“[B]ad years for the world often mean terrific years for us in Hollywood,” writes Commentary contributor and entertainment professional Rob Long. “The rule is: When times are lousy, people go to the movies. That’s what they did during the Great Depression of the 1930s.” As Long explains, during that desperate period people craved relief from the horrendous economic conditions. “Those were banner years for the business,” he recounts. As Gross Domestic plummeted and unemployment skyrocketed, countless investment gurus have told us, people sought to forget their troubles by flocking to fantasy-filled movie musicals.
It’s an oft-told tale that has burnished the images of motion picture studios and exhibitors in the bond market over many decades. After all, what could be safer than lending to enterprises that are not merely noncyclical but actually do better when the economy does worse? Too bad none of it is true.
The Reality of the Film Industry During Economic Hardships
Movie attendance and exhibitors’ profits did rise in 1930, thanks to the tailwind of the fairly recent introduction of talking pictures. But in 1931 earnings of both the theater owners and the studios dropped sharply. In 1932 the companies collectively lost more than $85 million.
It got worse from there. Losses continued to mount and by the end of 1933 nearly one-third of all movie theaters had closed their doors. Attendance was down by 25 percent despite a one-third cut in the price of the average ticket. Paramount, the top studio of the silent era, was in bankruptcy; both RKO and Universal languished in receivership.
None of this is news. Cinema historian Robert Sklar detailed it all in his 1975 book Movie-Made America: A Cultural History of American Movies. “By 1932,” Sklar wrote, “no one claimed that the movie industry was ‘depressionproof.’”
What We Can Learn from This Myth-Busting
Investors can draw a broader lesson from the debunking of the “Hollywood-is-exempt-from-the-business-cycle” myth: Don’t accept on faith any story you hear from somebody who’s trying to sell you an investment. Find out whether the facts genuinely support it.
This doesn’t always mean that salespeople are intentionally misrepresenting the truth. Often, they’re simply repeating longstanding but mistaken market beliefs. Sure, the story may have been made up out of whole cloth to get a trade done decades ago, but through frequent repetition it has acquired the aura of truth. The narrative helps to get trades done and deals sold, so neither the studios nor the investment banks have much incentive to investigate its veracity.
When my career path led into corporate bond strategy in the mid-1980s I needed some research topics. That led me to wonder whether the accepted wisdom I had been taught in my earlier work as a trader had ever been empirically tested. It proved a rich vein of analysis, for I discovered that many beliefs about market dynamics were objectively wrong.
Market Myths and Realities
For example, I found no support for the claim that when bonds were downgraded from investment grade (BBB or higher) to speculative grade (BB or lower), they invariably became undervalued. The story was that portfolio managers were forbidden by inflexible investment rules to continue holding these “fallen angels” and consequently unloaded them in fire sales. Managers of the country’s largest pension plans told me that in fact they had latitude to exit the downgraded bonds in an orderly fashion instead of dumping them at the most inopportune time. My analysis of returns on a sample of issues that were lowered to speculative grade detected no evidence of the superior risk-adjusted returns that, according to the salespeople, a shrewd investor like you could earn at the expense of the dummies. (You may recognize the con man’s classic modus operandi—leading the victim to believe he’s in on the con.)
The Bottom Line
I don’t intend to impugn the reputation of all purveyors of financial products. And by the way, I enjoy Rob Long’s monthly Commentary articles, which provide many useful insights into the entertainment industry. But regardless of all the regulatory protections that federal and state authorities have put in place for investors, caveat emptor is still the rule to follow when you’re presented with market lore. (That’s the “soft” information—or misinformation—that’s harder to regulate than the presentation of financial data.)
What “everybody knows” about why security prices rise or fall may actually be a demonstration that everybody can be wrong until someone like Robert Sklar comes along to set the record straight. Even then, long-held beliefs may predominate no matter what the facts are. It’s up to you to avoid getting taken in by a seductive but unfounded story.
