Motley Fool Hidden Gems Investing - Netflix Gets Raw

Episode Date: January 23, 2024

One of the biggest shows on cable is leaving for streaming. (00:21) Ricky Mulvey and Bill Mann discuss:  - Netflix’s $5 billion deal with the WWE.  - Proctor & Gamble’s quarter and write down of Gillette.  - Why Schwab’s deposit flight isn’t quite breaking the bank. Plus, (16:12) Robert Brokamp kicks off a two-part interview series with Michael Finke, the Director for the Granum Center for Financial Security at The American College of Financial Services. In part one, they discuss what to consider when planning a withdrawal rate for retirement. Companies discussed: NFLX, TKO, PG, SCHW Hosts: Ricky Mulvey, Robert Brokamp Guests: Bill Mann, Michael Finke Producer: Mary Long Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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Because we have your number. Netflix gets raw, and you're listening to Motley Fool Money. I'm Ricky Mulvey, joined today by Bill Mann. Bright and early. Bill, good to see you. What is happening, Ricky? You doing well? I'm doing pretty well. How about you? It's warmed up a little, so that's nice. Yeah.

I'm not part polar bear like a lot of people. We got, well, last time I think we lost you due to snowfall. So it was good to get you back on the following week. And I know people from the northern climes laugh at the DMV when we talk about snowfall, but it was actually legit. We had a legit, legit snow. I'll take your word for it. Let's talk about Netflix. Netflix got a big deal this morning. The streamer is paying $5 billion to get WWE Raw for 10 years starting next January. The TKO

group, which is the combination of the UFC and the WWE, those investors are a little bit more excited than the Netflix investors. Talk to me. Why do you think Netflix is going heavy on these live events right now. You know, I love the fact that I've been called upon to talk about wrestling because I grew up in Raleigh, North Carolina, which was the home of Dorton Arena. So we had all the time, Rowdy Roddy Piper and Dusty Rhodes and the Russian bear, Ivan Koloff coming into our climb. So wrestling is something that is in my blood. But back in the 70s, we would not have expected wrestling to go for $5 billion worth in terms of television viewing revenues. It's really staggering. I think from Netflix's standpoint,

in some ways, this is battening down the hatches in the area in which it probably feels like it has the most vulnerability versus other streaming services. They have not really done much or have they really successfully cracked the code on live entertainment. So, wrestling is something that's interesting because it's live entertainment, but it also has a longer tail than almost any other form of sports entertainment. I'm making up a number, but 95% of the people who watch a football game, watch it within the first 24 hours, right? With wrestling, you can go back and because there's a storyline attached to it, there is much more of a tale there. And those are things that Netflix knows how to handle.

So it's a really interesting transaction to me because of those two things. I also envision an executive conference room where the words scalable and repeatable are often being used about this yeah i saw i remember 2017 my buddy was like you want to go to the wwe monday night raw i'm like this is gonna be stupid but i'll go because i got nothing better to do and there's parts where i'm like all right this kind of this kind of whatever no i like real sports ray ray ray braun strowman and big show jump off the top turnbuckle and literally break the ring to finish the show and i was like all right all right man this is sick let's go that's right see i go back to uh the country boy haystacks calhoun and 600 pounds worth of

doing the same thing bill we're not talking about haystacks cowboy we we had our trip down memory lane yeah it is also a a sport unlike the nfl with a huge international reach yes so netflix as a you could call it a geographically um unconcerned entity now has access to you know now has a reason saudi arabia for example which is not a huge market but it is one that is wild about about wrestling and wwe and you know raw is something that's going to do very well there and it's going to draw viewers in to the entire platform uh of netflix yeah they'll also pay some pretty big money to put on put on large shows there i think what's also significant is that wwe on a monday night it is unless unless there's monday night football going on it is often the number one two

and three cable television show and this is a signal for linear television where your your top three dogs are literally leaving and wwe saying you know what we're gonna lose some of our audience because there's gonna be friction in this transaction shout out to the schwab discussion we'll have later. But they're saying this trade-off's going to be worth it, a la what Howard Stern did to radio and what Joe Rogan did to podcasting a little bit. It really does show, and it's why, just to make a little bit of a bizarre step in this conversation, it is why content is still king. It is not to say that Disney hasn't had a huge amount of missteps, for example, including how they've managed their content.

But at the end of the day, if you were to ask me, do I want to invest in a pipes company or do I want to invest in a content company? It's the content company all the time. All right, let's kick out, talk about Procter & Gamble. They reported this morning, beat expectations, but what's grabbing headlines is another Gillette write-down for the Razor Maker. P&G bought it back in 2005 for $54 billion. Four years ago, P&G took an $8 billion charge on Gillette this quarter. It's another $1.3 billion write-down. Bill Mann, what happened? Accounting is such a funny thing. I just want to go back and emphasize that you're talking about a transaction that happened in 2005. It was $54 billion, which is about $95 billion in

today's dollars. It was a huge transaction for Procter & Gamble. Basically, the way accounting works is they put that transaction on their books, and it's considered an asset, but they have to make a determination whether that asset is impaired or not. They're going back for an 18-year-old transaction. They're saying, we don't believe that we're going to make full value from that transaction for Gillette. It just goes to show in business how much stuff has left a chance because Procter & Gamble is a very savvy company. You're not talking about a company that goes out and does wild things. They went out and bought a dominant razor and blade company thinking that the environment in which they were operating in 2005 could last long enough

that they would be able to regain their investments. AI is not a risk to people needing to shave right like it's just it's it just isn't so what they really didn't get right was that things actually did change yeah they they didn't i think it's a story about pricing power yeah and it's existed it's it's a question i think for for some products at procter and gamble and right now though i'll also add grooming is watch watch me from cincinnati play defense on this. Grooming is the smallest segment for the company. It's 8% of sales. This is a multi-billion dollar company that still seems to be doing all right. Yeah. I mean, that's the baseline, right? And I think that's exactly right. So, again, fascinating that we're talking about an 18-year

plus ago transaction that is still on their books as being written up and down. So, a couple of things happened. One was that the distribution channels changed a little bit. You remember Dollar Shave Club and their fantastic ads. That bit a little bit. But what really bit into Procter & Gamble was at the time that they made this transaction, the thing that it seemed like the world was counting on was that the dollar was in a decline. And what has happened almost linearly since 2005, is that the dollar has gone up against almost every other currency in the world. It's made it much more expensive to buy Gillette products. They call out places like Argentina and Nigeria, but those are simply placeholders for all of the countries that are

outside of the U.S. where the middle class is going to be price conscious. It has harmed this transaction for proctor again yeah so i want to exclude the write-down let's let's let's make some let's adjust that gap bill if you if you exclude the write-down operating income would have been up 21 for the for the quarter year over year this is as you said it's it's a company that's not affected by ai it's also not a it's not one that you would expect to be quickly growing like that. It still has some pricing juice left in it. In organic sales, you're still doing okay. Yeah. And you said something important, and I'm going to pull back and say, you said, okay, let's ignore the write-down, which is a fine thing to do because Procter & Gamble

doesn't have many of them. It is a red flag when you see a company that has every quarter or every year, they've got a different write-down because then they could say, oh, that's non-cash. when in actuality, they spent cash and debt to buy this. It's the realest cash there is. So, Procter & Gamble is right to downplay this write-down and the impact to it because it was money that was spent 18 years ago. From an accounting perspective, it was right of them to do. But you are absolutely right that Procter & Gamble is doing absolutely fine. And a 21% rise is nothing to sneeze at. Before we go, I also want to check in on Charles Schwab with you. Deidre, Matt Frankel took a look at the banking sector last week. But I know you follow Charles

Schwab. There's a pretty gloomy article about the company in the Wall Street Journal. It's maybe not of banking crisis, but Chuck still seems to be going through it. Looking at the latest quarter, there were a lot of parentheses in the wrong places, Bill. A year ago, Schwab paid about $800 million in interest expense on the quarter. This year, it paid a billion more. How's that happen? Well, you've heard about rates going up, right? Yeah. Next question. It makes money on interest revenue. No, exactly right. But you know who else does? The savers. The people buying T bills. Yeah. Basically, since 2009, we have been punished to save. It has been absolutely fine at places like Charles Schwab. Charles Schwab isn't organized as a brokerage. It's organized as a

savings and loan. It is, at its core, a bank. For years, people who have not had their money invested in stocks. I've had them in sweep accounts where you've been paid 0.1% on your money. But as it turns out, when you go into a higher interest rate environment, it becomes beneficial for Schwab's customers to put their money that's not allocated to stocks or other investments into interest-bearing instruments. That's where the billion comes. That's from members reinvesting their money, taking it out of cash, and putting it into interest-bearing vehicles. That's something that's called cash sorting. It is something that is costly to Schwab, but they had to expect it. I mean, it is something that was absolutely part of what a savings and loan at its core does.

Yeah, so Schwab lost essentially $175 billion in bank deposits, which is about nearly 40% of what it had at its peak. Sounds bad. That's bad, but here's what – there's a version of this where that means you have a banking crisis, and Schwab doesn't seem to be having that, which is – No, exactly. That's what's entirely different about what's happening at Schwab. In 2023, people, after Silicon Valley Bank collapsed, are like, okay, what's the next one? Ooh, there's Schwab. Under accounting standards, this seems like a banking crisis. But Schwab hasn't been losing money. People haven't been withdrawing from Schwab. They've been taking bank deposits and then transferring them into T-bills or transferring them into CDs or transferring

them into higher interest-bearing instruments, which changes the capital ratios at Charles Schwab. Charles Schwab, unless they are forced to revalue the debt side of their balance sheet, This, it's not great for Charles Schwab, and it's really not great in an environment in which they're already undertaking a merger with TD Bank and all of those deposits. But it really is just the valley of the shadow of death that they've got to walk through. They're going through the fire swamp. That's what I would say, Ricky. The fire swamp. And some would say that it's impossible to get to the other side, but Wesley and Buttercup did it, and Schwab's going to do it too. Yeah. I mean, for, for as much friction as there is with the

TD Ameritrade merger, I mean, you're talking about, they've got 15 million accounts going over. They've got basically 1.6 trillion in assets. You have to get basically everyone gets a letter at TD Ameritrade, which is a negative consent letter, meaning, Hey, if you want to opt out of this, you can, which I'm sure the wealth management firms are not. actually, I know the wealth management firms are not happy about that. Anytime you give, Hey, Hey, just a reminder. If you want to leave, you can. Yeah. So, so they got, they got a couple of, they got a couple of frictions coming at them right now. Yeah. They've got friction, but, uh, but imagine, imagine thinking that a firm that has, you know, uh, $8 trillion in, in client,

assets under management, and it's 33 million client accounts, it's just going to be allowed to fail by Uncle Sam because of a capital ratio. It's not going to happen. So, with Schwab, I look at a company that had a very, very bad year. Some of it was unfortunate. Some of it was they had flown a little close to the sun. But at a baseline, the price that is available for Schwab now absolutely takes into account most reasonable case scenarios for the company. So, it's not good. It's not good at Schwab. But if you believe that a dominant bank with a history of innovation has a steady state. That steady state, I think, is higher than it is now. Well, Uncle Sam, always looking out for the little guy. And as a Schwab shareholder, Bill,

I hope that's the case. I hope they don't forget about them. But as always, Bill, appreciate your time and your insight. Thank you so much, Ricky. Before we get to our ad in our next segment, I wanted to throw in a quick pitch that if you find value in the show, please leave us a review on Apple Podcasts. A few sentences helps us reach a bigger audience and also rating the show on Spotify helps us out too. If you have specific notes about the content, guests, anything you hear, our email is podcasts at fool.com. That is podcasts with an S at fool.com. You just found out that your sales team is at risk of missing quota. Don't panic. Just ask Rippling AI. Since it's built on your real-time people and business

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full visibility and take complex actions across your entire organization. That's r-i-p-p-l-i-n-g dot a-i slash f-o-o-l. Sign up for exclusive access today. rippling.ai slash fool. What's a safe withdrawal rate for retirement? Dr. Michael Finca is a professor of wealth management and the director for the Granum Center for Financial Security at the American College of Financial Services. He caught up with Robert Brokamp to talk about his research in the first of a two-part conversation. So, Michael, you have two PhDs. The first one you earned is in consumer economics, In that first chapter of your career, what did you learn about why some people make better

choices when it comes to purchases like food, and how did that lead you to getting a PhD in finance? Wow, that's an interesting part of my career. I was interested in knowing what motivated people to eat healthy foods. I found in my research that there was this amazing correlation between eating healthy foods and exercising and saving. And I thought, well, there's got to be some sort of an interesting theory that connects what motivates people to eat well and to also save. And so I took a finance class.

It was actually a PhD class in investments. And at the end of the class, I loved the class, by the way. I thought it was so fascinating. I loved investments theory. And at the end of the class, my professor took me aside and said, do you realize how much more money you could be making if you were a Ph.D. student in finance than studying food consumption? So that really that served as a jump for my second Ph.D. in finance. Now, there was a lot of overlapping content between the two because finance is really as much as finance people don't want to admit it. It's just applied economics.

So, you know, I was doing applied economics when I was studying food consumption, and I'm still doing applied economics right now. It's just a topic that tends to be of interest to people who have money, which is a good thing as an academic. We recently did an episode on the correlation between health and wealth, and in terms of cause and effect, we sort of felt like it went both ways. Did you find what caused one or the other, or is it people just wired to be better with their money and their bodies?

Yeah, you know, so there is this idea that one of the reasons why people who have more money live longer is perhaps because they have access to higher quality health care. And actually, there's really not a whole lot of evidence to support that. What seems to be happening is that the kind of people who do things like eat better and exercise and, you know, they are making investments in their health. Now, what is an investment? An investment is a sacrifice that you make in your joy today in order to experience more joy in the future. So it really is just what we call an intertemporal choice. Anytime we make an investment, whether it's eating the grilled chicken instead of having a hamburger for lunch, or whether it's getting up in the morning and going to the gym as opposed to doing something

that's maybe a little bit more fun, which is just about anything, all of those are motivated by this desire to live better in the future. And so that also motivates people to save more. You know, I'm doing some interesting research right now on positivity. And I had no idea. We did this survey. We added a few questions about how positive is your outlook about the future. I didn't expect them to be really strong predictors of financial outcomes, they ended up being huge predictors of how much people save for retirement, even things like asset allocation. You're willing to take more risk if you have a more positive view of the future. All of this, I think, is just fascinating, getting into what motivates us to choose one type of financial behavior or another. But it does seem

to be a powerful way of thinking about that motivation as an investment. Investments in relationships are similar to investments in money. When it comes to retirement as a goal, which has really become much more of your focus, people have to decide on the price of that goal, starting with how much income they'll need to maintain their lifestyle and retirement. I'm sure that many people have heard that they'll need around 75% of their pre-retirement income when they retire. Is that a good starting point? It depends. It could be higher. It could be lower. It could be higher if you earn less money. It could be lower if you earn more money. Now, that means that, let's say someone who's making between $100,000 and $200,000 a year,

if you think about it, they're already saving, especially if they're doing catch-up contributions after the age of 50, they might be saving 15% or even 20% of their income. That's money that's not being spent. So, if they're making $200,000 a year, you can just start at $160,000 right there. And then you've got payroll taxes that you don't have to pay in retirement, Social Security, Medicare taxes. You don't have to pay that stuff. So, that's another 15% if you're self-employed, half of that if you're employed with a company. And the fact is that most people don't spend every single penny of their paycheck, especially people who watch shows like this. There are people who tend to accumulate money in their savings account. What I found is if you

look closely at the data, even before retirement, someone who's making a couple hundred thousand dollars a year, probably only spending about 55% to 60% of that, that's the lifestyle that they need to replace in retirement. That's good news, I think, especially in an environment where you believe that asset returns are going to be lower than they have been in the past. The goal is more attainable. And of course, you have Social Security, which serves as a foundation. You simply have to make up the difference in that lifestyle over the course of an expected lifetime in retirement. Now, that lifetime in retirement, of course, we were talking about health investment. David Blanchett, who works at PGM, used to work at Morningstar, and I did a study

where we looked at people who save and define contribution plans. And people who save and define contribution plans are different than the average American because they tend to make more money. And people who make more money are healthier, which means that it's far more likely that they're going to live on average into their late 80s, which means that their time horizon, if they retire at 65, is probably on average about 23 to 25 years. And then you have this uncertainty that surrounds how long the money needs to last. Boy, that is the ultimate issue. None of us know exactly how much money we need to save because none of us knows exactly how long retirement is going to last, nor do we know the returns that we're going to get on our investment

portfolio. There's also the question of how spending changes over the course of retirement. Because if you use a retirement calculator or even the foundations of the old 4% rule, which we may talk about later. The assumption is that your expenses go up every year in retirement. But is that generally the case? No. So, there's two questions here. On average, how much does spending decline in real after-inflation terms? And it does tend to go down. There's some differences of opinion based on the way people do research on this topic. But the reality is that we're not going to be able to spend as much money when we're 90 as we could when we were 70. Now, the other part of that question is, how much happiness are we

going to get per dollar of going on vacation when we're 90, as opposed to going on vacation when we're 70? That is a compelling reason to front load some of that spending. But that makes retirement more risky, because you're spending more early on, and that means that you're more susceptible to what's known as a bad sequence of investment returns early on. You could significantly deplete your savings. However, the reality is that if you, I mean, think about it, you're a 65 year old healthy woman. You are on average going to live to age 90. Let's say you've got five rows of five circles and you've got so much money saved and you've got to decide how many chips you're going to put in each one of those circle. And do you put them all when you're 90?

Do you conserve your chips so that they're left over if you live to be more than 90? Or do you put more of your chips on 65, 66, 67, 68, 69? When you're more physically and cognitively capable of enjoying the money, that might make more sense. So that's part of the game of life, is that we've got to figure out where to put our chips. And a lot of people just end up conserving their chips because they're worried about running out. And that just means that your kids are going to spend the money.

They're going to have the fun that you didn't have between the ages of 65 and 75. Yeah, some of your research has shown that for the median retiree, they're spending about 8% less than they probably could. And for wealthier retirees, they're maybe even spending 50% less than they could, possibly because they're so worried about running out of money. Yeah, to me, that's the big mystery. I have a new article coming out on this topic, which is why do so many people who say they are not that interested in passing money on to others after they're gone, why do they just not spend the

money? And I've done interviews with retirees, and I consistently see how proud they are of the fact that they're not spending down their money. So they're 10 years into retirement, they have more money than they did 10 years before, and they're proud of it. And they even look at me, Well, you're a finance guy. You should be proud of it too. And I'm not. I think they're making a mistake. I think that they've wasted 10 years essentially because they haven't spent the money in a more rational fashion. Now, if that's your goal, if you really want to pass it on after you're gone, then don't spend it. That's fine. That's the way to win the game. But if that's not your goal, then there's only two places your money can go. You can either spend it on yourself

or you can pass it on to others. And if passing it on to others isn't that important to you, let's put together a plan for actually spending the money while you can still enjoy it. When you talk about how much someone can safely spend each year, that brings up the topic of safe withdrawal rates, which most people have heard of as 4%. Some say it's too low. Some say it's too high. What's your take? And I'm guessing that you don't agree with Dave Ramsey, who in November, said it should be 7% to 8%? Yeah. Dave Ramsey said that his mathematics was very clear. That is, since stocks always return 12% and inflation is 4%, you should easily be able to withdraw 8% of your savings balance as your retirement income plan. Now, there are so

many things wrong with that that you don't want to get me, you know, you want to keep me focused here for a moment. But first of all, they don't actually return 12% because there's a difference between what's known as geometric returns and arithmetic returns. He's referring to the arithmetic average. Geometric is what you actually keep. So, you know, in other words, if you have a year, like 2022, your investments go down by 20%, then you have to get a 25% return the next year just to get back to where you started. So on average, you've gotten, you know, you may have had a 2.5% return, but you have exactly the same amount of money as when you started. That's the difference between arithmetic and geometric returns. So he's ignoring that. The other part

that he's ignoring is what happens if you get unlucky? At the very beginning of retirement, let's say you have $1 million, you're pulling $80,000 out the first year. What happens if your portfolio goes from $1 million down to $800,000? Now you're pulling $80,000 out of it. You have $720,000 at the end of year one. Do you again pull $80,000 out of there? Well, what happens if the market's flat? Now you're down to $640,000. It's not difficult to imagine that you're going to be out of money pretty quickly. So, in the early 2000s, you can pretty much pick your year in the 2000s. If you would have followed that strategy, it would have maybe taken you anywhere between 10 and 15 years to run out of money if you would experience that same sequence of returns.

So, sequence of returns risk is a very real thing. It means that you're going to have to significantly adjust your lifestyle downward. If you get a bad sequence, you simply can't just be blind to whatever return that you got. That's what the 4% rule is based on. It's this idea that if I have a million dollars, I can spend $40,000 the first year. I can increase that by the rate of inflation. That should last me over the course of 30 years. Well, what happens if I get unlucky? What happens if my portfolio falls the first year? What if it falls again the second year? Do I continue to spend $40,000 a year plus inflation? At some point, you're going to say, well, that's getting a little bit risky. I'm not comfortable with that. Maybe I should adjust that

spending downward. That's what you should do. That is the way that a rational person would respond to a down market. They would spend less. And I think that that's, which was known as a flexible withdrawal strategy or something that involves guardrails. So in other words, you could maybe go up by, you know, half a percent per year or something like that. That's the right way to do it. And that allows you to pull more money out at the beginning, by the way, because, you know, you spend more early on in retirement as long as you're willing to make adjustments if you get unlucky. And remember that bad luck, that's going to cause you to have to adjust your spending downward. But what if you get good luck? So, in other words, what if at the beginning of retirement

you have a positive sequence of returns? Then should you not spend more? You know, it shouldn't just be your financial advisor and your kids who benefit from the risk that you took, you should be able to spend more also. So that's what's known as flexible spending rule. I'm a big fan of that. I think that's the right way to do it. Now, you can do a flexible spending rule only if you have the ability to be flexible in your spending. And that's why I think one of the stages of planning for retirement income is evaluating how flexible you are capable of being with your retirement budget. Because if you do have a segment of the budget, which is simply not flexible, then you can't take investment risk with that portion of the budget. You're going to have to

cover it with social security and some other strategy that is not going to require you to cut back if you get unlucky. As always, people on the program may own stocks mentioned, and The Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.