Whoops, I dropped the opening brace from my de-golf'ing. I'll correct that above, but also try to explain it a little more explicitly.

The thing to remember is that the perldoc perlrun entry for -n is applied literally.

Again from perldoc:

while (<>) {
  ...             # your program goes here
}
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So -n literally puts that code around yours.

while(<>){
  / /, $;{$`}++}{print $_, $/ ^= "*" for %  # this line is what
                                            # was inside the single qu
+otes
}
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Literally. The }{ closes the while loop and lets you add extra code outside the while loop. And since -n will always add that extra closing brace, you need to open one. Resulting in:

while(<>){
  / /, $;{$`}++
}
{
  print $_, $/ ^= "*" for %
}
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s**lil*;  $*=join'',sort split q**;  s;.*;grr; &&s+(.(.)).+$2$1+; $; =
qq-$_-;s,.*,ahc,;$,.=chop for split q,,,reverse;print for($,,$;,$*,$/)
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