Odd Lots - Episode 3: The Strange Story Behind the Beanie Babies Bubble

Episode Date: November 23, 2015

(Bloomberg) -- Two market bubbles stand out from the late 1990s. Technology stocks that were supposed to make everyone a zillionaire. The other: A series of mass-produced stuffed animals priced at $5 each. Odd Lots hosts Joe Weisenthal and Tracy Alloway speak with Zac Bissonnette, author of "The Great Beanie Baby Bubble: Mass Delusion and the Dark Side of Cute," to figure out exactly what made millions of people believe that these plush cuties were destined to soar in value. We dive into the psychology behind one of the weirdest speculative manias of all time and draw a connection with the dotcom bubble.See omnystudio.com/listener for privacy information.

Thanks for listening to Oddlots. Follow the show on Amazon Music for more future episodes or just ask Alexa play the podcast Odd Lots on Amazon Music. Welcome to Oddlots. It's Monday, November 23rd. I'm Tracy Alloway. And I'm Joe Wisenthal. Joe, I've got a question for you. What were you doing to make money in 1999? The summer of 1999 was the best summer because I think I made about $2,000 from just a summer job that I had. But then I put that all into stocks because it was the internet bubble. And I basically paid for two years of college thanks to essentially what I did that summer. So it was a good time. Well, I was making money too a little differently.

I was still in middle school. I was going to garage sales and selling old toys. And one of the things I sold was a tie-died Beanie Baby Lizard. I sold it for $200 to a 40-year-old. man. And at the time, me as an 11-year-old, I thought this was amazing money and I was rolling in it. That is amazing money. Objectively, for any age, selling a stuffed animal for $200. Right. So why are we talking about this? Today, we're going to delve into what can drive seemingly rational people to spend hundreds, sometimes thousands of dollars on stuffed animals.

We're going to talk about the Beanie Baby Bubble. And we're going to talk about something more than that. We're going to talk about bubbles in general, the Internet bubble, and the psychology behind speculative mania. So here with us today is Zach Bissonette. He's the author of the Great Beanie Baby Bubble, Mass Delusion, and the Dark Side of Cute. It's a book that came out earlier this year, and I just happened to finish it this morning.

Zach, thanks for joining us. So why did you write a book about Beanie Babies and stuffed animals? Like you, I was in middle school when the Beanie Bury Cray's hit, and I was kind of a nerd, and I was into, like, old books and antiques and that kind of thing. and every weekend I would go to this flea market on Cape Cod with my mother. And we had never heard of Beanie Babies. And then all of a sudden, out of nowhere, that flea market was like 80% Beanie Baby dealers.

And they were wearing like fanny packs and visors and talking just really, really excitedly about how much they were going up in value and how this one they'd just paid $5 for was now worth $40. And they're not going to sell it this week because next week it'll be worth $50. And that was like that for about two years. And then all of a sudden it was gone. And no one ever talked about it again. I just want to say during those same years that my mother was dating a guy who was an antique dealer. And so I also went to a lot of flea markets in New England. And I actually saw all the exact same thing where suddenly there were these flea markets where that used to be people bringing out their old stuff from their barns.

And then it was just people stuffed animals. Oh, and the traditionalist antique dealers hated it. Yeah. There was one guy I talked to who he was so proud of this. he was a traditionalist antique dealer who had just railed against Beanie Babies. He would go on CNN. I'm not even kidding. CNN would have these, like, debates between this guy who they called the Beanie Meany

and the Beanie Baby experts who were making millions of dollars selling, one of them sold a million copies a month of a Beanie Baby magazine that she was publishing. And they would have these debates in this, in a group of antique dealers in Indiana, gave him a crucified skunk Beanie Baby with a certificate thanking him for being a traditionalist, who stood up for traditional antiques. So this is the amazing thing. Walk us through how the Beanie Baby Bubble came into existence and how we

at one day actually got to the point where people were debating the value of stuffed animals on CNN. So it starts out with this very sort of eccentric toy maker named Ty Warner who dropped out of Kalamazoo College, tried to become an actor, failed at that, then became a toy salesman,

was wildly successful at that, but then he got fired from that and decided to start his own stuffed animal company. And he started to create these Beanie Babies initially because he thought at a $5 price point they would be irresistible and that it would help him sort of a foot in the door with large accounts and that he would then be able to kind of upsell bigger stores on selling his larger stuffed animal line. And it didn't work at all. I remember talking to the sales reps for Ty who remember just there was no interest in these Beanie babies. People worried they were cheap. They thought they looked cheap.

they worried people would buy the beanie babies instead of a more expensive product. He was just not getting any interest in them. But Ty Warner, the guy created them, really, really believed in this product. And he combined that belief with an extremely sort of eccentric, obsessive approach to the product. And the people who had worked with him, which at the beginning was just his girlfriend. But she remembered when I talked with her, he would keep her up until like four in the morning debating what color the ribbon on a bear should be. And then she'd think they would finally be done debating the color.

And he would say, well, what if it was tied this way instead of the other way? And then they would have to go back through the iterations of different colors again for hours. So he had this really, really obsessive approach to the product. This is how the retirement came into being, right? Precisely. So sometimes he would come out with a product. And then a few months after he chipped a few thousand of them, he would wake up in the middle of the night, basically, and decide that it should be a different color.

So, like, one of his first Beanie Baby is not one of the very first, but one of the first was Peanut the Elephant, who was originally a royal blue color. And then after a few months of that, I think he shipped, I think like 1,400. I can't remember that it, 1,400 or so of this Beanie Baby Baby Baby, and he decided it shouldn't be Royal Blue. It should be Baby Blue. And so the fact that they would get retired and never made again, there were never more than that, that's how they became collectible that people would see is going up in value. entirely accidentally. Because this is happening before anyone cares about these. His annual sales are like

$4 million a year at this point, mostly not from Beanie Babies. No one cares about Beanie Babies. Then all of a sudden this small group of people in suburban Chicago who lived on one cul-de-sac started collecting Beanie babies. They saw them in stores because they were near where Ty was headquartered

so that he had a big presence in stores there. And they decided they liked these Beanie Babies and that they wanted to assemble complete collections for their kids. And they became very obsessive. These were soccer moms. They came very obsessive with trying to assemble complete collections. And so they would call stores and other towns to ask

them what beanie babies they had. And then they remembered this. They would realize that there would be like these weird variations and these were the ones that he had retired. It just changed the designer because he would trip a few thousand and then change it entirely accidentally and they started paying each other more for these kind

of beanie babies. It was kind of started this small market for them just in this town. As this started to happen, As this kind of starts in this small town, this woman, Peggy Gallagher and her sister, Dr. Paula Brinko, had this idea, you know, we're just calling stores, like, in the Chicago area where this all started. But if we call stores in, like, other states, we'll be able to find beanie babies that are really rare that no one else has. So they go to start going local chambers of commerce and getting lists of all of the gift shops. The woman who's a doctor at the same time as she's doing this, she's doing this study. on women who were like diabetic or something

where she had to call hospitals to talk to their researchers and after she called the researcher she would ask to be transferred to the gift shop to ask about Beanie Babies so she could try to order the rare one. But this is the part of the story that I love because we eventually go from this like small group of soccer mom collectors who professionalize themselves as Beanie Baby dealers

and Beanie Baby Market experts. I mean one of them had a Beanie World magazine. She was a self-described Chicago suburban soccer mom. She had a magazine with the circulation of more than one million. Million a month. And more ads per copy than glamour. These were like thick

magazines full of ads. So people start seeing the priceless for these beanies and they all figure prices are going to go up forever. These are good investments. Right. And the stores that are hearing all of a sudden out of nowhere start getting calls from these out-of-state collectors are like, oh my gosh, Beanie babies

are really hot. It starts out as like two people. Did the magazine that published the prices? Because I remember I used to collect baseball cards when I was a kid and it was the Beckett magazine. And there was like a crucial avenue by which the baseball card bubble, which also burst. Everyone checked the prices

each month. So did the magazine for Beanie Baby service similar purposes? Hugely so. So there's a reflexivity I think to price guides where they impact prices as much as they report on them. And the first price list, which we've heard about this lady, Peggy Gallagher, which she started to circulate,

She put an ad in like a magazine for other collectors saying you sent her a self-address stamped envelope. She would send you this checklist. And she was like, well, what should I do? Her prices. She just made them up basically. She told me this, that she said, this one's rare, so that one should be worth $20. These were not really based on anything. And then she kind of sat back and watched on like the AOL message boards.

Is these priceless she was making up kind of became the price. And so talk about that how the internet, and those are the early days of the internet helped stoke that bubble. So this is a, Beanie Babies were 10% of eBay's sales in the early days of eBay's. eBay disclosed in the risk factors to its SEC filings, a dependence on the contingence. That's crazy fact. I love this fact. Yes. And so people were getting computers and Beanie Babies more than anything really gave people a reason to go on eBay and to do online trading and actually just e-commerce and there was also trade on a message orders. In the early days of e-commerce, There were a lot of stories that it was not growing as quickly as people thought it would.

People weren't comfortable with it. Stuff was too expensive to ship. With Beanie Baby, something that had a kind of weird, you weren't sure exactly what they were worth. They were easy to ship and they were really hard to find locally. It brought people on to e-commerce in a way that other more mundane products like Pets.com were not able to. So even though it was a completely pointless bubble of ultimately worthless stuffed animals, it actually did help. It had a beneficial effect on the development of these internet markets. Meg Whitman has said in interviews that eBay, and I think Pierre Omidyards had the same thing,

that eBay may not have gotten off the ground without Beanie Babies. So, Joe, I know you remember what the late 1990s were like. When we look back on Beanie Babies, it seems amazing that people spent all this money on them, all this time. We had at least one instance of a guy committing murder because of a soured Beanie Baby Baby deal. Do you remember how nuts it was? Are you talking about Beanie Babies or just the late 90s? Both. I mean, I would say they're linked, right?

Oh, they're absolutely. The people who, when they think back and they talk about the 90s bubble, it's often referred to as a tech bubble or the internet bubble or the dot-com bubble, it completely misses the point. Yes, I love you. It was so much bigger. It was such a big, it was a sense of optimism about everything all at the same time. And so there's so many wonderful. stories about people completely losing their mind. My single favorite story of the late 90s bubble was when a car dealership in Nevada, it was called Unipriam capital acceptance. And I

remember this very vividly because I was on the message boards at the time. It was a penny stock. Maybe you traded at 10 cents. This was Joe Day trading, right? I was. They put out a press release that said they had a cure for AIDS. A car dealership in Nevada, they're like, oh, someone we've worked with or if we licensed this thing from a scientist, They just straight up, we have a cure for AIDS. And, you know, even in the craziest times, like, that's kind of a skeptical belief. But enough people believed it that the stock surged.

It doubled and then it doubled again. Because just on the possibility that maybe a car dealership in Nevada had found a cure for AIDS, people were so optimistic of everything that it seemed not 100% unbelievable. When people talk about the Internet stocks, anything that was – that breathed on the internet, people were going crazy for. One of my favorite facts is the fact that KTel, the company that makes really cheesy compilation CDs of like 70s disco music, they sold it like infomercials.

They sold their CDs online, Big Whop. The stock grew tenfold at one point and over the span of a few months. People were losing their minds. The other fact that I love is the fact that the segue that didn't really take off, but people still go tours around, people really thought entire cities were going to be redesigned because of how the segue got people around. So basically, it was a time of just incredible optimism about everything. So, Zach, I'm curious.

In your book, you quote a lot from existing, you know, economic and financial literature. You quote people like Robert Schiller on the optimism that precedes bubbles. When it comes to Beanie Babies, if you could kind of pinpoint one thing that flipped it into speculative mania, what would it be? It's people seeing prices rise. That is what drives what drives speculative bubbles is that as soon as there's, you know, this insignificant phenomenon of someone who's trying to complete a set for their kid, as soon as they pay $100 for a Beanie Baby that someone paid $5 for, that's what sets in motion, or at least can set in motion, certainly, this kind of chain because that becomes a story. And Beanie Babies, and I think all bubbles are spread by narrative, by people. saying I bought this beanie baby for five dollars and sold it for a hundred anyone who did that told a thousand people about it because it was so weird so how big did it

get in the end is there an estimate of what the total outstanding value of beanie babies was at the peak tye's annual sales peaked at around 1.5 billion dollars and that was just wholesale 250 and other people who there must be but have a bunch and held it all the way down and now just they live in a house filled with there is a retired soap opera star in Arizona I can't remember it's been so long because I talked to him. There's a retired soap opera star who lost his kid's six-figure college funds on them and has like 30,000 of them still in his home.

That's grim. We talked about how these sort of bubbles begin, at least in the case of Beanie Babies. How did it end? Because it did start to fizzle out in 1999, and within a couple years, the secondary market value of thousands, millions of stuffed animals was gone. This was one of the funniest things about the reporting on this. And I think there's a lot of very similar stuff with the reporting on the housing bubble and the Internet stock bubble is that I would kind of pose this question to the collectors, anti-executives, about kind of how this thing had ended. And they all had these really specific explanations for it, these kind of linear cause and effect things.

You know, there was one person saying, oh, you know, the counterfeits really invaded the market and people were paying, you know, $600. it hadn't for pieces that turned to be fake, and if it hadn't been for all the fraud, this, you know, it wouldn't have ended that way. A lot of people felt, you know, Ty got greedy and made too many, too many styles and overproduced them. And I'm like, okay, you know, maybe kind of, but, you know, if he hadn't done that, then would they still be 10% of eBay sales and we'd all be rich? I mean, these things end because they're stupid, right?

Like, that's ultimately, they're unsustainable. And eventually, there is something that nicks them and causes that kind of, you know, of that kind of cascade of confidence that started it to just crescendo down. And that's what happened. There's this thing at the end of 1998. Everything's still basically going well. Secondary market sales still good. Top piece is still valuable. Some overproduction and some of the newer pieces. Those are stacking up a little bit. But basically still a strong market. No one's saying this thing's ending. Collector's still confident. Magazine's still selling. And Ty announces at the end of 1998 that on that on January 1st, 1999, all of the Beanie babies will be retired and that they won't be made

anymore. Theoretically, prices should have gone through the roof at that point, right? They did for a minute. Yeah. They did for a minute and people were very excited. And people were like, what's going on? This is going to do a different product? And then he announced that he would do a vote to raise money for AIDS on whether people

wanted to beanie babies to continue. and you would log in and online and donate. There were some other stuff going on in his life, but where you could donate $1.49, I think it was, to vote on whether Beanie Babies should be continued. First I'll raise the question of who would spend $1.50 to vote to end Beanie Babies. Weird. So he does this, and almost no one voted,

ended up just having to donate all the money himself because he hadn't gotten as many votes as he claimed he had and announced that Beanie Babies would be continued and that all the new releases, there would be all these new Millennium Collection coming out, and no one cared. And the whole thing, just every month after that, the sales collapsed, and people started to...

So that caused a crisis of confidence about the one source of this product. And then what happened was, so these retired Beanie Babies, I remember talking to one of the first collectors who was on her way back from speaking at a Beanie Baby convention as a paid expert, you know,

like a keynote speaker on Beanie Babies, and she was at the O'Hare Airport. And she saw a stack of Beanie babies that were still $5 in the store but were retired. And this was like mind-blowing. I mean, people thought it was a law of physics that a retired beanie baby was worth more than $5 and that that was just true. And I mean, kind of like, you know, home prices don't go down.

None of the models included that. None of their models include the idea that a retired beanie baby could conceivably still just be worth the retail price. One of my favorite sayings on Wall Street is that something. becomes a bubble once the bubble bursts. Anything else is a great trade, right? You just made tons of money. When you look around the world, it seems like we are continuously seeing warnings about bubbles, again in tech, lots of other areas and financial markets. Having studied the science of stuffed animals, do you have any wisdom for how we can spot bubbles? Before they burst in real time.

Before they burst, yeah. I think the thing, just behaviorally, is that when wood is dry, it is entirely stories about how much money people have been making on it. That's something to be really concerned about. And I think any time you have a kind of surge of interest in new entrance into a field based on sort of past successes of other ones. There was a ton of that with the internet bubble. You had legitimate companies go public first. And then the next one, you know, this is going to be the next that.

And that was a piece of crap. So I think. Well, to me, you know, to bring. your point to the current era, you know, we've been hearing about a possible tech bubble for the last 10 years. I mean, when Facebook was valued at a billion dollars, people said tech bubble and now it's worth hundreds of times that. But I did see an ad on Instagram this week that, like, was promising how to make your billion dollar app, like a service that would teach people how to make an app that would be worth a billion dollars. And that reminds me of like telling stories just about the money

is a next level of the euphoria. I always love those like J.P. Morgan Shushim Bowie stories about bubbles. I think those are... Oh, yeah. That's a great story. I mean, I remember when I was in high school, my bus driver, and this was dangerous because he was driving a bus full of kids. And he had two cell phones, and he was flipping houses while he was driving, talking to his, like, real estate agent and his manager. And I just so, I always look for things like that.

Yeah, and I remember in 1999, when that year I had a summer job, we'd go to the pizza place. and they would also, it was just a little pizza shop, and they would also have a rival financial network to Bloomberg on TV all the time. That was what the pizza guys were watching was CNBC. Rival network, well said. So, Joe, you actually managed to make some money from Internet stocks. How did you time it? Because it seems like the timing is key here.

Lots of people did get rich off Beanie Babies, and lots of people got really poor. It was really the best luck I've ever had. I was trading through the basically Christmas break of 2000. And then I had to study abroad in Switzerland in the spring of 2000. And before I left, I sold all my stocks because I was not going to be able to trade while I'm studying abroad. That just didn't seem plausible. And then the bubble burst while I was studying abroad. So out of pure luck with no insight, no way to.

You need to craft that into a narrative about your own foresight. No, just the opposite. Just pure luck. I just happened to sell like a couple months before the peak. So that worked out well. All right. So you made thousands off internet stocks and I made 200 bucks from a single Beanie Baby. Yeah, but you got to cuddle it.

So that's... Okay. I'm not sure. All right, Zach, it was lovely having you on the show. Thank you so much. This was fun. That's great. Thank you.

All right, Joe. We just had a really interesting, entertaining conversation. What did you learn? I actually think my favorite single fact was that point about the magazine and the relationship between seeing prices written down and seeing prices move and then the effect that has on actual prices. I think that's a fascinating point. Right. I just love the idea that this group of soccer moms in Chicago became market tycoons basically. And I hadn't thought about that before this idea of they're needing to be a complete set of them.

And so it sort of creates this inherent scarcity to them that drive. of demand. That was an aspect of the Beanie Baby boom that I had not realized before. Artificial scarcity is a hot topic in economics right now. Maybe that's something for another podcast. This is Tracy Alloway. You can find me at Tracy Alloway on Twitter. And I'm Joe Wisenthall. Find me at the stalwart on Twitter. And if you want to follow Zach, he's on Twitter too at Zach Pissinette. And thank you for listening to Odd Lots. Tune in next time. The news doesn't stop on the week.

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