Is content king? Is the Kindle an iPad killer? Binary thinking like this is easy to fall into, but it can hold you back as an investor.
Rule Breaker Investing
Of Killers & Kings: What Netflix Gets That Most Investors Don't
It's the Rule Breaker Investing Podcast with Motley Fool Co-Founder, David Gardner. And welcome back to Rule Breaker Investing, so pleased to have you with me this week. It's been a really interesting week for the markets, really the whole last month has been very volatile and a time of great interest for those of us who are thinking long-term and realize that we can now be buying stocks at about a 10% to 20% discount from where they were six to eight weeks ago. But we're not going to talk about that this week beyond what I just said because we're going to talk about what I promised last week. The title of this podcast is of killers and kings. And I want to talk about killers first. So when I'm talking about killers, I'm talking about headlines like this. Is the iPad the ultimate Kindle killer or will Hulu be a Netflix killer or will Netflix be a Comcast killer, killer, killer? I think first of all, it's worth noting that almost everything that has ever claimed to be killed in headlines is still living. So whether it's the Kindle or the iPad or heck, how about paper? Because the internet was going to be a paper killer. Most of these things not only weren't killed, but they're also very vital and whether it's the paper industry or the Kindle, which has sold tens of millions of units, all thriving. So I think the first thing we want to note about killers is it's just not true. And I think the reason that it's not true is that most things that are invented and most new innovations aren't done for the purpose of killing something else. If I were meeting a young entrepreneur and he or she told me, yes, I'm trying to invent the blank killer, that person is less likely to get funding from me because it doesn't seem as if they are really focused on their customer, the person who's buying from it. Sounds like they're focused more like in sports on defeating a rival. So the very nature of business and capitalism is that we're not specifically trying to kill other things. Maybe we maybe in some senses were motivated by a bad experience. We had, for example, Blue Nile, a rule breaker stock that's presently in the PELDI box in our rule breaker service, but Blue Nile was invented by a guy who didn't have a good experience purchasing his engagement ring in a traditional store. And so he thought there's got to be a better way. And I think we can all, we all know stories of businesses that have started by somebody who said there's got to be a better way. And they try to invent that solution themselves. But most of these that work are done for the purpose of simply creating a better experience, a better solution with a product or service on behalf of the customers. So really the world isn't organized. The capitalistic world isn't organized around killing. So it's really more the nature of media headlines that has us thinking in terms of killers. And I have to say even on our own website, fool.com, the last week or two, I think we've had an iPad killer story up there. So this is a very, very common thinking. But I don't have a lot more to say about killers right now. I want to move to Kings next. But you know, maybe I would all suggest that every time you see a media headline that's talking about what product is about to be killed contrarily, maybe consider buying some more of that stock in that product that's supposed to be killed. Because a big reason that the headline is being written in the way it is, is that it's usually a leading product or something that's doing really well out there. And so it's shocking to think that that thing could be killed. And in fact, that thing won't be killed. And so maybe we should just go ahead and buy more of the company that makes the Kindle or the iPad or paper. I do want to say in passing, but before moving on to Kings, that if you've ever seen the Highlander movie, the 1986, it's still a 7.2 on IMDB. I was seeing the other day. So this movie continues to be of interest to people some 30 years later. But Sean Connery delivers that great line. There can be only one. And I think that's more killer thinking. The notion that there's only going to be one tablet that we're all going to use or read, or there's only going to be one movie service. So let's call it the Highlander fallacy of killers and kings. So next up, we have kings. And here's what I mean by kings. We very frequently see a discussion back and forth on our Motley Fool discussion boards, especially in our rule breakers service where our premium boards have some of the smartest thinkers that I have the privilege of coming across from one day to the next. And the debate will be about whether content is king or is distribution king. And I'm sure you've heard this talk as well. The notion that something is king. And one's a king, I guess, and the other's, I don't know, a queen? Not sure. No one really ever uses that talk. I did see a headline recently. If content is king, then distribution is king Kong. So there are playful ways of talking about these things. But really what's at issue here is the notion that the pendulum will have swung so far one way that this thing is king in the opinion of a writer, a thinker, a pundit on whatever subject. And in general, kind of similar to our killer talk, kings are misleading as well. Let's talk about content and distribution. Content is extremely attractive today. Some of my favorite companies are content generators. We have companies like Walt Disney, which is a long term holding and Motley Fool stock advisor, a major content creator. We have smaller companies like AMC networks or Lionsgate, both of which are active recommendations of mine in rule breakers and stock advisor respectively. And these are all really good content companies. And it's very valuable not only to come out with a big movie debut and make a ton of money at the box office and then make residuals and streaming, et cetera. But increasingly with the internet able to remember everything, whole libraries are just being built with the production of every new book, every new television show, every new movie. So we're stacking up and building up these companies, these content companies, massive libraries that are valuable. And so it's very, it's very attractive. At the same time, it's going to be really important if you're a content creator to find your market. And these days you can't really just make a television show and expect people to find you at your own site online. You generally have to seek distribution. And so distribution is king, right? Or queen? Netflix has become a very powerful company in the world today because it offers distribution. And it uses the internet to do it directly so that a lot of the bureaucracy and extra cost of having cable television or other old school aggregators out there have been circumvented by Netflix and its ilk as this company provides distribution globally increasingly and at a cheaper price, seven bucks a month, kind of a thing, much easier than ever before. So these are, these are very attractive businesses, the distribution businesses. And one of the big debates that I remember having 10 years ago or so with a lot of fellow investors and Motleyful members was, you know, what happens when a company, any content company, let's go with Fox cinema, Fox pictures, what happens when they decide that they're just going to have their own movies on their own website? And they don't need television or movie theaters. And what happens when similarly another company in the same industry does the same thing and another one after that. And so, you know, universal pictures, you're going to watch movies on universal pictures website. And I think the reason that didn't happen and why it was fallacious thinking is because it asks way too much of you and me as consumers. I already have probably more passwords and more different registrations that I'd like to manage. And the notion that I would want to go direct to every single content player and open up my own account on their site doesn't really work, right? So is content king or is, or is distribution king? And the answer is, of course, that both are equally key. Neither is king. It's critical to have the chicken and the egg. It's really helpful to have both peanut butter and chocolate. And so the notion that we would pull out one of these in an important ecosystem, one element and call it king, often leads to the wrong kind of thinking, leading to the wrong kind of investing results in the people who practice that those kinds of thinking. And in passing, I do just want to point out that Netflix has ended up being a much more powerful company because it didn't conform to one of these two paradigms. It is both a content company today and a distribution company today. Netflix gets it. So of killers and kings. And what I want to do is I just want to bring out a couple similarities between these two concepts, these two categories to make a more general point. So I want to say four things about these in closing. First, both are very, very common. These are typical headlines and typical ways that people think about investing in the stock market. And I think it's coming largely from people who think in sports terms that we think about, you know, the Super Bowl, there can be only one. And we tend to go in, often this is a very male mindset as well, we tend to think there's going to be a winner and a loser and it is in fact zero sum when it is not in fact zero sum. So these are both very common ways of thinking that I personally think come from zero sum sports world thinking. Number two, both of these make things binary. There's a killer and a victim. One thing's a king. No, the other thing's a king. There can be only one king. But things aren't binary. So point number two, both make things binary but the world isn't binary. Number three, I think I've already double underlined this but both are untrue. So both of these are wrong headed ways of thinking that lead I think people down rabbit holes or mental traps as they practice or try to practice good investing. And finally, number four, both of these reveal something about the human mind. I'm not a psychologist myself. In fact, I didn't even take a single undergrad psychology course still, still a regret now some 30 years later. But I think I can still talk and you can too about how the human mind works. And there's a lot of study about this today, especially when it affects money. A lot of books and a lot of concentration on what are the fallacies, what are the mental traps, what are our biases and how do these influence the decisions that we make. I think what killers and kings show us is that we tend to want to short circuit thought and we like to make cartoonish pattern recognition about the world at large. And especially, we like the drama. Killers and kings and headlines are very attractive and create a sense of human drama around business or the stock market. When in reality, there isn't a lot of drama to great businesses. And I don't think there should be a lot of drama to your thinking about the stock market, even if it is down 10% or so over the last six weeks. So our minds love drama. We love to short circuit and make binary that which isn't. And I think when we can get underneath that in our own heads, it's going to disabuse us of these simplistic notions. And I think you and I are going to be much better rule breakers as we come to consciousness about that. So there it is. There you have it of killers and kings. And I guess self-reflectively and perhaps ironically, it takes a jester to call this out. Thanks a lot for listening to this week's Rule Breaker Investing. See you next week. Fool on. As always, people on this program may have interest in the stocks they talk about. And Miley Fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. Learn more about Rule Breaker Investing at rbi.fool.com. [MUSIC] [BLANK_AUDIO]