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For the first time, Mitchell actually manages to put together a reasonably coherent section, in that it basically starts on one topic and more-or-less stays on it to the end.  So rather than do a paragraph by paragraph breakdown as I’ve tended to do so far, I’m going to stick to addressing the overall premise Mitchell puts forward, at least until the big finish.

In brief, Mitchell notes that back in 2002, when Overstock first rose to prominence, it was something of a media darling, hailed as the next big challenger to Amazon, and so on and so forth.  But even by the time of Byrne’s Sith Lord presentation, Overstock was no longer getting the favorable press it once enjoyed.  Even in 2004, as long as six months after the fateful interview relived later in this section, Jim Cramer was penning optimistic articles on Overstock’s prospects.  But a year after that, not so much.

Mitchell asserts that this change of heart on the part of so many in the financial media can only be due to some outside influence, i.e. David Rocker, ordering them to go negative.

This is a point of interest because it really speaks to what I feel is one of the biggest misconceptions when it comes to investing in individual stocks.  Far too many people, I find, confuse investing in stocks with rooting for sports teams.

Sports fans almost invariably value loyalty to teams.  Even as the actual personnel of a given team changes over time, it’s where they play (half of) their games that, in general, establishes a connection to the local populace.  Thus there is virtue attributed to being a “die-hard” Cubs fan even as they find new and innovative ways to fail, and the agony of being a lifelong Red Sox fan is deemed to be worth it all when the team finally breaks through and wins the long-sought championship.

And, in a way, public companies bear a superficial resemblance to sports teams, in that they have variable personnel, they have a headquarters/home field, they have victories and defeats, and you can even keep score by following the share price.

But there’s a big difference.  Let me give you an example.  If you’re a Patriots fan, you probably expected your team to win the Super Bowl last season.  But the fact that they didn’t probably didn’t cost them very many, if any, fans.  That’s team loyalty and as I said, it’s highly valued, expected really, of those who call themselves sports fans.  But with stocks, it just doesn’t work that way.  There is no virtue seen by successful investors in going down with a sinking ship; furthermore, each person that ceases to be a “fan” of a company you’re invested in, hurts those that remain.

I also think the phenomenon of loyalty to an investment is something of a corruption of the “buy and hold” strategy espoused for so many years by the famous Motley Fool website (which, incidentally, will be getting its turn in the smearlight before Mitchell is through here).  “Buy and hold” was basically a warning against overtrading, running up large amounts of commissions, and having a big impact on your returns.  It’s not an entirely unsound principle on its face, but it has the undesirable side effect of discouraging regular re-evaluation of investments.  Indeed, the Motley Fools’ iconic home run, buying AOL stock in 1994 and riding it all the way to the big merger with Time Warner seven years later, actually made people afraid to sell positions, be they winners or losers, for fear of missing out on the next great score.

I think I’ve gone a bit far afield, so let me get to the point as it applies here, and that is: there is nothing inconsistent with being a “fan” of a company in 2002, then changing one’s mind a couple of years later, especially if the company fails to meet your expectations.  This is precisely what changed Cramer’s mind: he expected full-year profitability in 2004 and Overstock did not deliver.  Nor has it done so in 2005, 2006 or 2007, which would only seem to exonerate Cramer’s reversal.

And even then, Cramer liked the idea behind Overstock enough that he wanted to give it another chance, which brings us to the closing part of this section, where Cramer brought Patrick Byrne onto his show (this was when Cramer shared a show with Larry Kudlow) for a hot-seat interview.  At the time, Byrne, looking around, as many CEOs of struggling companies do, for something positive to accentuate about Overstock’s performance, had settled on “gross profit” as one of Overstock’s successes in 2004.  Gross profit basically means the difference between the acquisition and sales prices of goods sold, specifically excluding any expenses incurred in actually running the company, such as employee salaries.  To put it mildly, it’s a highly incomplete picture of a company’s finances, and not normally highlighted as a key metric.  Yet Byrne was doing just that, and people were raising eyebrows at this.

Even from Mitchell’s Byrne-friendly account of the interview, it’s clear that Byrne simply did not understand why anyone would ask such a question.  It’s his company and he’ll emphasize what we wants to, dammit, and nobody gets to tell him what to say or how to act!  (And boy did that ever prove true.)  You even see Cramer — of all people! — trying to defuse things by rephrasing the question more sympathetically, but Byrne was well and truly off tilt and would have nothing of it.

I don’t know if this was the first incidence of Byrne being faced with the words of his critics and reacting poorly, but I have to think that this day went a long way towards fueling Byrne’s animosity, towards Cramer, towards CNBC, towards the financial press in general, towards critics of his company, and ultimately towards critics of any company.

Next week: Fallout from the interview.



    • Al Robin
    • Posted September 16, 2008 at 2:30 am
    • Permalink
    • underbond
    • Posted September 16, 2008 at 3:20 am
    • Permalink

    Nope, sorry!

  1. Is your blog Sith Lord certified?

    Just kidding.

    Sam E. Antar (former Crazy Eddie CFO and a convicted felon)

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