It was originally possible to use this compass while falling. It has been reported that if you succeeded in using this compass while falling, you did not take (as much) falling damage. It appears that in the process of spinning you around, it moved you up a little, resetting "where you fall from". It is unknown if this was an intended side effect, or whether this would be considered a bug (or an exploit). It was changed in Patch 3.1.2.
Inspiration
This item is believed to be a reference to Captain Jack Sparrow's famous compass from Disney's Pirates of The Caribbean movies. When used, it faces your character in a random direction. (Perhaps that of your heart's greatest desire?)