Steve Martin tells a story as part of his current comedy tour in which he encounters a teenager who asks if him he was in The Jerk. Martin proudly says to the teen: “Yes, that was me in that movie,” which causes her to ask: “When are you gonna do another movie?”
The Jerk is in my view a funny movie with great writing:
“Carl Gottlieb, who was nominated for a Golden Globe for the screenplay for Jaws, co-wrote The Jerk and also played Iron Balls McGinty in the movie. Michael Elias was the third credited writer. ‘Our goal was to have a laugh on every page,’ said Martin.”
Are there some people who will not find this movie funny? Yes. But that is an inevitable part of comedy. Richard Pryor said once that he could tell that even his very best jokes were not funny to some people in the audience. The Jerk is a satire and deals with hard to discuss issues like race and I have a note on that at the end of the blog post. When you create a satirical movie, some jokes will not be funny to some people. That comes with the territory for a director like Rob Reiner and the writers identified above who are masters of comedic satire.
This is a succinct summary of the plot if you have not seen this movie (which is a crime in some states): “Steve Martin plays Navin R. Johnson, a man who one day discovers that he is both adopted and white. Johnson sets out to see the world and becomes a millionaire by inventing the Opti-Grab, a device which keeps eyeglasses from slipping down one’s nose. But because it also makes people cross-eyed, he loses it all.”
Navin R. Johnson: I’ve already given away eight pencils, two hoola dolls, and an ashtray, and I’ve only taken in fifteen dollars.
Frosty: Navin, you have taken in fifteen dollars and given away fifty cents worth of crap, which gives us a net profit of fourteen dollars and fifty cents.
Navin: Ah… It’s a profit deal. Takes the pressure off. Get your weight guessed right here! Only a buck! Actual live weight guessing! Take a chance and win some crap!
Life as an operator of a business is just better when you have high gross margins. Just as Lieutenant Colonel Bill Kilgore in Apocalypse Now said: “I love the smell of napalm in the morning,” I love the smell of 80% gross margins in the morning in a business. Bill Gurley describes a key point about gross margins in this way:
“There is a huge difference between companies with high gross margins and those with lower gross margins. Using the DCF framework, you cannot generate much cash from a revenue stream that is saddled with large, variable costs. As a result, lower gross margin companies will trade a highly discounted price/revenue multiples. All things being equal, gross margin percentage should have a direct impact on price/revenue multiple, as there will obviously be more gross margin dollars to contribute to free cash flow. Journalists who quickly apply 10x multiples to all private companies should at the very least consider gross margin levels in their analysis.”
Like many things in life, high margins can be a double edged sword since it is much easier for a disruptive new business to attack an incumbent. Jeff Bezos famously said: “Your margin is my opportunity.” In other words, Bezos sees a competitor’s love of margins and other financial “ratios” as an opportunity for Amazon since the competitor will cling to them while he focuses on absolute dollar free cash flow and slices through them like a hot knife through butter. But given the choice of defending high gross margins or getting by with low gross margins, I will take the former. It it possible to find a defendable niche in a low margin high volume business? Yep. Waffle House is an example of that, but that’s not an easy business to operate.
Navin: The most exciting game on the midway! Imagine the thrill of getting your weight guessed by a professional! You can blow up your cheeks, you can stick out your chest, but you’re not going to fool the guesser. How ’bout you, sir? Step right up!
Carnival Rube: Hey honey, let’s see how good this guy is. Now what do I win?
Navin: Ah, anything… in this general area, right in here. Anything, below the stereo, and on this side of the Bicentennial glasses. Anything between the ashtray, and the thimbles. Anything in these three inches. Right in here, this area, that includes the Chiclets, but not the erasers.
The movie script here is making the important point that marketing isn’t a substitute for delivering genuine product value to customers. If a business doesn’t have product market fit nothing else matters. Spending on marketing on a product that doesn’t have product truth damages rather than creates value. Jeff Bezos describes recent changes in business that have reduced the power of marketing to generate higher margins:
“The balance of power is shifting toward consumers and away from companies…the individual is empowered… The right way to respond to this if you are a company is to put the vast majority of your energy, attention and dollars into building a great product or service and put a smaller amount into shouting about it, marketing it. If I build a great product or service, my customers will tell each other….In the old world, you devoted 30% of your time to building a great service and 70% of your time to shouting about it. In the new world, that inverts.”
Navin: Oh, this is the best pizza in a cup ever. This guy is unbelievable. He ran the old Cup ‘o Pizza guy out of business. People come from all over to eat this.
“Disruption” is a subject people love to talk and write about. Much of this talking and writing has taken the concept to places where it does not belong. One major problem arises when people try to simplify what is very complex phenomenon into a very simple story. The stories get worse if the creator of the narrative is suffering from survivor bias. I have always liked this explanation of the survivor bias phenomenon written by Michael Mauboussin:
“The trouble is that the performance of a company always depends on both skill and luck, which means that a given strategy will succeed only part of the time. So attributing success to any strategy may be wrong simply because you’re sampling only the winners. The more important question it: How many of the companies that tried that strategy actually succeeded?”
There is no simple answer to creating a profitable disruptive product or defending against it. There are best practices, but no generic formula exists. Business is hard which is why everyone is not rich.
Navin: First they didn’t have the bamboo umbrellas for the drinks, and now snails on the plate!
Waiter: Would monsieur care for another bottle of Chateau Latour?
Navin: Ah yes, but no more 1966. Let’s splurge! Bring us some fresh wine! The freshest you’ve got – this year! No more of this old stuff.
If you can take something like fermented grape juice in a bottle or cooked snails on a plate and sell them for a significant profit, that can be a financially attractive business. If people will also pay more if they get an umbrella in their drink that can be a good thing for profit margins too. These approaches are part of one of the oldest and best ways o generate a profit in business: take something relatively cheap to buy like a few beans, describe them as “magic beans” and then exchange them for Jack’s cow! Unfortunately, an approach like that is inevitably discovered and other businesses copy the innovation. As an example, once upon a time brisket was a cheap cut of beef and you could transform that via “low and slow” barbecue into a valuable product with attractive margins. Unfortunately, as competitors have copied the approach the price of brisket has risen to a point where the profit must be made mostly on alcohol and side dishes.
Con man: If your initial investment is a half a million dollars and your apartments are up in March, you should have x amount of dollars rolling in by the end of this year.
Navin: Ah, x amount. That’s very good isn’t it.
Con Man: Not only that, you can depreciate the entire building for the full amount!
Navin: Depreciate! Hum, very good. I like that.
Once upon a time loads of people made a lot of money selling cattle, orchard and other limited partnerships to buyers like doctors, dentists and lawyers who were, in effect, financially taken to the cleaners. These buyers were not a lot different than the carnival rube in the weight guessing booth at the carnival in the movie. Charlie Munger has a great set of comments on fraudulent tax shelters:
“You’ll better understand the evil when top audit firms started selling fraudulent tax shelters when I tell you that one told me that they’re better [than the others] because they only sold [the schemes] to their top-20 clients, so that no-one would notice.” “I talked to one accountant, a very nice fellow who I would have been glad to have his family marry into mine. He said, ‘What these other accounting firms have done is very unethical. The [tax avoidance scheme] works best if it’s not found out [by the IRS], so we only give it to our best clients, not the rest, so it’s unlikely to be discovered. So my firm is better than the others.’ I’m not kidding. “Creative accounting is an absolute curse to a civilization. One could argue that double-entry bookkeeping was one of history’s great advances. Using accounting for fraud and folly is a disgrace.” “Anytime somebody offers you a tax shelter from here on in life, my advice would be don’t buy it.”
Navin: The new phone book’s here! The new phone book’s here!
Harry Hartounian: Boy, I wish I could get that excited about nothing.
Navin: Nothing? Are you kidding? Page 73 – Johnson, Navin R.! I’m somebody now! Millions of people look at this book every day! This is the kind of spontaneous publicity – your name in print – that makes people. I’m in print! Things are going to start happening to me now.
[the Sniper points to Navin’s name in the phone book]
Sniper: Johnson, Navin R… sounds like a typical bastard.
Navin: He hates these cans!
I agree a statement that Warren Buffett made in a very recent CNBC interview that the value of brands is changing:
“THE WILLINGNESS OF PEOPLE TO CHANGE THEIR HABITS PROBABLY HAS A HIGHER PROPENSITY THAN 20 OR 30 YEARS AGO. BRANDS ARE NOT A SENSATIONAL BUSINESS IN TERMS OF WHERE YOU CAN BE FIVE OR TEN YEARS FROM NOW.”
The conclusion expressed in this quote represents a huge shift in Buffett’s thinking. He is not saying that brands are not valuable, but rather that they will become less valuable over time. As just one example of how this shift impacts him, Berkshire is a partner of 3G in some very large business that depend on the value of key brands. 3G’s Lemann recently acknowledged at the most recent Milken Conference that he was caught flat-footed by an onslaught of competition from challenger brands: “We bought brands that we thought could last forever. You could just focus on being very efficient. All of a sudden we are being disrupted.”
Navin: I’m hitchhiking.
Driver: Where are you going?
Navin: St. Louis. How far are you going?
Driver: To the end of this fence.
Navin: Okay.(he gets in the truck) I’m Navin Johnson. What’s your name sir?
Driver: Here we are!
Navin: Okay, thanks for the company. I hope I can repay you someday.
Navin started small in his journey to Saint Louis, but at least he started. Sometimes in starting something important like a business, you need to take some actions that do not scale well as was the case with Navin as a hitchhiker in the movie. Paul Graham has said: “One of the most common types of advice we give at Y Combinator is to do things that don’t scale. In Airbnb’s case, these consisted of going door to door in New York, recruiting new users and helping existing ones improve their listings.”
Navin writing a letter to his family: I’ve got a lot to learn about handling my money and banks. You have to be careful. Poor Hobart. Hester took some money out of her savings account, and had to pay a substantial penalty for early withdrawal. (Hester is shown outside being shot at by a firing squad) Enclosed is this week’s, check. Love, Navin.
Navin: Sorry about your wife Hobart.
Hobart: Federal regulations sir. Oh, dear me. Your wife has given you another gold chain. I nearly forgot. Ah, I suppose I’m still not quite over Hester’s death.
Fees of all kinds can be financially painful. Some products are structured so it is easy to be assessed penalties for not doing something. For example, a financial services app that enables customers to “buy now and pay later” reported that it earned 24.4% of its income from late fees. As another example, bills are sometimes being sent with relatively short payment due dates that are designed to generate substantial income from late payments. Of course this practice of making money on late fees is not new. Blockbuster depended heavily on charging its customers late fees, which was a boon for Netflix. I almost certainly paid late fees renting The Jerk from Blockbuster. As an aside, Movies like The Jerk, The Princess Bride and Caddyshack are popular with many people who watched movies during the Blockbuster era. People watched them over and over again whereas today they would find something new to watch on Netflix. Repetitive watching of these classic comedy movies resulted in people quoting lines from the movie as a form of humor, which feed back on itself (the more they were quoted the more they were quoted).
Navin: Dear mom, the big news is Marie and I were married. We couldn’t wait. Luckily, we found someone at the Hollywood View Apartments who could marry us immediately. He was a certified priest (actually, he is a voodoo doctor). We were both glad we had a religious wedding. Money hasn’t changed our lives that much, our one little extravagance is a live-in butler and housekeeper.
It is easy to let “lifestyle creep” put you into a financial fix. The best part of wealth is not the stuff, but the greater options cash gives you in life. People who do not have cash can find themselves with very lousy options. Navin and Marie learned that lesson the hard way in the movie and by final scene are vastly happier.
“Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness.
Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”
– Wilkins Micawber (David Copperfield, by Charles Dickens)
Nassim Taleb puts it this way: “Money can’t buy happiness, but the absence of money can cause unhappiness. Money buys freedom.”
Taj: It turns out Dad’s a financial genius!
Father: All I did was take the money you sent home and embarked on a periodic investment in a no-load mutual fund.
Taj: He leveraged his ass deep in to soy beans and cocoa futures.
Was Father telling the truth? Or was Taj? My theory is that Father knew that only some people can make a living as traders and didn’t want Navin to get the wrong idea since he is one of Warren Buffett’s “know nothing” investors. Father knew a lot about commodities as a result of his experience as a farmer and he did not want Navin to get the wrong idea. Taj did not realize that father was trying to protect Navin, who is definitely a candidate for a diversified portfolio of low-cost index funds since his circle of competence is about the size of his Thermos.
Stan: Damn! Damn these glasses!
Navin: Sir! I can fix those glasses!
Stan: You can? Well here, fix those suckers!
(Dramatic music plays as Navin is tossed the pair of glasses. He catches them and runs inside to fix them.)
Navin: Sir! Guess what – I fixed ’em. I was back there thinking, what causes glasses to slip on and off and it’s because when you take them on and off you’re always putting pressure on the frames like this – it causes them to spread, so I put a little handle right here in the center and it puts the pressure on the bridge where it belongs, just like the tierods on a 72 Buick, plus I put a little nose brake on to prevent slippage. Try it! Use the handle.
Stan: Well, I’ll be. It works! You know, I make a pretty good living selling shit like this. I tell you what: if I can develop this gizmo, I’ll split with you fifty fifty.
Stan: Remember, at the gas station? Boy, you are one hard guy to find! You don’t remember me! The glasses handle – look!
Navin: Oh yeah, my glasses handle.
(Navin reaches for a pair of glasses)
Stan: Use the Opti-grab.
Stan: Navin, look we’re in business! Fifty fifty. Just like we said. Right in here, I have your first check for two hundred and fifty big ones.
Although the opti-grab product ended up having product liability issues, the pairing of a product person like Navin and a person who really knows distribution was fortuitous while it lasted. People are increasing realizing that is it distribution that most often creates a more survivable advantage in business. Marc Andreessen notes:
“As far as defensibility, I think you construct defensibility through some combination of product innovation and distribution building. You construct it. You obviously want as much defensibility as you can get in your product, and so you try to get as far out ahead as you can. …The problem with that is true defensibility purely at the product level is really rare in the Valley, because there are a lot of really good engineers. And there are new ones every day, whether they’re coming out of Stanford or coming in from other countries or whatever. And then there’s the issue of leap-frogging. The next team has the opportunity to learn from what you did and then build something better. So I think pure product defensibility is obviously highly desirable, but it’s actually quite difficult.”
“Navin: I’m gonna bounce back and when I do I’m gonna buy you a diamond so big it’s gonna make you puke.
Marie: I don’t wanna puke.”
In my recent blog post on Chance the Rapper I quoted him as saying: “Some people are so poor, all they have is money.” I have nothing to add.
Discard Quote Pile:
“Truck Driver Picking Up Navin which is hitch hiking: St. Louis?
Navin R. Johnson: No, Navin Johnson.”
Navin (reading) Well mom, remember my dream of owning a big house on a hill and how I used to wish for a living room with a plaster lion in it from Mexico and how I always wanted a large twenty four seat dining table in a dining room with original oil paintings by Michelangelo and Rembrandt and remember how I always wanted a rotating bed with pink chiffon and zebra stripes and remember how I used to chit chat with dad about always wanting a bathtub shaped like a clam and an office with orange and white stripes and remember how much I wanted an all red billiard room with a giant stuffed camel and how I wanted a disco room with my own disco dancers and a party room with fancy friends and remember how much I wanted a big backyard with Grecian statues, s-shaped hedges and three swimming pools? Well, I got that too.
New Accounts Bank Manager: I will need two pieces of identification.
Navin: Ah yes. I have my temporary driver’s license – and – my astronaut application form… I didn’t pass that though, I failed everything but the date of birth.”
Navin: The only thing I need is *this*. I don’t need this or this. Just this ashtray… And this paddle game. – The ashtray and the paddle game and that’s all I need… And this remote control. – The ashtray, the paddle game, and the remote control, and that’s all I need… And these matches. – The ashtray, and these matches, and the remote control, and the paddle ball… And this lamp. – The ashtray, this paddle game, and the remote control, and the lamp, and that’s all *I* need. And that’s *all* I need too. I don’t need one other thing, not one… I need this. – The paddle game and the chair, and the remote control, and the matches for sure. Well what are you looking at? What do you think I’m some kind of a jerk or something!
Note about race issues and the movie:
Hollywood Reporter: In The Jerk, you played the white son of black sharecroppers who doesn’t realize he’s adopted. Could you get away with that in today’s era of heightened racial sensitivity?
Steven Martin: “I haven’t looked at The Jerk in a long time. But looking back, everyone was treated with such respect, and we had that fabulous opening with Sonny Terry and Brownie McGhee singing on the porch, two very well-known blues artists. You might get a kind of knee-jerk reaction, but it would be hard to get a verdict in court against it. https://www.hollywoodreporter.com/news/steve-martin-jerk-would-work-799334
“The big reason The Jerk’s racial humor works is for the sheer fact that it’s not played as a malicious slight to the black community. Navin isn’t jumping for joy because he’s truly white. In fact, he’s kind of disappointed. Even in 1979, this was a pretty bold joke to shuffle into the deck of gems the Carl Reiner film would use, but taken in a more modern context, it works just as well as it did back when it first played. Not only does that fact speak to the strength of the film’s writing, it also speaks to the comedic abilities and care of Steve Martin’s skill set, because in lesser hands this could have been a much uglier joke.” https://www.cinemablend.com/new/Steve-Martin-How-People-Might-React-Jerk-Humor-Today-71857.html
The cast includes Steve Martin as Navin Johnson, Bernadette Peters as Marie Kimball, Jackie Mason as Harry Hartounian, Catlin Adams as Patty Bernstein, Mabel King as Mother, Richard Ward as Father, Dick Anthony Williams as Taj and Bill Macy as Stan Fox.
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