Monday, May 5, 1997
[Today we revisit a
classic Fribble from May 1996.]
Styles on
Video
by David Wolpe
It's like this.
It's a warm day in Los Angeles, in November of 1993.
I'm reading this li'l ol' investment rag called Ye Olde Printed Motley Fool. It's a sixteen-page newsletter, printed on off-white cardstock, full of Foolishness and fun, and, because I've stumbled onto a plain vanilla message folder on AOL called 'The Motley Fool', and because I've liked what I found there, I've decided to buy it.
One of the stocks highlighted with a 'buy' recommendation in those tawny pages is a little gem called 'Styles on Video.' What is Styles on Video? Well, it's a company that seems to have cornered the market on an ingenious technological advance. Suppose you wander into your local hairdresser, and you wonder how you might look with that perky beehive hairdo that you see in all those fifties movies. You've always had a secret urge to do that 'do,' but you're a bit shy, and you haven't the courage to take what seems like an irreversible plunge.
But your hairdresser has a treat for you. He sits you down in a chair, and turns a video camera toward you, and punches a few buttons, and then beckons you over to a television. And there you are, your lovely face framed in the beehive. You need tax your imagination not one whit. You can see *exactly* what you look like with that hairdo. "Tony," you say, "I'm going to do it! Haul out the shears and the curlers, fire up the hairdryer, and let's go to town!"
But I know enough to know that stocks aren't just about the product. They're about valuation. I've begun to learn about something called the PEG ratio, and this particular stock has a ratio of something like .33. Now, for those who know about such things, this is excellent. It means that it should more than triple before attaining its true, fully valued price.
I like triples. I liked them in baseball, and I like them with my money. With the stock at a 'mere' $14 a share, I buy (for me) a pile. It sinks to $13 a share. I buy more. I am now the proud owner of two piles.
I have the occasional laugh with the brothers Gardner in our little private chat room, available only (if I recall) to those who're given the secret password and who subscribe to Ye Olde Printed Fool. Six of us or so hang around in the room and talk stocks, and get our questions answered.
Styles On Video begins to announce deals in Asia, with hair care product provider Redken, and the rumors are that the video setups are flying out the door, sales are rocketing, and the future looks as bright as the California sunshine that spills onto the courtyard outside my window.
When the next edition of the Printed Fool comes out, I see that Dave and Tom are dumping Styles on Video, and urging their Foolish readers to follow suit. It's at about 11. They give assorted reasons -- they don't like the analysis that's been done on the stock, they're unimpressed with the logic or thought capacity of the one analyst following the company ('dumb as a post' is the phrase that springs to mind), and they're growing suspicious of SOV's accounting and reporting practices.
I consider selling, but I don't. Why don't I? Because I have an Investment Philosophy. And my Investment Philosophy goes like this: I Buy Growth Stocks, And I Don't Sell Them Because They're Going To Keep Growing. Selling is for Chickens. I've come to realize, you see, that growth companies are where you can really make money. Everything's going to go up over time, if you can just stomach the hiccups and the dips. And I, being a Man, eat dips with chips and stopped being bothered by hiccups when I shed my diapers.
So I hold. I actually have a conversation with Dave Gardner a few weeks later, in which I tell him that I'm holding. He confides to me that 'We've actually thought about shorting SOV,' but I tell him that I'm holding. The stock is now at about 10.
The company is located in Canoga Park, California, just over the hill from where I live, in balmy Beverly Hills. From time to time I think about driving over that hill and shaking hands with the people in Investor Relations, and perhaps having a private demonstration of the machine, and seeing what I myself might look like with a beehive. But I don't, in part because I don't really have the time, and in part because I don't really know enough about stocks yet to avoid embarrassing myself in a discussion with the head of investor relations.
The stock begins to plunge, testing my courage and conviction with each downtick. And it continues to plunge. By the time it hits 2 3/4, trading is halted. Apparently there are 'irregularities' in what the company is doing. Apparently what the company has been doing is *giving away* the video systems (to all of Asia?) and reporting these giveaways as sales. The stock price has been pumped up by these false numbers, but now the truth is emerging, and the market is reacting.
But the story doesn't stop here. No. The CEO of the company, a guy named Guy (pronounced 'ghee' because he's Dutch) has appointed someone to look into this whole sorry mess. This independent prosecutor, so to speak, will have free rein to unearth any wrongdoings that he, Guy, may have done. And who is this level-headed, impartial truth seeker, this avenging and relentless investigator who will leave no stone unturned in his pursuit of justice? The guy is none other than Guy. Guy has appointed himself to investigate his own practices.
What more could we, as shareholders, ask?
As I write this, the stock sits at 11/16. It seems to trade every few months, just for a day or so, with no notice, just enough to drop another 50% before any of the shareholders notice, and then it lies dormant again. Sort of like the twitching spasms that you might notice in the leg of a dying frog.
I receive no notices of what is happening with the company. Mr. Ghee is reputed to drive a Ferrari, or Porsche, I can't remember which. But a few days ago, I did receive notice of an impending class action suit against Ghee & Co. The letter is crafted by attorneys, and says something like: "the company denies any wrongdoing whatsoever, but, realizing that these proceedings may drag out over time, and desiring to be of public service" or some such thing, agrees to the settlement. It's bound to net me pennies on the dollar.
From time to time I have the idea to go over to SOV, if it's still over the hill, and pelt Guy's Porsche with tomatoes. In fact, should a groundswell develop among you, the faithful readers, to send me on a Fool's Errand to SOV, I just might go. But in the meantime I'll try to spell out the lessons learned from this debacle:
1) Growth stocks don't always grow.
2) When someone presents a compelling case for selling a stock that you own,
listen and evaluate it. If you can't refute it, consider selling.
3) Realize that losing money sometimes is part of owning stocks, and that
courage has little to do with intelligence.
4) Never buy stock in a company whose CEO is some Dutch Guy.
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