Q:I understand that you’ve started a second short list. Can you give us more details?
A: Yes, the Fixed System Short List #2.
Criteria for getting on the list are as follows:
- A prior price rise greater than 500%
- A large market capitalization that makes further price rises unlikely to exceed 33%
- Sufficient opportunity for underwriters and insiders to exercise stock options and unload
- A stock price that exceeds 10 times the company’s value as a going concern. There is no requirement that there be a flawed business model or expectation that the company will fail.
- The broad stock market must be in a bear phase.
Q: Does Herbalife, symbol HLF, qualify for this short list?
A: No, it does not. Herbalife is selling for 10.6 times earnings and paying a dividend of almost 3%. It is a real company with millions of customers.
Q: William Ackman, a billionaire hedge fund manager, has mounted a very public campaign to take down Herbalife. He has asked regulators to close the company based on his view that it is a fraudulent pyramid scheme. Is he mistaken?
A: He certainly made a blunder when he shorted Herbalife shares. He did not approach the task of financial analysis with an understanding of economic law. David Stockman did in analyzing Tesla Motors, symbol TSLA. He understood that TSLA does not have a viable business model. William Ackman mistakenly does not think that Herbalife has a viable business model.
Q: Why do you say that Tesla does not have a viable business model?
A:There is no Nikola Tesla technology being used at Tesla Motors. They are not using a Tesla coil to get free electricity. They are using 100-year-old battery technology. Why do they have their manufacturing facility in Silicon Valley? Could it have more to do with stock promotion than low labor costs? Did management consider doing an ICar with Apple?
Q: Are you offended by their use of the Tesla name?
A: Ford Motor Company was founded by Mr. Henry Ford. It was altogether proper to put the family name on a family business.
Q: I see your point. It appears that the stock promoters deliberately sought to give a false image. What is Herbalife’s business model?
A: They have more than one model working. Everyone thinks it’s multilevel marketing, and yes, they do that, but that doesn’t begin to explain their extraordinary success. If you’ve carefully read my book, The Art of Speculation during Civil War — Sun Tzu Meets Jesse Livermore, it should be easy to understand. They’ve found a way to monetize legally circumventing government-imposed restraint of trade in minimum wage and hour laws as well as many barriers to starting a new business or getting a proper business and marketing education. That they’ve been able to finance that on the back of $1.50 milk shakes is brilliant.
Q: But ultimately, they’re selling a business opportunity: the right to open one of their “stores”. And, it is a pyramid marketing structure. Isn’t it possible the government will shut them down?
A: It is possible but unlikely. There are too many people benefitting from Herbalife’s business model. Ackman is out some $50m doing what he says is “G-d’s work”. He cites the example of a Herbalife store owner who offered three hours of babysitting for free to anyone who bought 3 milk shakes from her store. He uses this as evidence that there is no real business there. It proves just the opposite. All value is subjective. Minimum wage and hour laws prevent entry level full employment. That Herbalife has found a way to monetize this means they have a service the free market is willing to pay for. They are not a four-year college charging over $100K for a degree that guarantees nothing. I suspect that if you look at it in terms of cost per successful entrepreneur graduated, Herbalife may be a better bargain than Ackman’s alma mater, Harvard.
Q: You can’t be serious.
A: I don’t have the statistics, but consider this: among the USA’s general population, 95% of new businesses fail within five years, while among the Amish, 95% are still in business after five years. The Amish do not send their children to government schools. Their teachers do not have any special training. The Amish only teach in a classroom setting up to age 16. After that you are expected to be in full time gainful employment. Everyone works in an Amish household; even the two-year-olds feed chickens and gather eggs. No one is guaranteed a minimum wage. They think work is good for you. So does Herbalife. I think that it is the only way you can acquire a repeatable skill: by doing.
Q: You are beginning to sound like an advertisement for Herbalife. Do you have a position in the stock?
Á: No. I have no connection to Herbalife whatsoever, nor do I have any connection with William Ackman, Harvard College or Harvard Business School. I’ve had two persons with Harvard MBAs work in my businesses, and I let each of them go. I do not believe that has colored my analysis. Herbalife clearly does not qualify as a viable short on any basis I can see. Much of what Ackman complains about Herbalife’s conduct would be highly praised by Sun Tzu.
Photo credit: An eye for my mind via Visualhunt / CC BY-SA
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