Remember how Carl Icahn called Bill a loser? That insult was in the context of a major battle about the massive nutritional supplement company Herbalife. Herbalife is a “multi-level marketing company”: it recruits sellers (paid only through commissions), who in turn recruit sellers to pay them commissions, who in turn recruit sellers… with the theory being that eventually someone down the line will buy and use the product.

If that sounds a bit like an Ancient Egyptian construction scheme to you, you’re not the only one: Bill Ackman was convinced of its geometric properties. So much so that he bet the authorities would crack down on Herbalife, sending the value of the company plummeting. Icahn, meanwhile, thanks to a previous (and messy) grudge with Ackman, started buying up Herbalife’s stock instead, eventually becoming its biggest investor.

What happened? Just like with MBIA, Ackman tried to raise public awareness of Herbalife’s model – even prompting a government investigation into the company. But while regulators shared many of Ackman’s concerns, they stopped short of calling the company a pyramid scheme. That meant Herbalife could keep operating – destroying Ackman’s chances of a win. In 2018, he admitted defeat and exited his position with massive losses – perhaps over $700 million worth.

Why are you telling me about a failure? Because it’s a good case study for what not to do when making an investment.

Ackman’s bet on Herbalife was really a bet on regulators shutting the company down. But gambling on government decisions is extremely risky – you never know for sure what officials are going to do. Modern crypto and cannabis investors hoping for regulatory acceptance should take note...

The debacle is also a lesson in making sure you fully understand the risks of any given investment. Ackman admits he underestimated Herbalife’s financial capacity to keep itself going and increase its share price. Unlike him, you should always try to keep a cool head and properly assess your chance of success.

You can also do a better job of accepting when you’re wrong. The regulatory ruling on Herbalife came in 2016, but Ackman maintained his bet for another two years, convinced he’d be proved right in the end. Quitting earlier might have saved him some pain: his losses kept increasing until he finally gave up.

Did he do anything right? It’s not for us to pass judgment on Herbalife’s merits as a company. But Ackman believes it did and does exploit some of the most vulnerable people in society. And with that in mind, he doesn't actually think of his Herbalife bet as a total failure.

“I view Herbalife as an enormous success because we’ve surfaced the harm the company has caused.” – Bill Ackman

Investing doesn’t have to be just about money – it can be about making a difference, too. If you commit yourself to investing for a moral cause, you might be able to stomach a financial loss when society has seen positive returns instead.

Herbalife wasn’t Bill’s only disaster, though. In the next session, we’ll look at how he bounced back from his worst one yet.

The takeaway: Betting on government decisions and underestimating risks is a recipe for disaster – but there's more to life than money.