This blog post is part of a summer-long series of posts written by Humanities Blogger, Kristen Costa. Check back weekly to get a fresh, informative look at the themes explored in the films we’ll be showing as part of the newportFILM Outdoors series, presented by Lila Delman Real Estate International.
Betting on Zero highlights investor Bill Ackman’s quest to expose Herbalife, the nutritional supplement company that he believes is a pyramid scheme. The title of the documentary references Ackman’s belief that Herbalife’s stock would eventually hold no value because of his effort to “short.”
Pyramid schemes are defined as “a form of investment in which each paying participant recruits two further participants, with returns being given to early participants using money contributed by later ones” (Merriam-Webster Dictionary). This business model is based on the idea that the more people you get to invest, the higher your return as an early investor. It’s name refers to the hierarchical visual structure the investing strategy takes where the few people at the start of investing are the only ones who benefit. They are illegal in the United States and many other countries around the globe.
Pyramid schemes cannot go on forever and the illegal activity stems from the false hope given to later investors about their ability to make money. Similar to a pyramid scheme is a Ponzi scheme, named after Charles Ponzi, who ran a fraudulent investment program from 1919 to 1920. Ponzi created an investment system based on coupons and stamps for international mail postage. This type of business model fraudulently promises investors little risks and high rates of return on their initial investment. Like a pyramid scheme, it pays off the first round of investors, with not enough funds to go around for people who participate later. Any income that is generated goes to the original group and when income runs out, the fraud is revealed.
The concept of ‘shorting’- a term in the financial world that refers to betting against a company’s stock, is not new. Also called ‘a short’ or ‘a short position,’ this investment strategy involves an investor selling shares of borrowed stock. The investor expects that the stock will decrease in value, and he will then purchase the lower value, lower cost shares, returning them to the original borrower. This gives the investor unlimited risk and allow them to profit from the loss. It is used by investors who believe the price of an asset will decrease in the future and there is profit to be made from that loss.
For more information on this week’s newportFILM Outdoors screening of Betting On Zero, visit bit.ly/ZeroDoc.
The Humanities Blog Series is made possible through major funding support from the Rhode Island Council for the Humanities, an independant affiliate of the National Endowment for the Humanities. The Council seeds, supports, and strengthens public history, cultural heritage, civic education, and community engagement by and for all Rhode Islanders.