If you are a normal person, you’ve probably been busy with the holidays, shopping for gifts or going to office holiday parties. If you are little weird like me, you’ve been fascinated by Bill Ackman and his billion dollar stock market bet that Herbalife is a pyramid scheme. There are a lot of over-embellished titles used for articles in the media, but this Business Insider title of We Have Never Seen Anything Like Bill Ackman’s Dizzying Takedown Of Herbalife is dead on.
A few months ago, Einhorn asked some innocent questions on a conference call that sent the stock reeling. Many inverstors attributed the drop in stock price because Einhorn famously bets against stocks and his presense could suggest trouble. What people missed is that Einhorn was very cleverly asking Herbalife if they are a pyramid scheme by trying to find out sales of product to people outside of Herbalife (a key measuring stick) and Herbalife’s response was that they didn’t know.
Wall Street isn’t educated in MLMs and pyramid schemes, they just understand profits, losses, and other financial metrics. The news organizations missed what Einhorn was saying and focused on it being Einhorn that was saying it.
Enter Bill Ackman, his dizzying presentation, and the fallout. I’ve been reading and commenting on the articles at SeekingAlpha and have been amazed by how many people seem to not understand the most basic of concepts. Perhaps they do understand them, but because they own the stock, they are forced to come up with conspiracy theories that simply don’t make sense.
Like with Einhorn a great number of people have missed the point. Mr. Ackman doesn’t typically bet against companies. That made it a little more difficult for Herbalife supporters to ignore the message and attack the messenger. However, those supporters still tried to claim that Ackman is just trying to slam a company to line his own profits. Ackman is on record saying that the money made is going to charity. The supporters claim that Ackman is still going to gain personal notoriety from this. Of course he will. If a policeman catches a criminal, he “risks” becoming a hero. It doesn’t mean that policemen should just criminals go, because it is a terrible thing to be seen as a hero.
The presentation itself, Who Wants to be a Millionaire is so in depth that I can’t adequately cover it in this space. I have about 5,000 words typed up on the 334 slides, but I think such commentary would be best put it bite sized posts on another website. Perhaps I’ll do that soon.
However, if you’ve ever been curious as to how these MLM work and how they harm society, I implore you to see the presentation.
One of the things that I thought that was most interesting was at the beginning where Ackman shows Herbalife products are not priced competitively with other similar products in the marketplace and that they are commodities, nothing deserving such a premium. The mail me if you want to hire a competent person.
How Difficult is it to Understand Herbalife? Not Even the Wall Street Analysts Know What They are Talking About
On page 2 of this Business Week article, there are a couple of analysts giving their opinion:
- Tim Ramey analyst for D.A. Davidson & Co. – “Ackman gets an ‘A’ for effort and style points… not much substance in our view.” If the above isn’t full of substance with very specific references to the FTC’s definition for pyramid schemes and why HerbaLife runs afoul of them, I don’t know what else to say.
The article attributes the following to Ramey, “Ackman misses the fact that Herbalife sells a premium product to a growing number of individual users in the midst of a global trend toward healthier foods and weight loss.” Actually Ackman addresses the product quality in great detail showing that they are commodity product with no meaningful research and development or innovation. Furthermore in a room of Wall Street executives almost no one had heard of their top product, Formula 1. These people are paid quite well should be the very target of a company that sells a premium product. Tiffany’s is viewed as a premium diamond retailer and I’m sure they’ve heard of them and have some of their products. They are probably also familiar with Mercedes and BMW.
The point about sales to individual users and the global trends are inconsequential as to whether it is pyramid scheme. It is simply puzzling why an analyst would make this point and ignore addressing the information in the presentation.
Then again, in my previous Herbalife article, Ramey suggested that people should buy HLF stock hand-over fist given the sell off to $50. Those people would now own a $27 stock.
- Linda Bolton Weiser analyst for B. Riley & Co. – “The product is sold to people, people do use it, he included very little of that aspect.” Bolton Weiser is a HerbaLife distributor which hardly makes her unbiased, but let’s put that aside for a moment. She misses the point that when it comes to pyramid schemes, it is irrelevant if the product is sold to people and they use it. No one contends that point, but it is a red herring.
Then she goes on to tell a boldface lie, “His claim is that nobody is buying it at all. He literally said at one point there’s almost no retail sales going on. That’s a very odd statement to make.”
Ackman never makes the point that nobody is buying the product at all. Since Ms. Bolton Weiser is an MLM distributor (she’s signed a distributor agreement), she should know retail sales are sales of the product to people who aren’t distributors at retail prices. What he is saying that the people who buy the product are like Ms. Bolton Weiser, distributors buying the product at a discount rather than buying the product from a distributor at the suggested retail price.
If you understand the rules of MLMs and pyramid schemes as an MLM distributor and an analyst covering an MLM company, you know that Ackman’s statements are NOT very odd. They are directly in line with the FTC’s requirements to be a legit company.
Finally, just because I really liked these videos of Ackman stating that he’s trying to help consumers here’s a CNBC video and a Bloomberg one. Before I give you the videos though, I’d like to finish with one thought.
Herbalife hasn’t responded to the presentation. They said they’ll get around to it on the 7th of January. If it were me, I’d address the fact that my company has lost shareholders some 5 billion dollars and 60% of its value in 7 months. I’d probably also look into distributing my product in a way that doesn’t get compared to a pyramid scheme. Apple and McDonalds doesn’t have these problems. I may be Lazy, but I’m not irresponsible.