Long patience but still short Valeant and Herbalife

Oil’s down 12% in the last week. Stock markets having a hard time getting any traction on the upside. Let’s talk stocks.

Valeant Pharmaceuticals is down big yet again to below $11, down to new multi-years lows yet again and, as I’ve argued since I first shorted it back near its highs and wrote “Trade Alert: Shorting Valeant VRX at $167/share“, the company might be in big trouble. The company’s largest shareholder for the last few years has been billion-dollar hedge fund activist investor. Bill Ackman just sold his stake for a $3 billion, 95% loss or so and that news is why the stock is down yet again today.

My small remaining short position in Valeant is showing a 93% gain this morning, as I was on the other side of Ackman for the last year and a half. Do you know how rare it is to get a 93% gain on a short? I’m sticking with me Valeant short still, as the company still has bankruptcy risk in the next few years.

Bill Ackman has been on my mind a lot the last few weeks because he’s also bet more than a billion dollars shorting Herbalife, which, I’m also short, meaning I’m on the same side as Ackman on Herbalife, unlike how I was betting exactly opposite of Ackman on Valeant.

One thing you never want to do on Wall Street is cast shadows and judgement on other traders and investors. And we’ve all had our big mistakes (you guys know how sick to my stomach I was over our small position in Fitbit becoming an 80% loser). But the one thing that stood out to me about Ackman and the records of how he tried so hard to make sure Wall Street stayed convinced that Valeant’s roll-up, drug-price-jacking, questionable account and overleveraged balance sheet was going to keep working instead of just looking at the facts and getting out of the way (see ‘We are on the brink of a catastrophe’: 9 highlights from Bill Ackman’s Valeant emails). The markets will reward strong earnings growth and organic business growth over time. Ackman seemed to focus on image rather than substance.

Which brings me back to Herbalife and the very public campaign that Ackman has taken in trying to get Wall Street to give up on Herbalife’s business model. The company itself pays Google to make sure you see Ackman’s involvement in the anti-Herbalife movie.

On the other side of Ackman’s and our Herbalife short is Carl Icahn, another billionaire hedge fund manager. Carl last week increased his stake in Herbalife by a few hundred thousand shares which made his stake from 24% to nearly 25% in the company.

One of the keys to investing is to be objective and free-thinking. We don’t buy or sell a stock based on someone else’s analysis or positioning. So regardless of whatever Ackman or Icahn might be doing right now, I’m going to base my decision on my own analysis.

In the end, you guys know that I think Herbalife’s settlement with the FTC and the new unproven business model they’ve had to implement since then is likely to cause big problems with the company’s earnings expectations for the next couple years at least. But the company has so far been able to stave off any major issues.

It’s possible that Ackman’s going to have to reverse his short positioning in HLF as his investors demand money out of his hedge fund. That might give shorts a great chance to build their positions at a higher level in coming weeks. We’ve got 20% gains in our HLF short position so far so I’m

I’m sticking with my Herbalife short for at least a quarter or two more to see if the company continues to have to guide expectations for future earnings growth lower yet again, as they have done each quarter since they settled with the FTC.

I’m being patient for with most of my money right now, as you can go anywhere to find new trading ideas — let’s stick with quality rather than quantity when it comes to trading. Here are nine great Jesse Livermore quotes that underscore why I’ve been so patient with both my longs and my shorts:

1. “Money is made by sitting, not trading.”

2. “It takes time to make money.”

3. “It was never my thinking that made the big money for me, it always was sitting.”

4. “Nobody can catch all the fluctuations.”

5. “The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel that they must take home some money everyday, as though they were working for regular wages.”

6. “Buy right, sit tight.”

7. “Men who can both be right and sit tight are uncommon.”

8. “Don’t give me timing, give me time.”

9. “There is a time for all things, but I didn’t know it. And that is precisely what beats so many men in Wall Street who are very far from being in the main sucker class. There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time. Not many can always have adequate reasons for buying and selling stocks daily – or sufficient knowledge to make his play an intelligent play.”

So let’s stay cool, stay objective. And most of all, let’s stay patient as we look for the next great long and short.