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.