The principles of value investing are as important on the Great White Way as they are on Main Street, where the average person tries to achieve a long-term financial goal.
Indeed, that is what I learned after I recently completed a story for the New York Post on why so many Broadway shows don’t make money. That’s even though some play to full houses.
How can this be? For the same reason that many people make good money over decades but never accumulate substantial assets.
So many popular shows, I found, still can’t achieve the goal of returning their backers’ money and providing a healthy profit. It’s an anomaly: They can’t make money despite critical acclaim, standing room only performances and lots of dollars coming in from ticket sales.
It reminded me of another irony: The average person, who over the course of a lifetime makes a good income, yet often he or she ends up with nothing.
The same as the ostensibly successful Broadway show that never makes a dime, these seeming wealthy people make a good living and yet almost always leveraged to the hilt. They enjoy a high standard of living. But, as they approach their golden years—when they should be free of financial stress—they have little or nothing.
(To use a popular television reference as an example, Charlie Harper of the hit show “Two and a Half Men” is a successful TV songwriter making a boatload of money. Yet, when he dies, it turns out his gorgeous Malibu home has a triple mortgage on it. He saved and invested almost nothing).
So what does the average investor seeking to reach a long term goal and a Broadway producer have in common?
More than you would think.
In researching the Broadway story, I came across some financial investment analysis straight out of the value investing bible of John Bogle and Warren Buffett, the patron saints of value investors and average people trying to reach financial independence.
So let’s begin with Broadway. Why do some popular shows still end up in the red?
“Broadway is a very special world,” write Jeff Brabec and Todd Brabec, “one that defies reality in any discussion of whether something is a good or a risky investment. Because of this, knowledge of how things work behind the scenes is many times more important than what happens on stage.”
The play’s not always the thing, according to the Brabecs, who have studied the economics of Broadway. Success is often based on who writes the checks and reviews the bills just as your success is often based on how you spend money.
Carefully or recklessly? Like or unlike Charlie Harper? On Broadway, in the business of plays, the questions are the same..
“Even with significant weekly box-office ticket receipts (e.g $500,000 to over $1 million) a sustainable hit depends on the difference between the box office income and the costs of the musical. If the costs are greater than the income or if the income barely exceeds the costs, the musical is on the way to closure,” the Brabecs say.
To quote John Bogle on investing: “Costs matter.”
Indeed, how you spend your money as an individual is at least as important as how much you earn. Maybe more because those with middle class incomes—people like my wife and I—have less margin for error than those in top tax brackets. And it’s the same on the Great White Way.
For instance, industry observers say an example of a highly popular show that was too costly and died was “Spider-Man: Turn Off the Dark.” A lot of people loved the show. It played to packed houses.
Indeed, throughout 2012, it grossed about $1.5 million a week, a huge amount. But industry observers say it had bad cost structure and would have had to average some $1.5 million every week for three years just to break even. That’s well nigh impossible goals for most shows.
Despite its popularity, “Spider Man,” closed in January 2014.
How could that have happened when so many people loved it?
Excessive costs trapped Spider Man. Theater people speculated that it was possibly the most expensive Broadway play ever. Some estimated it cost $80 million. Certainly, outrageous costs aren’t the only reason why a Broadway play can lay an egg: Sometimes the producers don’t have the right material—the book isn’t good. They fail to market shows properly etc.
Still, always we come back to a factor that is of equal importance to a Broadway producer and an individual investor trying to reach financial independence: Having a reasonable cost structure regardless of your financial goal.
The common lesson that should guide Broadway investors or the individual investor on Main Street is this: Without reasonable costs, goals generally will be unreachable no matter how much money you make or how many sold out performances you play.
If you don’t grasp this simple yet vital idea you will end up as the person who had a flawed dream of how to make a business work: He would enthuse about his sales and ignore all else.
A sensible person focused on costs would tell him that he was losing money on every transaction.
“That’s o.k.,” this unrealistic person replies, “I’ll make it up on volume.”
I don’t want a share in that guy’s Broadway play.
Without reasonable costs in anything, no amount of volume, income or standing room only performances will help you reach a financial goal.
Costs always matter.