What Beanie Babies Can Teach Us About Market Bubbles

Photo by Peggy Gallagher, one of the first Beanie Baby collectors.

Could the behavior that drove the Beanie Baby market help predict future market bubbles, and help us spot the speculative manias we are currently in?

Beanie Babies was my first betrayal. At the age of 8, I truly believed that these plush toys would be worth thousands. But I wasn’t the only one. Rational adults were sold on the idea that Beanie Babies would be a safe asset to add to their portfolios. And what started out as an innocent toy turned into hysteria fueled by greed.

Children were trampled by herds of adults rushing the racks of small gift shops for retired Beanies. Cars were broken into not for their radios but for Beanie Baby bounties, while more white-collar criminals opted for Beanie forgery. Divorce proceedings for a couple in Las Vegas included a Beanie Baby custody battle. There was even a murder in what police describe as a “Beanie Baby deal gone wrong”.

What caused this mid-ninety’s mayhem?

On my journey down the Beanie Baby clickhole, I discovered a book called “The Great Beanie Baby Bubble: Mass Delusion and the Dark Side of Cute” by Zac Bissonette. The book gave me closure with my personal relationship with Beanies, but it also outlined patterns that can be seen in other market bubbles across history and across cultures. Speculative manias like Holland’s Tulip Mania of 1593, the 1990’s Dot-com bubble, and even our recent Housing Bubble of 2008 follow a pattern that is more psychological than it is economic.

Could the behavior that drove the Beanie Baby market help predict future market bubbles, and help us spot the speculative manias we are currently in?

1.) Stories are what inflate an asset’s value, not economic analysis

All market bubbles begin with a story spread by word-of-mouth. Stories about a friend of a friend who invested early and made a fortune are what fill the space between speculative value and actual value. As the stories are circulated, and the number of stories grow, the perceived value gets further and further away from how much the asset is actually worth. Congratulations! A trend is born!

In the case of Beanie Babies, stories of people buying $5 under-stuffed plush toys and selling them a week after they retired for upwards of $40 were rampant. When news agencies got a hold of these stories they brought the conversation about Beanie investments to a national level. But the stories they told were emotionally charged and did not provide economic analysis or facts about true Beanie value to their audiences.

Frances and Harold Mountain were unable to split their Beanie Baby up collection by themselves. They needed a Las Vegas judge’s supervision. Photo by Reuters.

I remember plush toy peddlers at the Jersey Shore displaying Beanies under locked glass cases as if the dolls were engagement rings at a Kay Jewelers. I watched as full grown adults carefully considered which Beanies they would buy, some consulting their Beanie Baby Handbooks, before reaching into their fanny packs to throw away wads of cash. Even the buyer experience had an air of wealth, but it was all an emotionally charged psych-out that validated the stories that blinded millions.

2.) Naive buyers jump on the bandwagon

All markets fluctuate, but market bubbles grow very suddenly and there’s no signs (or at least stories circulating) of it stopping. That’s because market bubbles tend to attract average citizens to play in the investment game. It’s a red flag when your bartender who has never studied economic theory or market behavior starts giving you investment advise. If you notice that the people around you who are not normally tech investors (Dot-Com craze), Real Estate moguls (2008 Housing Crisis), or they’re not normally political analysts (Fake News Bubble?) then the idea that they’re buying into is not stable.

Initially Beanie Babies did have some value — at least the originals did. The craze was sparked by a group of soccer moms in the suburbs of Chicago. They were collecting sets for their kids and trading amongst one another when they started to recognize what they perceived as factory defects. In reality, Ty Warner’s inability to make a decision is why we have Quackers with and without wings, Patti being Fuchsia or Magenta, Pinchers the lobster with and without antenna. The anomalies paired with Beanie Baby retirements turned innocent collecting into market speculation. A secondary market formed the moment one mother bought a Beanie from another mother for $20. From there it spiraled, but by the time the rest of the United States jumped into the frenzy, they were buying up second and third generation Beanies that were mass produced and that would never be worth more than the $5 retail price.

Beanie Baby shopping spree. Photo by Getty Images

The market becomes unstable not by the fact that these people are buying, but by what they are buying. The average person is not liable to do preliminary research and they end up buying the wrong thing, and they buy in it at the market’s peak. This concept can also be applied to news — the average person does not do the required research to formulate their own opinion and they end up buying into the wrong idea, and they buy in when it’s too late.

3.) ‘Shovel dealers’ are stirring the pot, and are the one’s profiting

Mark Twain was right when he said “during the Gold Rush is a good time to be in the pick and shovel business.” A notable characteristic with market bubbles is its ability to spur subsidiary markets around it that are dependent to the survival of the market bubble. Look around and see who are the people who are actually profiting off of the mania? Are they credible or do they have a vested interest in ensuring the market not only survives, but thrives?

Other than Ty Warner whose company grossed over $1 billion in sales during the peak of the craze, companies selling tag protectors, verification services, and Beanie Baby magazine subscriptions were making millions. Mary Beth’s Beanie World had a monthly subscription of over 1 million people who relied on its price guide — a price guide written by Peggy Gallagher, one of the original soccer mom collectors who now admits she was just making up the prices as she went along. The Official Beanie Baby Handbook was self-published by Les and Sue Fox, two rare coin and antique dealers from New Jersey who also self-published a fictional flop called Return to Sender: The Secret Son of Elvis Presley. Even eBay admits that if it weren’t for Beanie Babies, the company may not have survived the Dot-Com Bubble that was happening at the same time. Beanie Babies were 10% of all eBay sales and when they filed with the SEC to go public, eBay was required to list Beanie Babies as a risk factor.

So, if the market, or the idea, is too good to be true, then it most likely is.