Some Bubbles of the 1980s

Some Bubbles of the 1980s

The late 1980s also had its share of spectacular booms and busts in more prosaic companies, whose concepts caught the fancy of Wall Street. Whereas many investors lost 75 percent of their initial purchase price in the biotech boom, others saw well over 90 per cent of their investment dollars disappear while chasing these other concepts.

Alfin Fragrancies

Alfin Fragrancias, a cosmetic company jumped into the spotlight in late 1985 when it announced a new face cream. Glycel, which could slow the aging process and reverse skin damage. Glycel’s believability was enhanced by the news that it contained “ingredients developed in Switzerland by Christian Barnard,” the doctor who pioneered the first successful heart transplant. The image was perfect. Barnard, sixty-three years old at the tine, presented himself as a modern-day Ponce de Leon. He was always seen in the presence of his lovely twenty-two-year-old “girlfriend.” Even in the hyperbolic world of the cosmetics industry, Barnard’s claims that Glycel could penetrate the skin and reverse the aging process seemed excessive. But for a while both the public and Wall Street were convinced. Introductory %195 kits of the product sold out at Neiman-Marcus and other fine department stores. Extraordinary growth seemed assured and the stock price tripled within a month after the announcement of Glycel. Even the prestigious firm of Morgan Stanley joined the bandwagon, “justifying” the stratospheric price-earning multiple for the stock, and indicating that “the stock will head even higher.”

But, unfortunately, Alfin’s beauty was only skin deep. Alfin’s claim that Glycel penetrated skin cells to “bring back the memory of the cell” wrinkled a lot of scientific brows. One dermatologist claimed, “It would be like giving someone a blood transfusion by rubbing blood into the skin.” The product received a fatal blow from the FDA, which insisted that any product intended to alter a normal bodily function such as aging was a drug, not a cosmetic, and that the agency would require proof of efficacy. Rather than subjecting its product to that kind of scrutiny, Alfin withdrew Glycel from distribution. The stock, which sold near $40 in early 1986, fell to near $2 in 1989. Investors with dreams of castles in the air usually suffer rude awakenings.

Bubbles of the 1980s. Photo by Elena

Home Shopping Networks

This concept combined two of America’s favorite pastimes: watching TV and shopping. All America loves a bargain and Home Shopping Network provided “budget-priced goods” day or night to cable TV call-in customers. You could be sure that your program on Home Shopping Network would never be interrupted by a commercial – the show was one never-ending commercial.

The program resembled a game show with hosts named “Bubblin’ Bobbi” Ray, “Discount Dan” Dennis, “Diamond Jim” Brecher, and “Budget Bob” Carcosta. Even people magazine described most of the items for sale, such as gold-plated jewelry and tableware and baskets of porcelain flowers, as being “tacky”. But as founder “Bud” Paxson said, “If you really want to buy something, it’s not junk to you. It’s beautiful.”

Home Shopping Network stock went public on May 13, 1986, at $18 a share. Its first trade in the after market was at $42 a share. In three months’ time the stock reached a high of $133 a share before splitting three for one. When skeptics asked whether a retailer should sell at 199 times earnings, the answer was that this was an entirely different situation. Home Shopping Networks was not simply a retailer, it was pioneering a “fundamental shift in America’s shopping habits.” The sky was the limit. It was as if America’s thirst for cubic zirconia was unquenchable.

Reality began to hit home in 1987. First there was the boredom factor. Even hardcore customers eventually tired of lovely hostesses making homey conversation with customers, such as “Oh, you’re from New Jersey, that’s just terrific,” followed by the tooting of a bicycle horn. But people also began to question the value of the merchandise they were buying. Forbes, for example, in early 1987 wrote up the story of the woman who had bought an “exquisite emerald-and-diamond” with a retail value of $500 which she “stole” for only $243. Forbes took the ring to a reputable New York jeweler who appraised it as follows: “The diamonds are a joke worth about $15. The emeralds? The best you can say about them is they are green.” Finally, the Home Shopping Network idea was easily copied, and the company soon found itself with considerable competition for the affections of cable TV viewers.

It was not long before investors began to return some of their Home Shoppin Network shares. The skeptical Forbes story alone caused a drop of 25 percent. By the late eighties the stock was selling for less than $5 a share. One is reminded of the comment by the legendary investor John Templeton: “The most dangerous words in the investment business are “this time it’s different.”

ZZZZ Best

One of the favorite booms and busts of the late 1980s is the story of ZZZZ Best. Here was an incredible Horatio Alger story that captivated investors. In the fast-paced world of entrepreneurs who strike it rich before they can shave, Barry Minkow was a genuine legend of the 1980s. Minkow’s career began at age nine. His family could not afford a baby sitter so Barry often went to work at the carpet-cleaning shop managed by his mother. There he began soliciting jobs by phone. By age ten he was actually cleaning carpets. Working evenings and summers, he saved $6,000 within the next four years and by the age of fifteen he bought some steam-cleaning equipment and started his own carpet-cleaning business in the garage of the family home. The company was called ZZZZ Best (and pronounced zeee best). Still in high school and too young to drive, Minkow hired a crew to pick up and clean carpets while he sat in class fretting over each week’s payroll. With Minkow working a punishing schedule (and having friends drive him to appointments), the business flourished. He was proud of the fact that he hired his father and mother to work for the business. By age eighteen, Minkow was a millionaire.

Minkow’s insatiable appetite for work extended to self-promotion. He took on all the tangible trappings of success. He drove a red Ferrari and lived in a $700,000 home with a large pool in which a big black Z was painted on the bottom. He also publicly extolled good old-fashioned American virtues. He wrote a book modestly entitled Making It in America, in which he claimed that teenagers didn’t work hard enough. He gave generously to charities and appeared on anti-drug commercials with the slogan “My act is clean, how’s yours?” By this time, ZZZZ Best had 1,300 employees and locations throughout California as well as in Arizona and Nevada.

Was over 100 times earnings too much to pay for a mundane carpet-cleaning company? Of course not, when the company was run by a genius and a spectacularly successful businessman who could also show his toughness. Minkow’s favorite line to his employees was “My way of the highway.” And he once boasted that he would fire his own mother if she stepped out of line. When Minkow told Wall Street that his company was better run than IBM ad that it was destined to become “the General Motors of carpet cleaning,” investors listened with rapt attention. As one security analyst told at the time, ”This one can’t miss.”

In 1987, Minkow’s bubble burst with shocking suddenness. It turned out that ZZZZ Best was cleaning more than carpets – it was also laundering money for the mob. ZZZZ Best was accused of acting as a front for organized-crime figures who would buy equipment for the company with “dirty” money and replace their investment with “clean cash skimmed from the proceeds of ZZZZ Best’s legitimate carpet-cleaning business. But in fact, the spectacular growth of the company was itself mainly an elaborate fiction produced with fictitious contracts, phony credit card charges, and the like. In addition, Minkow was charged with skimming millions from the company treasury for his own personal use. Minkow, as well as all the investors in ZZZZ Best, were in wall-to-wall trouble.

The final chapter of the story occurred in 1989 when Minkow, then twenty-three, was convicted of fifty-seven counts of fraud and sentenced to twenty-five years in prison and required to make restitution of $26 million he was accused of stealing from the company. The United States district judge, in rejecting pleas for leniency, told Minkow, “You are dangerous because you have this gift of gab, this ability to communicate.” The judge added, “You don’t have a conscience.” As Barron’s Alan Abelson, who actually predicted the collapse long in advance, opined, “ZZZZ Best will likely turn out for investors as ZZZZ worst.” Most investors who lost their entire stake in the company would certainly agree.

The lessons of market history are clear. Styles and fashions in investors’ evaluations of securities can and often do play a critical role in the pricing of securities. The stock market at times conforms well to the castle-in-the-air theory. For this reason, the game of investing can be extremely dangerous.

Another lesson that cries out for attention is that investors should be very wary of purchasing today’s hot “new issue.” The new issues of 1982 and early 1983 performed very poorly. A study by the investment firm of Kidder Peabody examined the performance of over 1,000 initial public offerings (IPO’s) of common stock from 1983 through mid-1988. Their remarkable conclusion was that two-thirds of these IPO’s actually underperformed the Dow Jones industrial average from their issue date through mid-1988. While it is true that smaller stocks tend to outperform larger ones over long periods of time, that finding applies to established companies that trade in the secondary markets – not the IPOs. With only a one in three chances of outperforming the Dow average, investors would be well advised to treat new issues with a healthy dose of skepticism.

Certainly investors in the past have built many castles in the air with IPOs. Remember that the major sellers of the stock of IPOs are the managers of the companies themselves. They try to time their sales to coincide with a peak in the prosperity of their companies or with the height of investor enthusiasm for some current fed. The biotech IPOs that proliferated during the late 1980s are a good example. In such cases, the urge to get on the bandwagon – even in high-growth industries – produced a profitless prosperity for investors.

It is clear that when the market favors some particular characteristic in a stock, such as an association with biotechnology, financial entrepreneurs will invariably find some way of manufacturing it – or at least a close substitute. It seemed during the biotechnology boom that all that was needed was a few scientists with test tubes to produce an exciting IPO. The public inevitably pays dearly for such creativity.

And, without doubt, this creativity is not random. It is fueled, at times, by fraud, hype, and foolishness. Probably more. This review of stock valuations seem inconsistent with the view that the stock market is rational and efficient. Yet, in every case, the market did correct itself. The market eventually corrects any irrationality – but its own slow, inexorable fashion. Anomalies are able to crop up, and often they attract unwary investors. But eventually true value is recognized by the market, and this is the main lesson investors must head