The Underlying Issue in the Herbalife Fracas

Recently, a well-known hedge fund manager gained the spotlight by presenting to a conference full of people for over 3 hours and over 300 pages on a company called Herbalife that:

  • The company is a scam
  • that he was reporting the findings of his extensive research to the FTC
  • and that Herbalife’s stock was going to zero

So is he right?  I don’t care to speculate about the legalities of this. I’d rather focus on the idea that his opinion rests on the premise that multi-level marketing (MLM) companies are a scam. He doesn’t come out and attack the whole industry, but the issues he points out in his presentation are issues that apply to multi-level marketing companies generically:

  • The idea that people sign up to join with false hopes that they will become rich
  • New associates are asked/required to buy products which are overpriced in order to remain a “distributor”
  • The higher prices compensate the people above, also called “upline”

In my opinion, the salient argument with MLM’s continued industry growth is this:

It attracts average people because there is a clear cut path to increasing one’s income. However, making $500,000 in MLM is no easier than making 500k in other businesses in my opinion. And that’s it – some people have talents that make it seem easier to pull off and some people will never have the patience and natural talents that help them excel in this type of business. And others wont have the work ethic to develop the skills to succeed. Nonetheless, the basic idea that by selling a lot, recruiting a lot, and having “downline” sales increase exponentially is a simple-to-explain system that people grasp and try to succeed with.

And  we can not dismiss that upside potential for the average person trying to get ahead, however difficult it may be to obtain. Consider this –  for someone without pre-existing experience and training, they could potentially earn a “pro” income by following a “system” like MLM. And this type of model will continue to find interest as unemployment stays high in the US and globally, as people want a better lifestyle, they will be attracted to such systems. Think about it – their other option is (enter wit): get a 4 year degree in a hard science, go 4 years to medical school (first get in) do 2-5 years of residency, then earn a pro income. Let’s  be realistic – doesn’t option A seem more feasible to your average truck driver?

Perhaps if that hedge fund manager had visited a local MLM meeting of any company, and saw the people joining, he’d understand the mechanics better and the desires of average people much better. And his complaint to the FTC may be just a waste of time (this already happened in the last century when early MLM businesses like Amway got going. Yes most people who join will never earn much money, but the companies could continue to grow. This would make betting against these companies a bit complicated.

Disclosure: at the time of this writing, author holds no positions mentioned in this article (HLF) and has no intention to enter any positions mentioned. Also, author is not in any way related to Herbalife or any other MLM firm.