Scott Galloway (@ProfGalloway) joined Barry Ritholtz (@Ritholtz) in June 2015 to talk about brands, entrepreneurship (and implicitly dentistry), and so much more. At the end of the interview Ritholtz says that he encourages other people to check out Twitter if only to follow really smart people. That’s just like these podcasts. Galloway’s NYU course costs $6,000. You and I get to listen to him for free. Add in some great questions from Ritholtz and this is further proof that it’s a great time to be a learner.
As always, the interviews are more in depth than the notes. Here’s a few things we’ll try to cover:
– Unlimited tweets, but a limited budget.
– Don’t waste a crisis.
– The first rule of marketing is to have a good product.
– It’s never been easier to make a billion, but never harder to invest for a million.
– The wealthy dentist of Silicon Valley.
– Our death grip on smart phones.
– Don’t do what you love.
– The 4 (5th?) Horsemen.
– Signals, red flags, and brown M&Ms.
– Galloway’s book suggestions.
Ready? Let’s get to it.
Unlimited tweets, but a limited budget.
Marketing seems easy. Gary Vaynerchuk‘s books Jab, Jab, Jab, Right Hook and The Thank You Economy give step by step instructions for what brands should do online. Stir in Seth Godin who writes about Tribes and Permission Marketing and you have a recipe for success. Right?
Wrong. Galloway says that there are four areas a digital brand can use; site, digital, social, and mobile. Each of these is like a lever that can be pulled for different results.
For example, if you want to drive engagement with younger users, you need more social. Even though you can tweet, flick, gram, and pin all you want, you don’t have the resources to do it well. You need to pick your punches.
And this is good. As we’ve seen before, constraints help. Kevin Kelly says that without unlimited money, he finds better solutions. Amanda Palmer says that without unlimited time, she has to choose what to do. Stanley McChrystal says that constraints were crucial to Ranger training.
Planet Money talked with Rob Cohen about making movies. Cohen directed The Fast and The Furious in 2001. After that he was one of the hottest directors in Hollywood. It led to the $135M movie, Stealth. Heard of it?
Probably not. Stealth’s worldwide gross was $35M. That’s a big haircut. Cohen’s career quickly cooled down. Then Jason Blum called to say that he wanted Cohen to direct his movies, but the budgets would be a bit smaller.
Blum was responsible for movies like Insidious, make for a scant $1.5M but grossing $54M. A much better investment. About working for Blum Cohen said:
“You’re going to have to be clever, and that cleverness stretches you, it makes you think outside the box because the money panacea isn’t in your arsenal anymore. You have to fix the problems another way.”
Galloway’s point is that companies have to deal with constraints – and do so wisely. It’s not enough to just put pictures online (see Gary Vaynerchuk) or create an email list (see Seth Godin). No, what you want is a social method that is in line with your overall strategy.
In this video (2:00 mark) Galloway talks about how Asos does this well.
His point is that even though they are a clothing company, they don’t always sell their clothing. Sometimes they publish photos of dogs and ice cream cones. “101 stuff” says Galloway.
Don’t waste a crisis.
In 2006 Macy’s stock crashed. Galloway was asked by a group of investors if they should buy the company and sell the land – which was worth more than the brand. Galloway said no, and tells Ritholtz that Macy’s has done great since then, going from $5/share to $72/share over the last seven years.
“A crisis is a terrible thing to waste,” Galloway says. Macy’s reorganized around being a place of convenience. People could order things on Amazon, but stores like Macy’s provide other services too. It’s those things, Galloway believes, that will bring in a new era of retail.
“We have these great warehouses,” says Galloway, “they’re called stores.” His perspective is that people will browse and buy online, but want to pick up their things at a store. Half of all car buyers don’t test drive before they buy he says. The new trend is to click and collect. Macy’s emerged from their crisis focused on this.
Galloway’s own life has had its own crisis. When he was young he had a health scare and it made him realize he didn’t want to be an investment banker. When his company IPO’d he cashed out and become a professor.
Jon Acuff said something similar when he talked with James Altucher. Acuff had planned for a big event, 1000+ people, early in his career. He had stickers made. He reserved a huge space. He rehearsed his speech.
Two people showed up.
Two. Rather than “waste a crisis” Acuff realized that he got a story out of the situation. How he reacted to this let down and how he shared it would determine whether or not he seized this opportunity.
The first rule of marketing? Have a good product.
It used to be – in the 1980’s and 1990’s – that you could get by with a merely good product. A good product with the shine of great branding could go a long way Galloways says. That’s no longer the case.
Now you need a great product and great branding to have something truly successful.
There’s a reason, says Gary Vaynerchuk, that Lil Wayne doesn’t need a good social media profile. He’s a great artist. Gary goes on to say:
“The product you’re selling is the variable to success. If your product is shit, there is no great marketing that’s going to save you.”
Ryan Holiday told James Altucher the same thing. Holiday has a reputation of doing outlandish things to market products. Like dogs in clothes.
People often come to him and ask about things like this. Maybe buy some weird name. Do something crazy. Holiday says that might work, but only if you have a good product.
Galloway says it has to be a great product and that’s where anyone should begin.
It’s never been easier to make a billion, and never harder to invest for a million.
In his classes at NYU Galloway says that he sees some of the brightest young people he’s ever known. “Millennials are the most talented generation I have ever worked with,” he tells Ritholtz. These millennials are entering a new work environment. The Hollywood Model.
We laid it out broadly in the post with Adam Davidson and Taylor Pearson, but if you missed it, here’s the big idea. Work is changing. Lifetime employment has been replaced by alliances. Skills and ratings matter more. Expect your job to have some “Yelp style rating,” writes Tyler Cowen in Average is Over. Don’t be a jerk, word will get around. Expect to freelance more.
Galloway says that he’s seen this with the millennials he works with. They are willing to make tradeoffs. They stay for less time. Galloway says that creating loyalty is something he and his partners are working on. (For more on this idea, listen to the Phil Libin & Tim Ferriss podcast.)
Another change, Ritholtz says, “is that the middle class has really shrunk,” and Galloway agrees. What Cowen, Galloway, and Ritholtz all see is a larger upper class – maybe 20% – that earn most of the rewards of the future economy. The remaining 80% will see their earnings stagnate.
A corporate canary might be Apple, who earns 93% of all smartphone profits. Samsung collects a tidy 15%. Everyone else loses money. The macro trend is that some people will collect a bulk of the profits and some will make almost none.
That’s not to say things won’t get better. Facebook and other free entertainment is great. The internet, medical advances, and trickle down technology (which Alex Torenberg talked about with Cowen) will bring some rewards to everyone. But the real gains will be had by the ones that help themselves.
And it’s getting harder to help yourself.
Education has become so expensive, Galloways says, that people who graduate “have a headwind before they get out.” Too much debt means they don’t have the same chances that he and Ritholtz did.
They mention that university endowments are something that seems ready for change and Freakonomics (hosted by Stephen Dubner) had an episode on this. Endowments are more complex than they first seem says Harvard President Drew Faust.
“I worry a lot that there’s not a broad understanding of what endowments are. So thank you for this opportunity to say a little bit about it. First of all, an endowment is made up of gifts given to the university over time that are legally bound to certain uses. So some of the endowment is restricted to funding a French professor, or funding student aid. And that means that we have to use the income from that money for that particular purpose. And also at the same time preserve the corpus of the gift so it can continue to fund that in perpetuity. Now let me say one other thing about comparing Harvard’s endowment to Yale’s or Princeton’s or anyone else’s. It depends what a University does. Harvard is much, much bigger than Yale. So if we look at endowment per student, Yale actually has more endowment per student than Harvard. And if you think about some of the things that are funded by Harvard’s endowment, things like our art museums, things like a Renaissance research center in Italy, we can’t take that money out of that. It can only be used for that. But it gets counted in that figure of Harvard’s total endowment that you described. A major thing we use our endowment for is student aid. And we are able to fund in our undergraduate college student aid for 60 percent of our undergraduates because of the very generous gifts to financial aid that have been given over the years.”
The Wealthy Dentist in Silicon Valley
Ritholtz and Galloway turn the conversation to the HBO show Silicon Valley. Both guys like it because it’s real enough. The show shows that it’s not always glamorous to be an entrepreneur. “On a risk adjusted basis,” Galloway says, “you’re better off going to work for a platform, than be an entrepreneur.” If there’s a better introduction than that for Nassim Taleb, I don’t know what it is.
Taleb begins (p.20 actually) his book Fooled by Randomness with the story of John Doe A and John Doe B. Mr. A is a janitor who has won the New Jersey lottery and moves into Mr. B’s neighborhood. Mr. B is is a dentist, “who has been drilling teeth eight hours a day over the past thirty-five years.”
Even though Mr. A, won millions of dollars, he is not wealthy. Taleb explains:
“If John Doe B had to relive his life a few thousand times since graduation from dental school, the range of possible outcomes would be rather narrow. At the best, he would end up drilling the rich teeth of the New York Park Avenue residents, while the worst would show him drilling those of some semi deserted town full of trailers in the Catskills… as to John Doe A, if he had to relive his life a million times, almost all of them would see him performing janitorial activities (and spending endless dollars on fruitless lottery tickets), and one in a million would see him winning the New Jersey lottery.”
Taleb’s points is that we should consider the alternate histories, not just the realized one.
Timely (September 2015) for this post, was this letter. A teacher from the Bay Area wrote an open letter to Steph Curry asking that he not come to speak at his school. The teacher’s point was that it would encourage students to think about the lottery option without thinking about the alternate histories. Steph Curry made it to the NBA with lots of hard work. That doesn’t mean that lots of hard work will get you to the NBA.
We suffer from the survivorship bias. We see the examples that have survived, and these are often successes. There’s no movie about a college student at the University of Nebraska who dropped out to make a social network. But dollar to donuts, he’s out there.
We see the janitor who wins the lottery, we don’t see the ones who’s a janitor. We see Steph Curry, not the kid who wanted to be him. We see entrepreneurship* this way too. Maybe instead we think of things on “a risk adjusted basis.”
“You can pry it from my cold dead hands.”
No, not guns. Something more valuable – smartphone. Galloway says that Apple has become the new luxury brand and is headed for a trillion dollar valuation. Like Sherman’s March to the Sea, Apple’s wake will be filled with companies that stood in their way. If you’re thinking the carnage will be Microsoft tablets or Fitbit bracelets, you’re wrong. The next victims are the luxury brands.
“There’s only so much disposable income in the ecosystem that goes to products that cost between $300 and $1000,” says Galloway. Apple is the premier item in that space. If you can only get one thing from that price point, you’ll probably want an iPhone.
On his podcast, John Gruber talked about the same thing. He was thinking about Apple sales in with regards to the shaky Chinese economy. Gruber doesn’t think it will be that much of a problem. People will cut out a lot of things before a new phone. Vacations and luxury items will be sacrificed in lieu of a new phone.
Don’t do what you love.
Follow your passion is bad advice. I’ve never heard a successful person – no matter how they define success – say that it was passion that got them where they wanted. No, the thing everyone says is hard work. “Find a platform and work really hard at it,” says Galloway. Entrepreneurship (like the lottery or professional sports) success is rare. It’s also not for everyone. Galloway suggests that instead people can find a company to work for, and do good work.
Add that to the other advice:
- Gary Vaynerchuk said to be so good that venture capital companies come to you.
- Brian Koppelman said to get great at writing.
- Ramit Sethi said that you get passionate about something once you get good at it.
We always come back to this quote because it explains it so well. In his book, So Good They Can’t Ignore You, Cal Newport quotes Steve Martin:
“Nobody ever takes note of [my advice], because it’s not the answer they wanted to hear,” Martin said. “What they want to hear is ‘Here’s how you get an agent, here’s how you write a script,’…but I always say, ‘Be so good they can’t ignore you.’”
The 4 (5?) horsemen.
The podcast covers a lot of “The 4 horsemen.” Rather than summarize it here, this video will explain it.
And here is where things get interesting.
It’s academic to create models that fit what’s happened. It’s profitable to create models that fit what will happen. Galloway admits that he may be wrong about all this, BUT what if he’s right.
These companies all have five things in common.
- Truly differentiated products and intellectual property. You can open another fro-yo store, you can’t create a Google competitor.
- Visionary capital. It costs them less to borrow.
- Control of the end user (vertical integration). No one get mess things up in the last mile.
- Vanity. People want to be seen with their product.
- Maternal. These places are all great places to work.
What might be next? Galloway’s guesses include; Nike, Alibaba, Starbucks, and Uber.
Now, to reduce the options further. Let’s create a multiple regression that includes market share, stock prices, working capital…. wait a minute. We don’t want to do any of that.
The beauty of Galloway’s five points is their simplicity. In the book, Gut Feelings: The Intelligence of the Unconscious, Dr. Gerd Gigerenzer writes that there is a problem with too much data – it overweights the past.
“In an uncertain world, a complex strategy can fail exactly because it explains too much in hindsight.”
The more data we put into a model, the more noise we get.
When Michael Mauboussin talked with Barry Ritholtz, he said that as skill increases, luck plays a larger role in successes.
“Yep, the Warriors got lucky. They suffered no major injuries, beat teams that did, and got through the West without facing the Clippers or Spurs. Guess who else got lucky: every team to ever win the championship….The Warriors, on balance, were luckier than most championship teams.”
In an uncertain situation, the more complex a model of prediction, the more it weighs things that were luck. Galloway may be wrong about which company will excel in the years to come, but his model is right.
The conversation between Ritholtz and Galloway was full of a lot of good signals. Rather than spread them widely, I collected them here.
- How to spot an industry ready for disruption. If you want to see where disruption might strike next, says Galloway, look where prices have outpaced inflation. Galloway bets that education is ready for disruption.
- How to appear sexy. Have an Apple product. We are in a time when a lot of signaling is done by the products we wear, Galloway says. Right now there is no better brand than Apple.
- How to tell if the stock market is too high. Ritholtz says to look at the prices of classic cars. Classic cars – or any scarce good – go up in price when fewer are on the market. Fewer are on the market when more money is available to buy them.
- How to tell if you have a good product. When Galloway started L2’s Digital IQ Index he did so to conduct academic research. After he published his results 40 companies began to call him about using that data. This was a good indicator for business.
Some classic signals include.
- Ramit Sethi looks for certain words in interview responses to see if someone really has the skills.
- What Barry Ritholtz says that when he hears “Sharpe ratio,” it’s a signal people want a hedge fund. When he hears traders say “ugh,” it might be a stock worth investing in.
- Van Halen used brown M&M’s, actually a lack thereof, to see if their equipment was set up properly.
Here are some of Galloway’s suggestions.
- The Alchemist. A great book. Don’t take my word for it. Pharrell loved it. James Altucher too.
- Winds of War. From Amazon, “A Masterpiece of Historical Fiction-The Great Novel of America’s “Greatest Generation” Herman Wouk’s sweeping epic of World War II, which begins with The Winds of War and continues in War and Remembrance, stands as the crowning achievement of one of America’s most celebrated storytellers.”
- Adventures of a Bystander by Peter Drucker.
- John Irving.
Thanks for reading. I’m @MikeDariano.
* Taleb has said that entrepreneurship is good, for us at large. You don’t want to be the one who takes the risk to open a new restaurant, but if someone in our town does, you and I get to reap the rewards. Taleb has even suggested a national entrepreneurship day where we celebrate the risk takers.