The Prof G Pod with Scott Galloway - Office Hours: When to Sell Investments, Should I Take Venture Capital Money?, and Scott’s Book-Writing Career & Advice

Episode Date: February 21, 2024

Scott gives his thoughts on when to sell investments, specifically the variables one should consider such as portfolio analysis, taxes and diversification. He then offers advice to a listener who is wondering whether to take venture capital money to grow a consulting business. Scott wraps up with a conversation on his book-writing career, breaking down his process and providing advice to aspiring authors.  Music: https://www.davidcuttermusic.com / @dcuttermusic Learn more about your ad choices. Visit podcastchoices.com/adchoices

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NMLS 1617539. Welcome to the Profiteer Pod's Office Hours. This is the part of the show where we answer questions about business, big tech, entrepreneurship, and whatever else is on your mind. If you'd like to submit a question, please email a voice recording to officehours at profiteermedia.com. Again, that's officehoursatproptimedia.com. By the way, thank you. We have been getting some great questions lately. Question number one. Hi, Prop G. This is Sean from New York, now living in Sydney, Australia. I'm a professor of education, and I've been following your content for a few years now, and I find it insightful, heartfelt, and meaningful. I've gifted your book, Algebra of Happiness, to my two older sons,

and I'm looking forward to sending them and my teenage daughter the Algebra of Wealth once available. That brings me to my question. I started investing right after the start of the pandemic, watched my investment lose 60%, and then saw significant gains over the past few years. I've taken your advice, and while most of my money is in low-cost ETFs, I have a fair amount in individual stocks, mostly tech, which has seen outstanding growth. My question is, how do you know when to sell? I'm happy to hold on to these stocks for years. I don't need to divest, but I have no idea what the signs are that I should sell. Thanks for taking my question and for all your great work.

Sean from New York, living in Sydney. First off, congratulations on knowing how to live life. I went to Sydney and I went in 2000. I had just quit my job. I'd been kicked off the board of Red Envelope. I had gotten divorced. I mean, I was just sort of, I don't want to say wandering, but kind of struggling, for lack of a better term. I was running a strategy firm called Profit Brand Strategy, and I was invited to present to the board of directors of Levi Strauss and Company,

who were doing a board meeting in Singapore. And I thought, well, that's a great opportunity. So I went to Singapore, did my jazz hand song and dance about the future of retail and e-commerce. And I thought, well, I'm in the South Pacific, where am I going to go? So I went to Bali, and I stayed at the Ritz-Carltonton and it was me and literally 50 honeymooners. So I got out of there and then I went to Sydney and I was there basically two or three nights and thought this was the coolest place I'd ever been. I'm moving to Sydney and interviewed actually with a venture capital firm and thought I want to move here and then found out that the largest venture capital firm in Australia had about 300 million under management and I had raised over 100 million just for my shitty little companies.

And what I recognized is that I think the US is still the best place to make money, but it struck me that Australia is the best place to probably spend it. I think we'd all live there if it wasn't so far. Anyways, big fan of Australia. When to sell? Oh, my brother. So there are two sides to getting wealthy in terms of investments, when to buy. And the thing that's underappreciated is when to sell, because I think it's more painful when you sell a stock and it goes, it skyrockets than when you lose money. So true story, I bought Netflix at 10 bucks a share. It went down to eight. I wanted to take the tax loss. I sold it all, never bought back in. And now what is it, 440? So anyways, the reason why I don't have a Gulfstream 650

is because I fricking sold Netflix at eight bucks a share. But anyways, okay, so a few things. One, there's a lot of ways to look at it in terms of when you sell. The first is a portfolio analysis. You said something in the beginning that the majority of your money is in low-cost ETF and index funds, which says to me that it's okay to play around a little bit. If

you're getting some sort of psychic compensation, I think it's fun to buy stocks. It gets you engaged. You learn about the markets. You learn about business. Sometimes you have opportunities for outsized gains. If you bought NVIDIA three years ago, oh my God, you think you're a genius. Fine. It's fun. And you do have an opportunity for outsized gains, also outsized losses. But if it's a small portion or a minority of your portfolio, say less than 30%, I think it's okay. And I think you learn from it. And again, it's fun to think, oh, you know, I'm better than other people. I'm going to do some investing. Specifically, I think it's dangerous to trade a lot. I wouldn't ever buy a stock you didn't

want to hold for at least a few years, in my view, because it's sometimes trading commissions and the friction and the taxes that can eat up your returns. I would always, on a stock that has gains, wait at least a year, because I don't know how it is in Australia, but I imagine as an expat, your U.S. taxes follow you around. I bought some claims against a bankrupt FTX. You can actually, there's an active market for claims. That's one of my investments this year that's performed really well. I bought them for an average of 23 or 24 cents. They're trading at like 75 or 80 cents now. Wow, disco. But I'm going to hold onto it for at least a year because I want my effective tax rate to be 22.8,

not 37. That is a big difference. One of the greatest ways to build wealth is to take advantage of one of the greatest kind of tax loopholes, and that is stocks. Stocks appreciate or go up in value tax deferred. What do I mean by that? Say you make $50,000 or $100,000 a year as a pipe welder. You're a stock. Your stock's going up $50,000 or $100,000 a year. You are increasing in value $50,000 or $100,000 a year. You are increasing in value $50,000 or $100,000 a year, but every year the government shows up and takes 20 to 45% of that away. It clips you every year, whereas you have a stock, an actual stock, and it goes up in value. You don't have to pay taxes on it until you sell it. So generally speaking, you want to be in a mindset where you don't trade a lot. You don't trade a lot. Now, let's talk about specifics in terms of valuation.

Generally speaking, bottoms-up valuation is a decent way to think about if and when to sell. What do I mean by that? The S&P is trading, I think, at a multiple of, like, price-to-earnings of 22. That's pretty rich. But wait, let's talk about the Magnificent Seven or the Seven Samurai. They're trading at a price-to a price to earnings ratio of between 59 and 62, meaning they are expensive. What I would suggest is, what I would suggest is, is look at that portfolio of your individual stocks. And if one is dramatically bigger than the rest, it's 80% of your portfolio of individual stocks or the value, and it's trading at a really high valuation relative to its traditional PE

history. For example, Apple is usually traded somewhere between a PE of somewhere between 13 and 16. And I think right now it's trading at a PE of like 22 or 23. So Apple is sort of historically expensive. So the idea of if you have in your little stock portfolio, if you will, if you get above 40 or 50% in any one stock, and that one stock, if you will, has performed really well, and you've held it for longer than a year, then you may want to take some money off the table and diversify within your stock portfolio. The tech sector tends to be very volatile, huge up cycles, and oftentimes huge down cycles. Having said that, a lot of people would argue that tech is the future. So again, take all this with a grain of salt because the only thing I know is that no one really knows.

But there's some basics here. Think about taxes, think about diversification. I would argue you're taking absolutely the right approach. Congratulations on living in Sydney and thanks for the question. Question number two. Hey, Prof G, greetings from a Stern alumni who is a longtime listener, currently living in Brazil.

I've heard you'll be visiting my hometown of São Paulo soon, so I really hope you enjoy this amazing city. Anyway, I'm here to talk about my wife. We both work in the field of education, but she is smarter than me and built a successful consulting business. On several occasions, she has been offered investment capital to expand her business, but she remains hesitant. We wanted to learn from your experience with L2, specifically regarding the negotiation with General Catalyst. What were some of your considerations when you accepted the investment? And also, if you have any advice on growing a consulting business in general? Thanks, Anonymous from Brazil. I absolutely love Brazil. I go there pretty also if you have any advice on growing a consulting business in general.

Thanks, Anonymous from Brazil. I absolutely love Brazil. I go there pretty much every year or have gone every year for the past 15 years. I go to Floripa, which is a wonderful place to surf. And at this point, surfing for me is occasionally I go out in the water with this fiberglass buoy that I hold on to for dear life while my younger friends surf. And I can, you know, at least pretend to get some physical activity before I start drinking caperinhas and getting fucked up and staring at the people. Jesus Christ, Brazilians are hot.

I mean, my God, Jesus. And the beef, hot people and beef and beach, hot beef, beach, people. Jesus, go Brazil. Go Brazil. Also, the best players on Arsenal tend to be Brazilian. And also the player that's just on this unbelievable run for Hotspurs is this Brazilian guy. They call him the lamb. They call him the lamb. I'm spanking on his name. Anyway, love Brazil. This podcast brought to you by the International Tourism Board of Brazil. Okay. So typically speaking, services firms and consulting firms don't make great venture investments. And that is because they don't typically go for sort of a crazy multiple.

The wonderful thing about a services company is that it doesn't take a lot of capital to scale because the expenses are humans. And you can dial up or dial down, which is a polite way of saying hire and fire people pretty easily. You got an office and some people and some intellectual property and a focus. You're doing supply chain consulting for the automobile industry or you're helping hotels with revenue management, whatever it is, your niche. You don't need a ton of capital. I've started really two consulting firms. The first was Profit, a brand strategy firm. The second was L2. The first one I started with literally no capital. Granted, my partner at the time was making a good living. So I guess technically she invested in it because I didn't have any living expenses. She covered our rent while I was starting Profit. I sold that for $28 million 10 years after I'd

started it. And then I started L2, which was essentially consulting, but it was more data-centric, more technology. And then we moved to a recurring revenue model. After seven years, I sold that for $158 million. But four years in, I raised $17 million. $10 million went into the business, and $7 million went out to secondary sales. What is that? $7 million went to the existing shareholders, employees, including myself, who wanted to take some money off the table. I raise money from General Catalyst. There's a few things you want to be mindful of before you even talk about valuation. One, do you need capital? Because guess what? Control is an addictive substance. Who you hire and fire, what business you're in, when you sell the company, how hard you're going

to drive at this thing, what other activities you're going to have outside of work, what other investments? Do you want to side hustle? Do you want to invest in other companies? Maybe you and your wife decide to move to London. All of these decisions are yours right now when you own the company. Once you have outside investors, you are a fiduciary for their interests. And a venture capitalist's interests are the following. They want an enormous return on their investment. And typically, venture investors are looking for possibly 10x their investment. And that's why services companies usually don't make good investments. They usually aren't zeros. They usually produce cash flow. They usually are, if they're good, they get sold for a decent multiple, but they usually don't have kind of Google-y, Netflix-y like returns.

So they typically don't attract a ton of outside capital. So the fact that she has people wanting to invest, I don't know if it's just friends and family, but if it's institutional investors, she's on to something very special. So one, do you need the capital? Two, do you get along with these folks? Do you really want their advice? Are they going to add sort of intellectual capital, firepower, contacts, distribution, whatever it might be? I would probably discount the kind of non-economic benefit. They all claim that they're going to add a ton of value around contacts. And

at the end of the day, that's still going to be kind of up to you, is at least what I found. And I work with the best venture capitalists. Decide what the time horizon is. How long do you really want to stick with it. If all of those are sort of green light, green light, green light, then it becomes about valuation. Say your firm is doing 10 million a year in consulting. Consulting firms go for kind of typically two to four times revenues typically. So it's got a valuation of 20 million. You're going to raise 5 million. So it's a pre of 20, a plus to 25. That means you got to give your venture capitalists 20% of the company and probably a board seat. And then you have 5 million in capital and smart

people who are invested in the growth of the company. And that can be a great thing, but it comes at a cost. So what I would do is talk to some people about valuation, third parties. Also, I wouldn't negotiate unilaterally. If you can, get more than one player in the ring because nothing creates better terms like competition. So I just think it's good to do a market check and see if there's other people interested in investing and the kind of terms they would want. And also, if they ask you, well, what terms, what valuation you want, I would say, no, I'm not going to put a number on the table. That's up to you. Don't negotiate against yourself. Ask them to put their best foot forward and then you can negotiate things. But I'd be very thoughtful about this. And also my key point of advice to

every person going through a situation like this is assemble an informal kitchen cabinet of people in the venture world, entrepreneurs, give them, be very transparent in terms of the situation and get their advice because it is always hard to read the label from inside of the bottle. But again, a really good problem. Congratulations on your success. We have one quick break before our final question. Stay with us. Welcome back. Question number three. Hi, Prof G. This is Mark from Dallas, Texas. In a recent podcast, you spoke about how you really enjoy writing books and how this is something you wish you got into years earlier. As someone who's always thought about writing a book, but has a hard time figuring out where to start, can you share how you begin the process of writing

a book? What perhaps are the steps that you take and get yourself going the right way? Thanks. It's a great question. I wish, yeah, I absolutely wish I had started earlier. I thought about writing a book for 10 years before I actually wrote one. And I think my career and reward and professional success and just, I'm at a point where I was very focused on economic success. Now I'm focused on relevance and books.

You can develop economic success from books, but it's better at relevance, I would say. I would say in terms of return on investment, I'll be very candid because I can't stand it when people don't talk about money because one of the ways that we keep the poor and middle class down is wealthy people don't talk about money. My first book was The Four. I sold it for the English rights. Wait, the U.S. rights for a million bucks. And then I probably got another million bucks for international rights. It sold well. It was a New York Times best Scott Galloway about self-help. I think I got three or 400 grand. I did something called post-corona and they said, oh, that's not that big a deal. It's perishable. You're just talking about economics and what happens after. I think I got three or 400 grand for that. Finally, my most recent one that's coming out in a month, The Algebra of Wealth, I got 1.7 million and I'll probably get another five or 800 grand from international. I'll end up with about two and a half million bucks. Now, let me be clear.7 million, and I'll probably get another $500 or $800 grand from international, I'll end up with about $2.5 million books.

Now, let me be clear. I am, you know, after working my ass off for 30 years, I'm an overnight success. I have a big media footprint. I enjoy writing. I'm good at it. My books resonate with people. They sell well. So I get, I would imagine, I'm in the top 1% in terms of advances for publishers.

So it's been both rewarding intellectually and also economically for me. Having said that, it actually pays off more in terms of speaking and other types of ancillary revenue. So writing books, if you can do it well and what you do resonates, it's an outstanding way to make a living. How do you start? It's like how to eat an elephant, one bite at a time. How I start is I find topics that interest me, and I start writing about them, an article, a newsletter. Basically, my books are sort of a mashup of my No Mercy, No Malice newsletters. I have 500,000 people who I send a newsletter to every Friday, and then I look at the kind of cadence or how I try and bucket or bunch or clot, if you will, my newsletters, think about themes that I'm really interested in, whether it's young men, whether it's masculinity,

whether it's the marketplace for mating. I'm fascinated with financial literacy and how people generate and build wealth, having been both poor and almost rich, then rich, then not rich, then wealthy, then very wealthy. I've kind of been through the entire cycle up and down, and I'd like to think there's a lot of life lessons that can be incorporated into that. I look at all this stuff, and I kind of build from the bottom up a foundation for a book. So what's the key? You got to start. Start writing articles. Start posting to LinkedIn. Start, for God's sake, start doing tweet storms, whatever it might be. Start putting articles on Medium and looking at the comments and see where your kind of passion lies, where your skill lies, what do you enjoy writing about, what resonates with people. And then think, okay, I want to write a book on X and put together a

proposal. A proposal is a sample chapter or two, a table of content. And then you find hopefully an agent and say, I have an idea for a book and see if you can get started. And if you can't find an agent, then just self-publish to begin with. There's nothing wrong with that. But like anything else, the key is just starting. And by the way, if you flip open your computer and stare at it for an hour, get used to staring at it for another five or six hours. I'm convinced the only reason that people get books done is because they take an advance and then they have a gun to their head and they actually have to write the goddamn thing. And by the way, you want to talk about a monkey on your back? Some of my darkest moments where when I took that enormous seven-figure advance for the four and I would be sitting up at night thinking, what the fuck am I going to say about Google that hasn't already been said by a million people who know this company better than me and quite frankly,

are a lot smarter than me. But I would start, I would say, okay, Google is God. It's our God. Instead of praying to an all-knowing being that takes a query or a prayer, processes it, and then delivers back a question, we now type in symptoms and treatment of croup to this all-knowing God called Google. It looks at every other question, every other answer, and tries to spit back an answer that we trust more than any answer from any priest, rabbi, scholar, mentor, coach, or boss. And I thought, wow, that's an absolutely interesting way of thinking about Google. I'm really going to expand that metaphor and write about it. And then your publisher calls and says, this is shit, start over. Anyways, it's a long, iterative process. I think it keeps you young mentally. I work out

to stay young physically, and I write to stay young mentally, because it is difficult. And even if it's shit, it doesn't matter. The point is, it's shit. Just get it on a piece of paper. Pull open the computer and just start writing. Take a certain amount of time every day, an hour, two hours, when you kind of feel like most creative. For a lot of people, that's in the morning. For me, it's really late at night. I do my best riding between the hours of 1 and 3 a.m. And quite frankly, it's usually with my dogs. Sometimes I have a drink. And just that quiet and that stillness is when I'm a night person, when my brain starts popping, if you will. But get your own cadence around when you enjoy riding. And there's no reason why you can't start small.

But yeah, write a book. And you know what? You know what the worst case scenario is? You write it, no one publishes it, and your kids will get to read it in 20 or 30 years. And they will feel as if they know you a little bit better. They'll know a little bit more about what you did, the way you think, what you're interested in. And my friend, that is worth it right there.

That's worth the price of admission. Just start. That's all for this episode. Again, if you'd like to submit a question, please email a voice recording to officehoursatproptimedia.com. This episode was produced by Caroline Shagrin. Jennifer Sanchez is our associate producer

and Drew Burrows is our technical director. Thank you for listening to The Profiteer Pod from the Vox Media Podcast Network. We will catch you on Saturday for No Mercy, No Malice, as read by George Hahn, and on Monday with our weekly market show.