Well, the praise was brief but extravagant, specifically “this is the best managed pyramid scheme in the history of the world,” which I at least would be proud to have on my resume, but I might be in the minority there. What do you think Ackman’s goal was in this morning’s 340-slide, nineteen-hour Herbalife presentation featuring phrases like “Shane’s going to come up here and talk about the accounting again” and “now I’m going to bring on our lawyer for the next 200 slides” and “here’s where it gets really interesting: shipping and handling,” and, at the 2 hour 28 minute mark, “feel free to go to the men’s room, ladies’ room, it’s at the top of the stairs, but I’ll keep going”?1 Ackman thanks several team members for working tirelessly for a year or more on this presentation, and if you watched all of it you have a pretty good sense of how they must have felt.

One model of this fight is that Ackman and Herbalife are attempting to wage regulatory battle by proxy. Presumably some SEC and FTC lawyers are watching this and the respective hopes are:

  • Ackman hopes that the Federal Trade Commission will conclude that Herbalife is a pyramid scheme and shut it down, bringing the stock to zero-ish and making him a zillion dollars on his short position, and
  • Herbalife hopes that the SEC will conclude that Pershing Square is a market-manipulation scheme and shut it down, causing HLF’s stock to soar.2

Neither, either, or both of these things could happen, I suppose; the FTC and the SEC are their own dogs and so you could have each running around investigating one of the protagonists here. But generally relying on a regulator is sort of a dicey proposition; even if you’re right, the regulator may have better, or possibly worse, things to do with its time than inflicting pain on your adversaries. So what does that leave you?

I dunno. Speaking as a guy who has not pondered the multilevel marketing industry much previously, I was pretty persuaded that this company seems Not Good. But I was persuaded of that by their own 10-K, so. Per Ackman’s math something like 99% of Herbalife “distributors” who pay to sign up to sell the product never make any money, while Herbalife’s marketing videos – one of which he played – show the one guy with a Bentley and a Ferrari and a comically underused home office. But there’s a long way – a way partially paved with 200 PowerPoint slides delivered by a hedge-fund lawyer – between “hey that’s pretty shady” and “that is an illegal pyramid scheme”; if advertising pretty low-probability business opportunities via results-not-typical car porn were illegal, who would pay for late-night television? Who would trade stocks, for that matter?3

The first question in Pershing Square’s Q&A, from a Barron’s reporter, was a great one: paraphrasing, it was “you are presenting this information to a bunch of overeducated people in this room who can influence the stock price, but how will it affect the actual people who are, shall we say [and here the paraphrasing gets looser] Herbalifing it up with negative results for their personal and financial lives?” The answer was to the effect of “you’re a reporter, go tell them.”

But it’s a fair point. The gist of Ackman’s presentation was not “here’s why I think Herbalife’s margins are unstable” or whatever, but rather “here is why it is a really bad idea to invest your life savings in becoming an Herbalife distributor.” That … I mean, color me convinced, but that wasn’t a career opportunity I was going to be pursuing anyway, and I’m currently a blogger. It may not be a message best disseminated to its target audience by a presentation at a midtown conference center, even if there’s also a live webcast.

The second question, from an analyst and Herbalife distributor, was less great – it was basically “what do you think of the cash flow and where would a private equity firm buy it?” – but got a great answer, which was “our target price is zero” because in Ackman’s view HLF is an unstable pyramid scheme that will soon run out of victims. He never answered the cash flow question though.4

What is your math here if you’re short? There are about three ways to win:

  • FTC shuts company down, stock -> zero.
  • Company runs out of distributors due to exceeding population of world and/or people being tipped off to the risks by watching Ira Sohn conference webcast, cash flow goes to zero-ish, stock -> zero-ish.
  • Company continues along doing the thing that it’s been doing – a thing that Bill Ackman doesn’t like but that has doubled its net income since 2009 – but the multiple that the market puts on that thing decreases substantially.

The presentation was I think well constructed to target those first two bullet points – get the FTC and/or the press involved to reduce Herbalife’s ability to recruit distributors – but even more exquisitely targeted at the third: to making other big investors uncomfortable with the idea of owning Herbalife’s stock regardless of its business success. When you tell a long, heartfelt story about pyramid schemes and broken dreams, one thing you want to achieve is to make multilevel marketing, like guns and cigarettes, a tough business for oh say TIAA-CREF to own – even if none of the story rises to the level of illegal pyramid scheme in the FTC’s eyes. But you gotta believe that story, and act like you believe. Ackman announced that he will be donating all his (personal) profits from this trade to charity, saying “I view this as blood money” and repeatedly stressing the purity of his motives.5

Of course one can’t be too cynical: Ackman’s plan to donate all his profits may help in pitching his moral-short thesis to the market, but then that doesn’t bring him any financial benefits, because he’s donating all his profits. Presumably the moral-short thesis here really is driven by Ackman’s views of the badness of this company, rather than by calculation of how to make the most profit.6 It’s nice that he can afford to do that: bring down an evil company, make money for his investors, and give $25 million to cancer research, all in one day, while remaining staggeringly wealthy. And it’s … well it’s statistically unusual that he got to that point by picking stocks, a crapshoot if ever there was one. In investing, as in selling powdered diet shakes, it’s good to be at the top of the pyramid.

1. But also: “Ghana? They’re selling weight loss products in Ghana?,” which got an exhausted laugh.

2. This oversimplifies: Ackman raised an eyebrow at Herbalife’s CEO’s own share sales, so maybe he can get both regulators on his side. [Update: though maybe not?] Then he wins!, is I think how it works.

3. Or FX, really. FX is where retail investors go to get fleeced these days, isn’t it?

4. Also the last question was fabulous, from a Bloomberg reporter who asked the Pershing Square analyst and lawyer how big Pershing Square’s short is while Bill was out of the room.a That’s how you do it! They didn’t answer though.

a. Presumably in the bathroom.

5. And he notes that, even though this presentation would predictably drag down the stocks of other multilevel marketers, he’s only short Herbalife. That prediction is, incidentally, full of interest, but doesn’t seem overwhelmingly true (NUS down ~4%, AVP down ~0.5%, as I type this).

6. Obvs fiduciary duties to investors, management fees on those investors’ cash, etc. complicate that calculation.

36 comments (hidden to protect delicate sensibilities)
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Comments (36)

  1. Posted by davidrusso | December 20, 2012 at 2:39 PM

    "And as you can see from this chart, Herbalife's bestselling supplement causes Elephantiasis of the nuts.."

  2. Posted by davidrusso | December 20, 2012 at 2:40 PM

    "Per Ackman’s math something like 99% of Herbalife “distributors” who pay to sign up to sell the product never make any money.."

    and your point is….?

  3. Posted by el invitado | December 20, 2012 at 2:43 PM

    That's a pretty disproportionate ratio in that picture. Whoever it belongs to should get that checked out.


  4. Posted by Ron Mexico | December 20, 2012 at 2:50 PM

    FX is where they go to get fleeced now, OTOH, with 100-1 leverage you only have to get lucky once with $10k to retire.

  5. Posted by Guest | December 20, 2012 at 2:53 PM

    On the other other hand, if $10k is a number that impacts your retirement plan, 100:1 leverage should never factor into your investment decisions

  6. Posted by Guest | December 20, 2012 at 2:54 PM

    I hate it when Bess is out of office

  7. Posted by Guest | December 20, 2012 at 3:05 PM

    Matt I said this earlier but I have to say it again. Shitzars presence has either made me realize how good you are or (the more probable answer) made me realize how much worse you could be.

  8. Posted by UBS FICC/TMT VP | December 20, 2012 at 3:06 PM

    I really don't understand what's so bad about FX, I really like Sons of Anarchy, and plus "FX has the movies!"

  9. Posted by Nu Skin | December 20, 2012 at 4:06 PM

    Don't look at me!

  10. Posted by Guest | December 20, 2012 at 4:07 PM

    Well, if you like him so much why don't you marry him !

    Matt's mom

  11. Posted by The Mormons | December 20, 2012 at 4:10 PM


  12. Posted by tex2 | December 20, 2012 at 4:14 PM

    In addition to Herbalife, an even larger scam everyone should be aware of is the Amway Tool Scam. Google StopTheAmwayToolScam for more information, and forward this to every non-IBO you know, so they don't get scammed.

  13. Posted by Texashedge | December 20, 2012 at 4:18 PM

    If you've got only $10K, you might as well lever up 100:1.

    Upside: $1 million
    Downside: buy bullet, rent gun

  14. Posted by PSA | December 20, 2012 at 4:19 PM

    The More You Know.

  15. Posted by NakedShorts | December 20, 2012 at 4:52 PM

    There is no theory of evolution. Just a list of animals Bill Ackman allows to live.

  16. Posted by GI Joe | December 20, 2012 at 4:56 PM

    Now you know, and knowing is half the battle.

  17. Posted by deez | December 20, 2012 at 4:56 PM

    which nuts?

  18. Posted by dima | December 20, 2012 at 6:34 PM

    Any one have the actual presentation? Or video of it? Thanks.

  19. Posted by Guest | December 20, 2012 at 6:39 PM

    Bill Ackman ?

  20. Posted by anonymoose | December 20, 2012 at 9:27 PM
  21. Posted by Ray Dalio | December 20, 2012 at 10:56 PM


  22. Posted by khbl | December 20, 2012 at 11:26 PM

    Cramer got it exactly right: http://www.youtube.com/watch?v=5ideFWrwsOs

  23. Posted by Pharroh | December 21, 2012 at 9:06 AM

    good article, Matt

  24. Posted by guest | December 21, 2012 at 11:47 AM

    I give up: IBO? Google says International Baccalaureate Org, Irish Boxing, Intl Bowhunting…

  25. Posted by guest | December 21, 2012 at 11:49 AM

    I read somewhere that in the US a significant portion of micro-finance loans is used to buy Herbalife franchises.

  26. Posted by tex2 | December 21, 2012 at 12:37 PM

    If you visit the blog, you will see what it stands for.

  27. Posted by Guest | December 21, 2012 at 1:12 PM

    "Welcome to THE Amway blog that represents the equivalent of the EIB made famous by someone I have a LOT of respect for, Rush Limbaugh. I trust he will allow some flexibility to borrow the initials EIB (Excellence In Broadcasting) and reuse the initials to stand for Excellence In Blogging. In fact, just like Rush, I can successfully debate other bloggers, as well as the “best and brightest” from Amway, with half my brain tied behind my back, just to make it fair."

    I'm not sure whether I am reading brilliant irony or pure, unashamed stupidity.

    …Either way I am impressed.

  28. Posted by Portfolio Manager X | December 21, 2012 at 2:30 PM

    Graph is actually a depiction of Kweku Adoboli’s testicles.

  29. Posted by tex2 | December 21, 2012 at 2:46 PM

    You read the truth.

  30. Posted by Guestest | December 21, 2012 at 2:51 PM

    Nice! Heads I win and get a tax deduction, and tails, its a charitable loss.

    – Acky

  31. Posted by guest | December 21, 2012 at 3:06 PM

    Had I know you had a lot of respect for Rush, I wouldn't have taken the bait. But I did. And know I know that IBO = independent business owner. F/K/A "distributor"

  32. Posted by CDO-Guy | December 21, 2012 at 4:35 PM

    Bloomberg reports Herbalife stock down 13% for Ackman's 210 minute presentation.
    So, 210 minutes for 13 points…
    Assuming Act/360…
    annualized yield of about 32k%? Nice!

  33. Posted by FYI | December 22, 2012 at 10:59 AM

    Jocking Cramer on here = guaranteed multiple "thumbs down."

  34. Posted by Guest | December 26, 2012 at 4:59 PM


    Here's the website from Pershing Square's Bill Ackman that has the presentation (including sources) from the Sohn Investment Conference.

  35. Posted by Guest | December 28, 2012 at 12:08 AM

    The chart looks like penis with balls

  36. Posted by dissertation | April 29, 2013 at 4:57 PM

    The main objective of this chapter to bring to your awareness all the education credits, deductions, and benefits, which you might be eligible for; to enlighten you how to claim these benefits, and to enable you to make an informed decision, based on your particular circumstances, as to which ones would be more beneficial.