Warren Buffett Knows Direct Sales, Pampered Chef, Wells Fargo, Herbalife & Fraud

Many Herbalife supporters point to Pampered Chef (see John Hempton blog here), Warren Buffett and Berkshire Hathaway (owner of several direct sales businesses, some of them for decades) in this debate, for obvious reasons. I’d add Wells Fargo to the list because they provide debt capital to Herbalife, which I haven’t heard anyone mention yet. In any event, it’s ridiculous to invoke any of them with respect to Herbalife. If I were Pampered Chef’s CEO, I’d be outraged that someone would compare my company to a global predatory pyramid scheme akin to the Mafia.  (read here and don’t conclude I’m a quack until you hear me out.)  Many pyramid schemes have been prosecuted under RICO.  David Boies, Herbalife’s own lawyer, got $150 million out of Amway using RICO.  (read here)  Direct sales and legitimate MLMs may not have the best reputation, but don’t drag them down into the mud with Herbalife.

Let me start by saying, I am far from perfect, so I am not holding any individual to a standard of perfection. But we should set a high bar and strive to achieve it. When we fall short, we should simply and honestly call attention to it (in ourselves or others), that we might stop it and not repeat it. I am convinced Herbalife inflicts serious harm upon millions of low income people seeking opportunity and Hope, and I’m asking if one is inclined to say or do anything about it, particularly if they are blessed with a unique position of influence.

For the record, I am a value investor for 23 years. I read the Intelligent Investor, by Benjamin Graham in one night and it changed everything for me, the light bulb went on, I had the keys to the intellectual financial kingdom. For me, it’s like paint to Picasso. It’s the Element, the intersection of what I love to do and what I’m also very good at. It isn’t about the money. Although I didn’t mind money very much, it was often a distraction. I will live in a box in the woods to practice value investing. If you know me, you know I mean that. (I went off on a diversion for many years and it was among the most unfulfilling decisions I’ve made. When I got back to it, it was like I’d been lost and found my way home.) I owe an enormous intellectual debt of gratitude to Warren Buffett, as does my entire generation of value investors. Ben Graham was the first level. Buffett took us to the next level, initiated a whole new dialogue that continues and evolves.

Buffett has also set or spoken about a high standard of corporate accountability, ethics and morality. He and Charlie have candidly and honestly called-out Wall Street for its many sins over the years and I’ve applauded them for the manner in which they’ve done that. But I have also been critical when “the Buff” (as we endearingly refer to him) has fallen short – which is mostly when he remains silent in the face of a scandal near to him or pays some general lip service to it. My feeling is you can’t have it both ways. You can’t say one thing when it sounds good, but when the rubber meets the road in front of your house with your guy driving the car you don’t say anything or you reluctantly put out some lame statement.

I’m a Berkshire shareholder. I bought my engagement ring 20 years ago from Borsheim’s Marvin Cohn. He mailed me at least 5 stones to choose from – part of Borsheim’s purchase-by-mail program. I was so nervous at the time. When I tell the story now, walking down the street in NYC with a pocket full of stones, wondering if I was going to be the first loss ever, Buffett singling out my name in next years annual report – it is hilarious. I was present at the shareholder meeting when he said, “Lose money for the firm and I’ll be understanding. Lose even a shred of reputation and I’ll be ruthless.”  It made an impression on me. I was young and impressionable. Did that ruthlessness apply to David Sokol or Ron Ferguson? Ferguson got some from the government. The direct and indirect list is actually longer than you’d think. A critical-eye student of Berkshire Hathaway knows what I mean. And that’s not being judgmental, that’s just being honest. A long career comes in contact with many characters. I’m also not talking about the tough, but necessary, decisions like shutting down a dead end textile business. Berskshire is a case study in reallocating capital from unproductive to productive use. Yet stating right up front, that it won’t take capital away from less attractive enterprise it already owns, so long as they earn a fair return. But if they destroy capital on a sustained basis with no end in sight, that’s a deal breaker. That’s interesting, because one would think he’d have to be ruthless in constantly seeking the highest return for every dollar in order to achieve the amazing results. (That’s what the Hedge Fund managers tell us, right?) A little leverage from the insurance float affords that luxury, I guess. (I got off topic. You see, I am insatiably curious about this stuff.)

Buffett is a fan of Dale Carnegie. By his own admission, one of the most influential books as a young man, after the Intelligent Investor, was How to Win Friends and Influence People. You win more with honey, not vinegar. I forget exactly how he said it, but recently on CNBC he compared himself to Carl Icahn that way. Who wants to sell the family business to a guy who’s going to sell it or ride the managers if it doesn’t achieve super-premium returns indefinitely? Who wants to work for a guy who publicly throws people under the bus, right? He almost never singles people out regarding their unacceptable actions, and if he does, it’s usually soft soap. Singling people out is reserved for praise.

Throughout the years, when I’ve seen Buffett protecting his image and legacy to the detriment of the greater good or being what I consider hypocritical, I’ve said so (not many people cared to listen though – he has a loyal following. It’s borderline heresy to say such a thing.). Ruthlessly protecting your reputation sounds noble, until you have to publicly take your friend out behind the woodshed. I have a different standard. Be ruthless regarding the behavior. Be compassionate regarding the individual. It’s been said differently: Hate the sin, Love the sinner. Maybe that’s what he meant and followers misinterpreted him.

Here’s the issue I have as it pertains to Herbalife. It gets back to his statement, “…lose even a shred of reputation and I’ll be ruthless.” Berkshire is Wells Fargo’s largest shareholder. Wells Fargo is a lender to Herbalife and I believe that is aiding and abetting a global predatory fraud by providing it with capital. Capital is the oxygen a business lives on. Warren Buffett is an exceptionally intelligent man. He knows the difference between legal direct sales or MLM and an illegal pyramid scheme. I am sure the CEO’s of his own direct sales companies do, too. He can do his own inquiry. They can provide input. Berkshire has been in the direct sales business for decades. They have witnessed the industry being run over by pyramid schemes. Tupperware’s CEO has said some telling things about the industry. There was a popular letter written a couple millennium ago that included this, “Evidence is all around us, so that we are without excuse.” I think it’s a good analogy.

Supporters of Herbalife have and will continue to point to Pampered Chef, Kirby and, now at my suggestion, Wells Fargo as “proof” that even Buffett thinks Herbalife is legitimate. More accurately, it is evidence of his choice not to engage in a social issue (this is not just a business issue) that harms millions of people every year. He greatly admires Bill Gates for the charitable work he does helping millions of poor people around the world. Maybe this is a unique opportunity for Buffett to apply his analytical talent and ability for the benefit of millions of people. Stand up and do something about it – weigh in, directly or indirectly. What kind of reputation and legacy is truly important?

In the Buffett biography The Snowball, Alice Schroeder quotes Buffett telling a group of business school students, “Basically, when you get to my age, you’ll really measure your success in life by how many of the people you want to have love you do love you. I know people who have a lot of money, and they get testimonial dinners and they get hospital wings named after them. But the truth is that nobody in the world loves them.”

Maybe Buffett is more interested in having John Stumpf, the CEO of Wells Fargo love him instead of the millions of poor Latinos seeking only opportunity and Hope. They think they are finding opportunity and Hope in Herbalife, which Wells Fargo has funded with hundreds of millions of dollars, but instead they get defrauded.

Having said all that, I remain without judgment and grateful to Warren Buffett for all the many lessons over these many years and I look forward to many more. I believe he is a man of high character and integrity, which is why I bothered to write this.

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