March 8, 2015

An Era Of Unreality Defined By Magical Thinking

A weekend topic on financial manias. “At one point in the late 1990s, a $5 toy mass-produced in China became such a big craze that people – mostly adults – paid thousands of dollars to collect them. But only a few years after Beanie Babies made their creator a billionaire, the stuffed animals became virtually worthless. Humorist Dave Barry explained the craze in a 1998 column: ‘Beanie Babies were originally intended as fun playthings for children, but as the old saying goes, ‘Whenever you have something intended as innocent fun for children, you can count on adults to turn it into an obsessive, grotesquely over-commercialized ‘hobby’ with the same whimsy content as the Bataan Death March.’”

“A self-published author sold more than three million copies of a book that touted ten-year predictions for their values. The magazine Mary Beth’s Beanie World, started by a self-described soccer mom, reached one million copies in paid monthly circulation. In it, a full-page, full-color ad for Smart Heart tag protectors led with this headline: ‘How Do You Protect An Investment That Increases By 8,400%[?]‘ The answer was to buy hard-shell lockets in which to encase the heart-shaped paper tags that read ‘Safety Precaution: Please remove all swing tags before giving this item to a child.’ More than any other consumer good in history, Beanie Babies were carried to the height of success by a collective dream that their values would always rise.”

“I was in middle school when the Beanies hit and I remember a couple I had. But mostly I remember the Beanie Baby dealers who sprouted at Cape Cod’s Dick & Ellie’s flea market, which my mother and I visited every weekend. I remember the adults wearing fanny packs and visors, eagerly discussing the ’secondary market’ fluctuations driving up the prices of pieces they’d paid $5 for a few weeks earlier. The Beanie sellers had the busiest booths and, for a couple years, it really did look like the dealers sticking with Shaker furniture and oil paintings were as out of touch as Warren Buffett seemed to be when he eschewed Internet stocks in favor of acquiring Dairy Queen in late 1997.”

“I hadn’t thought about Beanie Babies at all in at least ten years until, on a wintry day in 2010, I stopped at Kimballs, an auction house down the road from the University of Massachusetts, Amherst. I was a year away from graduating into the worst job market in a generation, and the fallout from the recent speculative mania in real estate was never far from anyone’s mind.”

“Three large Rubbermaid containers on a table in the back of the room holding at least five hundred Beanie Babies, all with plastic lockets protecting their hangtags. Some were preserved individually in Lucite containers. There was another large box of magazines and price guides with names like Beanies & More, Beanie Collector, Beans! Magazine, and Beanie Mania. Then there were spreadsheets and checklists—how many of each Beanie Baby the collector/speculator had, which ones she was missing, how much was paid, and estimates of current value (as of 1998 or 1999).”

“More interesting than the Beanies themselves was the manifest conviction of whoever had assembled the collection that it would one day be of great value. Everything on display was perfectly preserved and, as we found out when the auction started at 6 p.m., almost worthless. The entire lot sold for less than a hundred dollars—probably well below 2 percent of its value at the height of the Beanie Babies market, which, not coincidentally, was the height of the Internet stock bubble.”

“That the speculative episode in Beanie Babies took place in tandem with the Internet bubble suggests that the cultural forces that were alchemizing Internet stocks had the same effect on Beanie Babies. They rose in an era of unreality defined by magical thinking; as economist Dr. Robert Shiller writes in Irrational Exuberance: ‘Speculative market expansions have often been associated with popular perceptions that the future is brighter or less uncertain than it was in the past.’”

“They also, Shiller notes, have a way of clustering around century turns—as if the prospect of going from ’99 to ’00 is so fantastic as to make all things seem possible. In the new millennium, the residents of America’s high culture thought, the Internet would change everything, making everyone who bought Internet stocks rich, no matter how much they paid. Those in the lower culture adapted that optimism to a belief in the investment potential of stuffed animals, and it’s hard to say which view was proven more wrong.”

Book Excerpt: ‘The Great Beanie Baby Bubble’

By Zac Bissonnette

Bits Bucket for March 8, 2015

Post off-topic ideas, links, and Craigslist finds here.