Motley Fool Money - Investor Behavior and the Business of Popularity

Episode Date: October 26, 2018

On this week’s show, we revisit two of our favorite interviews. Award-winning financial columnist Morgan Housel talks about the psychology of money, long tails, and investor misconceptions.  Plus, Chris Hill discusses the business of popularity with Atlantic Senior Editor Derek Thompson, author of Hit Makers: The Science of Popularity in an Age of Distraction. Learn more about your ad choices. Visit megaphone.fm/adchoices

LinkedIn is pretty amazing at helping you grow your small business. We cannot stop your new clients from emailing you at 3 a.m. We can help you sell, market, and hire in one place. We cannot help you be in three places at once. And while we can't help you organize your calendar, LinkedIn can help you land more clients so you have a calendar to organize. Grow your small business on LinkedIn. Learn more at LinkedIn.com slash small business.

Support for Motley Fool Money comes from our friends at Rocket Mortgage by Quicken Loans, who are excited to introduce their all-new rate shield approval. If you're looking to buy a home, rate shield approval is a game changer. And here's why. Quicken Loans will lock your rate for up to 90 days while you shop. And here's the good part. If rates go up, your rate stays the same. And if rates go down, then your rate also drops.

So you win either way. It's the kind of thinking that you would expect from America's largest mortgage loan. lender. To get started, just go to rocketmortgage.com slash fool. Everybody needs money. That's why they call it money. From Fool Global Headquarters, this is Motley Fool Money. It's the Motley Fool Money Radio show. I'm Chris Hill. Thank you so much for listening. For the past few days, we've been in Denver for a Motley Fool investing conference, so we've got something a little different this week. Later on in the show, we'll revisit my conversation with Derek Thompson,

author of the best-selling book, Hitmakers, The Science of Popularity in an Age of Distraction. But first, a few months ago, I sat down to talk with my favorite financial columnist, Morgan Housel. Let's start with the thing that you wrote recently that got more buzz on Twitter than anything I've seen. And a lot of the stuff you write gets a lot of buzz on Twitter, but I haven't seen anything like this. And it was a long piece entitled The Psychology of Money. And let me quote from early into piece, Investing is not the study of finance. It's the study of how people behave with money.

That's right. That really is, and when I read the piece, it was one of those things that just kept going back to me like, yeah, we're weird creatures when it comes to money. We human beings. Yeah. The whole post is 9,000 words, and I think that sentence that you just quoted is probably all you need to read. If you don't want to read the other 8,900, that's really all you need to read. Because that's always how I've thought about investing.

about investing. There's no amount of intelligence that can't be undone by poor emotions or poor behavior. And if you were to look at, if you were to make like a hierarchy of investor needs, like a pyramid, the base of that pyramid is good investor behavior. And then as you go up from there, you need analytical skills, you need to know how to model, you need to learn how to read an annual report and so on. But without investing behavior, and what I mean by behavior is your relationship with greed and fear, your ability to take a long-term view, your ability to react with to market ups and downs with a sense of calm and a sense of not taking things too seriously, not getting too overwhelmed by greed, not getting too knocked down by fear. That's what I mean by good investing behavior,

saving consistently, dollar cost averaging. And it's one of the simplest points of investing, which is why it doesn't get that much attention. It's not that exciting. But I think it's unequivocally the most important part of investing. Because again, no amount of intelligence is stronger than poor behavior. So the whole report just dug into 20 kind of flaws and biases that we do with money. And I made it the psychology of money, not the psychology of investing, because a lot of these things have to do with savings or how we think about financial goals, how we think about our careers, that are distinct from actual investing,

but they all kind of tie into each other. Well, and as you point out, investing is the one endeavor where amateurs can absolutely outperform. professionals in a very significant way. This isn't happening in, say, heart surgery. Never. Completely impossible to think of someone walking off the street, picking up a scalpel, and performing a successful heart transplant. Completely unthinkable. It would never happen a million years. But you have stories of amateur investors who have just been leaving their portfolios alone for 50, 60, sometimes 70 years. And oftentimes after they pass away, their heirs or their friends, their state looks into their money and realizes they have millions and millions of dollars.

and these are humble people who came from very modest means, and they're able to outperform the best professional investors who've gone to Ivy League universities and have the best training. And some people would say, well, that's because it's luck. You have these amateurs that did really well because they picked the right lotto ticket. And I think there's an element to that that is undoubtedly true. But the key factor for me is that you don't need a lot of book intelligence

to do well in investing if you've mastered the behavior. And the reverse is true, no matter how small. smart these people are who've gone to Harvard Business School and our alumni of Goldman Sachs, if they get too caught up in greed and fear, nothing that they've been taught in the past is going to matter. Well, and it's Warren Buffett's line about how one of the big turning points for him as an investor was when he mastered his temperament. Speaking of Buffett, one of the things you reference is the Berkshire Annual Meeting, which I believe you went to earlier this year.

I went to with a group of friends, but we didn't actually go to the meeting. So I'm going to say, I went to Omaha this year. I've been to the meeting four times, and it's a, it's a, It's 40,000 people, which is a lot. There's just long lines everywhere. If you want to go to the bathroom, it's going to take you four hours. And I think this says a lot about how Buffett and Munger think, but they say the same things every year. And that's not because they have, or, you know, it's not because they're being boring.

I think just because their core thoughts, their core beliefs, don't change year to year. So once you've been once or twice, the actual meeting isn't that much. but it was fun to go out there and just hang out with a bunch of investing friends. Well, and as you pointed out in the piece, it's 40,000 investors, every one of whom considers themselves to be a contrarian. Every Buffett follower thinks they're not following the crowd. And then you go to Omaha and you look around and you see 40,000 people, each of whom will tell you, I don't follow the crowd.

And just the irony is palpable. It is, and I suppose this ties as much into the behavior as anything else. But one of the points you hit a couple of times is just excitement versus boredom and how, certainly when you're a kid, among the worst positions to be in, is in a position of boredom, like when you're a kid. But let's face it, that's what gets a lot of investors in trouble, too. It's just like, this is boring. I want to take a little chance.

And it's like, you know what? Boring can be a really winning strategy. One thing I've always said is, you know, the purpose of investing is not to minimize boredom. It's to maximize returns. But there's a reason that CNBC and Yahoo Finance use flashing lights and breaking news and, you know, huge bulletins. There's a sports element to investing. And people really do treat it like sports. You have your preferred beliefs.

You have an idea of how the market works. You have companies that you're backing and that you're rooting for. You have companies that you're rooting against to go down or companies to fail. There are a lot of times I feel like it's indistinguishable from sports in that sense. And people use it as financial entertainment. But that gets dangerous because we know that the key to successful investing is effectively hands-off compounding for years and years and years, which is it should be boring. Like, boring is good and it's supposed to be boring. But it takes a certain kind of personality and a certain kind of temperament to be okay with that and to find your entertainment elsewhere.

And that, I think, will never change. Finance is always going to have an entertainment part to it. That's never going to go away, no matter how much we tell. tell investors not to treat it as entertainment to really focus on the long run. It's always going to be flashing lights and breaking news. Let me go to another piece that you also wrote recently. This one caught my attention because it was one of these concepts that I was very familiar with, but I hadn't really seen it laid out in the way that you did. And it has to do with sort of the long tail.

And you make the point, and I would say you make a pretty compelling case that long tails drive everything. Yeah. So my job now is in venture capital. people say, you know, venture capital is driven by tails. What they mean by that is for venture capital fund, if you make 100 investments, you're going to lose money on at least half of them. You might lose all of your money on at least half of them. You're going to have, of those hundred, you're going to have five or ten that do pretty well, and hopefully one or two that does really well. And that's where all your return is going to come from. So you make 100 investments, maybe five of them are

actually really going to matter. That's what they mean by when they say venture capital is driven and by tails. And I just looked at that and said, yes, that's true, but it dug into the piece. That's actually true for public stock markets as well. If you look at the composition of the S&P 500 or the Russell 3,000, which is another big index of public stocks, it's pretty much the same. In any given year, or even over longer periods of time, the huge majority of gains from, like the S&P 500 is driven by a handful of stocks. We're talking five or ten stocks. So if you look at the last couple years, Facebook, Amazon, Apple, Microsoft, that's driving about how. half the return in the S&P 500, even though it's a basket of 500 stocks.

Because you have these companies that are very big that have gone up incredible multiples in price over the last five years. And that's way more important than the other tiny companies in the S&P 500, that even if they're going up a lot, they're so small that they don't really make that much of a difference. And it's also true at companies themselves. You have a company like Apple that has driven overwhelmingly in sales and profit by the iPhone. The iPhone itself is a tail event in the world of tech products where people have tried

everything, new devices, all different iterations, the iPhone is the biggest tail event that it gets, like one tiny product out of thousands that have been tried that drives the huge majority of returns. It's the same for Amazon, where Amazon is always tinkering with new products. And two products that have worked extremely well in the last 10 or 15 years is Prime and AWS. Like, those are tail products. And I also made the point that the people working at these companies have tail careers. The hiring rate at Facebook, Amazon, Apple is less than 1%. So you have people with tail careers that are working on tail products that are driving tail returns in the stock market.

Like anywhere you look, the majority of results are driven by a tiny minority of instances. Do you think that that is one of the biggest misconceptions about stock investing, the whole idea that a couple, you know, taking it away from VC and more to the individual level, if someone's got a portfolio of 25 stocks or so, that if a couple of, of them are big winners. Because I've heard the criticism in the past from some in the media in the early days of the Motley Fool, where it's like they were looking at sort of the first online portfolio that the Motley Fool had. And I remember going back and forth with a couple of reporters. And they were saying, well, you know, only a couple of those stocks are big

winters. That's why that portfolio is being the market. I just, I remember saying to one of them, and this one guy said, well, if you take those two stocks out, the portfolio It doesn't do as well. And I just said, yeah, but if you take John Lennon and Paul McCartney out of the Beatles, the band isn't as good either. I mean, the response to that would be, because I imagine the alternative that they propose is index funds. The response to that would be, how is the S&P 500 performed if you take out Apple, Facebook, Google, and Amazon? How has it performed over the last decade? And the answer is terrible. So that's always going to be true. The disconnect, I think, is that when

people own 25 individual stocks, they can readily see the performance of every one of those. they're going to log into their brokerage account and see, wow, a couple of these companies fell 50%. That's crazy. That hurts. I wish I wouldn't have bought them. Whereas if they own an S&P 500 index fund, they don't have ready, easy access to information of how all those components fared. But if you dug into it, you would see that of those 500 companies in the index, half of them performed really poorly and 10 of them performed really well, and that's what's driving the return. So it's not even a difference in how diversification works or how tails work. It's just that in the index fund. It's kind of hidden from you.

More after this quick break? Stay right here. This is Motley Fool Money. Welcome back to Motley Full Money. I'm Chris Hill in studio with financial columnist Morgan Housel. Let's talk about your recent trip to the West Coast. You were at EBI West. EBI, as I since learned, stands for evidence-based investing. This was a conference. You were moderating the panel. How was the conference? It's great. I think it's one of the best financial conferences that exist. They do twice a year. It's put on by Josh Brown and Barry Rittholz, and they do a great job. And it's great content, and no one takes themselves too seriously at the event either. It's a very lighthearted event, which just makes it a lot of fun, but still a lot of great investors there. And I really like financial conferences for the

same reason I really like Twitter. It just exposes you to other investors. And in a fun environment like that, people share stories just about how they've done, what they see in the world, what they're experiencing day-to-day. Basically, all the investors there are professional investors. They're mostly financial advisors, maybe some fund managers. So it's just great to talk shop about how the industry is doing, what they're seeing their clients doing. So I'm a big fan of financial conferences. What was the mood at the conference? I mean, these are people, as you said, these are professionals. We are in year nine of a bull market? I mean, were people feeling good? Were there some out there saying, I don't know, I'm starting to, I'm starting to build up my cash reserve. Yeah, it's a great

question. I'd say the mood is nervous optimism. You can't, you can't work in the investment industry and not be excited with how things have gone over the last nine years. And there's a good chance that if you work in the investment industry, 2017, 2018, is as best as you've ever done. Probably the most money you've ever made. Assets under management probably at an all-time high. For most of the people at the conference, those things were true. And so people enjoy that. And I would contrast that to investment conferences that I went to in, say, 2010, where it was just gloom, not because of they think the market's going to, where the market's going to go next. In fact, in 2010, there was a lot of optimism about that.

But working in the business of investing, talking to fund managers and asset managers, financial advisors, is very different. So I would say it's nervous optimism. And I say it's nervous because it's very difficult to be a pessimistic financial advisor. If you're managing money for other people and you predict that the world's going to hell, they're going to take their money out from you. If you think things are going to crash, just give me my cash back, please. That's all I want you to do. So it's very difficult to promote active pessimism even if you really believe in it. So that's kind of how I would summarize the mood.

Things have gone very well, but anyone who understands business cycles and economic cycles knows that, and this is not a forecast, because I would have said this three or four years ago to you as well. But, you know, we're not close to the bottom. We're a long ways from the bottom. Who knows where the top is, but we're a long ways from the bottom. Well, and that goes back to what we talked about earlier, which how does it? to do with the psychology of money. If you're in the professional side of this business, you're not just managing money. If you're working with clients, you also have to manage

their psychology. As you pointed out, it's tough enough for us to manage our own psychology, much less other peoples. And that I think is the number one job of a financial advisor. And that's the way that financial advising has really shifted over the last five or ten years. It's less about we are genius investors and we can do this for you, which is kind of how stock brokers work. for most of history. And it's moved much more towards my goal and my job is to hold your hand through the ups and downs and to try to keep you your head stable when you're thinking about making a bad decision. So that's the number one job of financial advisors. And it's very difficult

to do. It's much more psychological exercise than it is an analytical exercise. But that's where we're seeing the financial industry move. A lot of that is a shift in the fee structure from commission-based where a financial advisor had to kind of churn their customers' accounts and keep trading stocks with new ideas to make a living. To where now it's fee-based. To where it's now, if you want to make money as a financial advisor, you need to keep your clients around, keep them retained, which is just a matter of getting them to trust you

and managing their emotions and their behavior over time. So that's the key job of an advisor, and it's very difficult. Do you have a trick that you use in your own investing life to just sort of, if you're getting roiled by whatever is happening with your own investments? Do you have a, it's just like, I'm just going to put this down, I'm going to go for a walk. Well, here's what I do. I've written about this a couple of times back when I was here at The Fool, but I keep way more cash as a percentage of my portfolio than I think any financial advisor would say it's necessary. And if you saw the percentage of cash, the dollar amount of cash, you would say, you should put that money to work.

What are you doing here? And I agree that on a spreadsheet, it doesn't make any sense. If you were to say, like, you don't, you know, in terms of how many months living expenses do you need? The amount of cash I have doesn't make any sense. But I sleep well at night. And even if there was a calamity, a 2008-style calamity, I wouldn't have much, not only what I have not much to fear, because I have a big buffer in my portfolio,

but then I would have the ammunition to take advantage of opportunities. So that cushion, that margin of safety is how I deal with it. And that's an analytical thing that I do, but it's designed to manage my emotions and expectations of, I'm really, as an investor, I'm trying to maximize for sleeping well at night. Not maximizing returns. I just want to go to bed every night and say, I'm cool. I'm cool. My wife and my son are cool. That's what I'm trying to maximize personally, rather than how can I squeeze another 10 basis points of return out of the portfolio. You work at the collaborative fund. What do you do there? And how do you fit into the team of people who are working at the fund? I ask myself that every day. No, so my job of the collaborative fund is overwhelming.

content. I write articles, write research reports, and speak at conferences. And people often ask, it's a legitimate question, why does a fund need that? What role does that serve at a fund? And I would just make the point that, you know, there are about 1,000 venture capital funds these days. All of them have checkbooks waiting to back startups. And money is fungible. If that's your only competitive advantage is to say, I have a checkbook, a lot of people have checkbooks these days. So you need to be able to promote yourself to entrepreneurs in a way that promotes your values and where you see the world going, how you think about entrepreneurism, how you think about investing, how you think about sitting on a board, just promoting your

worldview. Like those values are really important, and no one's going to, those values don't matter unless people know about them. So the purpose of content, and I think to be honest, Chris, Molly Fool was probably one of the forerunners in this idea, has been doing it since the early 1990s of using content as a way to effectively get people to trust you. And it's not marketing, although I think people could construe it that way, but it's not marketing because it's not writing about, hey, here's why we're great and here's what we do. It's just putting forth your worldview so that people know who you are and what you're doing so that by the time that they might be in a situation to do business with you, they already know who you are, which is a big

part of getting over the finish line. Thanks for being here. Thanks for having me. You can follow Morgan on Twitter and find his work at collaborative fun.com. Up next, bestselling author Derek Thompson. This is Motley Fool Money. Welcome back to Motley Fool Money. I'm Chris Hill. So what makes something popular? Last fall in front of a live audience,

I talked to Derek Thompson, bestselling author of Hitmakers, The Science of Popularity in an Age of Distraction. Let's start with just sort of how you got here. What was it about popularity that got you interested to the point where you thought, oh, I think I've got a book here. I think popularity.

is inherently weird and inherently interesting. And that's a good intersection to write a book about because you sort of have to stay, it takes so many months to write it and so long to read it. Coming up with a subject that was both small, why do things become popular and big? Why do things become popular? Was the challenge here.

And for me, the article that I wrote for The Atlantic that really taught me or showed me that this book would be possible and interesting was an article that I was writing about the TV industry. And it was about Mad Men and AMC strategy when it greenlit Mad Men. Typically, throughout television history, the role of a TV company is to array the largest number of contemporary viewers around the television at once. Big Bang Theory, Chuck Laura comedies, you want the biggest possible audience. But the business model of cable television is such that a lot of cable companies make the most money, not from advertising, but from what are called affiliate fees,

from money that is essentially sent from the subscription, the household subscription, straight to the television companies. And so the goal of AMC wasn't to maximize audience. It was just to stay on the cable bundle. And the really clever strategy was what we need to do is we need to create a show that elites on the East Coast love and will call up Time Warner cable and complain very, very angrily if AMC is taken off of their cable bundle.

We need to create something that is unmissable for a very small segment of the population, and that turned out to be madmen. And it was interesting to me the degree to which invisible forces of economics and business models that you can't see explain the content that you see. There is something perfectly capitalistic and somewhat craven about that story you just told, because, ironically, it's about the advertising industry. That's where the show is set, and they are very mission-focused. And in this case, the people at AMC are the same way that they're just like,

here's our one goal. How do we create a show that does that? Yeah, I thought you were going to say it's ironic that a show about advertising was actually created to minimize advertising revenue, which is also pretty amazing. Well, I was going to get to this at one point, but why don't we just go there now since you've sort of touched on the business of cable television because that's one of the things that you write about in the book is we are now at this point in the business of television

where unbundling is becoming a real thing. But one of the things that you touch on is we may actually get to a tipping point where rebundling needs to happen. Yeah, I think there's two interesting tipping points that are worth looking at. The first is that obviously a lot of young people in particular have switched from the cable bundle, from pay TV, from linear programming,

these sort of mini bundle internet only products like Netflix or Amazon or Hulu. And eventually I do think that there will be so many of these Netflix-style products. Disney is talking about creating its own Disneyflex. If that's successful, Time Warner is going to try to create its own standalone product. If that's successful, 21st Century Fox is going to create its own product. For those in the room who are investing or looking at Netflix, that's sort of a scary proposition. The idea that an incredibly exciting company in Netflix, that doesn't make an enormous amount of profit, is about to be joined in this market by the largest content and entertainment companies in the world trying to create perfect competitors. That's a little bit, I think, of a scary thought.

But another interesting thought that I think is really worth thinking about as an investor and as a sort of 30,000-foot observer of the advertising and content space is, all right, pay TV is a $40 billion ad market. Television is the biggest medium for advertising in the United States, $40 billion annually. But young people under 35 now watch half as much pay TV as they did just seven years ago. They are migrating in droves toward Netflix and Amazon and HBO Now. And what's one thing that all those products have in common, Netflix, Amazon, HBO Now? They're all advertising free. So, you know, Madison Avenue is used to reaching,

it's 19 to 48 demographic, or 20 to 49 demographic through television. But now that demographic is the single most likely to be leaving television. And where's the advertising going to go? Historically, it hasn't gone anywhere. Advertising has hovered between about 1.5 and 2% of GDP for the last 80 years. It's completely metronomic. So where does the money go? Well, it goes where the eyeballs are going, and a lot of those eyeballs are going to,

in terms of ad-supporting mediums, Facebook and Google. So in a very strange way, sorry to connect so many dots here, but hopefully there's a dot-connecting thing that's forming in your brains. That was my most articulate passage, I think, of the morning. In a weird way, Facebook and Google could not have better designed a corporate assassin than Netflix, because Netflix is for young people, destroying the advertising business,

destroying the advertising viewers and pushing them toward the duopoly in mobile and digital advertising, which is Facebook and Google. So that I think is a big idea that I'm looking at, that Netflix, the biggest winner of the Netflix disruption could be Facebook and Google. Let's come back to Facebook and Google in a moment

in terms of the potential, the real incoming direct competitors for Netflix, Disney, when you think about the content library that Disney has. And if we're just talking in terms of original content, yes, Netflix has original content, but it probably doesn't stack up all that well against all of Disney, all of Pixar, all of Marvel, all of Star Wars, all that exists right now, and all that is in the pipeline. And yet, as we were talking about earlier, it is not that Disney is dealing with a content challenge. They're dealing with a technology challenge.

How big a leap is it going to be for not just Disney, but 21st Century Fox, all of these other companies, Comcast as well. How big is that tech challenge for them? Because Netflix, just as a user interface, I mean, that's part of, I mean, if you just look at how popular Netflix become and how quickly it became popular, first it was DVDs by mail, which was so much more convenient than going. to the blockbuster and then came streaming, which is so much more convenient than going to your mailbox. Yeah, I think that when it comes for a lot of these really powerful content owners,

like Disney, like Time Warner, like 20th First Century Fox, I think it's sort of, I think it's 2008 right now, which is to say that a dip is coming, everybody can see that a dip is coming, but it's not a perma recession. It's not a permanent depression. This isn't going to to be like post-Soviet Russia. Instead it's going to be... God, I hope not. Yeah. Instead it's going to be you have a lot of really, really successful, incredibly talented,

brilliant people at these companies, managing the transition from cable television, probably the greatest business model in the history of the world. Just pause for a second. Think about there's never been anything closer to a private sector tax regime than there's been with cable television. 90 plus percent of American households paying $100 to seven companies every single month. Like, that's what U.S. taxes are. Every year, about 100 percent of American households pay taxes to the U.S. government,

and it supports a bundle of goods, including defense and social security. Like, that's basically what cable television was. It was a private sector tax system. You'll never have a better business model than that. and that's going away, and it's going to be replaced by a much more competitive streaming-only system. That transition is going to be rough.

There's no way around it. It's going to be rough. They're not going to make money hand over fish the same way they did when ESPN, for example, in the early 2000s was probably the single most valuable brand in the world. That's going away, but eventually they will build

these tech distribution systems, and then they'll be relatively equal on distribution and they'll win, I think, on content. Because as wonderful as Netflix is, I love Netflix. It's been investing in original content for five years, six years maybe. Disney's been investing in original content for nine decades. It just has more stuff. It has better stuff, and it's used its richness in order to make some really brilliant investments in Pixar, Star Wars, Indiana Jones, and Marvel. So I think that going forward, I think Disney is, is a long play. But if you're looking to make money in the next few years, I think I don't

know what Disney's short-term outlook is going to look like. I think it's actually going to be very rocky. Coming up, more with Derek Thompson. You're listening to Motley Fool Money. Quick shout-out to Rocket Mortgage. Interest rates are rising, and there's a lot of unpredictability when it comes to buying a home these days. And some folks are getting nervous. Our friends at Crickon Loans are doing something about that. It's called the power buying process, and It works like this. Quicken Loans will verify your income, assets, and credit in less than 24 hours to give you a verified approval. This gives you the strength of a cash buyer. And once you're

verified, you qualify for their all-new exclusive rate shield approval. They'll lock your rate for up to 90 days while you shop. And the best part is, if rates go up, and they might, if rates go up, your rate stays the same. If rates go down, your rate also drops, so you win either way. It's the kind of thinking you'd expect from America's largest mortgage lender. To get started, just go to rocketmortgage.com slash fool. Reachield approval only valid on certain 30-year purchase transactions. Additional conditions or exclusions may apply based on quicken loans data in comparison to public data records. Equal housing lender licensed in all 50 states, NMLS Consumer Access.org, number 3030.

Welcome back to Motleyful Money. I'm Chris Hill. get back to my conversation in front of a live audience with best-selling author, Derek Thompson. What role does luck play in all of this? Does it play any role at all? Because when I think about business and I'll go back to Netflix, you know, Netflix, Reed Hastings, he's a tremendous leader, and Netflix is a great business. They did get lucky in the early days that whoever was running Blockbuster at the time was completely asleep at the switch, did not take the threat of Netflix seriously at all. And I think it was six years went by before Blockbuster

decided, you know what, we're going to try this DVD by mail thing and give it a shot. So when you look out, whether it's content creation, distribution, does luck play a role? Absolutely. It absolutely does. And one of the

reasons why I think people who read my book, I think some people read my book and were frustrated because I couldn't give them a perfect formula because I take so seriously this issue of luck. And you can't have a foolproof formula if luck is a huge part of this equation. So a quick story about luck. In 1954, an artist named Bill Haley recorded a song called Rock Around the Clock. It was the B-side to a song called

16 women and one man about a hydrogen bomb exploding and the world being left with just 16 women and one man. You can kind of guess where that was headed. This song completely flopped. It was not popular at all, even though Bill Haley was a relatively popular artist. It came out, people had a chance to listen to it, the label pushed it as hard as they could, it just had no uptake. No one wanted to hear this song. One of the few thousand people

who bought the vinyl record was a fifth grader named Peter Ford, and Peter Ford was the son of a Hollywood actor named Glenn Ford, who was in a movie called Blackboard Jungle. And one day, Richard Brooks, the director of this movie, visited the Ford's

house in I think it was Malibu, Beverly Hills, and said, I need a jump-jive tune to kick off this movie. It's a movie about juvenile delinquency. It's a bit like Rebel Without a Cause. And I need a song to kick off this movie. And Glenn, the father says, I only like Hawaiian folk music, so this is not going to work out for you.

My son, however, is really into like this weird, new loud music. The son, Peter Ford, hands the director Richard Brooks, a stack of vinyl. One of the vinyl records in that stack had the word Bill Haley on it, and Rocker on the Clock ended up playing at the beginning of Blackboard Jungle, in the middle of Blackboard Jungle, and at the end of Blackboard Jungle in 1955. And it is only then, three weeks after the movie came out, the song became the number one song in the country, the first rock and roll song to ever hit number one on Billboard, and the second best-selling song in American history after White Christmas by Bing Crosby, which is cheating because people just buy that

for Christmas. So, is rock around the clock an intrinsic hit, right? If you are an investor in some marketplace of music hits, and it's 1954, and you hear Rock Around the Clock, is the smart move to bet on Rock Around the Clock or to bet against it? Both. In 1954, the song was a flop. In 1955, it was the biggest hit of the century.

So, yes, luck plays a role. Timing plays a role. No world in which the biggest hit of the century, in which that song's outcome rests on the thin little shoulders of a fifth-year-old of fifth-grader boy named Peter Ford in 1955. You can only discuss that world through the lens of probabilities and likelihoods and not formulas and inevitabilities. Let's go back to Facebook because in its relatively young time,

a short amount of time as a company, certainly when it went public, and it grew in popularity to the point where people's grandparents were getting on Facebook, and there were plenty of smart people at the time saying, well, that's it. It's over now for Facebook, because it's no longer the cool place for younger people.

it's no longer the popular place. It has only continued to rise in popularity. When you look at Facebook today, what do you see in terms of a company that is not only one of the biggest public companies in the world, it is one of the most popular stocks, it is one of the most popular businesses? How is it able to maintain that popularity?

Is that the biggest challenge they face? When I look at Facebook, I see one of the most impressive companies in American history that is going through a very serious existential crisis at the moment that doesn't really understand what it is and what it's built.

It knows that what it's built is valuable, but it doesn't know what it's capable of, and it doesn't yet understand how to talk about it. So the best way to understand Facebook briefly to me is as a piece of information infrastructure the same way and

a national highway system is a piece of transportational infrastructure. Facebook owns practically no content. It owns the proverbial roads on which the content reaches consumers. It's done a magnificent job of

stitching together this proverbial nation, which is actually international, this international polity. But in doing so, it's not only created an incredible place for advertisers to reach people and people to reach people, but it hasn't understood that other equivalent with roads, which is that when a state builds roads, it also hires police officers to make sure the roads are safe and erect signs to make sure that cars don't hit each other and paint lines and do the decades of thinking required to build a safe and truly effective national highway system. And Facebook right now has become profitable before it's become self-aware in a weird way.

And what you're seeing right now with the fake news crisis from the 2016 election, another fake news crisis with yesterday's Las Vegas shooting where it turned out that Facebook was heavily promoting, I believe it was either right-wing American propaganda and or Russian propaganda toward, in its trending news section, and is now buying advertisements in Burma to, in newspapers, to teach,

Burmese people how to read Facebook. So I joke today on Twitter, I was like, this is a grotesquely ironic version of Amazon getting back into brick and mortar, like Facebook buying advertising in print to teach print readers how to read Facebook. So this... And then on top of that, you have sort of Mark Zuckerberg

said semi-political, semi-presidential tour around the country to talk to farmers in Iowa about who they are and how they live. I think you put this all together and you have an incredible, amazingly successful company at the crossroads of an existential crisis, not understanding exactly what it's built and how to control what it's built. Because Zuckerberg founded this company thinking that connecting the world would simultaneously serve a dual purpose. It would be good for humankind as the connections between individuals have always been, according

to his philosophy, and it would be insanely profitable, because connecting people tends to be profitable and tends to grow GDP. But I think he's now realizing that there's lots of people who are not good, and they, according to Facebook's algorithms, are just as valuable as the people who just want to talk to their uncle and on and share a CNN story. So I think that in conclusion, I would say

that Facebook's biggest problem going forward is not economics, it's politics. No company that has so quickly achieved what is essentially quasi-monopolistic power in its industry. No company like that wants to be on A1 of the New York Times and Washington Post every single time there's a national news story

and it turns out that they've given enormous backing to some piece of fake news. I don't think the Trump administration is going to be the one to regulate them. But you look at some of the people who want to be the next president of the United States that are Democrats, and a lot of them are picking as their boogeyman, not elites, but big corporations. And Google and Facebook are duly afraid of that future. Derek's book is Hitmakers, The Science of Popularity in an Age of Distraction. It is available everywhere.

That's going to do it for this week's show. Our producer is Mac Greer. Our engineer is Steve Broido. I'm Chris Hill. Thanks for listening. We'll see you next week. Thank you.