The basic business of an activist investor is that you pick a public company, you buy a bunch of its stock, you announce your position, you say “I have a few suggestions for how this company could be run better,” you get the company to implement your suggestions (by persuasiveness, or public pressure, or proxy fight), the suggestions are in fact good, and the stock goes up. Your suggestions increase the long-term value of the company, which is good for the stock price today. You are a big shareholder, so you profit. When you are done — when the company has implemented your changes and the stock price reflects the increased long-term value — you sell your stock and collect, as it were, your paycheck for a job well done.
Obviously it is possible to be bad at this. You might be bad at getting companies to implement your suggestions — you are not persuasive, you don’t win proxy fights, people don’t like you, etc. — or you might be good at getting them to implement your suggestions, but the suggestions are bad and make the stock go down. But let’s assume that some people are good at it. What that means is that, when they announce an activist position in a company’s stock, (1) they are likely to make changes to that company and (2) those changes are likely to make the stock go up.
What that means is that, when they announce an activist position in a company’s stock, the stock will go up right away. Other investors will say “ah, yes, that activist is in the stock, and her track record is good, so this stock will go up, so I should buy it now,” so they do, so it goes up now.
If you are a good activist, this might create some temptation. You just spent, I don’t know, $100 million buying some stock. You have a 120-page slide deck about how the company should make changes. You’ll have to go in and have a contentious meeting with management, and they might say no, and then you’d have to have a proxy fight, and you might lose. Even if you win, they’ll have to execute your plan; they might mess it up, or your plan might be bad to begin with. Everything is risky and uncertain and a lot of work, and it’ll be a year or two before you know the results. Meanwhile the stock jumped 20% on your announcement, so you have a $20 million profit right now. If you just sell your stock, then, boom, you’ve made money from your activism without actually doing it, quickly, without much risk. Why not just sell now?
A little bit of the answer is “if you sell people will complain about market manipulation,” but most of the answer is that you are playing a repeated game, and your reputation is valuable. If you have a reputation for being good at activism, you can keep doing activism, and it can keep making you money. If you do this stunt — announce an activist position, see the stock rise, dump the stock — more than once or twice, then the magic ends. After that, everyone will say “oh, sure, you bought stock, but just to pump it, not to do valuable activism, I’m not falling for that again,” and they won’t buy the stock, so it won’t go up, so you won’t have any profit, so you’ll have to go back to actually doing activism — except that no one will trust you and they’ll all assume you’re an opportunist.
In 2020, Chewy founder Ryan Cohen bought a big chunk of GameStop Corp. stock and did some activism to try to pivot it to e-commerce and technology. This was fine, you know, whatever — Cohen got himself a board seat and the company’s attention — until January 2021, when GameStop’s stock exploded.
He’s been on the board for two weeks, he’s done roughly nothing, and he’s up 1,655%, or some other comically large number, depending on what minute you choose to look at the stock price. It is a staggeringly good trade. … Cohen has been in for five months and has made more than a billion dollars.
But what can he do? I mean one thing that he can do is work diligently on GameStop’s board of directors to improve the company’s performance, like he planned to do two weeks ago. But it’s going to be kind of a long time, if ever, before GameStop’s performance catches up to its stock price. The market has (let’s say!) already given Cohen full credit for unprecedented, spectacular, sustained success in turning GameStop around; it seems sort of tedious, now, to come to work every day and try to actually do it. Also it might not work, and then where will he be? Not up $1.3 billion anyway.
The obvious trade is to get out while the getting is good, sell all his stock, quit the board and take a month-long victory lap just hanging out on Reddit and bragging. But he can’t really do that either. For one thing there would be certain legal complications if a board member and 12.9% shareholder tried to dump all his stock into this wild rally. There is also the likelihood that the GameStop magic is delicate, and if he announced he was selling his stake the stock might collapse before he could sell. It’s not that the stock rallied this week because of Cohen’s involvement, but Cohen’s involvement is a load-bearing element somewhere down in the basement of this bizarre structure. If he said “that’s it I’m out,” other people might too. He has made a once-in-a-lifetime trade and can’t cash in.
Well! Here’s a story about Cohen from today’s Wall Street Journal:
Investor Ryan Cohen might have run afoul of disclosure guidelines in his surprise sale of Bed Bath & Beyond Inc. stock this month, securities lawyers said, but regulatory action against him appears unlikely.
Mr. Cohen sold his entire stake in the home-goods retailer on Aug. 16 and 17, just months after he took a significant position in the company and pledged to force changes there. Shares tumbled after news of his sales came out on the afternoon of the 17th, but meanwhile Mr. Cohen benefited from a huge surge in volume that enabled him to sell millions of shares while prices rose.
An ownership disclosure that Mr. Cohen filed on the morning he began selling included a trivial update about the size of his holdings and said he hadn’t done any trading in Bed Bath & Beyond during the prior 60 days. …
Within minutes or hours of the ownership disclosure, Mr. Cohen began selling. Individual investors “have no idea he is dumping the stock against them,” said Joshua Mitts, a law professor at Columbia University who specializes in analytical research on trading strategies.
The Securities and Exchange Commission could investigate whether Mr. Cohen had a plan to sell before he filed the Aug. 16 update that he should have disclosed, according to former regulators and law professors who specialize in securities law. … A person familiar with Mr. Cohen’s trading said his filings complied with rules, and he didn’t make any offers or seek any prices for his Bed Bath & Beyond shares before making the Aug. 16 ownership disclosure update.
The Aug. 16 filing was … a reminder that Cohen owned the stock? In March, Cohen reported that he owned about 9.45 million shares (via direct stock ownership and high-strike January 2023 options), or about 9.8% of the company; later that month, he reported that he had reached an agreement with Bed Bath on the appointment of new directors. Nothing changed since then except that Bed Bath bought back some stock, meaning that Cohen’s 9.45 million shares now represented 11.8% of the company. So he filed an update saying that.
Then the stock soared for, as far as anyone can tell, irrational meme-y reasons: The Aug. 16 filing reminded meme-stock investors that Cohen owned a bunch of Bed Bath stock and options, and they were like “oh yeah, love that guy, to the moon!”: Cohen is a “meme king,” with “a deep fan base of individual investors” because of his role in GameStop, so when he buys a stock — or even just reminds people that he already owned the stock — the stock goes up. When Cohen filed that disclosure on the morning of Aug. 16, the stock was trading at around his purchase price; by the end of that day, it was way up. Cohen, sensibly, sold, making a profit of about $57 million.
One possibility is that this was a nefarious plot, but that seems unlikely. The more likely explanation is that he felt required to make this disclosure and was not particularly planning to sell (at more or less no profit) when he made it. And then the stock soared and he figured, sure, why not, take a profit now. People got excited when he reminded them that he owned the stock, and he took advantage by selling the stock.
The main point that I want to make here is that it is not at all clear that being a meme-stock king is a particularly repeated game. I mean, Cohen has done it twice, so good for him. But can he, or anyone, do it, like, four times? It is one thing to painstakingly build a track record of driving corporate improvements through activism, to the point that your investments can move a stock price, and then say “I do not want to undermine my credibility by dumping my stock before I have a chance to make improvements.” It is another thing to build a track record of people on Reddit calling themselves “apes” and piling into your stock trades for entertainment reasons. How long can you count on that lasting? If they’re buying your stock, you might as well sell it.