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Performance Comes to the Market:
The Bubble in Concept Stocks
With conglomerates shattering about them, the managers of
investment funds found another magic word, “performance.”
Obviously, it would be easier to sell a mutual fund with
stocks in its portfolio that went up in value faster than the
stocks in its competitors’ portfolios.
And perform some funds did—at least over short periods
of time. Fred Carr’s highly publicized Enterprise Fund racked
up a 117 percent total return (including both dividends and
capital gains) in 1967 and followed this with a 44 percent
return in 1968. The corresponding figures for the Standard &
Poor’s 500-Stock Index were 25 percent and 11 percent,
respectively. This performance brought large amounts of new
money into the fund. The public found it fashionable to bet
on the jockey rather than the horse.
How did these jockeys do it? They concentrated the
portfolio in dynamic stocks, which had a good story to tell,
and at the first sign of an even better story, they would
quickly switch. For a while the strategy worked well and led
to many imitators. The camp followers were quickly given
the accolade “go-go funds,” and the fund managers often were
called “youthful gunslingers.” The public’s investment dollars
flowed into the riskiest of the performance funds.
And so performance investing took hold of Wall Street in
the late 1960s. Because near-term performance was especially
important (investment services began to publish monthly
records of mutual-fund performance), it was best to buy
stocks with an exciting concept and a compelling and
believable story that the market would recognize now—not
far into the future. Hence, the birth of the so-called concept
stock.
But even if the story was not totally believable, as long as
the investment manager was convinced that the average
opinion would think that the average opinion would believe
the story, that’s all that was needed. The author Martin
Mayer quoted one fund manager as saying, “Since we hear
stories early, we can figure enough people will be hearing it in
the next few days to give the stock a bounce, even if the story
doesn’t prove out.” Many Wall Streeters looked on this as a
radical new investment strategy, but John Maynard Keynes
had it all spotted in 1936.
Enter Cortes W. Randell. His concept was a youth
company for the youth market. He became founder,
president, and major stockholder of National Student
Marketing (NSM). First, he sold an image—one of affluence
and success. He owned a personal white Learjet named
Snoopy, an apartment in New York’s Waldorf Towers, a
castle with a mock dungeon in Virginia, and a yacht that slept
twelve. Adding to his image was an expensive set of golf
clubs propped up by his office door. Apparently the only
time the clubs were used was at night when the office cleanup
crew drove wads of paper along the carpet. Randell spent
most of his time visiting institutional fund managers or calling
them on the sky phone from his Lear, and he sold the concept
of NSM in the tradition of a South Sea Bubble promoter. His
real métier was evangelism. The concept that Wall Street
bought from Randell was that a single company could
specialize in servicing the needs of young people. NSM built
its early growth via the merger route, just as the ordinary
conglomerates of the 1960s had done. The difference was that
each of the constituent companies had something to do with
the college-age youth market, from posters and records to
sweatshirts and summer job directories. What could be more
appealing to a youthful gunslinger than a youth-oriented
concept stock—a full-service company to exploit the youth
subculture? Glowing press releases and Randell’s earnings
projections for the company became increasingly optimistic.
The following table clearly shows that institutional
investors are at least as adept as the general public at building
castles in the air.
My favorite example involved Minnie Pearl. Minnie Pearl
was a fast-food franchising firm that was as accommodating
as all get-out. To please the financial community, Minnie
Pearl’s chickens became Performance Systems. After all,
what better name could be chosen for performance-oriented
investors? On Wall Street a rose by any other name does not
smell as sweet. The
shown in the table under “price-
earnings multiple” indicates that the multiple was infinity.
Performance Systems had no earnings at all to divide into the
stock’s price at the time it reached its high in 1968. As the
table indicates, both companies laid an egg—and a bad one at
that.
Why did the stocks perform so badly? One general answer
was that their price-earnings multiples were inflated beyond
reason. If a multiple of 100 drops to a more normal multiple
of 20, you have lost 80 percent of your investment right
there. In addition, most of the concept companies of the time
ran into severe operating difficulties. The reasons were varied:
too rapid expansion, too much debt, loss of management
control, and so on. These companies were run by executives
who were primarily promoters, not sharp-penciled operating
managers. Fraudulent practices also were common. For
example, NSM’s Cortes Randell pleaded guilty to accounting
fraud and served eight months in prison.
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