One Billion Dollars Short, Bill Ackman, and the Siege Of Herbalife (2015)
fortune.com
fortune.com
Company A sells natural remedies, etc. Company B is a news organization which reports on natural health remedies, and also advertises for those companies, et. Nonprofit C is a consumer watchdog organization that investigates and promotes natural health. They are supported by the natural health industry, and community. Trade Association D is a group of natural health corporations that lobby the government, and fight bad press.
The trick is, A, B, C, and D are all working together, in collusion, with the same investors, same backers, and each supports the other. It's so pervasive it's astounding, and extremely difficult for consumers to see through to factual information.
Look at south Africa, multi vitamins, and hiv/aids denialism. It's pretty fascinating, human toll aside.
As for Aids denialism, South Africa suffers from a case of cultural antiestablishmentism, particularly in the context of Western medicine. Thankfully our government has stepped up in recent years, and actively promotes HIV/Aids education these days.
Hahahhaha. Great joke. Sadly, there are and probably always will be a lot of ignorant/gullible people. As PT Barnum said, "there's a sucker born every minute."
-Keynes
You could lose because the rational choice model does not accurately model human behavior in the real world; people don't act based on perfect information, in part because even when presented with correct information, they are likely to reject it if it doesn't fit their pre-existing world view.
No, full rational choice theory posits that people do behave in a way which maximizes actual (not expected) net utility, or, in more detail, as if:
(1) They have a coherent “utility function” mapping each potential path through time that might be taken to a unidimensional, real-number utility value.
(2) They have perfect knowledge of the outcome (path through time), or at least resulting utility value, produced by every possible option with every decision they make,
(3) They consistently choose the option that maximizes utility.
There are more limited modifications of rational choice theory that attempt, with varying degrees of success, to close the predictive gap between full rational choice theory and actual behavior resulting from the fact that humans do not behave “rationally” in the sense of rational choice theory, but they aren't what is involved with the question “how can you lose when rationality is on your side?” asked upthread.
Do you think rationality can win when the President of the United States says that global warming is a Chinese hoax.
And to be accurate, I believe Trump's current position is "global warming is happening, caused by humans, but Paris unfairly advantages other nations over the US."
Which is how all climate agreements look when you're trying to get buy in from developing economies... but at least it's better than hoaxism.
This is why I like consumerlab.org. They summarize the medical research and test to see how much of the active ingredient it actually has.
Do you have any other recommendations along this line?
Here's what I know: The products are of dubious quality, and can be bought for much cheaper elsewhere. The majority of people who end up being distributors absorb a net loss, and given that many already come from financially unstable backgrounds, that loss is particularly painful. The largest sellers in the chain either got in super early, or make more money off of ancillary products (seminars, etc.) than actual sales.
That sounds shady as hell as best, downright predatory at worst, and all of the "Yeah, it might be bad, but so is X" arguments in the world don't absolve it.
I guess where the real decision fork is to what extent you feel the Government is responsible for making it harder for people to make dumb decisions by shutting down the companies that prey upon them.
My parents did it for awhile, after being turned onto it by another woman in the small town we lived in. But guess what? That same woman was already selling to 90% of our potential customers. Everyone who was going to buy a case of Glister toothpaste already had one sitting in their garage; who were we supposed to sell to?
The answer to the rhetorical question is, nobody. We brushed our teeth with our shitty investment for about a year, then wrote the whole thing off as a failed experiment that luckily didn't bankrupt us.
The MLM "model" can be summarized thusly:
- 1. Give people pretty good business advice from a host of good business books
- 2. Give people a very positive exciting environment
- 3. Give people literally the WORST job ever created with a product that cannot exist on its own in the marketplace if it wasn't being artificially propped up by hundreds of thousands of distributors
MLMs are scams. And no matter how much they try to attack other industries by saying how unethical they are, or how much they lie about their products, that can never and will never absolve them for the damage they have done to so many lives.
ALSO: something else you'll notice is that people who've been involved with MLMs might recall them fondly. This is just a defense mechanism (an extremely understandable one) to prevent having to view oneself as being duped. I think it's a shame though because we'll all be duped or scammed to some degree in our life, no need to change the past. Anyway reading "The Big Con" by David Maurer right now, a book by a sociologist about con-men in the 1940s. It's the basis for the movie "The Sting", and its remarkable how many people in the book are conned but refuse to believe it, and even years later still think their guy is out there, about to return their money at any time with 20x the profit or whatever.
EDIT: Also it is nearly impossible to look this stuff up on Google. MLM people have so carpet bombed the search sites the first 30 or so links will be links to Youtube videos with titles like "Is XYZ company a scam??" that find of course it's not. Occasionally a random legitimate news article will leak through. Otherwise they've literally walled the world off from anti-MLM information.
That's a very pervasive problem in political satire. It's often pandering. You have hosts taking clips of someone doing or saying something the demographic audience is going to clearly disagree with, then acting absolutely gobsmacked at how stupid/malicious/unaware they are. That's not persuasive to anyone and doesn't complement changing someone's mind, it's just ridiculing the people they currently agree with.
Ostensibly the show is supposed to be informative, because he does appeal to the other side's rationality to try and persuade them. I think the usual argument for the format is that a sobering account doesn't capture enough attention, which is why jokes are interspersed. But those jokes are heavy handed enough that opponents probably will be put off. If the goal is actually convincing someone that MLMs don't really work for most people, I think there are probably better sources of information if they're willing to be proven wrong in the first place. And if they're not willing, they may take someone who is as abrasive as John Oliver as ridicule.
That is literally his job description.
The clips were still humorous, but they were generally contextually and fairly presented so as to be an accurate statement of the target's beliefs. The subversion usually came in choosing clips where the true beliefs were exposed, rather than the PR whitewashed version.
Oliver tends to overdo the histrionics in reaction to the topic, whereas one of Stewart's most effective rhetorical devices was "... But maybe they {good reason for doing the thing that was done}" -> segue into next clip where target explicitly rejects {good reason} as motivation.
Again, as Oliver himself says repeatedly, he is a comedian, not a journalist. That's what comedians do. It's confusing to some people, because he talks about real things and sometimes manages to slip in more actual information than some actual journalists--esp the mock-journalists on TV--do.
More importantly, if that's his job description than it's not all that conducive to qualified political discussion. If someone really sides with Bernie Sanders, providing an elevated rebuttal to his economic policies is better than making fun of his hair, or the fact that he has a (to some) funny Brooklyn accent.
Likewise, critiquing Trump's policies is good. Making him appear ridiculous and starting every single show with, "President Trump, two words that...{funny joke}" while joking about his hair and fake tan are not conducive to educated discourse. It just further entrenches the demographics into two isolated camps. Sure he cites specific sources, but you begin to wonder how much of the audience really tunes in for that material, since a lot of it just appears to be a reaffirmation of unchallenged beliefs.
Where I do give John Oliver credit is for showcasing problems in society than many people are unaware of. I do frequently give the show a watch, I just make it part of a very diversified set of news and I don't particularly enjoy it all that much when, as another commenter mentioned, he goes heavy into histrionics. It becomes circular.
I guess to put my point more succinctly: John Oliver is not necessarily wrong in his conclusions, and he makes attempts to cite sources. But he arrives at his conclusions in a way that intrinsically encourages the same tribalism he often criticizes, and that tribalism is harder to identify because of the (real or apparent) intellectualism about it.
Whenever Snowden starts techno-babbling, Oliver brings him back to "normal people level" with "how does this enable the NSA to see my private information?"
Clearly, Snowden is annoyed at first, because he's always taken back to "how can they see my dick pics", but I feel he realizes as the interview progresses that he's being given a much-needed lesson in public communication.
If you're buying wholesale stock at retail prices, you are being scammed.
http://mlmlegal.com/MLMBlog/what-is-front-loading-or-invento...
Btw of course a scam will make some people successful, that's what scams do, take people's money. If someone isn't getting rich, it isn't a scam in the end.
That being said, MLMs are weird and quite honestly conceptually bizarre to reason through. They thrive on this and they operate in the gaps and blindspots of human reasoning.
Here's another way to describe MLMs:
-1). They get you hyped up on success and by borrowing the best of innovations that were mastered by Evangelical churches and various performing arts over the last 200 years (see Aimee Mcpherson, the amazing female preacher from LA and the inspiration for the male preacher in "There Will Be Blood" with Daniel Day Lewis).
-2). By pretending to have a business they can sell you a $500 or so "gold" level business kit to launch your business.
-3). They then get you so hyped up you talk to all of your friends, reluctantly 2 or 3 of them buy. Now the MLM has made $500 + $1000 or so from your friends. That means you as a "mark" has been taken for $1500.
-4). Rinse and repeat with your other friends, burning social circles and harvesting the ashes as you go.
If products don't get sold to actual consumers in sufficient numbers to pay everyone, then the money has to come from somewhere. It generally comes from "lower" distributors that one signs up. Those who are successful and see a profit by doing this talk about it; those who lose money do not.
Ergo, no social good, the majority of people talking about it are successful, and it ruins lives.
Imagine if venture, incubators, etc. had to pay market rates for all the work that goes into it.
Agnostic to his Herbalife bet, Ackman "has widely underperformed the S&P 500 since its EOY 2012 inception: 7.1% since inception net of fees vs. 84% for the S&P 500. Their original flagship fund's (2004 inception) track record is outstanding with returns of ~20% per annum."
So his first fund killed it, he made a name for himself, raised a ton of money, and has literally cost his investors 75% of their returns to date in the market.
He's personally worth $1,400,000,000 now as a result.
Every fund pitch everywhere comes with the disclaimer "Past performance is not an indicator of future success" because of funds like Ackman's.
No, it's because of the simple fact that you can't predict the future. That sleazeballs can make it even worse by making funds that pretend that they had yields before they even existed (or were active only in a theoretical sense with a few bucks in it as a fig leaf and the other 999 that got axed you'll never hear about) is taken as a given.
That's just the 1024 envelope trick at a higher level.
I believe that the regulation that requires that disclosure comes from the 1933 law establishing the SEC. A specific concern was how advertising past returns fed into getting people excited about bubbles like the one which popped in 1929.
Therefore the regulation was meant to address a systemic problem rather than individual malfeasance.
But why should the S&P 500 be the benchmark for what Ackman does? If he was advertising that he's betting on broad market risk it would make sense, but he's not. He's long/short high concentration, which you could argue he's also not done fantastic at, but with a small number of positions you'd expect a wide potential spread of returns.
The point of hedge funds is that they can do better than that, but charge a fee. However, if you get worse results than doing nothing, then the fee seems unjustified.
In general, the S&P500 presents the most cursory comparison metric for hedge funds, but not necessarily the most accurate. This is specifically why we have the term, "risk-adjusted returns."
For an area that in many ways is punching above its weight class in terms of tech companies, I occasionally have nagging (possibly unfounded?) concerns in the back of my head that one day a lot of these companies will be a hindrance on the continued growth here. I know some people already view Utah mostly as the home of MLMs and I don't know if that does much for attracting forward looking tech investment. That said, these companies have brought a ton of jobs and has certainly helped fund the growth in the area and I have worked with and met a lot of people who seem pretty decent.
While many of these companies aren't "evil", I think the MLM is probably one of the most insidious dark design patterns around. I think the best way of how these companies primarily operate is like the Cassette/CD clubs of a few years past. A small fee gets you a decent amount of "up front value" (Join the club for $30 and get 30% off your first order!) with the expectation that you won't order anything else or forget to cancel the yearly membership fee. This is, of course, all made worse by the fact that is often friends and family who are peddling the high margin health and dietary products with questionable efficacy. Like I said, I don't know if I can call it an outright scam (I know a few people who really like there shakes and supplements and swear by them), but it does drive strange incentives...
The mlm seems to be the stay at home moms and maybe a mix of others that are able to leverage their church network.
It's a ridiculous idea. No one accidentally tunes a dark pattern so perfectly.
Bill Ackmann on Herbalife https://www.youtube.com/watch?v=bQc6L4ieMwo
Almost 60% of their distributors were latinos (http://articles.latimes.com/2013/feb/15/business/la-fi-herba...). The lengthy presentation countering Pershing Square's accusations which contained this fact (http://files.shareholder.com/downloads/ABEA-48ZAJ9/229776353...). There are countless stories of how these people were exploited in the name of gains.
They are expanding rapidly in international markets. In India, Herbalife has over 40 distribution centers now and over 0.5 million distributors ! They even got a famous sports personalities to advertise for them (http://www.herbalproductkart.com/herbalife-brand-ambassdors).
To do my bit in preventing people from falling for such scams, I asked my friends and mother to share it on their whatsapp groups so that people don't fall prey to such pyramid schemes.
http://brontecapital.blogspot.com/2015/06/herbalife-very-lon...
http://brontecapital.blogspot.com/2016/07/herbalife-and-end-...
The second link, which is far briefer, highlights that Hempton has finally found an example of inventory loading by millennial members of the Mormon church. But he regards that as an edge case. So I don't read that as making the point that you seem to be criticizing.
More important though is the first link which is extensive and addresses many of Ackman's claims and includes Hempton's own front line documentation. None of that has to do with defending Herbalife on the grounds of "Mormon end of the world hoarding".
Uh. What? Can you clarify your point here?
> Among the biggest accusations facing the company is that it targets low-income members of minority communities, including Latinos, by making unachievable promises of vast wealth from selling its line of protein powders, vitamins, supplements and beauty products.
> This concept has taken off among Latinos, who are taught at an early age that natural remedies such as herbs and juices are a better option than U.S.-style medicine, said Alexandro Jose Gradilla, chair of the Chicano Studies Department at Cal State Fullerton. That makes Herbalife products popular among immigrants.
Looks like Herbalife is having the last laugh.
He still has a group of followers because he's rich and has a nice pedigree, but he has fallen from glory pretty hard and his calls don't matter anymore.
One of the best short sells these days is to short everything in his portfolio when you think he is about to get a margin call. Because that will force him to liquidate several large positions in different stocks.
So for example, when Valeant Pharmaceauticals was tanking from its highs of $220, all the way to $16, after Bill Ackman defended it, doubled down, joined the board, and bought calls, and then admitted to not having more funds available. You just short other things in his portfolio, or at least short them on the expectation that other people are going to short.
Its fun. I do "proxy trades" a lot, where I trade a temporarily correlated asset, while the market focuses on a different asset.
His fund didn't go insolvent, many investors did redeem their stake in his funds when their lockup periods were up, and he has enough interest and clout to continue?
I'm not sure what you are asking. Its worded like you thought there would be police or broken kneecaps involved
The #1 factor in deciding if an MLM is legit is the product. Many, many MLMs have products that have no real value to any market, existing only to attempt to legitimize a money game.
However, MLM is a pretty good marketing approach for products that:
1 - are new or difficult to understand, and where having a human explain or demonstrate in person helps the potential consumer decide if it's something for them
2 - depend on customer testimonials to express their effectiveness, particularly regarding consumables that are not or cannot be judged and regulated by the FDA or similar body
3 - are consumable, such that the buyers and _consumers_ of the product naturally evangelize the product, and then get rewards for bringing new customers
Let's be honest - there are a lot of BS products that are legally marketed through traditional, accepted, and even respected channels. And there are a ton of BS products marketing via MLM. The difference is that some MLMs have lured members with the unrealistic prospect of huge incomes and then guided the new members to buy a ton of product ("front-loading") so as to ascend more rapidly to the higher earning potentials. That's how you end up with people with a garage full of junk they'll never manage to sell.
I don't know if Herbalife does this. I rather doubt it. But really, if a new employee in a company could choose to pay $25k up front with the promise that they would be more quickly promoted to higher management levels, I think a lot of people would do it - even if they had no skills or motivation to work to earn a promotion. In some MLMs, that option exists.
Regarding compensation, every company that markets products takes some percent of product sales and directs that toward marketing efforts. What makes MLM unique is that it directs that marketing money to individuals (presumably based on the amount of sales they drive). And just as Division Managers of large companies may receive bonuses based on the success of their divisions, MLM leaders often receive some compensation based on the sales (success) of representatives they have personally recruited or who have been recruited by their recruits.
I could go on, but it's boring now. Point is, MLM isn't inherently evil, just as capitalism isn't inherently evil. But everywhere, there are some people who will do anything for a dollar. Some become hedge fund managers, and some become MLM lead marketers.
So far there has only been two ways to fund social activism against companies - donations and feeds on class-action lawsuits.
Of course, they (the allegedly misled class) deserved to at least get a trial and a ruling, which at that scale require money and press coverage. But Ackman turned it into spectacle, which probably is what motivated Carl Icahn to btchslap his short.
> Conventional activists like Carl Icahn and Nelson Peltz buy shares and then “try to fix the company,” observes one hedge fund investor. Ackman, by contrast, is trying to annihilate a company. “I’ve never heard of short-selling activism in my life,” this investor says. “Are we comfortable that a private individual named Bill can try to put somebody out of business?”
Shorting a company as a method of activism just seems like a terrible strategy on the face of it. A short is a really risky strategy for investing, for activism it just seems even worse. If you want to change a company using its stock, the effective way is to be rich enough to buy enough stock to influence the board.
Back when I was younger, I was a stagehand at a venue where a huge MLM, also named in the Fortune article, had thrown a yuuuge party. They rented two entire conference halls for thousands of people and had a giant stage for a musical set up, complete with pyrotechnics and everything.
Utter madness, all financed by poor people who were screwed over by their relatives or close friends...
I have bought things on the open market 100% above the prior market price, when I wanted them. Moving the asset's price 100% and sure enough many out of the loop people started FOMOing and buying more. Its the same principle for bearish positions too.
In the securities market you can talk about your bullish or bearish rationale, and avoid sanctioning from regulators or private persons by disclosing your position. Ackman doubled down on that logic and did it very publicly. Although this is more a problem for bearish positions, the statements can't be lies or "intentionally misleading".
In the past there were many naked shorts, where fake shares were sold into the public market causing impossible selling pressure. That is illegal now, for the most part, and as long as you aren't doing that it helps make sure you aren't manipulating the market, by the legal standard.
Again, just because you can have an outsize affect on the price of the market and the mere presence of creating an advantageous circumstance, doesn't make it market manipulation or securities fraud.
The followers realize that the shorts act first and go public second, therefore any potential upside is likely to be already priced in, leaving very slim pickings for a tag-along investor.
The opponents at the same time will try to orchestrate a short squeeze, and they are in somewhat more beneficial position. Not only the short squeezers act on public information (the size of the short interest), they need to find just one factual error in short's thesis and then play that up. The activist short, once public, has to be 100% right with each and every statement - any sign of weakness is just an open invitation to join a short squeeze.
(the same goes for going long a stock)
In other words, can MLM be a useful tool for non-scammy companies?
They either sell snake oil products, or protein shakes that are 10x cheaper at Costco.
I've known people desperate enough to start selling that crap (as well as others-their friends-that have to buy it just due to friendship), so please stop spreading MLM scams.
They offer 100% buyback for distributors for unopened products and they stopped lead generation completely 4 years ago. So, their distributors are no different from what cell phone carriers are to Apple.
>They either sell snake oil products, or protein shakes that are 10x cheaper at Costco.
Kinda like Apple then?
>I've got the feeling this thread is full of people that drank the BS koolaid of herbalife.
Or the other way around?
The analogy to apple is poor. Apple sell a product that the majority of people like and they are actively trying to sell directly to the customer. They use networks as it is their only option in many markets and once a phone is sold to the network it is then sold to the customer, there isn't a series of transactions with each level profiting of the previous level.
How is it different from 3rd party Apple resellers?
>Apple sell a product that the majority of people like
As does Herbalife.
>they are actively trying to sell directly to the customer
Herbalife lets distributors handle sales, not very different from Apple's resellers.
>They use networks as it is their only option in many markets and once a phone is sold to the network it is then sold to the customer, there isn't a series of transactions with each level profiting of the previous level.
Apple -> Authorised Resellers -> Stores. While this is not Apple's only channel (because they have their own stores plus online shop), it is one of them... and there is multiple transactions with each level profiting.
Herbalife's model would be Herbalife -> tier 1 -> tier 2 -> ..... -> tier n-1 -> t n, with no real clarity on how many tiers there are.
If Herbalife's product is as good as they claim why not sell it direct to customers either online or in supermarkets? They sell through 'distrubutors' because it allows them to make a profit without having to actually sell their product to a customer, because if they were reliant on direct customer based sales no one would buy there garbage product, and they wouldn't make a profit.
The litmus test for me for a system like this is if it seems like the best way to actually make money from something is not to actually sell the product to consumers but to recruit people into your downlines then its probably some kind of pyramid scheme. I can't see a single product or market where the best product would be the most profitable when sold through a MLM network.
For the same reason Apple made iPhone exclusive to a carrier when it launched for the first time... and for the same reason many phone companies still do it with their phones.
Apple and these phones companies do it because they make anti-competitive deals... which have seem some backlash. However, Herbalife doesn't have that because they provide additional value. Products like fitness supplements are only good if you use it in an intended way, which is what a lot of these health clubs try to do. You can buy any other food supplement, but you will not get the results. People choose Herbalife because it just works.
Apple would clearly rather you bought the phone directly from them, their entire philosophy is based on continuous integration, from controlling the sale of their devices through to producing their own hardware and software, they are probably the least MLM like consumer electronics company going.
Do you distribute Herbalife products or do you just use them? I'm genuinely interested as no one I know who's tried them thinks they are superior product, and anyone I know who's got into anything remotely MLMy has lost money and regretted it.
Same for the phones. Apple ain't expensive if you assume it is a quality product.
Same with Herbalife.
The CEO makes bonuses based on performance of the company. The division managers makes bonuses based on their divisions' performance. The lowest people in the company probably make zero bonuses. And in many companies, the lowest paid workers were promised good future opportunities for growth in the company.
For every bad MLM (and there are many), I could probably identify 10 bad traditional companies.
Whether herbalife is the former or the latter is at the heart of the controversy around the company.
Having the earnings of the higher tier directly funded by financial contributions from the lower tiers is.
I lot of MLMs have a particular 'hiding in plain site deception'. The retail margins on the consumer goods aren't where the bulk of the top tier earnings are coming from. The conferences, training materials, tapes, courses and a raft of support systems for the distributors... all produced at very little cost are the true source. This is where the generous subsidies come from.
ON WHEN ACKMAN CALLED HIM IN 2003:
"I'm telling you he's like a crybaby in the schoolyard. I went to a tough school in Queens, you know, and they used to beat up the little Jewish boys. He was like one of the little Jewish boys crying ..."
ON ACKMAN AS A FRIEND:
"He's the quintessential example of 'if you want a friend on Wall Street, get a dog.'"
ON HAVING DINNER WITH ACKMAN:
"As far as I'm concerned, he wanted to have dinner with me. I couldn't figure out if he was the most sanctimonious guy I met in my life or just arrogant and that's Ackman."
ON ACKMAN DONATING ANY HLF PROFITS TO CHARITY:
"He talks about charity. That's complete bullshit!"
ON ACKMAN SAYING ICAHN IS A GOOD INVESTOR:
"I appreciate you, Bill, calling me a 'great investor', but unfortunately I cannot say the same for you."
BONUS: ON WHEN SCOTT WAPNER ASKED HIM IF HE'S LONG HLF:
"I want to say what I want to say and I'm not going to talk about my Herbalife position because you want to bully me ... I don't give a damn about what you want to know. I want to talk about what I want to talk about ... You can say what the hell you want. I'm going to talk about what Ackman just said about me, not about Herbalife ... I'll talk about Herbalife when I goddamn want to ... I'm never going on a show with you again, that's for damn sure, OK."