Is There a Sucker Born Every Minute?

During the Industrial Revolution we began to make things on a large scale. Instead of each item being handmade and unique, items could be mass produced. This resulted in two major advantages. The cost for each pot, pan, lantern or rifle was lower. Also, for more complex items, such as a rifle, parts were standardized making manufacture and repair easier. Without these attributes, for good or for ill, we would not all have cars, appliances or such.

Manufacturing brought jobs (Yay!) although many of the jobs were low paying, hard and in some cases pay was in scrip that could only be spent in the company store (Boo!). This brought about unions ([Insert your emotion here]). However, when the United States was attacked by Japan in 1941, America’s industrial base converted virtually overnight to war production. Underwood Typewriters manufactured M-1 carbines. Automakers produced tanks and jeeps. We cranked out planes, ships and weapons at an unprecedented pace, contributing to our success and the success of a number of our allies.

After the war, the manufacturing facilities turned to cars, radios, televisions and the other civilized products that both our troops abroad and those who manned the jobs at home desired. Life was pretty-not-too-bad (apologies to Sylvester Stallone.) Then we got smart and sophisticated.

We shifted to a society that valued feelings and beliefs. Marketing taught us that you could “Promise her anything, but give her Arpege.” You no longer could be satisfied with just sunglasses to protect your eyes, you needed Foster Grants. The brand became more important than the product itself. Car, beer and cigarette loyalties were intense. Chic retailers began to use distinctive packaging so that on your way home everyone would know you’d been to Macy’s or Nieman-Marcus. Eventually we got to the point that we put the brand logo on the outside of the product so you could demonstrate to everyone you were every time you wore or used the product.

Somewhere the focus shifted from items you could make, sell, hold and use to ethereal products. There had always been services, of course, but the wholesale shift to the service industries allowed a subtle but relentless shift. Doctors and hospitals became the healthcare industry which now accounts for about 16% of the Gross Domestic Product. Education moved from public and private universities to for-profit corporations, some of which are diploma mills. States got involved with the greatest marketing product of all time – state lotteries; the product is a fantasy. From the moment you buy the ticket until the moment you compare the numbers you have the fantasy that you might become extremely wealthy.

Products could be exported and sold overseas. Services – not so much. In fact, once we exported the manufacturing jobs to places that could do the same work more cheaply, companies realized they could do the same with service jobs, only faster and cheaper.

Why does this interest me today?

I’ve been following the Facebook Initial Public Offering (IPO) discussions. Here is a non-product and virtually a non-service. Expectations are that people will be willing to pay about 55 times what the company is expected to earn – the Price to Earnings (P/E) ratio. This basically means that at current conditions, it would take 55 years for investors to recoup their investment – an oversimplification, but you get the picture.

If Seinfeld was “a show about nothing,” is this the business equivalent?

Apple, which has more money than just about anybody and products people wait in line to buy has about a 15 to 1 P/E ratio.

So – if you’re an investor who is buying Facebook stock, please give me a call so we can discuss:

1. Some highly desirable swampland in Florida from me.

2. My cousin, the Nigerian prince who needs help with his banking.

3. My new software company, “Vaporware.”

4. And of course, a once in a lifetime chance to buy the Brooklyn Bridge.

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