“Help 3 people and ask them to help the other 3 and continue the chain.” Salman Khan once said. :p
But right now it is converted into “join 6 people under you and ask them to join other 6 under them.”
Yes, we are talking about the Network marketing / Multilevel marketing (MLM) / Pyramid scheme / Ponzi scheme and it has many other names. In recent times, I got more than 20 proposals through various social media platforms to join similar kinds of schemes. My general answer to them is “I am not interested”. I believe the same has happened to you.
The increasing popularity of these schemes reminds me of an event, which is also very beautifully presented in the movie: Betting on Zero. This event can teach us 3 important lessons about stock markets, network marketing, and human psychology, one per each. Which are at the end of the blog. First let us know the event.
Bill Ackman, a respected hedge fund manager and founder of Pershing square capital, shorted (bet against) $1 billion on Herbalife, which was and indeed it is, one of the largest pyramid schemes. The reason was very simple, like in other pyramid schemes, very few participants from Herbalife were actually making money. Others were just working hard and waiting for those dreams to turn real, which they were shown before joining.
According to Bill, those dreams were just dreams and he was expecting the collapse of this scheme.
To put this in numbers, 86% of distributors of Herbalife were earning $ 0 and almost 99% were making less than minimum wages. At the same time, the top 1% of distributors were making more than 88% of total revenue. Check out the diagram for more understanding.
Due to clear mismatch in profit distribution, Bill thought distributors of Herbalife will notice what is going on behind this scheme. His prediction was right, MLM members started protesting against the company.
Bill shorted $1 billion In December 2012 on Herbalife at the market price of $21 per stock. Like any other big trade, this trade also changed the sentiments of the market and the price of the stock started falling. After a dip, the price of the stock reached $40 per stock after one year.
Carl Icahn and Bill Ackman
Looking at the opportunity created by the volatility of the stock, Carl Icahn, an American businessman and investor, started taking a long position(betting on price appreciation) on Herbalife and bought 26% of outstanding equity. Meanwhile, due to the uncertainty and aggressive protest by distributors, the price of the stock again reached the level below than 2012 in February 2015 i.e. $15. At that moment Bill had a chance to leave the bet and book the profit. But he was “betting on zero and betting for zero”.
Fast forward to January 2019, the stock of Herbalife was trading at $60, and finally, Bill took a step back from the short position and made huge loss of $1 billion. 5 long years of the clash between titans ended. Check out the chart for more information.
Source: Google finance
Those lessons which we talked about earlier:
The stock market gives value to a company, which is making a profit. Period. They care a little about moral deeds. Although 99% of distributors were not earning enough, the company was making a profit, the main driving factor of price, in long term.
Network marketing is not a place where “only” your talent is awarded, unlike proposers of these schemes say to you. Your entry timing, the product of the company (some companies don’t even have trustable product lines), profit percentages, and many other things play a role. And all late joiners end up earning very little or even in the worst case, zero.
Then why those 99% of distributors, who were earning less than minimum wage, didn't leave the company? Of course, they did, but their places were replaced by others. Humans are attracted to materialistic things, and it is like “cherry on the cake” if they get it or perhaps start believing they would get it without working hard. Pitch of these schemes are all about it, Audi in 5 years, bungalow in 10 years, and whatnot.
In short, don’t just trust these schemes without doing proper research. And please don’t ask me to join any of them after reading this. :P
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Until next time...
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