For some investors, the hardest thing to do is throw in the towel when a position continues to move against you -- that is, the share price continues to sink, potentially eroding profits and leading to losses. Sometimes steep losses. The prudent move is to check, re-check and even triple check the underlying thesis by collecting and assessing data points to make sure the investment thesis remains intact, strengthened or waned. As much as we would like to think it does remain intact, that is not always the case. When it goes awry, one of the struggles that investors need to be mindful of is vanity -- the inability to admit that we were wrong, did not see what was really going on or missed something. For some, however, it means abandoning the data and the sound investing process, as emotion -- and perhaps the desire to be right -- take over. When that happens, odds are it's not going to end well. One of the more high-profile examples in recent history has been hedge fund manager Bill Ackman's short position in Herbalife (HLF) . Ackman has been a vocal enemy of the nutritional shake and supplement company over the last few years as his hedge fund, Pershing Square, held a short position in the stock. After a reported year of investigating the company, the investment narrative for the negative stance was Herbalife was a pyramid scheme and would eventually fall to zero. Backing up that view, Pershing Square placed a $1 billion short bet on the nutritional supplement company in 2012. That trade served Ackman well in 2012, and his team pressed as they urged the Securities Exchange Commission (SEC) to investigate Herbalife and organized "a series of meetings with lawmakers and their staffs to encourage them to call on federal regulators to investigate Herbalife." In January 2013, the SEC opened an investigation into Herbalife and focused on examining its sales practices -- and then In March 2014, Herbalife reported the Federal Trade Commission opened a civil investigation into the company. In between those announced investigations, the company responded by defending its business, winning the support of other hedge funds in the process. This led to a now- infamous dust up between Ackman and investor Carl Icahn, and likely contributed to Ackman's resolve.

As the FTC investigation wore on, in March 2015 -- when Herbalife shares were down more than 50% from their just-over-$80 price in January 2014, Ackman shared that, "shutting down the company is 'one of the most important things' he can do." One might suspect this was the start of emotion -- and the need to be right -- taking over vs. being a prudent investor. In May 2016, Herbalife's stock rose more than 25% when it shared its talks with the FTC were in an advanced stage with a settlement expected to include "injunctive and other relief as well as a monetary payment with our best estimate of a payment being $200 million." Then in July 2016, Herbalife settled with the FTC, which determined "the nutritional supplement marketer is not a pyramid scheme," but called not only for changes to Herbalife's operations, but also that it would "need to prove that its business model is legitimate going forward." This led HLF shares to rally to a 2016 high near $68, well above the January 2015 trough share price near $31. For a short position, that rise in the share price meant generating losses, which helped contribute to Ackman's Pershing Square dropping roughly 20% in 2016 after falling by a similar amount in 2015. So far in 2017, even though it is off its October highs, Herbalife shares have climbed more than 40% -- due, in part, to the company completing a share buyback program in October. Another driver for the move occurred in May, when 90% of Herbalife's three million retail transactions in the U.S. were documented as purchases by consumers (as opposed to distributors), which exceeded the 80% threshold called for in the company's agreement with the FTC. Seeing the writing on the wall after almost five years, Ackman recently covered his short position in Herbalife shares, which even now he apparently sees as too risky to stomach any longer (although Ackman did buy put options on HLF that will rise in value if the stock's price falls). Had he covered his short position in late 2012 or in January 2015, the trade's returns would have been in the range of 50%- 60%. This should remind us of the age-old Wall Street saying, "Bulls make money, bears make money, pigs get slaughtered." The reality is, it is a slippery slope from following the data and thinking your investment thesis is on track to looking for almost any means to support the belief that you are right instead of listening to the data, especially, and noting things have changed. There is nothing wrong with recognizing the changing landscape -- in fact, the real issue is falling prey to the "crockpot investing" think that has an investor "fixing and forgetting" the position. Much like Rip van Winkle, a crockpot investor may wake to find things have changed dramatically. One central concept to sound investing is to remain as cold blooded as possible and not become emotional or fall in love with your investments. It is a time-tested strategy of prudent investors that

helps keep discipline and one's investment process in place. That's not to say people don't wander off the path sometimes -- they do. Ackman isn't the only person this has happened to, but it's an example that bears remembering and learning from.

Game theory case study: Herbalife Herbalife is a nutritional company operating under a controversial business structure called multi-level marketing (MLM). In essence, MLM companies make money from non-salary commissioned workers selling goods. A common example of a MLM company is how Tupperware parties used to operate and how Avon currently operates. At best, MLM is a way to sell products without brick and mortar stores or online presences and at worst pyramid schemes with a different name. Bill Ackman, manager of the hedge fund Pershing Square Capital Management, shorted Herbalife after finding that the company generated most of its revenue from fees paid by new salespeople rather than from the sales of products. Ackman told investors he entered his short position in May 2012, shorting about $1 billion worth of Herbalife while hoping to get the U.S. Department of Justice involved to shut down the companys unethical practices. Carl Icahn, the founder of the conglomerate Icahn Enterprises, has a mutual dislike for Ackman. After a deal gone wrong, Ackman dragged Icahn's name through the dirt, and now, Icahn wants to get back at Ackman. In fact, nothing would make him happier than embarrassing Ackman and making a good amount of money in the process. The Setup Ackman shorted roughly $1 billion worth of Herbalife stock in May likely around $35 per share. Dividing $1 billion by the share price of $35 results in 28,571,429 shares shorted, or borrowed, by Ackman.

Fast-forward to Dec. 24, 2012, which marked the low point for Herbalifes stock price. Ackman had days earlier publicly accused Herbalife of running a pyramid scheme, an illegal investment scam, and revealed he was shorting the stock, which fell 63% to $13.03. As of then, Ackman had netted an unrealized net profit of roughly $600 million, meaning the gain was on paper and yet to be cashed out. Icahn has two viable moves against Ackman: do nothing, or buy into the company in hopes of causing a short squeeze. If Icahn does nothing, we assume Herbalifes stock price moves to zero as it has been heading the past few months, and Ackman earns a $1 billion profit.

But if Icahn buys into Herbalife, he has the potential to both earn some quick profits if the stock moves upward because of his large purchase. Plus, hed see the added benefit of humiliating Ackman by both being right about Herbalife and forcing Ackman out of his position. Because no one knows exactly where a companys stock price is heading, the payoff table is simplified to show clear dominant moves. Entering Herbalife is Icahns dominant move, though it certainly carries risk, because it assures that Ackman will not realize the full gain he was hoping for while increasing his returns from $0 to an assumed positive amount. Ackman's response Icahn decided to buy into Herbalife, effectively reversing its stock prices slide by and almost ensuring Ackman makes no more profits.

Ackman has two options: close his position or keep shorting the company. A healthy $600 million profit is appealing to Ackman, but with the prospects of getting the DOJ to close down Herbalife, humiliating Icahn and helping the victims of Herbalife holding out, taking short term losses for future gains seems better.

Alternatively, exiting his position locks in gains and prevents losses, though it could destroy Ackmans reputation due to empty accusations and losing to Icahn. Although cashing out has the least monetary downside, the social repercussions would be devastating. The monetary gains from each decision are represented above. The best financial move for Ackman is to take his gains and run. The actual amount for holding out for better times doesnt matter to Ackman, as they are less than what he could expect from exiting the position today. Although exiting his short position will make Icahn more money, Ackmans primary goal should be to return as much money to his partners as possible instead of trying to save face. What actually happened When Icahn bought into Herbalife in December 2012, Ackman didnt exit his position immediately. He instead incurred heavy losses as Herbalife recovered its lost ground and eventually surpassed the $35 mark that Ackman entered his position at. Ackman incurred roughly $1 billion in losses instead of $1 billion in gains. This is

Ackman incurred roughly $1 billion in losses instead of $1 billion in gains. This is because he held his short position until late 2017, and the interest fees and rises in

stock price caused big losses. Meanwhile, Icahn made out well and secured a substantial profit. Instead of following the correct rationale and exiting as soon as Icahn entered, Ackman acted in his best interest, not the best interest of the partners of his hedge fund

1. Assume that you are an investor that owns shares Herbalife HLF. In light of the evolution of the Herbalife case fight as depicted in the case, would you buy/sell/hold? Why?

2. Is Ackmans investment strategy on HLF a form of responsible investing?

3. Why did Carl Icahn go long HLF after Ackman disclosed his short position?

4. What are the conditions under which you would predict HLF will drop?

5. What should Herbalife's CEO Johnson do?