August 22, 2014

The Family That Sank $100,000 Into a Beanie Baby Collectibles Portfolio

A short documentary has been released called Bankrupt by Beanie Babies that details the loss of $100,000 by one family during the 1990′s craze.  Aaron just sent me the story, with a short note that read something like, “It’s sad because they should have applied to become a wholesale dealer and owned a shop.”  He’s right.  The $100,000 outlay would not only have been a fraction of the cost, it would have provided either a mechanism for profit generation through sales, or a real-world tax shelter in the form of an operating loss that could have shielded future earnings at the point the whole thing imploded. 

The entire thing is only 8 minutes and 29 seconds long so you should take the time to watch it.  It provides some insights into the mind of many “investors” – I hate even using that word.  There are people with this mentality buying securities right now.  Let the horror of that sink in for a moment.

This is the reason we talk about intrinsic value so much – I want you all to understand that there is an additional safety factor involved when you collect assets that have an inherent intrinsic value (such as throwing off cash) that will provide utility to you even if you can never sell the asset in the future.  A Beanie Baby has no intrinsic value other than the enjoyment you get out of it.  An apartment building, on the other hand, still produces cash rents each month if it is well-managed and well-located, regardless of whether or not you could ever find a buyer.  Plus, if you needed to do so, you could move into it for shelter.  There are redundancies of intrinsic value and utility there.  The same goes for good equities, private companies, intellectual properties, etc.

This video has been going around and is inevitably posted in the comments section of most sites talking about this story.  It’s a Funny or Die highlight reel showing just how excessive the entire thing was:

Collectibles are a sub-specialty of investing that have all sorts of risks not present with an asset that has an intrinsic, internal source of cash generation.  I have an extensive portfolio of collectibles ranging from fountain pens and Carl Barks artwork to factice bottles and rare fragrances, but I do not bank on them ever making any money – I enjoy them for what they are and, under the right conditions, would take profits on them paying the 28% collectibles tax, which by itself puts them at a disadvantage relative to other asset classes.  

If I were going to go into it as a business or something, it would be based on a long-term analysis of categories that are consistently profitable over generations – like rare furniture or musical instruments.  I’d build a business model similar to M.S. Rau Antiques in the south, with my own obsessive focus on profitability, not simply acquisition.

This entire thing makes me sad for them.  I don’t know if I could be in a business that took advantage of people’s misplaced hopes and dreams like this.  I’d feel too guilty.

Edit: The founder of the Beanie Baby empire is a guy named Ty Warner, who is now worth $2.5 billion.  He used the profits from selling the toys to acquire hotels, golf courses, and other real estate investments.  He remains the sole owner of the firm.

Also, do any of the rest of you who were around in the 1990′s remember how crazy it was when the home shopping channels were hawking these things?  Just listen to the language used to sell these two, cheap stuffed animals for $69.95.  On an inflation adjusted basis, we’re talking about over $100 today.  It makes carnival prices look like a steal.  Skip to 3:44 to listen to the words, the tone, the sense of urgency.

  • Joel

    15,000-20,000 toys. He could spend the next 40 years selling them on ebay for $1-$2 each. $100k is a lot of Coca-Cola stock which would have about doubled in value not counting dividends. Mom, “or at least we could have lost the money in the stock market.”

    • http://www.joshuakennon.com/ Joshua Kennon

      I agree. Plus, by hanging on to them, he isn’t factoring in the time value of money or the inflationary tax (each year, he has to sell one of them for 3% to 4% more just to be even with what he would have received twelve months prior in terms of purchasing power).

      I’d find a way to liquidate the entire thing for $1 to $3 each as quickly as I could, raising anywhere from $15,000 to $60,000. Even if I did nothing but go out and park the money in slow growth tobacco or oil stocks, I’d be collecting somewhere between $750 and $3,800 a year in cash regardless of what the stock market did. It would be vastly preferable to all of that inventory sitting in containers doing nothing.

      Heck, create a gift basket company and mark them up like crazy as part of children’s birthday or hospital gift baskets. There are so many ways to convert that back into cash.

      • Joel

        Now with your edit, it should be obvious to see how non-smart were those toys. Probably worse than Franklin Mint. They did not use one single phrase or word to persuade you to buy except that people “had” to have them. Clearly they sold hundreds of millions of the cheap junk for the owner to be a billionaire.

  • IndianSummer

    Ugh. I want to throw up. You see these “investments” at yard sales now for 25 cents. Most have been thrown out.

  • joe pierson

    I got a attic full of antique “collectible” computers I don’t know what to do with, sell them or wait?

    • http://odai.me/ Odai

      Depends on the age, really – they need to be a certain age before they’ll be considered rare and valuable, otherwise they’ll be seen as obsolete junk. You could poke around on eBay, Craigslist, etc and see what similar models are going for, or you could get them appraised by a collector.

      • joe pierson

        I generally know around what they are worth, just don’t know if I should sell them or not. Certain computers have appreciated 10x in the last few years. Others same price as a decade ago. So very hard to quantify.

  • http://ianhfrancis.blogspot.com/ Ian Francis

    It is sad because he seems to be in complete denial that he has wasted all his money. You can see it in his face: He knows it is a total loss, and inside I think he feels like a failure, but he refuses to admit it. Its just like a gambler who has lost all their money. They can’t just cut their losses and move on. They have to win. So they keep throwing in more and more money, trying to recover their losses, which keep getting bigger and bigger. This man refuses to sell the Beanie Babies and move on, recovering at least a portion of his investment, insisting that if he waits long enough the price will recover. It won’t.

    Even worse, were the price to recover a bit because of some nostalgic craze that sweeps the country from time to time, I would be willing to bet he still won’t sell them, insisting the price will keep going up. This is going to be a total loss for him and his family, at least until the beanies get passed onto the children, which from what I could tell from the video, are more than willing to sell them.

    It would have been better for him to take that $100,000 and burn it in a bonfire. At least then you could watch a pretty fire for a few minutes, you wouldn’t have wasted both your and your children’s time, and that room the beanies are stored would be free to be put to a better use. It is sad when parents make selfish choices that not only hurt themselves, but the entire family.

    Ian