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Bill Ackman broke some cardinal rules of short-selling with Herbalife: Kass

Aaron Task
Editor in Chief

It's not easy being green, as a famous frog once sang. It's also not easy being a short seller, especially in market that keeps hitting new records. But someone's got to do it and few have done it as well or formas long as Doug Kass of Seabreeze Partners.

Kass is rare among short-sellers in that he's a public persona and discusses active short positions on television and in publications like Barron's and TheStreet.com's RealMoney Pro service. So when Kass came to Yahoo Finance this week to discuss his new book Doug Kass on the Market: A Life on The Street, I had to get his opinion about one of the most public short-selling events in recent memory: Bill Ackman's crusade against Herbalife.

Related: Short seller Kass on market highs: I am waiting to pull the trigger 

In December 2012, Ackman laid out his short thesis in an epic 342-page slide presentation at the Ira Sohn Conference in Manhattan. At the time, Ackman claimed he will stay short until the stock goes to zero, called Herbalife "a pyramid scheme" and pressured federal regulators to investigate. (The Federal Trade Commission launched an investigation in March, but the company's CFO told Bloomberg last month the firm expects to be exonerated. The FBI and Attorney Generals in several states are reportedly also investigating the fraud allegations.)

Herbalife shares have gone on a wild ride in the past two years, going from nearly $43 the day before Ackman first announced his short position to nearly $82 in January 2014 before tumbling again to currently trade around $38. In between, Ackman got into an epic battle with Carl Ichan, one of a number of fund managers who took long positions in Herbalife and put Ackman's position under intense pressure; it's why they call it a short "squeeze."

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It's the kind of battle the media loves (Yahoo Finance included) but not what Kass recommends for anyone looking to play the short side.

"As attractive as a short sale might be, I am not interested in getting involved in a short squeeze as [Ackman] did in the embryonic stage of his short position," Kass says. "I have the scars on my back from the experience and I don't want to do that again."

In his book, Kass details his precepts and principles for short selling. "It's a non-starter for me if the short interest as a percentage of the average trading volume or as a percentage of the float...is substantial," he says, defining that as short interest over 7% of the float or more than 1.5 times the average daily trading volume as was/is the case with Herbalife.

Currently, short interest is over 39% of Herbalife's float and represents about 1.2% of average daily volume for the past 90 days, according to Yahoo Finance.

"The publicity associated when [Ackman] had a 400-page deck slideshow? I wouldn't do that either," Kass says, although he's willing to broadly discuss short positions. Rather than get into a battleground short like Herbalife, Kass prefers to target "a boring mundane slow growth company that sell widgets...whose secular growth prospects and business model is much worse than what the consensus thinks."

Aaron Task is Editor-in-Chief of Yahoo Finance. You can follow him on Twitter at @aarontask or email him at altask@yahoo.com.