhorn, Carl Icahn, Daniel Loeb, Bill Ackman, and, interestingly, Warren Buffett. He's got a point, and investors should both acknowledge what is going on and avoid the many "publicity stunts" making headlines today. 

Einhorn vs. Apple (NASDAQ: AAPL)

The recent public sparring between Einhorn and Apple has drawn plenty of media attention. At the end of 2012, the computer and device maker had about $16.2 billion in cash on its balance sheet. While that is truly a grand sum, add in the short-term and long-term “marketable securities” on the balance sheet and the amount of money the company is sitting on balloons to $137.2 billion. Now that's a lot of money!

Apple has legitimate uses for that money, including investing in research and development and funding acquisitions. However, shareholders have a legitimate right to wonder whether the money, which really belongs to them, wouldn't be better off distributed out to the company's owners. So, in that, Einhorn has every right to suggest that Apple give him what, effectively, belongs to him.

Herbalife (NYSE: HLF) vs. Ackman vs. Loeb

Another big story lately has been Ackman's insistence that Herbalife is little more than a Ponzi scheme. The company's multilevel marketing structure certainly opens it up to such allegations. In fact, hedge fund manager Ackman has made so much noise that the government is looking into Herbalife's results. That's bad news for shareholders, but great news for someone like Ackman, who has a publicly disclosed short position in the stock.

Loeb, on the other hand, is backing Herbalife. He suggests that a company with its history, size, and scale couldn't have survived this long if it were a Ponzi scheme -- unless the government watchdogs were asleep at the wheel. Loeb is long and probably suffering at the moment.

Regardless of who turns out right, investors are in for a wild ride on this one. The sad thing is that, at this point, both managers could turn out winners. Ackman has already made a mint from the stock's drop, while Loeb could ride the recovery if Ackman is proven wrong.

And, to make things more interesting, Carl Icahn has joined the fight, too, in support of Herbalife.

Chesapeake Energy (NYSE: CHK) vs. Icahn

In separate news, Icahn recently won a crucial battle in his fight to remake Chesapeake Energy. After gaining control of the board of directors and removing the company's co-founder and chief executive officer Aubrey McClendon from the president post, he's now managed to get the man fired. The company's shares shot up on the news.

While it may be nice to see the weight of a controversial CEO lifted, there's still plenty of heavy lifting to do at the company. Turning things around at Chesapeake is no small task. With a large debt load, the company has been selling assets to pay down its obligations and more sales are on the way. More importantly, the company has to transition from a land acquirer to an oil and gas driller. These are big tasks. While Icahn has the money to wait around, do investors?

Cohan vs. the Hedge Fund Managers

Cohan sums up his concerns about hedge fund managers well: “They know investors will listen to them. They get conviction in a stock -- long or short -- and build up their positions without anyone knowing. And then when the position is built, they go on national television to talk about it, and the stock moves in their direction. That’s a license to print money, and so that’s exactly what they’ve been doing.”

He even goes so far as to lump Buffett in with the hedge fund managers. While some might argue against this, it is hard to deny that he likes to talk up his long-term holdings. So it isn't so far fetched. While Cohan admits the hedge fund men aren't breaking any laws, his concern has merit. And these practices aren't likely to change any time soon.

Don't Play the Game

Investors like to follow what they see as smart money. This is, clearly, what these hedge fund managers are banking on. However, blindly following any investor is a bad idea and always has been. If that's the approach you want to take, you should put your money in mutual funds. That isn't to say you can't find value in the hedge fund games, but that you should pick your positions wisely and for your own reasons.

For example, Herbalife is an ugly situation all around. While both of the hedge fund managers could make money, regular investors are more likely to find themselves burned. Is it worth buying a stock that is being examined as a possible Ponzi scheme? No, move on. Chesapeake Energy after McClendon has still got problems to solve. Will it solve them? Probably, but it could take a little, maybe a long, while. Do you want to stick around to find out how long it takes?

Apple's stock has fallen sharply and not because it isn't paying out more money in dividends. Investors have legitimate concerns about its business, including the ability to continue bringing out industry changing products. While a big dividend might be nice, investors should only buy Apple if they believe the company is fundamentally strong and has a few more big hits up its sleeve.

Think, Don't Follow

Hedge fund managers live in a very different world than regular investors. While their antics can be a lot of fun to watch, make great press, and move stocks, you need to think about your money because they don't care what happens to your wealth, only their own.


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Reuben Gregg Brewer has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, Short Jan 2014 $15 Puts on Chesapeake Energy, and Long Jan 2014 $50 Calls on Herbalife Ltd.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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