1. “Phase 1: Collect underpants. Phase 2: ? Phase 3: Profit.” Eric Cartman. Underpants Gnomes. http://southpark.wikia.com/wiki/Gnomes/Script
The business model problem flagged in the Underpants Gnomes episode of South Park is real since creating a significantly profitable business model is hard. Not only is it hard, it is rare. Many important companies have done it exactly once. And companies that have created a successful business model are often not able to hold on to that profit for very long. The competitive pressure that markets put on any source of profit are formidable. Significant amounts of failure are an inevitable part of capitalism. But so is some level of success.
An important part of human nature is a tendency to turn away from hard problems and focus instead on something easy. Charlie Munger once described psychological denial in this way:”If you turn on the television you find the mothers of the most obvious criminals that man could ever diagnose and they all think their sons are innocent. The reality is too painful to bear so you just distort it until it’s bearable. We all do it to some extent. It’s a common psychological misjudgment that causes terrible problems.” Unfortunately, humans will often falsely believe that they have solved “?” for their business model due to psychological denial. The best entrepreneurs don’t fall prey to this and instead are laser focused on finding real solutions.
2. “Start up. Cash in. Sell out. Bro down.” Eric Cartman. Go Fund Yourself. http://southpark.wikia.com/wiki/Go_Fund_Yourself/Script
Many people want to start a business for the wrong reasons. Venture capitalists who have been profiled in this series talk about wanting missionaries as company founders rather than mercenaries. They feel this way in no small part since a founder who is a missionary can be counted on to stay focused on the tasks that will drive the company forward. The mercenary will be less likely to persevere in the face of inevitable adversity. Mercenaries will sometimes find success, but not nearly as often.
3. Bank Clerk: How can I help you, young man?
Stan Marsh: I got a hundred-dollar check from my grandma and my dad said I need to put it in the bank so it can grow over the years.
Bank Clerk: Well that’s fantastic. A really smart decision, young man. We can put that check in a money market mutual fund, then we’ll re-invest the earnings into foreign currency accounts with compounding interest aaaand it’s gone.
[Blank stares and silence as it goes from the Bank Clerk, to Stan, to the Bank Clerk, to Stan]
Stan Marsh: Uh… what?
Bank Clerk: It’s gone, it’s all gone.
Stan Marsh: What’s all gone?
Bank Clerk: The money in your account. It didn’t do too well, it’s gone.
Stan Marsh: What do you mean? I-I have a hundred dollars!
Bank Clerk: Not any more, you don’t. [Gestures]Bank Clerk: Poof!
When my children were born they were given some money by their grandparents. Their grandparents are very conservative and wanted that money put into a special children’s savings account (Dinosaver!) which paid interest (a quaint concept these days). My kids did not add or withdraw funds from that account since they were infants. Eventually the bank, without warning, transferred everything in the account to the state assuming that the money had been abandoned since the account was legally deemed to be inactive. This process, which is the law in some states, is called escheat. The bank eventually got the money back. But that story reminds me of the South Park script. More commonly the bank or investment firm just gives the customer bad advice and charges big fees that deplete the account. A rule of thumb is that the bigger the sales commission you are paying the worse the deal is for you since it is hard to sell a bad investment so a big sales commission is needed. The best approach to avoid this “aaand its gone” situation is to think for yourself. And do a lot of work. And have the right temperament. If you don’t want to do that or can’t do that, then buy a low cost diverse portfolio of index funds. When “dumb money” adopts this approach it is transformed into “smart money.”
4. “We thought we could make money on the Internet.” Kyle Broflovskin. Canada On Strike http://southpark.wikia.com/wiki/Canada_on_Strike/Script
The Internet is a wonderful means of distribution and it enables new business models. But the fundamental elements of a business remain the same even when the business is on-line. You must acquire a customer cost effectively, you must service that customer at a reasonable cost, the customer must stay a customer long enough and there must be enough revenue to make the whole thing work . All of this must be done in a way that does not result in the business running out of cash at any given point in time. If you are successful, others will try to copy you. More people copying you will result in lower prices. None of this is supposed to be easy. That’s capitalism. Otherwise everyone would be rich.
5. “Make the game about waiting. But let the player pay not to wait. It’s a surefire way to make lots of money.” Minister of Mobile Gaming. Freemium Isn’t Free. http://southpark.wikia.com/wiki/Freemium_Isn’t_Free/Script
Freemium is a natural business model in many businesses when the offering is digital and has zero or low marginal cost. By spending a relatively limited amount of money on the free items, customer acquisition cost (CAC) can drop dramatically. Because software has a marginal cost of almost zero (it costs almost no additional money to create more copies), there is a natural tendency for the price of software to drop to zero if there aren’t any barriers to entry. Of course, some free services have real storage or egress costs but the point remains true. This South Park episode goes into many of the psychological manipulations that are used in freemium games in some detail. The author of the PsiFi blog writes about the techniques used in business models like freemium:
“Operant conditioning is one of the oldest areas of modern psychology and arose out of the observation that people and animals can be conditioned to respond to stimuli in different ways. So if every time your dog chases a cat you give it an electric shock it’ll pretty soon figure out that chasing cats is not the pleasurable activity that instinct suggests. Although it may develop some strange theories about the remote electrical properties of cats. Psychologists used to love this stuff. Behaviourism, championed by B.F. Skinner – simultaneously a great man and one of the twentieth century’s worst examples of man with a hammer syndrome, insisted that operant conditioning explained all behaviour and refused to accept the possibility of the existence of an inner mental life. If he couldn’t measure it, it didn’t exist. So much for those flashes of inspiration we dream we have from time to time.”
6. “Big corporations are good…because without big corporations we wouldn’t have things like cars and computers and canned soup.” Kyle. Underpants Gnomes. http://southpark.wikia.com/wiki/Gnomes/Script
Scale economies are an important part of human progress. Jamie Dimon has pointed out that: “Economies of scale are a good thing. If we didn’t have them, we’d still be living in tents and eating buffalo.” Elon Musk has said: “There are really two things that have to occur in order for a new technology to be affordable to the mass market. One is you need economies of scale. The other is you need to iterate on the design. You need to go through a few versions.”
7. “It’s simple economics, son. I don’t understand it at all, but, God I love it.” Randy Marsh. Something Wall Mart This Way Comes. http://southpark.wikia.com/wiki/Something_Wall-Mart_This_Way_Comes/Script
The cacophony created by competing schools of economics is enough to confuse anyone. For example, heterodox, MMT, Keynesian, Post-Keynesian, Austrian, anarchist, freshwater, monetarist, saltwater, socialist, new classical, Marxist…
8. “Little boy, sometimes, what’s right isn’t as important as what’s profitable.” Agent. Prehistoric Ice Man. http://wiki.southpark.cc.com/wiki/Prehistoric_Ice_Man
There are certain profitable business that are odious from a moral standpoint. As an example, for Charlie Munger, operating a casino is one of these businesses. Or selling cigarettes. He is OK that Costco is a distributor of cigarettes. Everyone must draw the line somewhere. Munger points out: “You’ll make more money in the end with good ethics than bad. Even though there are some people who do very well, like Marc Rich–who plainly has never had any decent ethics, or seldom anyway. But in the end, Warren Buffett has done better than Marc Rich–in money–not just in reputation.”
9. “Well just like the rest of us, you have to make choices with your money. Do you want a bike, or do you not want to be depressed?” Randy. Trapped in the Closet. http://southpark.wikia.com/wiki/Trapped_in_the_Closet/Script
Deferred gratification is hard to accomplish, especially for some people. People use discount rates that vary and for some people any deferral of gratification is nearly impossible. Charlie Munger puts it this way: “It’s waiting that helps you as an investor, and a lot of people just can’t stand to wait. If you didn’t get the deferred-gratification gene, you’ve got to work very hard to overcome that.” In addition, people also do crazy things out of envy. As an example, for every $1,000 increase in a lottery prize, bankruptcy filings by the winner’s neighbors rise by 2.4%. If you can shut feelings of envy down, life inevitably gets better. Nothing good comes from envy. It is all downside. There are lot of ways to create motivation that do not involve envy.
10. “We got so caught up in the little things of Christmas, like love and family that we almost forgot it’s buying things that makes our economy thrive.” Ms. Choksondick. A Very Crappy Christmas http://southpark.wikia.com/wiki/A_Very_Crappy_Christmas/Script
Paul Krugman has said on the Paradox of Thrift:
Suppose a large group of people decides to save more. You might think that this would necessarily mean a rise in national savings. But if falling consumption causes the economy to fall into a recession, incomes will fall, and so will savings, other things equal. This induced fall in savings can largely or completely offset the initial rise. Which way it goes depends on what happens to investment, since savings are always equal to investment. If the central bank can cut interest rates, investment and hence savings may rise. But if the central bank can’t cut rates — say, because they’re already zero — investment is likely to fall, not rise, because of lower capacity utilization. And this means that GDP and hence incomes have to fall so much that when people try to save more, the nation actually ends up saving less. http://krugman.blogs.nytimes.com/2009/07/07/the-paradox-of-thrift-for-real/?_r=0
11. “Excuse me son, I’m an investment broker; I can help you invest that money.” Broker “Nuh uh, I’m spendin’ it.” Cartman. Cartmanland. http://southpark.wikia.com/wiki/Cartmanland/Script
The principal problem in dealing with financial advisers is known as “incentive-caused” bias. Munger puts it this way: “Both in one’s own mind and that in one’s trusted adviser … [this bias] causes perfectly terrible behavior. Take sales presentations of brokers of commercial real estate businesses. I’m 70 years old and I’ve never seen one that I thought was even within hailing distance of objective truth.” In asking your barber whether you need a haircut, there is natural incentive-caused bias. Seeking independent financial advice in situations where where incentives may not be aligned is wise.
12. “Man, I guess sometimes we let our technology and stuff grow too fast.” Kyle. Trapper Keeper http://southpark.wikia.com/wiki/Trapper_Keeper/Script
Technology and innovation help drive the progress in the world’s standard of living but that inevitably creates disruption. That disruption can be good or bad depending on who you are. Consumers always benefit. As for a given business, as Charlie Munger says:
“The great lesson in microeconomics is to discriminate between when technology is going to help you and when it’s going to kill you. And most people do not get this straight in their heads.
There are all kinds of wonderful new inventions that give you nothing as owners except the opportunity to spend a lot more money in a business that’s still going to be lousy. The money still won’t come to you. All of the advantages from great improvements are going to flow through to the customers.”
What Munger talks about above confuses many people since they assume that technological progress always increases revenue and profit. Anyone involved in a real business knows that sometimes an innovative new technology results in less revenue and profit.
This is as it should be in a capitalist system, but nevertheless there are winners and losers as Nassim Taleb writes:
“Like Britain in the Industrial Revolution, America’s asset is, simply, risk taking and the use of optionality, this remarkable ability to engage in rational forms of trial and error, with no comparative shame in failing again, starting again, and repeating failure.” “Most of you will fail, disrespected, impoverished, but we are grateful for the risks you are taking and the sacrifices you are making for the sake of the economic growth of the planet and pulling others out of poverty. You are the source of our antifragility. Our nation thanks you.”
In his recent shareholder letter Warren Buffett writes about the need for a safety net:
“Nothing rivals the market system in producing what people want – nor, even more so, in delivering what people don’t yet know they want. … For 240 years it’s been a terrible mistake to bet against America, and now is no time to start. America’s golden goose of commerce and innovation will continue to lay more and larger eggs…. Though the pie to be shared by the next generation will be far larger than today’s, how it will be divided will remain fiercely contentious. Just as is now the case, there will be struggles for the increased output of goods and services between those people in their productive years and retirees, between the healthy and the infirm, between the inheritors and the Horatio Algers, between investors and workers and, in particular, between those with talents that are valued highly by the marketplace and the equally decent hard-working Americans who lack the skills the market prizes.”
B.F. Skinner’s Stockmarket Slot MachinesWin Big, Win Rarely, Win Never http://www.psyfitec.com/2009/06/bf-skinners-stockmarket-slot-machines.html
- A Dozen Things I’ve Learned from Richard Thaler about Investing
- Richard Feynman and Charlie Munger: Expert Generalists