Investors Have No Business in Show Business
One of the bad things about a bull market is that the performance of
mediocre stocks can look great when presented in isolation. Combine that fact
with the willful neglect of the idea of the opportunity cost of investing--that
is, you have to measure the success of an investment against other potential
investments you might have made, not against "zero"--and you get a recipe for
real confusion.
Take the very curious column by Roger Smith, Variety's financial
columnist, in the most recent issue of that magazine. In essence, Smith argues
that entertainment has been a great business to be in over the last 15 years,
that entertainment stocks have been often undervalued, and that they've been
undervalued for one real reason: Wall Street is jealous of Hollywood, because
people in Hollywood make lots of money and have fun doing it.
There are a lot of strange ideas packed into that argument. First, it
assumes that Wall Street somehow controls stock prices. In the long term, it
doesn't. Markets collectively set prices, and markets are much bigger, and
smarter, than all the investment banks and brokerage houses in the world put
together. If the market has looked skeptically on entertainment stocks, it's
probably for a very good reason. And even if Wall Street did set prices, the
idea that investment bankers have consistently foregone potential fortunes for
themselves and their clients because their jealousy of Hollywood made them
unwilling to buy or even recommend entertainment stocks is, at best,
implausible. This is capitalism, remember? People who walk away from $20 bills
that are lying on the street eventually disappear.
But there's also a deeper problem here, which is that entertainment
companies have not, in fact, been those proverbial free $20 bills. Smith points
out that "the revenue side of showbiz" has risen dramatically at home and
phenomenally abroad over the past decade and a half. But he doesn't say
anything about the profitability of showbiz as an industry, let alone about its
return on invested capital (the most important single metric of a company's
economic performance). That's because compared to industries such as software,
telecom, networking, and pharmaceuticals, the performance of the entertainment
industry has been anemic.
Besides, haven't entertainment stocks been mediocre? Well, Smith mentions
that Wall Street analysts often cite this point as justification for what he
calls their "long-range myopia." But then he shows--or believes he shows--that
in fact big entertainment stocks have done very well in the past 15 years.
Four--Disney, Comcast, Cablevision, and TCI--are up 20-fold, two are up better
than 10-fold, a couple are up seven-fold, and a couple have "only
quadrupled."
Now, set aside the fact that of the real powerhouses, three are cable
companies that own hard assets, not part of what we usually think of as
"Hollywood." Consider instead that since 1984, the S&P 500 Index is up
better than nine-fold (and better than 12-fold since 1982). So most of the
stocks that Smith cites have done about as well as or worse than the market as
a whole. Then recognize that Smith is talking about the very best of the best
here, and you start to see how weak the industry as a whole has been.
Twenty-fold since 1984? Between 1993 and 1998 alone, Dell's stock rose
100-fold, AOL's rose 35-fold, and Microsoft was up 12 times. Cisco, Sun
Microsystems, EMC, Pfizer, Merck, MCI/Worldcom, Coke, Gillette, Wal-Mart, Home
Depot, McDonald's, even recent laggards like Nike: All of these stocks did as
well as or significantly better than the best entertainment companies over the
past 15 years (and many of them have been public for a significantly shorter
period of time).
It's not that entertainment isn't a better business than it used to be. It
is, mainly because the people running these companies are spending more time
running them and less time thinking about how to make them bigger. But by the
only standard that really matters--comparing how much money is put into a
company versus how much money that company makes--entertainment is just not,
and never has been, a good business. There are exceptions--Disney, Time Warner,
CBS, USA Networks, TCI--but they are the exceptions. The bull market makes it
easy to obscure that fact. But even in a bull market, the real numbers don't
lie. Of course, Smith is surely right that business in Hollywood is a lot of
fun. Spending other people's money always is.
