Stop Your Delusion – You Can’t Beat The Market and You are Wasting Your Precious Time Trying

In my last post, I wrote about the things that I learned and relearned by investing in MoviePass and HMNY.  Believe it or not, HMNY is not the worst investment I have ever made, at least not yet.  I have actually owned stock in two other companies that lost 100% of their value.  Washington Mutual was one, and XO communications was the other company, both went Bankrupt because of bad management and risky bets that did not pay off.  Yes, I should have learned my lesson fully with those two terrible stocks, and in fact, I had learned my lesson but unfortunately, I fell back into a bad habit of using the wrong parts of my brain (which are always functioning whether you like it or not) to make my investment decisions.  Luckily, I had previously experienced enough pain with those prior decisions to limit my portfolio exposure to HMNY.  I only wish I would have not wasted any time or money investing in HMNY at all.   The ONLY good thing that has come from investing in HMNY has been the reaffirmation that it is totally foolish and delusion to try and beat the market.  Again, this is something I inherently already know, both from hours and hours of studying investing and from my own experience over 35 years plus of investing.

There is a saying that I have seen around that goes something like this.  If you could beat the very smartest students on a test 99.5% of the time, by doing essentially no studying and putting in almost zero effort or preparation but simply follow a simple prescribed method of filling out a test, VS. studying for hours and hours, fretting over every decision on what you study and if you were considering the right factors; only to be almost certain you would not beat the average benchmark, what would you do?   The answer is obvious, you would take the path of least resistance, you apply the obvious known prescribed method to score in the 99.5% percentile of returns.   In investing, it is so obvious that our miswired silly human brains almost refuse to acknowledge it.

WAMU, as it was called, was a very big company, with almost 50,000 employees and around $40 Billion dollars of assets under management.   Because I lived in Washington, I could see first hand how big and successful WAMU appeared to be, they had branches all across the state, and eventually grew all over the West Coast.   They were a beacon of strength and stability, or so people thought.   When 2008 rolled around, it became evident that WAMU had taken on way too much subprime business, their assets were seized by banking authorities, a bunch of their assets were sold off in a fire sale, and the Feds sold the rest of the business to JP Morgan Chase for a huge discount.  Stockholders of WM were totally wiped out via a Chapter 11 bankruptcy filing.

For the sake of brevity, I won’t go into detail on what happened with XO Communications.   Basically, that was a riskier tech/communications stock that was similar to HMNY in that it had very dishonest management, it cleaned out stockholders, filed Chapter 11, got reorganized giving the dishonest and terrible management fat pay packages after totally ruining the company.  It was a sham, and it was many years ago now.   But you remember the really bad ones like HMNY, XOXO, and WM.   They hurt, and they should hurt.  As Warren Buffet says, the first rule is “Never Lose Money”.   And as easy as that sounds, when you are picking individual stocks, it is surprisingly easy to lose money, permanently and forever.

The good news is, that there is really no good reason at all to own individual stocks.   In truth, it is a terrible mistake for almost all investors to even try and pick stocks.   It is as the title of my post suggests, delusional to believe that you as an individual investor will beat the market averages.   But you definitely should not feel bad about that. Professionals also can’t beat the market.  It has been proven over and over again, for decades now, that fewer than 1% of professional traders beat the market.  And when they do beat the market, it is usually by a very small amount 1-2%.   There is literally reams and reams of studies and data that prove that Mutual Funds, Hedge Funds, Private Equity Funds and any other type of fund you wish to call into question simply cannot beat the market over a long period of time.  One of my favorite articles on this topic is from Julie Segal from the Institutional Investor, “Beating the Market Has Become Nearly Impossible”  It is worth a read if you insist on insisting that you can deliver better returns than the market.    In particular, I like that the article discusses some of the reasons that institutions keep trying to beat the market.   The article also has some links to academic studies that prove with data that professionals simply can’t beat the market.   It is a fact, people who are very smart, who have years of training and experience in the market, who spend their entire days working on finding unique opportunities to deliver market-beating returns – simply can’t beat the overall indexes.

What is the reason for this?  Well nobody knows for sure why.  But the simple answer is that markets tend to behave irrationally and humans tend to make bad decisions when faced with irrational markets.   It is as simple as humans tend to buy high and sell low.  But it is really more complicated than that.  There are all kinds of theories about the market and how it behaves, how information is disseminated, received and acted upon.  You can read book after to book on this subject.   I can save you the trouble here, all the factual based books come to the same conclusion.   You can’t beat the market, and it makes no difference how much you have studied them, how much experience you have, how many people you have working for you, or how smart you are.

Why do people with wealth keep trying to beat the market even when they know it is extremely unlikely?  That is an interesting question.  I have heard and read a lot of different reasons for this, and I will explore a few of them here.

One reason I often hear is that people with wealth tend to view themselves as somehow special.  After all, wealth has bought them privilege and luxury in almost every facet of their lives.   From private schools to luxury vacations, luxury cars, to the best doctors, to the best country clubs, wealthy people live a life of constant privilege.   From this experience, they have grown accustomed to “paying up” for the very best.  So when it comes to investing, most wealthy people simply believe that they need to “pay up” to get the best financial advisors and management.  For the wealthy, it is totally incongruent with the rest of their lifestyle to think that they could do something pedestrian like simply buying a low-cost Vanguard ETF to achieve performance that is on par or better than what they could receive from their high priced or “sophisticated” investment or wealth advisor.   It doesn’t matter if Warren Buffett himself advises personal investors to stick to low-cost by7 ETF funds.  The rich think that they can and should do better, even if all the evidence points in the other direction, they want to pay for the “best”.

Another common reason I hear about is that people with money like the “club-like” nature of investing with a wealth manager.  For high net individuals, many wealth management firms offer all kinds of special activities for customers who invest with their firms.   I have been to a few of these things over the years while being pitched to invest with various firms.   They offer things like nice dinner events, event tickets like sports or concerts, exclusive things like meeting local celebrities and such.   Some of the things are actually really cool and fun.  To me, it always felt like a very expensive way to buy friends.  Most firms charge around 1% of your total portfolio yearly.   That doesn’t sound too bad until you look at how much that will cost you over several years – most people agree that paying that kind of money to join a “club”  and to buy some friends is not worth it.   Trying to be open-minded about this, there may be some good networking opportunities in things like this, I never really found that to be the case, but I was not really in a position where networking with high net-worth people was super important to me or to my lifestyle.

A third reason that people choose to pay expensive financial advisors who don’t beat the market, is they both lack the confidence in themselves to manage their own money, and they prefer to be separated from that task.  Both to protect themselves from their own mistakes and to insulate themselves from any bad outcome that may happen, such as losing money or badly trailing the market.  It is easier to tell the significant other that the “guy or gal” we hired to manage our money sucks!  Than it is to tell them – hey I suck!  These are not necessarily bad reasons in my opinion.   However, there are good and bad ways, or better put, excessively expensive and fair priced ways to get this job done.  It makes zero sense to pay expensive fees to a salesperson, relationship manager, investment advisor, or whatever other bullshit titles these people put on their business cards.

If you really want or need help, pay fee-based certified financial planner for some time to help you understand how to efficiently allocate your portfolio.    If you want a firm that will do basically all the work of setting up a portfolio, rebalancing it, do loss harvesting in a tax-advantaged way, take a look at betterment, they charge only .25% and their results are consistently much better than any private client banking.   They have some good historical comparison data on their site that shows how much better they do.     I know a lot of really smart people who have done really well in their respective fields who simply have zero interest in managing their own money.  They just don’t want to deal with it for whatever reason.   I think that is fine, but just like buying a house or a car, or managing your healthcare, or any other major life decision you make.  You should at least get educated enough so you don’t get totally screwed over.   You wouldn’t buy a house without investigating the neighborhood, looking at comparable homes, getting an inspection and all the other things homebuyers do.   You certainly wouldn’t just hire a realtor and say, buy me whatever you think is best, and I will just live with it!    So don’t do that with your money either.  If you do, you are pretty much guaranteed a subpar return, and worst-case scenario, you could get totally burned by another Bernie Madoff like scandal.

Finally, there is the “I like the game” rationale for why people try to beat the market.  I fall into this category some, so does my father.  So I get this idea, it is part gambling, part skill,  part entertainment.  It is hard to blame any of us for wanting to play the game.   You only need to watch CNBC for a few hours to see what a bedazzling casino-like world investing can be.   Having worked in media for many years, the tricks CNBC uses to keep investors glued to the set and salivating for the next nibble are as old as the knowledge of not being able to beat the market.   CNBC is an exercise in eye candy, sensationalization, and the constant promise of continual changes that seem oh so important.   It is like crack to the personal investor/gambler.    I remember when CNBC for started out in 1989, yep I am that old and have been watching it from the start.   It was a totally different animal back then.  There was very little in terms of slick graphics, wild entertainment commentators like Jim Cramer had not really gotten started yet.   For most of the day they didn’t even run a ticker across the bottom of the screen.  (Take a look at the Inaugural broadcast, we have come a long way from 1989!)

Compare those early days of CNBC to what you see now.  It is a fined tuned machine for grabbing and holding your attention.  Not only do we have a constantly changing ticker running all day, we now have two of them stacked up at the bottom of the screen.  In addition, there is a constant barrage of fancy graphics zooming in and out of the screen, a charging bull! – A scary bear!  Instead of one or two anchors, most CNBC shows have 4-5 people at a roundtable, and if that is not enough, they are constantly bringing in guests from Wall St with their latest calls!   In the lower right-hand corner of the screen, you have the constant update of the Dow, the S&P 500 and the NASDAQ.  And if all that were not enough to put you into hyperstimulation mode, that graphic constantly flips over showing the 10YR bond, the dollar and some other crazy thing I can’t even remember.    My dear wife says it the best, turn that damn thing off it is stressing me out!   Personal investors who pick stocks live in this bizarre state of FOMO, (Fear of Missing Out).  Will I miss a critical piece of news on a stock I hold, will I miss out on an up and coming IPO, or a new opportunity?  Will the market make a turn right when I was not looking!!?    The game of investing is stressful and exhausting.  Along with being totally delusional and pointless.   One good piece of advice I have heard on dealing with the need to “play the game”.  Take a very small part of your portfolio to gamble with, maybe 1-3% of your total assets.  Set that aside in a different account for discipline.  Trade that account any way you see fit.  Compare your results against the results of the rest of your portfolio that is in low fee market-based ETF’s.  Do that for at least 10 years.  If you significantly beat the market-based approach, go apply for a job on Wall Street.   There is a 99.5% chance you won’t be changing your day job

Coming full circle, every single serious scholarly and professional data-driven study has proven that it is almost impossible to beat the market averages.  Hedge funds almost never beat the averages.  Highly paid wealth management firms do not beat the averages.  Day traders almost never beat the averages.   The industry and the media make a lot of money trying to convince you that you can beat the averages, but they all know that it is not true.   It is a lie you are told and marketed to so that they can make money.  CNBC, Fox Business News, Motley Fool, Seeking Alpha, the myriad of investment newsletters, they are all trying to make a buck off the industry.

Worst of all, trying to beat the market takes an incredible amount of your most precious asset!  Your time!  Further,  it can be extremely stressful so it is bad for your mental and physical health trying to beat the house.  So my very strong advice.  Stop being delusional.   Stop buying individual stocks.  Don’t lose money!  Make investing boring again.  Buy a basket of low-cost ETF’s from Vanguard, rebalance yearly to the exposure you desire, and never look back.  You will do very well, and you will perform better than 99.5% of your peers!  OH – and STOP with the delusion!







What I Personally Learned Investing – or umm Gambling – on HMNY/Moviepass

Wow did Moviepass and HMNY really humble me as an investor, or should I say gambler, on stocks.   I learned a lot and man oh man did the experience humble me and make me a bigger skeptic than ever before on Wall St. and buying individual stocks.   I have always accepted that buying individual stocks is risky, and have always tried to advise people who read this blog to not invest more than 1% or possibly 2% of your portfolio in ANY single stock.  I sure stand by that advice as we head toward the end of the year.  With Moviepass in a literal death spiral that looks very unlikely to correct, I am very grateful this Thanksgiving that I stuck to that rule.

In this post, I want to share some of the biggest lessons I learned and really relearned after investing in HMNY.  I think it is important to write these things down so I am less likely to repeat the same mistakes, and I figured I might as well share them with others in hopes that maybe they can learn from my mistakes and save them from making the same.

First big lesson – I did not do enough due diligence on the management of this company.   I was aware that Ted Farnsworth had a less than stellar record, but I did not truly understand what a total crook and fraud that guy was and still is today.  It is just about impossible to do well with a stock if the leadership is dishonest, self-serving, and has a bad past.   I overlooked Farnsworth because I really believed in Mitch Lowe, that also turned out to be a mistake.   While I still believe that Mitch Lowe has some good qualities, I believe I heavily misjudged him as well.  While Mitch did play a role in Netflix and he also did a decent job at Red Box, it appears that he is not investible on his own right.  He really spent a relatively small amount of time at both of those companies, and it now seems more likely than not he had little to do with their success.  Mitch and Ted together was a toxic management combination, bringing together greed, entitlement, carelessness, hubris and all kinds of bad things for shareholders.   I should have listened more closely to what others were saying about Ted, the signals were there, it was my mistake not to listen to them.  I truly hope Ted lands in jail someday.   His deceit caused many individual investors to lose a lot of money, some have said that people potentially committed suicide over their losses related to this company.   I sincerely hope that is not the case.   I think Buffett and Charlie say something like that greatly prefer a talented management team, but they would take honesty over talent any day.  Because if you are both talented and dishonest, you are very dangerous.  It may be giving too much credit to Ted to say he has any talent at all, but he most certainly is dishonest.  It was a big mistake to trust him with a single penny of my money.

My second big learning lesson.  I was arrogant and put on blinders.   This one really gets me as I have had enough training and experience to know better and to be more thoughtful and fully consider other people’s ideas and opinions.  In this case, it was even worse because there were good people who knew more than me about the potential pitfalls of this stock, that I should have listened to more carefully and with much more respect.   Mark Gomes was one such person, but there were others who also warned me that this was a risky bet and that dilution and potential lack of funding were serious potential roadblocks with the company.  Obviously, they were right, and had I listened and really sought to understand their arguments and weighted their experience and opinions equal or better than my own, I would not have bought a single share of HMNY.   I have always loved Warren Buffet’s simple baseball analogy for picking stocks.   There was enough wrong with HMNY that I was a fool to swing at that pitch.  The bad and dishonest management history and the fact that others with solid stock picking experience were waving red flags over the company’s dilution and ATM plans.   Those were more than enough to toss this one on the heap of “I am not sure, maybe later maybe never pile”.  Unfortunately, my own arrogance and bullheaded nature enticed me into believing what I want to believe about Moviepass, I was stupid enough to also believe what dishonest management was saying about their business.   I used management’s lies to reinforce my own arrogant tunnel vision on the positive prospects for the company.  This made for a fool and his money – being easily parted.  Shame on me for not fully listening and considering more viewpoints.  That was a rookie mistake, and I know better.  Damn it!

Third learning lesson.  Wow is this an obvious one, if it is too good to be true – it is!  That was definitely the case with Moviepass, both the consumer deal and the business story really was too good to be true.  I can almost give myself a pass on this one because Mitch Lowe, in particular, was so convincing with his pitch, he had his song and dance on how they had years of data that proved that people would “settle down” and on average utilize Moviepass less than one time a month on average.  That was total bullshit of course, and only now after making the product totally impossible to use have they been able to get utilization rates anywhere near where they had promised they would be with the unlimited once daily plan.   But I can’t give myself a pass on this one, because

Fourth learning lesson.  This is really an aside, but may be useful for some.  Generally people on stock boards like stock twits, yahoo etc. are really horrible people.  Not all, but most.  I have bumped into a few good people on these boards, but for the most part, these boards are full of angry, strange, rude, petulant trolls who seem to be miserable most of the time.   I regret almost all the time I have spent on these boards, and regret engaging in similar conduct from time to time on them.   These places bring out the worst in people.  They are like the Vegas strip full of losers, gamblers, and hustlers – only they are worse because it is all virtual and almost entirely anonymous which means that it is rare to run into anyone with even a modicum of civility.   I am pretty sure that an eternity in Stocktwits is what hell would be like, just add the fire.  I highly advise people to totally stay away from these boards, and if you do go to them, visit them sparingly.   The advice is generally bad, not trustworthy, and the environment only leads to bringing out the worst of human behavior and it is hard for it not to rub off on you.

My fifth and most important lesson – or reaffirmation in this case.  It is almost impossible to beat the market, and it makes no sense to try.  I know this and have known it for many years.  There is so much overwhelming evidence of this fact that it smacks of total stupidity to try and pick stocks that will help you do better than the market.   I will write another post that goes into this in more depth soon.   I will also talk about why I think many people just keep on trying, even when they know that can’t beat the market.  It’s something like a gambling addiction, but worse because it is so delusional.   But it is important to reflect here that this was another insane attempt to beat the market that backfired for a lot of people.  As a group, we know it is stupid to try, and if you don’t know, I will spend a good amount of time trying to convince you that you are not the 1% or less of people who can beat the market.  If you are reading this, I can guarantee you that you are not the type of person who will likely ever beat the market, so you should just put down the mouse and turn off your trading screen before you hurt yourself, or your financial future.

In the end – I promised myself and readers I would hold on to this stock for 5 years.  I have about 4 years left to hold this heavy bag, and there is a cold day in hell scenario where this stock does return some value, it will never ever get back to its all-time high.  But there are some possible scenarios where this POS gets a bit back.  They are highly unlikely of course, and I absolutely do not recommend this stock to even my worst enemy on Stocktwits.  – Well maybe to them, but nobody else 🙂

Moviepass Has Gone Low

Moviepass has now gone low and I am not talking about just the stock. Moviepass is now – probably way too late – following a classic disruption strategy of entering a market on the low end.

In past posts, I wrote about how Moviepass was attempting to come in on the low end of the market as a disruptive new service, but stupidly they were offering full price premium fair at a disruptive low price. That strategy bombed badly. Buying $15 tickets and selling them for $5 is not just a bad strategy, it turned out to be plain stupid. All the while Ted and Mitch were promising that over time people would start to watch fewer movies and the ancillary revenue would make up the difference. None of that was well tested by this supposed data-centric company, even when both CEO’s claimed they had data to prove their case. They didn’t, they were both lying, and admitted tacitly later that they did not realize how popular the service would be, and had only expected 100 thousand customers to take the deal, not the millions who did. I guess that is what happens when you basically give away free money.

Now Moviepass is definitely coming in on the low end of the market. They are offering a service that is definitely not a premium movie going experience. In fact, for many, you almost can’t even find a movie to go see. The service is cheap relatively speaking, at $9.95 a month it still pays off in most markets if you can see a single film a month. It’s not always easy to do, but generally, you can find at least one off beat film a month to see. It’s not exactly an exciting value proposition, but you can get some small value from the service if you put in the effort.

This new strategy could help Moviepass survive. Gone are the days of Moviepass generously buying tickets for the masses to the big blockbuster films. But if Moviepass can hang on to enough subscribers to help small indie films goose their numbers, a small low-end niche service may be born. This strategy of connecting Moviebuffs to smaller run lesser known films could have been the initial disruptive service Mitch envisioned but simply executed horribly. Coming in on the low end might have attracted filmgoers who are interested in supporting smaller indie films and had an interest in seeing more indies at a better price. Eventually, this could have progressed to include more and more films, and working with creative companies to partner and promote films to the Moviepass subscriber base could have created a win-win partnership with indies who struggle to find audiences and money to create new films.

Moviepass could have slowly taken more and more of this market without drawing the ire of the establishment. Instead, Moviepass stuck their neck and middle finger out, and summarily got slapped down by the establishment.

It’s probably too late for Moviepass to execute this new low-end disruptive strategy. They have done so much damage to the brand, it will be almost impossible for them to build trust with a new type of audience willing to accept Moviepass as a niche service. Theaters have essentially given up on Moviepass, as Moviepass is no longer a significant contributor to ticket sales. Large studios could care less about Moviepass, they never believed in it anyway.

The only shot Moviepass really has now is to find a way to really excite indie filmmakers and try and find a way to hold on to enough subs so they can create meaningful partnerships that help deliver bigger audiences to smaller films. If they can pull that off, there’s a slim chance Moviepass could hold on.

Moviepass Films is a bet that Moviepass can make this happen. It’s a risky bet, as picking films that work is a portfolio like game, finding breakout films that help fund the turds has proven to be a difficult and low margin business throughout the years. There’s no good reason to believe Mitch and Ted will have great success here, and so far they are batting a big fat zero on their portfolio choices. Gotti being the extreme example, but let’s be real, none of the films so far have done anything interesting in the box office, and the current slate looks bad or very risky for returning investment.

It’s a looong road from where Moviepass has been to where they might be going. But maybe a small glimmer,  a faint light of hope is on the horizon.

Amazon Has Jumped the Shark – Advertising, Over Monetization and Company Politics Are Trashing Amazon’s “Customer Obsession”

Amazon built its empire by focusing on customers first. All Amazon employees are indoctrinated in Amazon’s core 14 Principles – Amazon takes this stuff very seriously, they demand that potential new hires regurgitate these principles when interviewing for positions at the company, and they robotically and religiously try and proselytize these principles in everything they do. It’s a culture they think they believe in, and follow.

The problem is, Amazon has gotten too big, too political, and too fractured to truly embrace their principles, and like any big bureaucratic organization, competing groups, with competing interests are controlling and slowly destroying the Amazon customer experience. All in the name of “doing what is right for the customer ”

I have seen this movie before – actually I lived this reality while working at Microsoft managing their largest consumer website MSN was destroyed by multiple different competing fiefdoms inside Microsoft all claiming that they were customer focused, and strategic imperatives for the future of the company. All wanted a premium placement on the MSN homepage, all could demonstrate their deep commitment to consumers, and all who had very specific business and revenue goals assigned to them that they did not want to miss.

This manifested in an insane competition from groups all over the company trying to secure the best real estate on the MSN homepage they possibly could. Unfortunately, the result was a Frankenstein like site that did little for any internal group, and was a horrible and busy mess for consumers.

You only need to look at Amazon’s mobile app homepage, or read their most recent earnings to see that the company is now heading down the dangerous path of balancing the power of their huge audience on their entry page while also trying to feed the mouths of their internal constituents. Amazon is focusing less and less on customers, and more and more on promoting the multiple tentacles of its Goliath.

To be sure, Amazon has sophisticated data intensive methods for testing and measuring the performance of every pixel of their entry points. They have studied, tweaked, and debated every dot on the page, yet from my experience at Microsoft, none of that matters. Why? Because the politics of strategic initiatives, the demands for ever more revenue, and increased click efficiency take over, and the needs of the customers slowly, although justified by data, take a back seat.

What was once a well organized site with easy navigation to product categories or departments has been obliterated by a hodgepodge of Amazon’s pet products, advertising, and strategic initiatives. On my page today it is another hard push on the Fire TV Stick – I already own three of these things, I like the product. But I don’t want or need any more of them. It’s ridiculous that Amazon is using 90% of the page pixels promoting the stick to me. Enough already! Amazon. Geesh.

The ONLY other thing “above the fold” is an advertisement for “Portal” from Facebook. Another product I have absolutely zero interest in. For me it is just another lame banner ad that makes Amazon less useful to me. Clearly Amazon is doing well selling advertising, Estimates show Amazon could rake in $10 Billion from advertising soon.

This IMO is a disaster for Amazon. Selling $10 Billion in advertising and being customer obsessed is an oxymoron. Advertisers don’t pay that kind of money to “help” customers. I am not advocating that advertising or advertisers are bad or inherently negative. But I do know from experience, advertisers are not in the business of helping end users efficiently get things done. Advertisers are desperately trying to buy consumers attention, they are trying to divert consumers away from whatever they were doing in order to get them to pay attention to their brand or product. Sure they want to do this in a relevant and efficient as possible way. But they are more than happy to divert your attention from whatever it was you were trying to get done and hijack your flow and attention over to their message. Snagging your attention and getting you distracted to click is what they do!

This runs counter to what made Amazon great. Amazon was a productivity booster, a massively efficient and effective way to get shopping done. Amazon until more recently was never about serendipity, or shopping just for fun, it was about getting what you needed at a great price with great selection. It did not bombard you with ads for products you didn’t care about, and it’s navigation was seamless and easy to find what you were looking for, without weeding through massive pixel space of things you never cared about.

This is all made worse by Amazon’s relentless push of their hardware products. Fires, Dash Buttons, Mystery Giveaways, and crazy stuff like “scents from your favorite actors”. You can’t make this stuff up. It’s insane, and it is NOT customer focused.

No, the customer had been pushed to the back burner at Amazon. The focus now is clearly on Amazon, and how they can sell every pixel of the site to the highest bidder, be it a 3rd party advertiser or an internal product group trying to score points with the latest “company strategic initiative”. Amazon is broken, and they don’t yet know it.

Yep, I have seen this movie before…

And Now for the Spinoff Maneuver

Fartsworth has decided to spinoff!   Is this good for HMNY shareholders?  Is it good for MoviePass?  Is it good for Teddy?  Only time will tell.  Here’s my take.

First, for Shareholders, the spinoff could be good news.  HMNY is now one of the most loathed companies on all of Wall St., with a despised CEO, a business model the media loves to hate, and a ticker that means nothing to anyone, what is left worth saving in HMNY?

For investors, the best chance that HMNY and or the new MoviePass ticker returns some capital to beleaguered shareholders is if 2 things happen.

1) MoviePass finds a solvent way to move forward

2) HMNY actually delivers a decent dividend to shareholders of the new MoviePass INC.

In the PR release Fartsworth tried to include some BS about Zones, and that they had this plan of spinning out companies all along, that is all just total nonsense.   None of that stuff matters, there is nothing left when HMNY spins off Moviepass, everyone knows that.

What really happened here is Fartsworth could not deliver on the money he promised to Lowe and to Moviepass and as a result, they are looking for an amicable divorce.   The story went sort of like this.  Mitch thought he had found a white night in Fartsworth who could fund MoviePass through its planned expansion to get to 5 Million users.   Both Lowe and Fartsworth badly underestimated the cash burn it would take to get there, and both also badly underestimated how fast the service would catch on with such an unbelievable deal.  So as subscriber numbers went into hypergrowth, and cash burn went to mach 10, everyone, inluding Lowe and Fartsworth started to freak out.   Wall Street spooked, knowing that the only way to get enough cash for the experiment was to sell ever more shares.  Fartsworth was either too stupid, or too crooked, or just plain too unlucky to prove to Lowe that he could deliver the goods and make the marriage work.

Lowe was using Fartsworth for money – Not trying to be sexist, but Fartsworth was the sugar daddy, and Lowe was the golddigger.   When the money (or even the promise of money) dried up, Lowe lost interest in his new found friend.   And now the divorce proceedings are on.   Fartsworth could never get that last 8% of Moviepass to own it all, and knowing that all the old guard at HMNY now despises him, and that the folks at MoviePass now basically were done with him, he had to make a move to try and save whatever he could for himself.   Fartsworth also knowing that HMNY was now in the crosshairs of the New York AG, and that the SEC and NASDAQ had had just about enough of his Reverse Split, ATM share dumping shenanigans Fartsworth had to find his next move.

The spinoff could be the answer to Fartsworth’s prayers.   First, it clears MoviePass from all the shareholder lawsuits, AG inquiries, and other nasty baggage from Wall Street.  HMNY can simply spinoff Moviepass, and let HMNY live or die, or whatever – it really doesn’t matter all that much.  Maybe they can find some other bullshit company like Zones to get people excited with, who knows.

MoviePass will almost certainly remove Teddy from ANY operating role at the company, the guy is a total liability, and even he may realize this by now.  Almost certainly Lowe will be the CEO, and Ted will get a sacrificial BOD seat promotion.   Promoting idiotic CEO’s to BOD seats is a well-honored tradition in the corporate world.  Everybody wins, the CEO saves face, the company gets new leadership, and nobody has to admit they were idiotic.  He will be demoted/ promoted to one voting member of several.  He already has his seat, and you can bet that all or most of the other BOD members will treat Ted with all the respect he deserves :-).   For Fartsworth, he can save some face, he can chalk up the spinoff as a great strategic move.  He can stay on as CEO of HMNY until it totally withers to oblivion or they concoct their next Fartsworth scam company.   It is even possible that Ted could step down from HMNY shortly after the spinoff, take a BOD seat on both companies, collect money and call it all good.  Who knows what will happen to handsome Ted.  Jail would be good, but that looks increasingly unlikely now.

Spinoffs are a funny thing.  They can go really great, or really terrible in lots of different ways.   When I was at Microsoft we spun off Expedia, it was great for the people who went with the spinoff, it was not particularly great for shareholders of Microsoft or the employees who were left behind.   Expedia is now a $17 Billion dollar company – long shareholders of EXPD were richly rewarded.

However, There was no dividend for MSFT shareholders, and I can tell you if there were, it would have been a VERY nice thing to have.   Microsoft first spun off Expedia for a measly $75 million in an IPO in 1999.  It then sold the remaining portion of Expedia to IAC in 2001 for $1.8 Billion.   Not a bad return, but shareholders of Microsft hardly noticed any difference, and employees that were left behind were certainly not happy to have missed the opportunity to be part of a successful IPO and big market winner.  That said, IPO shareholders of the original IPO in Expedia did TERRIFIC!  Who wouldn’t love to see the HMNY spinoff of Moviepass see similar results to Expedia?!!

Expedia was in a similar spot to MoviePass when it was originally spun out of Microsoft.   It was losing money, it needed more capital to survive.  It was an innovative idea, in a very new and disruptive marketplace.  Many can barely remember the days of Travel Agents in strip malls, millennials can’t even comprehend travel prior to Expedia, and the like.   However, back in 1999 there were as many people inside Microsoft that thought Expedia would never make it, as there were believers.  That is in fact why they spun it out.  The leaders of the Expedia business inside Microsoft were furious they could not get enough funding and traction from inside Microsoft itself to go after their business plan.   The felt they had a much better chance of finding funding, and investing and focusing on the business outside of the clutches of Microsft and they wanted to be free!

Well – over the long term, the Expedia Management was 100% correct.  The company has been massively successful and has come a very long way from losing millions on tiny revenue numbers inside of Microsoft.   If you had purchased Expedia at the initial IPO, you would be the very happy owner of both Expedia and IAC stock, both of which have skyrocketed over the past several years.   If you had simply held MSFT – you also would have done just fine.  So there were no real big losers in this deal.

So to answer the question, will this ultimately be good for HMNY shareholders.  I think the answer is more likely yes than no.  Getting Fartsworth away from an operating role, and as far away from a CEO seat is a big win for the MoviePass business (and for humanity!)  The likelihood that Mitch Lowe can now take over what’s left of MoviePass and turn it into a good solid company looks much more favorable now.   Will HMNY shareholders get their “fair share” of the new MP INC?   MAYBE!  I mean, it’s Fartsworth we are talking about here so things could get screwed up before the spinoff in any number of ways.   But there are a lot of other VERY interested parties here.  Minority interests do have a say in these things, and with an AG watching, and the SEC and NASDAQ not really wanting to see more bullshit from Fartsworth, I don’t think he can screw HMNY shareholders out of at least some semblance of their fair share of the spinout company MP INC.

So my take, this is likely positive for everyone involved.  Even Fartsworth.  He doesn’t deserve it because he is a liar and he is stupid.  But the rest of the gang does deserve it.   MP customers, investors and employees all deserve a break, and I think the spinoff is the break that helps them all.  IF – and it is still a big IF, Moviepass can find a way to hold on to a couple million subs, and shore up the value prop from here, they could survive and someday thrive.  But there is nothing sure about any of this.  It is risky as hell, and certainly not a risk worth more than 1% of your total portfolio.