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Summary

  • Business, politics, and green men.
  • The marketing message - consistent or deceptive.
  • Investor short-term orientation.

Recently, we learned the FTC invoked its "civil investigative demands" authority, initiating an inquiry of Herbalife (NYSE:HLF) and threatening the celebratory atmosphere in Whoville. Imagine all the sad faces on Whoville children now looking at an empty Christmas tree. Oh, actually, the tree may be gone, too.

According to some stories, Bill Ackman, a green man with a heart two sizes too small, unfairly manipulated the political process to his advantage. Such stories argue that: a) this represents a stunning departure from the past behaviors of other green men and women (mostly men), and b) Herbalife and potentially other MLMs will now be subjected to unfair scrutiny. Of course, both arguments are hogwash.

Despite their relative distrust of each other, many investors and some who write about them suffer from a common form of dementia that pretty much wipes out their long-term memory. Why? Because investors pay attention to information that helps them make short-term decisions. Period. Long-term consequences and the historical forces that shaped the current environment cannot be easily monetized. One need only look at the growing influence of high-frequency trading (HFT) to see the direction of investing that I previously described as "frequently amoral."

Yet, now we hear pious outrage from some of these same investors and media. During this past year, I spoke with dozens of investors. Some small percentage actually wanted to know how we got to this point: How could the legitimacy of a 33-year old company be questioned? And by extension: What do we know or not know about the MLM industry? Most couldn't care less; they simply wanted to time their entry and exit from the market. To be fair, that is what they get paid to do. I get that. But then be what you are, and don't pretend to take on the false mantle of moral outrage.

Saving Seeking Alpha the many bytes of space that could be used to document the past behaviors of green men, I will use just one example. In this timeline of the S&L crisis, notice the many actions of legislators and regulators. Did these fine folks act on their own, independent of industry pressure and interests? Did they take it upon themselves to research and clearly think through changes that would be in the best interest of the citizenry? Or was there a ton of money spent by green men to shape their regulatory environment? Citizens and voters have and will continue to debate the appropriateness of money influencing politics, and by extension, regulatory behavior. But singling out the actions of a single green man ignores history and more resembles whining than thinking.

As to any unfair focus on Herbalife and MLMs, perhaps my analogy to Whovillians is incorrect. Perhaps the more correct comparison would be to Sneetches (also a Dr. Seuss reference), some with stars on "thars" and some without. Paying to get the stars brought smiles to the faces of Plain-Belly Sneetches, which soon faded as the value of having a star came into question. For sure, Herbalife is making money for shareholders (who like to always keep stars on thars), but is that based on "significant opportunities for distributors" or, as the company reported in the Bostick cases, is the reality that "most of even Herbalife's most successful leaders made only modest amounts of commission income"? Let's see, that is most of even the most successful. We know that the "most successful" distributors represent only a very small percentage of all distributors eligible for company compensation (and a much, much smaller percentage of all distributors), and here we learn that even most of them make modest commission income - before expenses.

And how is this opportunity portrayed to Plain-Belly Sneetches who consider plopping down money before entering the machine? Herbalife doesn't know, and apparently Nu Skin did not know in China either. But that's okay, because Herbalife properly warns shareholders in writing that it gives no assurances that distributors follow its policies. So we have what appear to be contradictory messages from a company in an industry that lacks transparency and accepts little responsibility for its independent contractors. Sorry, no sympathy here.

Over the past year, numerous commenters on this site have questioned my motivations, which actually are quite simple. Business is our social and economic backbone, and I like to encourage us to have a straight one.

Source: Herbalife, MLMs And The Unhappy Folks Of Whoville

Additional disclosure: P.S. Thank you David Einhorn for pointing out the risks of anonymity. Over the past 15 months, I have accepted no financial compensation from any party related to this topic.