The Prof G Pod with Scott Galloway - Office Hours: Portfolio Diversification, the Streaming Industry, and the Future of Brand Strategy

Episode Date: June 27, 2022

Scott answers a question about investing in individual stocks vs. ETFs, and how to diversify your portfolio. Scott also takes a question regarding the streaming industry’s future and offers his advice to a brand strategist.  Music: https://www.davidcuttermusic.com / @dcuttermusic Learn more about your ad choices. Visit podcastchoices.com/adchoices

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cards, savings accounts, mortgage rates, and more. NerdWallet, finance smarter. NerdWallet Compare Incorporated. NMLS 1617539. Welcome to the PropG Pod's Office Hours. This is the part of the show where we answer your questions about business, big tech, entrepreneurship, and whatever else is on your mind. If you'd like to submit a question, please visit officehours.propertymedia.com. Again, that's officehours.propertymedia.com. First question. Hi, Scott. My name is Milagros. I live in Miami, Florida, but I'm originally from Buenos Aires, Argentina. My question today is about portfolio diversification, specifically your views on stock picking

versus other more passive investment strategies like indices and ETFs. In a recent episode of the podcast, you spoke about diversifying your portfolio, but the examples you gave were picking stocks in industries different from where you hold the bulk of your stocks. I have also noticed that you tend to recommend stocks based on analysis of fundamentals.

However, given that there are so many other factors involved, including macro trends and timing of buying and selling, wouldn't index investing be a more sound strategy for someone looking to build their wealth? Thank you so much. Milagros, that's a very thoughtful question. ETFs and index funds share more things in common than differences. There's an index fund you can only trade at the end of the day. The ETF you can trade. It's basically a basket of stocks that you can sell as a security to someone else at any point during the day. There's some differences in tax treatment, but for the most part, it's effectively a great way of diversifying and also sort of low-cost trading

and someone else trades for you, which I think is important. You got to also, what you got to think of is not only return, but the capital that's invested. And there's financial capital, and then there's the amount of human capital. I think that one of the biggest ways of human capital to young people is them staring at their Robinhood account or looking at Coinbase or checking Coinbase 30 times a day. That's an investment in human capital and attention. And a lot of people think that they're learning. No, they're not.

They're just looking for a dope ahead on their board. But ETF funds and index funds are a fantastic way. Also, I think index funds do a better job of rebalancing maybe than ETFs. But anyways, they're both a great way of taking a diversified, typically low-cost approach to investing over the long term. So right now, we're recording this on June 7th. The SPY, which tracks the S&P 500, is up 70% over the past five years. But the last five years have probably not been indicative of economic history. We've had $7 trillion in stimulus and some of the lowest interest rates in history, as evidenced by the fact that over the past three decades, it's been up an average

of 11% as opposed to 70% over the last five years. The QQQ, which tracks the top 100 companies in NASDAQ, is up a whopping 119% over the past five years. Now, you might be tempted to say, well, that's not as good as having picked Amazon, which is up 148%, Nike 124%, or Apple up, get this, 296%. That's right, over the last five years, Apple is up fourfold. But here's the thing, for everyone that talks about the one stock that just killed it, they have a stock they don't talk about that is actually down in the face of these incredible gains. And also, unless you're in this business full time, you're just better off going with an index or an ETF fund. The fees are lower.

You get diversification, which offers you risk-free returns. If you talk to the smartest people in the world about investing, the ones that are in the finance department at NYU or at Wharton, they generally invest in ETFs and index funds. And they recognize it's almost impossible to time the market. They realize that stock picking really is throwing darts. That's not to say you shouldn't do it. I have about a third of my net worth in individual stocks that I've picked. My three biggest holdings are Amazon, Apple, and Airbnb. I have been very lucky. And by the way, even the generals occasionally get shot. So Amazon is off a third. Apple's down maybe 10% or 15%. Airbnb is off 45% from its high.

And check this out. People don't remember this, but from 1999 to 2001, Amazon, which was the future, and Cisco, which was considered bulletproof, remember them, they were selling was the future, and Cisco, which was considered bulletproof. Remember them? They were selling all the infrastructure. Both those stocks were off 90 plus percent from 1999 to 2001. So as smart as you think you are, as great as the company is, you just don't know. And diversification is your Kevlar. And that means, yeah, when you get a bullet, when you get shot

by bad returns or a stock going down, it hurts. But if you're diversified, you have Kevlar on, and it doesn't kill you. It's not a mortal wound because what if you'd said the future is streaming and Netflix is the premier streaming firm in the world and they're just killing it? All of those things are correct. You would have been right. But if you'd bought stock six months ago, you would have lost almost three-quarters of your principal. And no one would have faulted you for going into Netflix, but they can lost almost three quarters of your principal. And no one would have faulted you for going into Netflix, but they can fault you for not being diversified. So,

what do I recommend? About two-thirds of your assets should be in diversified ETFs, index funds, real estate. Make sure it's spread around. Make sure you're not in a position that you'll ever be a for-seller. If you're going to take out a little bit of margin or borrow against it to buy a house or maybe invest in other assets that help you diversify because you can get very low interest rate on margin, fine. It's a dangerous game though, because make sure that even if your stocks go down 50%,

you don't get margin calls because margin calls are like getting divorced. And that is, it will inevitably happen at the worst time. And being a for-seller means other people are for-sellers, meaning that likely you are selling at a low price. But I think at the end of the day, the algebra of wealth is the following. Focus. Focus on your talent. Focus on getting really good at something so you can make a good living at it. B, stoicism. Try and spend less than you earn. It is really hard. People naturally spend as much as they make. Try and figure out a for savings through an IRA, a forced savings plan, or even sometimes

a house, which over the long term isn't usually a better investment when you account for taxes and maintenance and the other asset class, but it is a form of forced savings, so to speak, and force yourself to live below your means such that you can save. Wealth isn't a function of how much you make. It's how much you save and then invest. C, we talked about a diversification, and then D, time. Let it take over. So what do I do? About two-thirds of my investments are in diversified things I don't manage. I really don't manage the real estate I own. I don't manage the ETFs, the index funds, the opportunity zones I've invested in. I have some money with some

hedge fund managers. And about a third is in stocks that I've picked. Why? Because I'm narcissistic enough to believe that I can beat the market. I enjoy it. It's fun. I get some psychic income from it. And if one stock becomes too big a part of my net worth, which is a good thing, I start selling down and investing in things that are somewhat diversified. Now, can you get true diversification in this economy? No. Why? Because in the 1980s, all the finance professors figured out that diversification gave you risk-free returns, and everyone listened, and they diversified, such that when an iron ore stock goes down in Australia, the people that get hurt have to sell their holdings in a German automobile company because they listened and they diversified. So everything is sort of interconnected, but you want to find stuff that won't get hurt as badly if one thing gets hurt. Diversification, it is absolutely the key

to economic security. And yes, there are some individuals who have 99% of their wealth in one stock, Tesla, or the infamous story of Steve Ballmer doubling down and borrowing money to buy more Microsoft stock. Assume you are not Steve Ballmer doubling down and borrowing money to buy more Microsoft stock, assume you're not Steve Ballmer. Next question. Hey, Prof G. This is Jonathan from Studio City. I've been in the entertainment marketing business for over 15 years. I watched Netflix change the game with tons of content, attracting talent with inflated salaries, and the promise of a culture that I feel like no longer really exists. Many thought they would be a studio and theater killer. My gut says that nothing beats the large scale theatrical release and all the downstream revenue associated with it. Is streaming now just

part of a larger distribution model rather than the end all? Thanks for the insight. Hey, Jonathan from Studio City. That's a thoughtful comment and one that has some veracity right now when you're coming off a record opening of Top Gun 2 Maverick, which, by the way, is a fantastic film. And more than anything, evidence that Tom Cruise has, in fact, struck a deal with the Dark Prince, Satan, because that guy looks 24. Notice how they didn't bring back Kelly McGillis or Meg Ryan. Why? Because they look their age and we couldn't have those people, those hot messes standing next to Tom Cruise because he is unnaturally good looking. As a matter of fact, the other guy his age from the original Top Gun

is Val Kilmer and they had to write into the script that he has cancer to explain why he looks like he looks, which is 60. So I just, I think the most exciting thing about this film is the modern biological marvel that is Tom Cruise. But distinct to that, I think it did $150 million on opening weekend. So yeah, is there a marketplace for traditional theatrical releases? Yeah. But here's the thing. It's going to be a smaller business. It's bigger risks. It's basically men in tights or men in jets. It's basically superheroes and big franchise blockbusters like Top Gun, you know, whatever it is, Thor and Rangoon. I don't know, DC Marvel. I literally can't stand superhero movies.

Anyways, and kids' movies because everyone wants to get the kids out of the house. But for the most part, every year, it just leaks more and more value. You know, will we have theaters? Yeah. Will we have office buildings? Yeah. But you don't want to own them, and I don't think you want to invest them right now. And streaming has taken what I call a cyclical hit. What do we mean by that? It's been overinvested. Does the model make more sense? Is the model

more sustainable? Yeah. Does the model get greater valuations in the marketplace? It's more predictable? A hundred percent. But it's gotten out over its skis and they can't sustain these level of investments. And for the first time, we saw Netflix actually shed subscribers. Now, what is the atmospherics? What is the hurricane? What is the macro factor that is literally changing the weather here? As my friend Todd Benson says, market dynamics will always trump individual performance. Let me say that again.

Market dynamics will always trump individual performance. So if you, in fact, decide this company can't lose, fine. But if you choose Apple because it's the best brand in the world and you know what great products they have and great management, check, check, check. If we go into recession, Apple stock is probably going down. So market dynamics will always trump individual performance. What is the market dynamic impacting all of media right now? Two words. First, tick and talk. 21 trillion minutes spent on TikTok

last year and the previous 12 months, 9 trillion on Netflix. Why? No decisions. And every young person in the world has this opium crack-like addiction to this streaming media platform called TikTok. Also, also, all of streaming employs 800,000 people. So there's a talent pool of 800,000 people bringing you Bridgerton and Euphoria. Guess how many creators, guess how deep the talent pool is on TikTok? There's 1.6 billion people, 55% of creators, 850 million people, or a thousand times the talent pool of Hollywood and Bollywood and London is on TikTok. They have a talent pool the size of the depth of the Mariana Trench. I think TikTok is doing to Netflix what

Netflix did to Hollywood in theaters. So yeah, will theaters be around for a while? Yeah. By the way, everyone says Alamo Draft Tiles and iPic, which I love. Oh my God, they bring me alcohol and sliders while I watch a movie. Guess what? They're in bankruptcy. Theaters, stay away from them as far as an investment. And yeah, we'll always wax and wane, rhapsodic and majestic, and we'll always have these film directors talking about how important it is to collect it. Fine. Go, enjoy it. But boss, do not invest there and do not believe that anyone who uses that distribution platform as a means of building their business is going to give you good returns.

It's the streamers here, now, and forever. Have they gotten over their skis? 100%. Have they overinvested? Yes, but do not get near, as an investor, anything that depends upon theaters as a form of distribution. Jonathan, thanks for the question.

I love talking about media. We have one quick break before our final question. Stay with us. The Capital Ideas Podcast now features a series hosted by Capital Group CEO, Mike Gitlin. Through the words and experiences of investment professionals, you'll discover what differentiates their investment approach, what learnings have shifted their career trajectories, and how do they find their next great idea? Invest 30 minutes in an episode today.

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Go to constantcontact.ca for your free trial. Constantcontact.ca. Welcome back. Question number three. Hey, Prof G. I'm Alfred Haidamous, originally from Lebanon. I live in Dallas, Texas. Fun fact, I was your brand strategy student at NYU back in 2020. I'm currently a senior brand strategist at a creative agency working on the microchip business. I feel like brand strategy as a profession has been lacking innovation and that money is being moved from pre-purchase to purchase and post-purchase portions of the clock model. What career growth advice do you have

for all brand strategists out there? Appreciate all the thoughtful topics that you tackle on a weekly basis. It really makes a difference, especially for an immigrant like myself. Freddie from Dallas, good to hear from you. And congratulations. It sounds as if you're thriving. Always good to hear from students. So this is going to sound strange coming from a professor of brand strategy, but roughly speaking, my rap for the last 20 years has been that the only

competitive sustainable advantage is brand. That the key to making or printing money or the algorithm for shareholder value is the following. Manufacture a mediocre product, a mediocre shoe, salty snack, beard, car out of Detroit, and then wrap it in these amazing brand codes, masculinity, beauty, America, patriotism, youth, European elegance, sex, all these awesome brand codes, or pick two or three, and then be like a rock. Buy this shitty truck and pay us a lot of margins so you can feel tough like Sam Elliott.

Spend $3 on 30 cents worth of peanut butter paste so that you can feel like you love your kids more. Why? Because choosing moms, choose Jiv. That was really the algorithm for printing money. And then along came Google. And all of a sudden, people no longer needed a weapon of mass diligence called the brand. And when I go to London, I stay at the Four Seasons or the Mandarin Oriental, one, because someone else is paying for it, and two, because they always deliver a seven or an eight. But now that I have these weapons, these additional weapons of mass diligence called

Google, TripAdvisor, my social graph, right, all of these travel blogs, I can find out that the Connett Hotel, Chilton Firehouse, the Haymarket, there's all these amazing little boutique hotels in London that do a better job and more foot to my specific wants and desires, which is mostly to hang out with people who are younger and better looking than me, which is pretty much anywhere. But these places especially deliver against those things. So people no longer need to readily or as readily defer to the brand. They can find the best product pretty quickly using Google and all these other tools. So what does that mean? We have transferred capital out of pre-purchase branding into

innovation, into the store itself. Apple took $7 billion out of pre-purchase into points of distribution. And we also have more in post-purchase establishing loyalty programs, whether it's airline miles, whether it's getting you engaged with targeting on social media, whatever it might be, behavioral targeting. But basically, capital has moved downstream into purchase and into post-purchase and gone away from traditional broadcast, traditional brand building that was more emotional to more direct response and kind of behavioral targeting. Oh, I'm configuring a BMW. Well, what do you know? Audi's interested in that data and will start serving me ads and using cookies to follow me

all over the web and start talking about their new vehicles. Anyways, what does it mean for a brand strategist? So the world of brand strategy is losing the oxygen. And that is the traditional sort of principles of brand strategy. The sun has passed midday on that. A big ad campaign isn't going to rejuvenate your company. Now, are those skills still important? Yeah, but there's a lot of brand strategists out there. So what would my advice be? The brands still matter. Amazon is arguably the most trusted brand in the world, but it's not building its brand the traditional or with the traditional tools. We kind of became known for pulling out of our quiver, if you will, and that is pre-purchase

advertising. Now, the pre-purchase part of the clock, where a lot of capital has been reallocated there is into strategic communications. There's 900 people at Facebook manicuring Mark and Cheryl's image and trying to basically dial down the negative associations of teen depression and weaponization of our elections. And it's money well spent trying to figure out a way to get free ink, earn media, find a team that's really good at social media. Kind of that pre-purchase social media and strategic communications has never been more important. But the traditional brand strategy of let's come up with brand identity, let's come up with brand codes, and then let's advertise the shit out of it and stuff a mediocre channel with our mediocre product that has great branding and packaging and associations. The sun

has passed midday on that. So what's a brand strategist to do? Focus more on supply chain and innovation. Be the guy or gal that really understands data, really understands how distribution is changing. It's also developing a great brand for employees. And that is what is your company about? How do you advance people's career? What is the culture such you can attract the best and brightest? But the traditional brand strategists, like I said, I think the sun has passed midday on us and it's more about innovation. It's more about supply chain. It's more about strategic communications. It's more about leaning into new channels of distribution, specifically C-Abub,

TikTok, spreading from Dallas, originally from Lebanon. Good to hear from you, my brother. Recruit at Stern. That's all for this episode. Again, if you'd like to submit a question, please submit a voice recording by visiting officehours.propertymedia.com. What software do you use at work? The answer to that question is probably more complicated than you want it to be. The average U.S. company deploys more than 100 apps, and ideas about the work we do can be radically changed by the tools we use to do it. So what is enterprise software anyway? What is productivity software?

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