Sunday, March 6, 2016

Madness of Crowds and Martha Stewart

Once the queen of the domestic arts, Martha Stewart and her media empire have since fallen from grace.

We were traveling recently and on the hotel teevee I was sort of shocked to see Martha Stewart was still on the air.  She looked a little tired and sad, but perhaps that is just because she is older now.   Maybe also because her once vaunted media empire, Martha Stewart Omnimeda is now a shadow of its former self, being sold off this year and de-listed from the stock exchange.

This is not to bash Martha Stewart, but to illustrate how we tend to over-value things based on their perceived popularity and frequency in the news.   Back in 1999 before 9-11 when the only real thing we had to worry about in the world was which monster SUV we would buy next and whether Bill Clinton really got a blowjob in the White House, I actually bought Martha Stewart Omnimedia stock.   Yes, I am that much of a chump.

Worse yet, when the stock shot up to $38 a share, I didn't sell it and take a quick profit, thinking at the time that this company was "going places".  Of course, the only place it was going was in the toilet.

Now to be fair, the company did sort of hit a bump in the road when Stewart, a former stock broker herself, was accused of insider trading and went to jail.   But I think the bloom would have quickly fallen from this rose as people realized that the company was a one-trick pony and the mother of all self-serving IPOs.

Steward sold off only about 4% of the company in the IPO, not to raise capital for expansion (as a real IPO is supposed to do) but to create a means of cashing out of her empire.   If you own all the stock in your own company, that is a fine and wonderful thing.  But if you can't sell it on the open market, then what's the point?

On paper, at least, Stewart was a Billionaire once the stock price hit $38 a share.  But that was just on paper.  When the company sold last year to Sequential Brands, the sales price was undisclosed.

Why did we go crazy over Martha Stewart Omnimedia and drive the price up so high?   The answer lies in bubbles and the Madness of Crowds, which I wrote about before.  Oddly enough, some folks will try to tell you, with a straight face, that market bubbles simply don't exist.  One reader tried to convince me that the Tulip bubble of the 1600's never happened or was exaggerated.   While that was a long time ago and thus we really have only the historical record to rely on, I tend to disbelieve the theory that it never happened, only because in my lifetime, I have seen similar bubbles take place, again and again.

Why did I buy the Martha Steward Stock nearly 20 years ago?  Well I was an idiot - or at least a novice investor.   I was looking for "the next big thing!" and tended to view stocks in terms of their short-term prices and not long-term gains and dividends.   Mark said that Martha was "hot" and we should buy the stock (not that I'm blaming him).   I saw her name and face everywhere - in the news, on the television, in her magazine, and whatnot, and thought, "Yea, this has to be something worthwhile, otherwise everybody wouldn't be talking about it!"

And that is a stupid way to invest.   Everyone today is talking about ISIS and Donald Trump, but I would not "invest" in either.  This is not to say Martha Stewart is like ISIS, although the similarities between her and Donald Trump are pretty close.   Both get a lot of media attention and the media - for the sake of a story - tends to over-emphasize their importance in the world.

When you got down to brass tacks, Martha Stewart had some cooking shows and magazines and that's about it.  This is not to say what she had was worthless only that it was worth less than we imagined at the time.   And as with all things, it had the markings of a fad.   She hit the scene and became popular, it seems, overnight.   People - particularly women - became enthralled by her, even if no one actually sat down to make her fancy Christmas cookies that took 20 minutes to decorate - each.  It was a "thing" at the time and emblematic of the excesses of the 1990's when the economy was doing well and people were spending money.

It was not to last, of course.

So what is the point of all of this?   Only that when something seems important in the media, you have to step back and ask yourself if the importance hyped by the media is really substantive or just hype.   The media reports all the time about Twitter because people in the media tend to use it.   But in terms of user base, not many folks are on it, and thanks largely due to horrifically generous stock options for the founders, the company continues to hemorrhage cash.  Is this a good investment?   No matter how many times you hear about "tweets" in the media, I would have to say "no".    It may recover and go up in value, that is true.  But are you going to risk your life savings on it?  You go first.

Sadly, for us "little investors" there is not a whole lot we have to go by in terms of how to invest or what to invest in.   So we tend to get snookered by whatever is hyped in the media.   A few years back, all you heard about was gold, gold, gold, which was going to go to $5000 an ounce, for sure, according to some people who just happened to be selling gold.   But the price peaked and then fell and sort of has been loitering at $1000-$1200 an ounce.   Not a stellar investment as it doesn't even pay a dividend.  You'd make more money on some dumb savings account earning fractional interest.

And so on and so forth.  When Enron hit its peak,the media talked about nothing else, and a lot of people were buying, even as the place was unraveling.   We only know what we hear.   One way to avoid this, of course, is to unplug from the media, particularly television, whose "financial" shows often offer the most horrendous advice based on nothing more than one man's personal opinions - which are often conclusory statements such as, "I suggest you BUY WilGrowCo, as my target price is $50 a share and this company is going places!"

Going places, as in bankruptcy court, in a matter of months.   And yet today, my "Spam" e-mail box still gets regular pleas from stock market "insiders" who want to give me tips on "the next big thing" as if we haven't all heard about how a pump-and-dump penny-stock scam works.

I guess the pool of suckers is never-ending.

A question for you readers:  What do you think is today's Martha Stewart Omnimedia investment?  Something hyped that "everyone is talking about" that is sure to tank within 24 months?