Start with a Large One

There’s an old, old joke about how to make a small fortune on speculative investments: start with a large fortune. We’ve seen a lot of examples of this principle over the years, but I have to admit that the recent rise and fall of the parent company behind the “Movie Pass” subscription service is so extreme that it is genuinely hard to believe it is really happening. And the fact that apparently there are still investors out there who are holding on to the company’s stock in hopes of it making a comeback takes us well past the point where the whole things sounds like satire…

If you’re not familiar with Helios and Matheson Analytics, don’t worry about it; their business is almost entirely built around Movie Pass. If you’re not familiar with Movie Pass, the basic idea was that users would agree to pay a monthly fee for a specified period, in return for which they would be able to go to an unlimited number of movies. The number of movies per month was later lowered to a specific number, but regardless of how often you were allowed to use it, the business model was clearly based on having more subscribers who pay for the service and never use it than subscribers who go to the movies all of the time…

Now, we should probably concede that there have been many other subscription businesses based on this same model that have succeeded very well over the years. A familiar example would be “health clubs” – private gyms – that offer memberships at somewhat less than the actual cost of providing service to an additional customer. Since a certain number of their customers will sign a two-year contract and then use the facility less than a dozen times – in some cases the number of customers actually going to the gym has been recorded at less than 25% of those paying for the privilege – this model can be highly lucrative. Unfortunately, it is much easier to go to the movies than it is to go to the gym, and attendance was correspondingly higher…

Without auditing their books I can’t tell you how much of the resulting operations failure was predictable, but one fact that stands out in the Market Insider article and other accounts of the company’s failure is that Helios never managed to negotiate a discounted high-volume rate for the movie tickets it was providing to its subscribers. If the company had obtained such a rate – say $5 per movie – and then offered customers five movies per month for a subscription of $30 per month they would have made $60 on every customer who attended all 60 movies over the 12 months, and more than that on anyone who attended fewer than that. Meanwhile, if movie tickets cost from $10 to $15 each, the service is still a good deal for the customer, since they will break even if they go to two shows a month, and save money after three…

Marketing a service that provides a finite number of movies, even at a remarkably good price, would have been much more difficult than just advertising “unlimited” movies and hoping that the majority of your customers don’t attend more than a few movies each year, of course. By the same token, it would probably have been a good idea to get the bulk discounts on movie tickets before you started offering the service to the public, and it probably would have been an even better idea to figure out what would make movie studios want to offer you bulk discounts in the first place…

Given all of these issues, I’m not sure why investors are continuing to hold onto the stock when Helios has seen its stock value drop from somewhere over $100 a share to somewhere under 10 cents a share, but then I can’t explain why people would keep buying more shares as the company was leaning further and further into its death spiral, either. It’s possible that people don’t really understand how sunk costs work, or what escalation of commitment means…

But that’s a discussion for another day…

Once Bitten

I’ve been avoiding the whole cryptocurrency issue for a while now, partly because I think there’s already enough chatter about it flying around, and partly because I’ll admit I don’t completely understand the stuff. The basic idea is simple enough – you buy something in the hope that its perceived value will rise and you will be able to resell the thing for more than what you paid for it. It’s the principle behind the (mostly apocryphal) story of the Dutch Tulip Bulb crisis, or the Beany Baby fiasco in our own time. As long as the price of whatever it is keeps rising it will remain possible for each dealer in turn to resell the things at progressively higher prices, regardless of what actual value (if any) the thing might have. The problem is, these conditions won’t continue forever…

If cryptocurrencies have any intrinsic value, no one has been able to explain to me what it might be so far, not that it really matters in cases like these. Certainly, the Beany Babies were never worth more than a few cents worth of fabric and filling, plus the labor to design them, name them, make them, ship them, inventory them, and sell them. Every time one of these artificial markets finally pops – generally because somebody finally asks “Why are we paying $10,000 for a stuffed animal worth $9.99 retail?” – the people who end up losing the most were the last ones to buy whatever commodities were involved. It is understandable that anyone with items still in their possession would want to keep the market going, at least until they could unload whatever they had left; where the situation becomes completely revolting is when someone is manipulating the market to drive the spot price higher…

Unfortunately, it seems as though that is exactly what happened during 2017’s Bitcoin boom. According to a CNBC story posted yesterday, Dr. John Griffin at the University of Texas investigated the rise of Bitcoin and discovered that some party or parties (currently unidentified) were using other cryptocurrencies to stabilize the Bitcoin market during the boom, in much the same way that fraudsters have artificially inflated stock prices by placing artificial buy orders – the classic “pump and dump” scheme. The difference in this case is that since cryptocurrencies are not connected to any real-world property, there’s no way to prove that they are over-valued the way there would be with a stock issue – and since they aren’t regulated by anybody, there is no authority you could complain to if somebody was manipulating the market…

The CNBC article goes on to say that the price of Bitcoin has been plummeting over the last few months, losing around three-quarters of the value it had at the peak – which means that someone who bought a Bitcoin at $20,000 has now lost close to $14,000 on the deal, assuming they can sell it now. Of course, the more people dump these things onto the market the more the price will drop, and the cycle will continue. We’ve all seen cases of stocks dropping from hundreds of dollars per share to a few cents per share, and people who held onto them for just a few hours too long and lost everything; this is the same idea, except that in this case there is no SEC you can complain to. Or, more accurately, there is – but they can’t do anything about it…

The lack of regulation and oversight was one of the original selling points behind cryptocurrencies – the government can’t tell you what to do with them, the Federal Reserve can’t interfere with their interest rates, and there were no issues with national economies imploding or currency conversion rates. But even if cryptocurrencies themselves really are foolproof and incorruptible (which still remains to be seen), the market for them would of necessity respond to the laws of supply and demand, just like any other free market – and that means it is susceptible to manipulation, just like any other commodity, equity, debt or currency…

I’m not saying that any of the people you may know who made money on Bitcoin during its rise and fall are crooks, even if they made very large amounts of money, and even if they aren’t able to explain to you how the whole thing works or how they did it. I’m just pointing out that, unless evidence to the contrary surfaces, it would appear that this latest form of get-rich-quick scheme has turned out the way most of them do…

What Ever Happened to Free Parking?

Over the years I’ve gotten into disposable income arguments with a number of people, most of whom have told me that conspicuous consumption is disgusting no matter how small the amounts involved are relative to your income, and people who spend $800,000 on a car or $200,000 on a bottle of whiskey should just get a Honda Accord and a bottle of some premium brand and donate the other $970,000 or so to charity. I’d like to think that I’m more tolerant than that, although in fairness I should probably just admit that I don’t particularly care how people want to squander their money. I follow the Heinlein school of ethics, which holds that anything you enjoy that does not unnecessarily harm another person is not wrong in an ethical sense – although it may stupid. The case of the million dollar parking space, as reported in the New York Times this week, probably falls into that last category…

Even if you’ve never been to New York City, the concept that parking would be hard to find and very expensive there shouldn’t be too hard to grasp. Space within the city is extremely limited, and as a result all real estate is expensive. Most of the residents don’t even own cars, and a surprising percentage of them will be happy to tell you, at the drop of anything resembling a cue, how wonderful it is to be able to go anywhere you want to go on public transportation, how much money they save every year by not having to make car payments (or pay for car insurance), and why this is further evidence of the complete superiority of their city to anywhere else in the world you could possibly live. I’m not convinced that the existence of a parking space that will cost you as much as $6,600 per square foot supports that contention, however…

According to the story in the New York Times website, the parking spaces are part of a new condo development in a building that will offer three-bedroom units in the $8.7 million to $10.45 million range – or around $3,150 per square foot; less than half of what the parking spots cost based on footage. Or, to look at it another way, each of these parking sports will require financial resources that would be sufficient to purchase a really nice house (complete with multi-car garage) in many other large cities, or four quite large houses in a good part of East Lansing, Michigan, outright. This would seem extravagant almost anywhere, but in a city that prides itself on its public transportation – and which is widely associated with both horrible driving conditions and unbearable automotive expenses – it seems like a complete logical disconnect…

Now, we should probably acknowledge that according to the same story it isn’t that unusual to see parking spaces with a six-figure price listing in New York; the author also points out that the available number of off-street parking spaces has dropped by around 26% over the past 30 years, whereas the population of the city certainly has not. We might also want to concede that someone who is paying in excess of $10 million for a new residence (especially a condominium) might consider an extra 10% in order to park in the same building no more than a minor expense – or possibly an interesting investment, since it will both enhance the value of the condo and also offer a property than can be sold separately from the residence. But it should probably also be noted than anyone who can afford to spend that kind of money on real estate can most likely also afford cab fare…

In the long run a parking space that costs four times more than the national average for a house may seem like a particularly disgusting example of conspicuous consumption, but if the people who buy them end up selling the properties at a good profit in five or ten years it’s hard to imagine what was wrong with this choice from a business standpoint; if the spaces appreciate the way some real estate did in the early 2000s the owners might end up having the last laugh on all of us. The truth is, if I could realize a profit of millions of dollars – or even $200,000 for a nice 20% profit – on buying and selling a piece of property, I don’t believe that I’d care whether it was a 200-unit apartment complex or a 200 square foot parking space…

And I can’t imagine why anyone else should care, let alone give me a whole lecture on conspicuous consumption…

Going to the Dogs

It was one of those headlines that you just know aren’t going to pan out, but you have to look anyway: “Canadian students invent ice cream that is stored at room temperature.” Anyone who has ever suffered through the freeze-dried abomination that is marketed as “Astronaut Ice Cream” already knows that the idea of storing a frozen dessert at room temperature is something of a dodgy idea to anyone whose idea of sweets does not include Styrofoam packing kernels. And if you follow the link, you will find that, as expected, the story it leads to isn’t entirely the one the headline would lead you to expect; it’s just closer than usual…

The product in question, which really was developed by students at McGill University, is less hype than a self-churning sorbet that can be stored indefinitely at room temperature before you activate its nitrogen canister and throw it in the freezer. It isn’t really ice cream in the sense that it isn’t actually frozen until you leave it in the freezer for a few hours, and also in the sense that it’s a vegan product containing no dairy products of any kind – hence, neither iced nor cream. I’m personally a little dubious about flavors like “hibiscus and ginger or almond and pistachio” – if it doesn’t contain chocolate, caramel, or vanilla it’s not really ice cream, as far as I’m concerned. But a much larger issue, at least as I see it, is that the people who shop for ice cream and the people who shop for “vegan sorbet” aren’t really the same people. Or, to put it another way, I don’t believe that there is currently any defined market for this product…

Now, in fairness, there is some precedent for a non-dairy/vegan frozen dessert product, including at least one brand that has been around for the last 25 years; it’s just that this category of product does not appear to have ever achieved mainstream acceptance. Sold under the name brand of “Tofutti,” these products make use of frozen tofu (and various flavoring, texturing and coloring additives) to produce non-dairy products that look – and, to some extent, taste – like real ice cream products, but which contain no animal products of any kind. It’s a great idea, in its own way; the product in question is cheaper to make and more ecologically responsible than conventional dairy products, and is generally considered healthier to eat, as well. The problem is, no matter how adept you become at freezing and flavoring bean curd, it still doesn’t taste that much like ice cream…

In management terms, a product or company that has a relatively weak position in a relatively unattractive industry (or part of a larger industry) is classified as a Dog – not to be cruel; it’s just a technical term. But from a management or financial standpoint, a company whose primary product is neither growing explosively in market share or revenue (like a Ben and Jerry’s or a Coldstone Creamery) or maintaining a consistent and profitable control over a large market share (like a Baskin-Robins or a Carvell) or even taking a strong position in an unstable part of the industry (such as any good frozen yogurt company) is not an attractive prospect for investment and further development, and should probably be removed from your portfolio. At least, that has been the case until now…

It remains to be seen, of course, whether or not the new stabilizing agent developed at McGill will work on tofu products, or whether the ability to store them for months/years without refrigeration and then churn up a batch whenever you want it will be a sufficiently large change in the product to make it more widely popular. Unless the inventors can also come up with some way of making the product chill itself as well – just open the box and hit the activator, and the product will do the rest – I can’t see this effectively competing with any of the existing types of frozen dessert. But, I must admit, I’ve been wrong before…

Loser

There aren’t at lot of events that make someone like me want to make the “L” sign on our foreheads and start yelling “Loser!” at someone who has managed to create his or her own Epic Fail in a business context. Part of it, of course, is simply due to the fact that I am a mature adult with two Master’s degrees in Business and a better-than-average experience with things that can go wrong through no fault of one’s own. Some of it is because I am a student of business failures, and I’m aware of how fine a line there is between a “moderate success,” a “fail” and an “EPIC FAIL.” And some of it is just because I’m the type to view another person’s misfortunes and think “There but for the grace of God go I,” rather than “Neener Neener Neener!” None of which keeps me from wanting to call the guy who renounced his U.S. Citizenship to avoid paying taxes on the money he made on the Facebook IPO a loser – and a complete idiot with no grasp of strategy – however…

In case you missed it during the original events, you can pick up the story on the Forbes web page. A man named Eduardo Saverin bought a large amount of stock in Facebook during the initial public offering, and then moved out of the country and renounced his U.S. Citizenship in order to avoid paying the capital gains tax he was sure would arise as the stock price continued to soar. He had to pay taxes on the $2.4 billion his shares were worth on that day, but he’d be immune to any additional gains. Unfortunately, he failed to take into account what would happen if the stock didn’t continue to rise – as, in fact, it didn’t. As of this writing, Saverin’s shares of Facebook are now worth about $1.2 billion, or about half what they were on the day he renounced his citizenship. But, since he’s no longer a citizen, he can’t take advantage of the tax implications of the loss…

Yes, that’s right: his stock is now worth $1.2 billion, but he is going to have to pay taxes on $2.4 billion. Best guess, according to Forbes, is that this will cost him around $180 million – in addition to the loss of half of his stock value in the first place, of course…

Now, I don’t pretend to know much about finance or tax law, let alone karma, but it seems relatively straightforward to me that if you’re going to play games with the tax laws in order to screw the United States government out of money you owe them, you should probably at least consider what will happen to your clever stunt – and your personal fortune – if the market doesn’t do what you expected it to do. Especially in a case like this one, where nearly all of the company’s assets are intangibles – not even defined things, like patents and copyrights, but nebulous things like market position and goodwill. Because if the market does not rise, you’ve renounced your citizenship and accepted all of the issues that will come with that decision for nothing – and if it drops, you’re losing money fast…

Previously in this space I’ve noted that right or wrong, a stock price is based on what people will pay for it, not on what the security is actually worth, or even on what they think it is worth. And in the case of a company that owns no property, has no tangible or intellectual assets, and is counting on driving its stock price up based almost entirely on hype it doesn’t take much to change people’s opinions. I’m not saying that attempting these sorts of shenanigans with tax laws and citizenship will automatically make you a loser; I’m saying that just as in any other human activity, you need to plan for the possibility that you’re not quite as clever as you think you are…

Expensive Covers

Every so often I’ll run across a story about a new consumer product that seems excessively expensive for its ostensible purpose – we’ve seen examples such as a $100,000 safety razor, a $200,000 bottle of scotch, a $40 bottle of water, and so on. Earlier this month I brought you the story of the Panda Tea, and the $2,000 an ounce price tag slapped on it because the tea plants are fertilized with panda dung instead of more common chemical and animal by-products. Some of these are signs of wretched excess (there’s no real justification for spending $40 for a liter of water just because you can) while others do offer value to the customer, if only for a specific definition of “value” (for all I know, the $200,000 bottle of scotch might actually be that good; I don’t drink alcohol anymore, and I don’t like scotch anyway). Where this category of consumer goods gets really interesting is when we consider products that will actually appreciate in price – despite the fact that they don’t appear to have any real value in the first place…

Consider, for example, the Richard Mille RM56 watch as featured on the Born Rich website and described on the Gizmodo news page. What distinguishes this time piece from a Rolex or other super-luxury watch is the fact that the entire housing has been carved from a single piece of clear sapphire crystal, allowing the observer to see all of the tiny gears and part of the mechanism. Well, that and the fact that this watch comes with a price tag of $1,650,000 USD. It’s an intricate piece of work, of which only five are being offered for sale; there’s no question that the mechanism is some of the finest in the world, or that it’s incredibly difficult to carve anything out of pure sapphire crystal. That doesn’t change the fact that for that price you could purchase a basic Rolex for 500 or so of your closest friends (or one of the really showy Rolex models for 100 of your closest friends) at that price – or for that matter that you could purchase houses for ten of your closest friends here in Lansing, Michigan for what they’re charging for this watch. But what is truly mind-blowing is that it might not be a bad investment…

A recent article in Businessweek discussed the increasing interest in luxury watches as an investment, much like art or jewelry. As with most other collectibles, it’s important to select the right ones to invest in, but the rare and exotic tend to be the best choices – and it’s hard to be rarer or more exotic than a run of only five examples, each carved out of single pieces of sapphire crystal. If the author of this article is correct, it’s possible that this watch could appreciate several times over, assuming you’re willing to hang onto it over a period of a decade or two. In fact, it would appear that such investments aren’t even that unusual; Sotheby’s and Christie’s both have departments that specialize in watches and hold regular auctions of collectible items. It may seem a little odd to non-collectors, but it’s hard to imagine why this would be any different from purchasing baseball cards, ingots of specific metals, or ownership shares in publicly-held companies for the same purpose…

I’ll admit that when I first saw this article, I just thought it was another case of wretched excess – people paying more for a watch than the average American will earn in a lifetime, just to show off how much disposable income they have. And it’s possible that somebody will, of course; we’ve seen people paying much more than that for consumer products with much shorter service lives in recent years. But assuming that all such purchases are made merely to flaunt someone’s wealth is just another case of judging a book by its cover – a very expensive cover, in this case, but still…