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Investment Lessons From Hedge Fund Thunderdome: Green Mountain Coffee Roasters Inc. (GMCR)

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Hedge fund managers have been making big news lately, and much of it has been dramatically contentious. Investors can learn some lessons from these public squabbles (and maybe even be a little entertained by all the insults and salty language). However, the entertainment value shouldn’t be distracting. Investment lessons abound in these matches.

Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR)Mano a mano
One of the high-profile skirmishes swirls around Herbalife Ltd. (NYSE:HLF). Hey, I’m not sure what could possibly go wrong with a nutritional supplement and diet food company based in the Cayman Islands, and hey, it also uses the notorious Ugland House address, used by, no joke, somewhere around 18,000 companies as a tax haven (that’s one huge house!). Granted, our own tiny, business-friendly Delaware is big enough to apparently “house” 945,000 companies, but such themes are for a different article on a different day.

Star investor Bill Ackman has publicly called Herbalife’s business a pyramid scheme and is short the stock. Among his arguments is the concept that Herbalife makes more money off luring new distributors than it does on its actual products — distributors don’t stick around for long.

Ackman’s latest contribution to the Herbalife controversy is pretty scathing, according to The Wall Street Journal: “If the [Federal Trade Commission] misses Herbalife, it’s the equivalent of the SEC missing Madoff.” He also had a message for the company’s auditor, KPMG: “If I were KPMG, I’d take a very, very careful look at that financial statement before I slap my brand on it.” Oh, snap.

On the other side of the fence is Carl Icahn, who has vocally supported Herbalife’s legitimacy and publicly berated Ackman. Daniel Loeb has also gone long on Herbalife shares. For a while, it was only a matter of conjecture that Icahn is long Herbalife, but he has now disclosed a 13% stake; he’s definitely short Ackman.

Ackman doesn’t have a perfect track record. He held Borders for years during its demise, and he is long J.C. Penney Company, Inc. (NYSE:JCP) right now, which has been struggling to compete.

Icahn doesn’t have a perfect track record either. While he can clock some activist wins for changes at companies like Chesapeake Energy Corporation (NYSE:CHK) (embattled CEO Aubrey McClendon recently stepped down, in a partial victory for shareholders), remember other situations. For example, he didn’t save Blockbuster.

Investment lessons:

1). The fact that renowned investors could have such wildly different and dramatically passionate opinions on a single investment shows that all investors will be wrong on some calls. While it will be interesting to see who turns out to be on the correct side of this battle, we regular investors should stay on the sidelines.

2). No one has a perfect track record. We investors should remember that in our own portfolios, during good times and bad, and give ourselves a break and take every wrong call as a learning experience.

3). Door-to-door, multi-tier marketing companies, regardless of whether they’re indulging in illegal behavior or not, are using a pretty creepy model. In just one interesting factoid in this case, Herbalife’s lowest-tier representatives — 88% of its distributors — don’t make a cent from the company. Ick.

Depressions, bread, and circuses
David Einhorn has taken Apple Inc. (NASDAQ:AAPL) to task (and filed a lawsuit) related to its renowned and rather epic cash hoard. Many dividend-hungry Apple shareholders may agree. For years, many investors have begged Apple to do something with its money, and big dividends are usually high on the list.

Einhorn called Apple’s attitude “Depression-era.” Apple’s Tim Cook shot back, dubbing Einhorn’s move a “sideshow.”

Shareholders should be aware of another element of this situation. Einhorn is recommending that shareholders vote against a proposal that would give its shareholders an important corporate governance change that’s been needed for a long time: the ability to vote for directors on an annual basis. Shareholder advisory firms Glass Lewis and Institutional Shareholder Services and pension fund CalPERS have all publicly advocated voting for the proposal.

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