Disney dollar special situation (quiz & investment idea)

Sportgamma · August 31, 2012

For the sake of entertainment I have decided to dress this investment idea up as a quiz. It is perhaps a bit far-fetched and it does not have a ticker symbol, therefore I will post it in the general discussions category.

So, without further ado:

In 1981, the residents of a small far away land, took up a brand new currency. We shall refer to this currency as the Disney dollar and therefore refer to this little land as Disneyland. There is a deliberate reason for calling it a Disney dollar. The fact is that the Disney dollars aren't really a currency, for one is not able to use Disney dollars anywhere else than in Disneyland, nobody would accept it elsewhere. So in fact, one could assume that the Disney dollar is more of a derivative or a function of (1) how well Disneyland conducts its business and the amount of Disney dollars in circulation. So, therein lies the predicament. A few years back the upper management of Disneyland thought of a brilliant marketing plan. In order to attract more people to Disneyland they started selling pre-payed Disneyland cards to potential customers. Tourist agencies stocked up on the cards and the upper management was all to keen on offering them preferable terms. In fact the campaign went so well that they even sold the cards to people who never even intended to go to Disneyland.

For the people working in Disneyland this had drastic consequences. Since they effectively got payed in Disney dollars, the only way for them to spend their Disney dollars was to knock on the doors of the upper management and ask for currency in exchange for Disney dollars. During the boom, the upper management offices became flush with currencies as the sales of the pre-payed cards skyrocketed. The upper management was all to keen on buying Disney dollars from employees in exchange for currencies at rates previously unheard of. Some of the younger and more ambitious of management came up with a plan to pay employees a lump sum in advance, allowing them to invest in commercial slots or even just to upgrade their sleeping chambers at the employee residential campuses. The only catch was that the payment schedule of the advance payment was linked to the future exchange rate of the Disney dollar with outside currencies.

Needless to say, when it became clear that the people of Disneyland were in fact living inside a bubble, all hell broke loose. The tourist agencies lost their most of their advance payments but still there was an overhang of about about 500 billion Disney dollars. The treasurer of Disneyland had received requests from "off-shore" dollar owners to sell in exchange for currency. The treasurer´s predicament was that if he would exchange all those dollars at once the value of the Disney dollar would collapse. That by itself would not be all to bad, as Disneyland would become cheaper to its customers and gain competitive advantage. The catch was that (1) since most of the employees had already gotten payed in advance on a much higher exchange rate, they would have to pay back for investments that they bought for bubble prices with Disney dollar future exchange rates and (2) most of the necessities that the employees needed they had to buy outside of Disneyland.

From an operational standpoint Disneyland was doing well as its income statement was showing decent profits, but the Disneyland treasury simply did not have the currency it needed to pay out the so-called "snow-hang" of "off-shore" Disney dollars without a drastic devaluation. So the treasurer effectively split the Disney dollar into (1) the new Disney dollar and (2) the "off-shore" Disney dollar that was waiting to get out.

Now the treasurer had to solve three problems. First of all, he had to make sure that the "off-shore" dollars exchanged hands to parties who intended to keep them in Disneyland. Secondly, he had to make sure that other tourists agencies would not become afraid of dealing with Disneyland. The third problem was that he had to make sure that the employees would not participate in exchanging Disney dollars for currency in order to buy off-shore Disney dollars for a much lower exchange rate. So, the treasurer convinced the the rest of upper management to place two new rules. Disneyland employees were strictly forbidden to buy off-shore Disney dollars and would be held accountable if they were caught doing so. If an employee wanted to exchange his hard earned Disney dollar he would have to write a detailed description on how he was planning to use that currency. Employees from the reception where transferred to the treasury to evaluate each submission. The second rule was that every two months the treasurer would hold a Disney dollar auction (which it named "the investment route") in which employees and tourists alike would be able to bid for a minimum of €9.000 worth of Disney dollars if they would pledge to not exchange them for currency for at least five years. The treasury will review each bid and rule if it fits the criteria or not. What the investor receives when he bids in the Disney dollar auction is one half new Disney dollar for the official treasury rate and one half "off-shore" dollar which is priced roughly at half of the treasury rate. This would effectively give the investor a ~25% discount on the treasury rate (it is not possible to simply contact an owner of "off-shore" dollars, buy at the off-shore rate and bring to Disneyland, for it is stuck at the treasurer´s office).

The investment idea

Obviously the bidder in the auction is taking on considerable risks, because he does not know the real rate of the Disney dollar. He does know that there will be pressure on the exchange rate until the "snow-hang" is cleared, but he does not know how long it will take to clear it. A value oriented investor will likely conclude that it is too-difficult and potentially a value-trap. But once the eclectic value oriented investor digs a little deeper he will find that there are assets within Disneyland which value have no direct relationship to the Disney dollar. In those cases the Disney dollar is merely an manipulated exchange rate for an asset that has value measurable in real currency. For there are operations within Disneyland that have revenue streams that are mostly (+90%) in currency. Hell, there even is an operation that is a top 5 producer in an entrenched market in which Berkshire Hathaway recently bought into by acquiring a competitor.

The eclectic value investor would be able to buy an assets for 25% discount, knowing that if the Disney dollar devalues, the value of the assets will be unaffected. Of course, other risks will remain (business, management, industry etc.) but the exchange rate will not be one of them.

I´m curious if anybody gets what I am referring to.

ragnarisapirate · August 31, 2012

It's obvious that you are talking about how the coal companies used to issue script to their employees in their company towns. :D

muwahahaha.

Sportgamma · September 2, 2012

It's obvious that you are talking about how the coal companies used to issue script to their employees in their company towns. :D

muwahahaha.

I´m guessing that was sarcasm :D

Anyways, that would be a no.

By the way, I really enjoy your blog, especially the Syms stuff.

twacowfca · September 2, 2012

You could be describing the original Ponzi Scheme with supposedly discounted international postal franks. Ponzi said he had a way to repeatedly monetize those illiquid, discounted assets. Of course, your description would also cover any number of other Ponzi schemes, whether based on currency controls or funny money or whatever. Is there a fatal flaw in your idea?

ragnarisapirate · September 2, 2012

It's obvious that you are talking about how the coal companies used to issue script to their employees in their company towns. :D

muwahahaha.

I´m guessing that was sarcasm :D

Anyways, that would be a no.

By the way, I really enjoy your blog, especially the Syms stuff.

That was in deed, sarcasm. :)

Thanks for reading. Any more clarity as to what you were talking about?