As an investor, I really enjoyed working on the Chemical Financial Corporation case. This study not only helped me understand better the management’s treatment of the securities investment available-for-sale, but also reminded me of an unpleasant memory. I have an unforgettable investment experience with a small tech cap which lost a significant amount of money from investing derivatives greater than the amount of its equity. Until then the company’s earning had been decent but the share price went down quickly upon the news about the investment loss. I did not understand why the loss incurred out of sudden and the company had to be delisted. But through the case study, I know why. As a result, I lost about $30,000 USD 7 years ago. It was an invaluable lesson to me in my life especially when I was obsessive with stock investment.

“Mr. Ackman, head of Pershing Square Capital Management LP, publicly alleged that Herbalife was a pyramid scheme last year and announced a $1 billion short bet against the company. Although Herbalife, a nutritional-supplement maker, saw its shares dip after Mr. Ackman’s broadside, it has been one of the strongest gainers in the stock market this year. The Wall Street Journal reported last month that Mr. Ackman’s losses on the bet were more than $300 million. “

This article was intriguing. It is not much related to my personal experience and the Chemical Financial Corporation but gives insights about the unrealized losses in investments available for sale. Mr. Ackman is a successful investor with “an impressive track record and his main fund has averaged more than 20 percent per annum in gains since launching in 2004”. He has a strong conviction that Herbal Life is a pyramid scheme and shorted a $1 billion on the company. Unfortunately, the stock price went up very high, bringing Mr. Ackman hundreds of millions of loss. Herbal Life’s earning in 2012 rose to $1.20 per share from $0.73 in 2011. Its net income also has grown gradually; everything looks fine according to the Herbal Life’s 10K. Herbal Life’s business seems to be just promising to me. I spent a couple of hours searching for the company’s activities related to the pyramid scheme which Mr. Ackman claimed. But nothing has been found.

Reading this article, two thoughts just came up in my head. First, I was very curious about what really makes Mr. Ackman is so confident about his argument even bearing a huge risk that he might lose many of his investors. Second, I found admirable the transparency that the unrealized loss of Mr. Ackman’s company was disclosed public and the trust that his investors still keep their investments in him even after the unrealized loss was known.

Article:

http://online.wsj.com/news/articles/SB10001424052702304906704579112211607810806Referenced:

http://www.reuters.com/article/2013/10/29/hedgefunds-ackman-idUSL1N0IJ2JA20131029

Reference:

http://www.sec.gov/Archives/edgar/data/1180262/000119312513065327/d452887d10k.htm#tx452887_8