Berkshire Hathaway 2013 Annual Meeting Audience Question # 16

Warren defends the Pampered Chef’s operations against accusations that it is a pyramid scheme

Warren Buffett:

OK. Andrew?

Andrew Ross Sorkin:

OK.

Bill Ackman, the activist investor, who’s also a Berkshire investor as well, has raised questions in recent months about the legality of the multilevel marketing company Herbalife. He called it a pyramid scheme.

Berkshire owns a multilevel marketing company, too: the Pampered Chef.

Will Ackman’s attack on Herbalife have any impact on the Pampered Chef or Berkshire, and do you believe Ackman’s concerns are legitimate?

How do you think about the debate over multilevel marketing companies and decipher which ones are legitimate and which ones are not?

Warren Buffett:

Yeah. I don’t know anything— I’ve never actually even looked at a 10-K of Herbalife, so I do not know about their operation.

But, I think the key, obviously, is whether a direct marketing operation is really based on selling product to would-be distributors of one sort, and loading them up, instead of sell— in effect… selling it to end users.

And Pampered Chef is a million miles away from anything where the money is made, in any way, by selling to level A, and then those people selling to level B, and all that sort of thing.

It is true that certain people… lots of people… get paid on the results… the selling results… of other people that they recruit.

But this business of loading up people with a couple-hundred dollar package of something that they never sell, and that being sort of the main business… and I don’t know anything about Herbalife on this, I do know about Pampered Chef… and that is not Pampered Chef’s business.

Pampered Chef’s business is based on selling to the end user.

And we have thousands and thousands and thousands of parties every week where people who are actually going to use the product buy it from somebody, and we are not making it… we’re not making the money… by loading up people and then having them leave the sales force and our profit coming from that.

Charlie?

I think that should be the distinguishing characteristic. If I were regulating the industry, I would look very hard at operations where thousands of people got their hopes as to earning a living by selling the product, invested their savings, and buying a whole bunch of product that they didn’t need themselves, and then sort of being… abandoning the hope and being left with the product.

And the parent company just— or the main company… just going out and selling millions and millions of people on a dream that was not fulfilled.

Charlie?

Charlie Munger:

Well, there’s likely to be more flimflam in selling magic potions than pots and pans.

Warren Buffett:

At our age, we’re in the market, though, for any magic potions, if any of you have them.

That’s the extent of your comment, I assume, Charlie?

Charlie Munger:

Yes.

Looking for an offline, PDF copy of all shareholder questions carefully arranged into specific topics such as How to properly evaluate a company for potential investment, Intelligent Investing and Secrets to achieving Success and Happiness? Click on the image below to learn more.

Q&A with Warren Buffett and Charlie Munger: A Compilation of All Shareholder Questions and Answers from The Berkshire Hathaway Annual Shareholder Meetings

Click here to return to the Q&A topic list. Alternatively, you can proceed to the next or go back to the previous question.

Don`t copy text!