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The Psychology of Money and Popularity

By Chris Hill - Oct 29, 2018 at 11:40AM

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Know how your emotions can work against you, and make them work for your returns instead.

It's a weird week for Motley Fool Money -- most of the hosts are in Denver, far from Fool HQ. In lieu of hot market news, have some fun Foolish interviews instead.

First, financial columnist Morgan Housel talks about the psychology of investing. How do emotions like fear, greed, and boredom affect our investing for the worse? How can amateurs and pros alike keep a level head? Why do so few companies make up so much of the return on profitable portfolios?

Then, a chat with Derek Thompson, author of Hit Makers: The Science of Popularity in an Age of Distraction. Why was Netflix ( NFLX -2.33% ) so disruptive, and how will it handle its ever-increasing number of competitors? How does Facebook ( FB -1.14% ) stay popular with fake news scandals and an aging user base? How much does luck play into success? Tune in to find out more.

A full transcript follows the video.

This video was recorded on Oct. 26, 2018.

Chris Hill: It's the Motley Fool Money radio show! I'm Chris Hill. Thank you so much for listening! For the past few days, we've been in Denver for a Motley Fool investing conference, so we've got something a little different this week. Later on in the show, we'll revisit my conversation with Derek Thompson, author of the best-selling book Hit Makers: The Science of Popularity in an Age of Distraction

But first... A few months ago, I sat down to talk with my favorite financial columnist, Morgan Housel. 


Hill: Let's start with the thing that you wrote recently that got more buzz on Twitter than anything I've seen. A lot of the stuff you write gets a lot of buzz on Twitter, but I haven't seen anything like this. It was a long piece entitled The Psychology of Money. Let me quote from early in the piece. "Investing is not the study of finance. It's the study of how people behave with money."

Morgan Housel: That's right. 

Hill: When I read the piece, it was one of those things that just kept coming back to me. We're weird creatures, when it comes to money, we human beings.

Housel: Yeah. The whole post is 9,000 words, and I think that sentence that you just quoted is probably all you need to read. If you don't want to read the other 8,900, that's really all you need to read. That's always how I thought about investing. There's no amount of intelligence that can't be undone by poor emotions or poor behavior. 

If you were to make a hierarchy of investor needs, like a pyramid, the base of that pyramid is good investing behavior. As you go up from there, you need analytical skills, you need to know how to model, learn how to read an annual report, and so on. But without investing behavior -- what I mean by behavior is your relationship with greed and fear, your ability to take a long-term view, your ability to react with the market ups and downs with a sense of calm and a sense of not taking things too seriously. Not getting too overwhelmed by greed, not getting too knocked down by fear. That's what I mean by good messing behavior. Saving consistently, dollar-cost averaging. 

It's one of the simplest points of investing, which is why it doesn't get that much attention. It's not that exciting. But I think it's unequivocally the most important part of investing. Again, no amount of intelligence is stronger than poor behavior. 

The whole report dug into 20 flaws and biases that we do with money. I made it the psychology of money, not the psychology of investing, because a lot of these things have to do with savings, or how we think about financial goals, how we think about our careers, that are distinct from actual investing, but they all tie into each other.

Hill: As you point out, investing is the one endeavor where amateurs can absolutely outperform professionals in a very significant way. This isn't happening in, say, heart surgery. [laughs] 

Housel: Never. Completely impossible to think of someone walking off the street, picking up a scalpel, and performing a successful heart transplant. Completely unthinkable. Would never happen in a million years. But you have stories of amateur investors who have just been leaving their portfolios alone for 50, 60, sometimes 70 years. And oftentimes, after they pass away, their heirs or friends look into their money and realize they have millions and millions of dollars. These are humble people who came from very modest means, and they're able to outperform the best professional investors who've gone to Ivy League universities and have the best training. 

Some people would say, "Well, that's because it's luck. You have these amateurs that did really well because they picked the right lotto ticket." I think there's an element to that that is undoubtedly true. But the key factor for me is that you don't need a lot of book intelligence to do well in investing if you've mastered the behavior. And the reverse is true. No matter how smart these people are who have gone to Harvard Business School, and are alumni of Goldman Sachs, if they get too caught up in greed and fear, nothing that they've been taught in the past is going to matter.

Hill: It's Warren Buffett's line about how one of the big turning points for him as an investor was when he mastered his temperament. Speaking of Buffett, one of the things you reference is the Berkshire annual meeting, which I believe you went to earlier this year.

Housel: I went with a group of friends, but we didn't actually go to the meeting. So, I get to say I went to Omaha this year. I've been to the meeting four times. A, it's 40,000 people, which is a lot. There's long lines everywhere. If you want to go the bathroom, it's going to take you four hours. And B, and I think this says a lot about how Buffett and Munger think, but, they say the same things every year. That's not because they're boring. I think it's just because their core thoughts, their core beliefs, don't change year to year. So, once you've been once or twice, the actual meeting isn't that much. But it was fun to go out there and hang out with a bunch of investing friends.

Hill: And, as you pointed out in the piece, it's 40,000 investors, every one of whom considers themselves to be a contrarian.

Housel: Every Buffett follower thinks they're not following the crowd. Then you go to Omaha and you look around, and you see 40,000 people, each of whom will tell you, "I don't follow the crowd." The irony is palpable.

Hill: I suppose this ties as much into the behavior as anything else, one of the points you hit a couple of times is excitement vs. boredom. Certainly, when you're a kid, among the worst positions to be in is in a position of boredom. But let's face it, that's what gets a lot of investors in trouble, too. It's just as boring, you want to want to take a little chance. But boring can be a really winning strategy.

Housel: One thing I've always said is, the purpose of investing is not to minimize boredom, it's to maximize returns. But there's a reason that CNBC and Yahoo Finance use flashing lights and breaking news and huge bulletins. There's a sports element to investing. People really do treat it like sports. You have your preferred beliefs, you have an idea of how the market works, you have companies that you're backing and you're rooting for, you have companies that you're rooting against, to go down, to fail. There are a lot of times I feel like it's indistinguishable from sports in that sense. And people use it as financial entertainment. 

But that gets dangerous. We know that the key to successful investment thing is effectively hands-off compounding for years and years. That should be boring. Boring is good. It's supposed to be boring. But it takes a certain kind of personality and a certain kind of temperament to be OK with that, and to find your entertainment elsewhere. That, I think, will never change. Finance is always going to have an entertainment part to it. That's never going to go away. No matter how much we tell investors not to treat it as entertainment, to really focus on the long run, it's always going to be flashing lights and breaking news.

Hill: Let me go to another piece that you also wrote recently. This one caught my attention because it was one of these concepts that I was very familiar with, but I hadn't really seen it laid out in the way that you did. It has to do with the long tail. I would say you make a pretty compelling case that long tails drive everything.

Housel: Yeah. My job now is in venture capital. People say venture capital is driven by tails. What they mean by that is, for a venture capital fund, if you make a hundred investments, you're going to lose money on at least half of them. You might lose all of your money on at least half of them. Of those hundred, you're going to have five or 10 that do pretty well, and hopefully one or two that does really well, and that's where all your return is going to come from. You make 100 investments, maybe five of them are actually really going to matter. That's what they mean when they say that venture capital is driven by tails. 

I just looked at that and said, yes, that's true. But, as I dug into in the piece, that's actually true for public stock markets, as well. If you look at the composition of the S&P 500, or the Russell 3000, which is another big index of public stocks, it's pretty much the same. In any given year, or even over longer periods of time, the huge majority of gains from the S&P 500 is driven by a handful of stocks. We're talking five or 10 stocks. If you look at the last couple of years, Facebook, Amazon ( AMZN -1.38% ), Apple, Microsoft, that's driving about half the return in the S&P 500, even though it's a basket of 500 stocks. You have these companies that are very big that have gone up incredible multiples in price over the last five years, and that's way more important than the other tiny companies in the S&P 500. Even if they're going up a lot, they're so small that they don't really make that much of a difference. 

It's also true at companies themselves. You have a company like Apple that is driven overwhelmingly in sales and profit by the iPhone. The iPhone itself is a tail event. In the world of tech products, where people have tried everything, new devices, all different iterations, the iPhone is the biggest tail event that it gets. One tiny product out of thousands that have been tried drives the huge majority of returns. 

It's the same for Amazon. Amazon is always tinkering with new products. Two products that have worked extremely well in the last 10 or 15 years are Prime and AWS. Those are tail products. 

I also made the point that the people working at these companies have tail careers. The hiring rate at Facebook, Amazon, Apple, is less than 1%. You have people with tail careers that are working on tail products that are driving tail returns in the stock market. Anywhere you look, the majority of results are driven by a tiny minority of instances. 

Hill: Do you think that that is one of the biggest misconceptions about stock investing? Taking it away from VC and more to the individual level, if someone has a portfolio of 25 stocks or so, the idea that if a couple of them are big winners -- I've heard the criticism in the past from some in the media in the early days of The Motley Fool. They were looking at the first online portfolio that The Motley Fool had. I remember going back and forth with a couple of reporters. They were saying, "Well, only a couple of those stocks are big winners. That's why that portfolio is beating the market." This one guy said, "If you take those two stocks out, the portfolio doesn't do as well." And I just said, "Yeah, but if you take John Lennon and Paul McCartney out of the Beatles, the band isn't as good, either."

Housel: I imagine the alternative that they proposed was index funds. The response to that would be, how has the S&P 500 performed if you take out Apple, Facebook, Google and Amazon? How has it performed over the last decade? The answer is terrible. That's always going to be true. 

The disconnect, I think, is that when people own 25 individual stocks, they can readily see the performance of every one of those. So, they're going to log into their brokerage account and see, "Wow, a couple of these companies fell 50%. That's crazy, that hurts. I wish I wouldn't have bought them." Whereas if they own an S&P 500 index fund, they don't have easy access to information of how all those components fared. But if you dug into it, you would see that of those 500 companies in the index, half of them performed really poorly, and 10 of them performed really well, and that's what's driving the return. It's not even a difference in how diversification works or how tails work. It's just that in the index fund, it's hidden from view.

Hill: Let's talk about your recent trip to the West Coast. You were at EBI West. EBI, as I since learned, stands for Evidence-Based Investing. This was a conference where you were moderating the panel. How was the conference?

Housel: It's great, I think it's one of the best financial conferences that exists. They do it twice a year. It's put on by Josh Brown and Barry Ritholtz. They do a great job. It's great content, and no one takes themselves too seriously at the event, either. It's a very light-hearted event, which makes it a lot of fun. Still, a lot of great investors there. 

I really like financial conferences for the same reason I really like Twitter. It exposes you to other investors. In a fun environment like that, people share stories about how they've done, what they see in the world, what they're experiencing day to day. Basically, all the investors there are professional investors. They're mostly financial advisors, maybe some fund managers. It's great to talk shop about how the industry is doing, what they're seeing their clients doing. I'm a big fan of financial conferences.

Hill: What was the mood at the conference? As you said, these are professionals. We are in year nine of a bull market. Were people feeling good? Were there some out there saying, "I don't know, I'm starting to build up my cash reserve?"

Housel: That's a great question. I'd say the mood is nervous optimism. You can't work in the investment industry and not be excited with how things have gone over the last nine years. There's a good chance that, if you work in the investment industry, 2017, 2018, is the best you've ever done, probably the most money you've ever made. Assets under management probably at an all-time high. For most of the people at the conference, those things were true. People enjoy that.

I would contrast that to investment conferences that I went to in 2010. It was just gloom. It wasn't because of where they thought the market would go next. In fact, in 2010, there was a lot of optimism about that. But working in the business of investing, talking to fund managers and asset managers, financial advisors, is very different. 

So, I would say it's nervous optimism. I say it's nervous because it's very difficult to be a pessimistic financial advisor. If you're managing money for other people, and you predict that the world's going to hell, they're going to take their money out from you. Why wouldn't they? If you think things are going to crash, give me my cash back, please. That's all I want you to do. It's very difficult to promote active pessimism, even if you really believe in it. 

That's how I would summarize the mood. Things have gone very well, but anyone who understands business cycles and economic cycles knows that -- -this is not a forecast, because I would have said this three or four years ago to you, as well. We're not close to the bottom. We're a long ways from the bottom. Who knows where the top is, but we're a long ways from the bottom.

Hill: That goes back to what we talked about earlier, which has to do with the psychology of money. If you're in the professional side of this business, you're not just managing money. If you're working with clients, you also have to manage their psychology. And as you pointed out, it's tough enough for us to manage our own psychology, much less other people's.

Housel: That, I think, is the No. 1 job of a financial advisor. That's the way that financial advising has really shifted over the last five or 10 years. It's less about, "We are genius investors and we can do this for you," which is how stockbrokers worked for most of history. It's moved much more toward, "My goal and my job are to hold your hand through the ups and downs, and to try to keep your head stable when you're thinking about making a bad decision." 

That's the No. 1 job of financial advisors, and it's very difficult to do. It's much more a psychological exercise than it is an analytical exercise. But that's where we're seeing the financial industry move. A lot of that is a shift in the fee structure from commission-based, where a financial advisor had to churn their customers' accounts and keep trading stocks with new ideas to make a living; now, it's fee-based. Now, if you want to make money as a financial advisor, you need to keep your clients around, keep them retained, which is just a matter of getting them to trust you and managing their emotions and their behavior over time. That's the key job of an advisor, and it's very difficult.

Hill: Do you have a trick that you use in your own investing life? If you're getting roiled by whatever is happening with your own investments, it's just like, "I'm going to put this down, I'm going to go for a walk." Or... ?

Housel: Here's what I do. I wrote about this a couple of times back when I was here at The Fool. I keep way more cash as a percentage in my portfolio than I think any financial advisor would say is necessary. If you saw the percentage of cash, the dollar amount of cash, you would say, "You should put that money to work. What are you doing here?" And I agree that on a spreadsheet, it doesn't make any sense. In terms of, how many months of living expenses I need, the amount of cash I have doesn't make any sense. But I sleep well at night. Even if there was a 2008-style calamity, not only would I have not much to fear because I have a big buffer in my portfolio; but then, I would have the ammunition to take advantage of opportunities. 

That cushion, that margin of safety, is how I deal with it. That's an analytical thing that I do, but it's designed to manage my emotions and expectations. As an investor, I'm trying to maximize for sleeping well at night, not maximizing returns. I just want to go to bed every night and say, "I'm cool. I'm cool. My wife and my son are cool." That's what I'm trying to maximize, personally, rather than, "How can I squeeze another 10 basis points of return out of the portfolio?"

Hill: You work at the Collaborative Fund. What do you do there? How do you fit into the team of people who are working at the fund?

Housel: I ask myself that every day.

Hill: [laughs] No, no. My job at the Collaborative Fund is overwhelmingly content. I write articles, write research reports, and speak at conferences. People often ask, it's a legitimate question, "Why does a fund need that? What role does that serve at a fund?" I would make the point that there are about 1,000 venture capital funds these days. All of them have checkbooks waiting to back start-ups. Money is fungible. If that's your only competitive advantage -- to say, "I have a checkbook" -- a lot of people have checkbooks these days. You need to be able to promote yourself to entrepreneurs in a way that promotes your values, where you see the world going, how you think about entrepreneurship, how you think about investing, how you think about sitting on a board. Promoting your worldview. Those values are really important, and those values don't matter unless people know about them. 

To be honest, Chris, I think The Motley Fool was probably one of the forerunners in this idea. It's been doing it since the early 1990s, using content as a way to effectively get people to trust you. It's not marketing, although I think people could construe it that way. It's not marketing because it's not writing about, "Hey, here's why we're great. Here's what we do." It's just putting forth your worldview so that people know who you are and what you're doing, so that by the time that they might be in a situation to do business with you, they already know who you are, which is big part of getting over the finish line. 

Hill: Thanks for being here!

Housel: Thanks for having me!

Hill: You can follow Morgan on Twitter and find his work at


Hill: What makes something popular? Last fall, in front of a live audience, I talked to Derek Thompson, best-selling author of Hit Makers: The Science of Popularity in an Age of Distraction


Hill: Let's start with how you got here. What was it about popularity that got you interested to the point where you thought, "Oh, I think I've got a book here?"

Derek Thompson: I think popularity is inherently weird and inherently interesting. That's a good intersection to write a book about because it takes so many months to write it and so long to read it. Coming up with a subject that was both small -- why do things become popular? -- and big -- why do things become popular? -- was the challenge here. For me, the article that I wrote for The Atlantic that really showed me that this book would be possible and interesting was an article that I was writing about the TV industry. It was about Mad Men and AMC's strategy when it greenlit Mad Men

Typically, throughout television history, the role of a TV company is to array the largest number of contemporary viewers around the TV at once. Big Bang Theory, Chuck Lorre comedies. You want the biggest possible audience. But the business model of cable television is such that a lot of cable companies make the most money not from advertising but from affiliate fees from money that is essentially sent from the household subscription straight to the television companies. So, the goal of AMC wasn't to maximize audience. It was to stay on the cable bundle. Their really clever strategy was, "What we need to do is, we need to create a show that elites on the East Coast love and will call up Time Warner Cable and complain very, very angrily if AMC is taken off of their cable bundle. We need to create something that is unmissable for a very small segment of the population." That turned out to be Mad Men. It was interesting to me the degree to which invisible forces of economics and business models that you can't see explain the content that you see.

Hill: There's something perfectly capitalistic and somewhat craven about that story you just told. Ironically, it's about the advertising industry. That's where the show is set. And they are very mission-focused. In this case, the people at AMC are the same way. They're just like, "Here's our one goal. How do we create a show that does that?"

Thompson: I thought you were going to say it's ironic that a show about advertising was actually created to minimize advertising revenue, which is also pretty amazing.

Hill: I was going to get to this at one point, but why don't we just go there now, since you've touched on the business of cable TV? That's one of the things that you write about in the book. We are now at this point in the business of television where unbundling is becoming a real thing. But one of the things that you touch on is, we may actually get to a tipping point where rebundling needs to happen.

Thompson: There are two interesting tipping points that are worth looking at. The first is that, obviously, a lot of young people in particular have switched from the cable bundle, from pay TV, from linear programming, to these mini-bundle, internet-only products like Netflix or Amazon or Hulu. Eventually, I do think that there will be so many of these Netflix-style products -- Disney ( DIS -0.67% ) is talking about creating its own Disney flicks. If that's successful, Time Warner is going to try to create its own stand-alone product. If that's successful, 21st Century Fox is going to create its own product. For those in the room who are investing or looking at Netflix, that's sort of a scary proposition, the idea that an incredibly exciting company, in Netflix, that doesn't make an enormous amount of profit, is about to be joined in this market by the largest content and entertainment companies in the world trying to create perfect competitors. That's a little bit, I think, of a scary thought. 

Another interesting thought that I think is really worth thinking about as an investor and as a 30,000-foot observer of the advertising and content space is, paid TV is a $40 billion ad market. Television is the biggest medium for advertising in the United States, $40 billion annually. But young people under 35 now watch half as much paid TV as they did just seven years ago. They are migrating in droves toward Netflix and Amazon and HBO Now. What's one thing that all those products have in common -- Netflix, Amazon, HBO Now? They're all advertising-free. Madison Avenue is used to reaching its 20-49 demographic through TV. But now, that demographic is the single most likely to be leaving TV. Where's the advertising going to go? 

Historically, it hasn't gone anywhere. Advertising has hovered between about 1.5-2% of GDP for the last 80 years. It's completely metronomic. Where does the money go? It goes where the eyeballs are going, and a lot of those eyeballs are going, in terms of ad-supporting mediums, to Facebook and Google ( GOOGL -0.68% ) ( GOOG -0.87% ). So, in a very strange way -- sorry to connect so many dots here. Hopefully there's a dot connecting thing that's forming in your brains. That was my most articulate passage of the morning. In a weird way, Facebook and Google could not have better designed a corporate assassin than Netflix. Netflix is, for young people, destroying the advertising business, destroying the advertising viewers, and pushing them toward the duopoly in mobile and digital advertising, which is Facebook and Google. That's a big idea that I'm looking at. The biggest winner of the Netflix disruption could be Facebook and Google.

Hill: Let's come back to Facebook and Google in a moment. In terms of the real and coming direct competitors for Netflix -- Disney. When you think about the content library that Disney has. If we're just talking in terms of original content, yes, Netflix has original content; but it probably doesn't stack up all that well against all of Disney, all of Pixar, all of Marvel, all of Star Wars, all that exists right now and all that is in the pipeline. And yet, as we were talking about earlier, it is not that Disney is dealing with a content challenge. They're dealing with a technology challenge. Not just for Disney, but for 21st Century Fox, Comcast, all of these other companies, how big is that tech challenge for them? If you just look at how popular Netflix has become and how quickly it became popular... First, it was DVDs by mail, which was so much more convenient than going to the Blockbuster. Then came streaming, which is so much more convenient than going to your mailbox.

Thompson: When it comes to a lot of these really powerful content owners, like Disney, like Time Warner, like 21st Century Fox, I think it's 2008 right now. That's to say that a dip is coming. Everybody can see that a dip is coming. But it's not a perma-recession. It's not a permanent depression. This isn't going to be post-Soviet Russia.

Hill: [laughs] God, I hope not!

Thompson: Instead, it's going to be, you have a lot of really, really successful, incredibly talented, brilliant people at these companies managing the transition from cable television -- probably the greatest business model in the history of the world. Just pause for a second. Think about it. There's never been anything closer to a private sector tax regime than there has been with cable television. Over 90% of American households paying $100 to seven companies every single month! That's what U.S. taxes are. Every year, about 100% of American households pay taxes to the U.S. government, and it supports a bundle of goods, including defense and Social Security. That's basically what cable TV was. It was a private sector tax system. You'll never have a better business model than that. And that's going away. It's going to be replaced by a much more competitive streaming-only system.

That transition is going to be rough. There's no way around it, it's going to be rough. They're not going to make money hand over fist the same way they did when ESPN, for example, in the early 2000s was probably the single most valuable brand in the world. That's going away. But eventually, they will build these tech distribution systems, and then they'll be relatively equal in distribution and they'll win on content. As wonderful as Netflix is, I love Netflix, it's been investing in original content for six years. Disney has been investing in original content for nine decades. It just has more stuff. It has better stuff. And it's used its richness in order to make some really brilliant investments in Pixar, Star Wars, Indiana Jones, and Marvel.

Going forward, I think Disney is a long play. But if you're looking to make money in the next few years, I don't know what Disney's short-term outlook is going to look like. I think it's actually going to be very rocky.

Hill: What role does luck play in all of this? Does it play any role at all? When I think about business... I'll go back to Netflix. Reed Hastings is a tremendous leader and Netflix is a great business. They did get lucky in the early days that whoever was running Blockbuster at the time was completely asleep at the switch, did not take the threat of Netflix seriously at all. I think it was six years that went by before Blockbuster decided, "We're going to try this DVD by mail thing and give it a shot." When you look out, whether it's content creation, distribution, does luck play a role?

Thompson: Absolutely. It absolutely does. I think some people read my book and were frustrated because I couldn't give them a perfect formula because I take so seriously this issue of luck. You can't have a foolproof formula if luck is a huge part of this equation. 

A quick story about luck. In 1954, an artist named Bill Haley recorded a song called Rock Around the Clock. It was the B-side to a song called Thirteen Women [and Only One Man in Town] about a hydrogen bomb exploding and the world being left with just 13 women and one man. You can guess where that was headed. This song completely flopped. It was not popular at all even though Bill Haley was a relatively popular artist. It came out, people had a chance to listen to it. The label pushed it as hard as they could. It just had no uptake. No one wanted to hear this song. 

One of the few thousand people who bought the vinyl record was a fifth grader named Peter Ford. Peter Ford was the son of a Hollywood actor named Glenn Ford, who was in a movie called Blackboard Jungle. One day, Richard Brooks, the director of this movie, visited the Fords' house in Beverly Hills and said, "I need a jump jive tune to kick off this movie." It's a movie about juvenile delinquency, it's a bit like Rebel Without a Cause. "I need a song to kick off this movie." Glenn, the father, says, "I only like Hawaiian folk music, which isn't going to work out for you. My son, however, is really into this weird new loud music." The son, Peter Ford, hands the director, Richard Brooks, a stack of vinyl. One of the vinyl records in that stack had the word Bill Haley on it. And Rock Around the Clock ended up playing at the beginning of Blackboard Jungle, in the middle of Blackboard Jungle, and at the end of Blackboard Jungle in 1955. 

It is only three weeks after the movie came out that the song became the No. 1 song in the country, the first rock and roll song to ever hit No. 1 on Billboard, and the second best selling song in American history after White Christmas by Bing Crosby. And that's cheating, because people just buy that for Christmas. 

Is Rock Around the Clock an intrinsic hit? If you are an investor in some marketplace of music hits and it's 1954, and you hear Rock Around the Clock, is the smart move to bet on Rock Around the Clock? Or to bet against it? Both. In 1954, the song was a flop. In 1955, it was the biggest hit of the century.

So, yes, luck plays a role. Timing plays a role. In a world in which the biggest hit of the century, that song's outcome rests on the thin little shoulders of a fifth-grader boy named Peter Ford in 1955 -- you can only discuss that world through the lens of probabilities and likelihoods, and not formulas and inevitability.

Hill: Let's go back to Facebook. In its relatively short amount of time as a company, certainly when it went public, and it grew in popularity to the point where people's grandparents were getting on Facebook. There were plenty of smart people at the time saying, "Well, that's it. It's over now for Facebook. It's no longer the cool place for younger people. It's no longer popular place." It has only continued to rise in popularity. When you look at Facebook today, what do you see, in terms of a company that is not only one of the biggest public companies in the world, it is one of the most popular stocks, it's one of the most popular businesses. How is it able to maintain that popularity? Is that the biggest challenge they face? 

Thompson: When I look at Facebook, I see one of the most impressive companies in American history that is going through a very serious existential crisis at the moment. It doesn't really understand what it is and what it's built. It knows that what it's built is valuable, but it doesn't know what it's capable of, and it doesn't yet understand how to talk about it. 

The best way to understand Facebook, briefly, to me, is as a piece of information infrastructure, the same way a national highway system is a piece of transportation infrastructure. Facebook owns practically no content. It owns the proverbial roads on which the content reaches consumers. It's done a magnificent job of stitching together this proverbial nation, which is actually international, this international polity. But, in doing so, it's not only created an incredible place for advertisers to reach people and people to reach people, but it hasn't understood that other equivalent with roads. When a state builds roads, it also hires police officers to make sure the roads are safe. They erect signs to make sure that cars don't hit each other. They paint lines and do the decades of thinking required to build a safe and truly effective national highway system.

Facebook right now has become profitable before it's become self-aware, in a weird way. What you're seeing right now with the fake news crisis from the 2016 election, another fake news crisis with yesterday's Las Vegas shooting, where it turned out that Facebook was heavily promoting right wing American propaganda and/ or Russian propaganda in its Trending News section. It's now buying advertisements in Burma in newspapers to teach Burmese people how to read Facebook. I joked today on Twitter, I was like, "This is a grotesquely ironic version of Amazon getting back into brick and mortar. Facebook is buying advertising in print to teach print readers how to read Facebook." And on top of that, you have Mark Zuckerberg's semi-political, semi-presidential tour around the country to talk to farmers in Iowa about who they are and how they live. 

I think you put this all together, and you have an incredible, amazingly successful company at the crossroads of an existential crisis, not understanding exactly what it's built and how to control what it's built. Zuckerberg founded this company thinking that connecting the world would simultaneously serve a dual purpose. It would be good for humankind, as the connections between individuals have always been, according to his philosophy. And, it would be insanely profitable, because connecting people tends to be profitable, and tends to grow GDP. But I think he's now realizing that there's lots of people who are not good. And they, according to Facebook's algorithms, are just as valuable as the people who just want to talk to their uncle and aunt and share a CNN story. 

In conclusion, I would say that Facebook's biggest problem going forward is not economics. It's politics. No company that has so quickly achieved what is essentially quasi-monopolistic power in its industry, no company like that wants to be on A1 of The New York Times and Washington Post every single time there's a national news story and it turns out that they've given enormous backing to some piece of fake news. I don't think the Trump Administration is going to be the one to regulate them. But you look at some of the people who want to be the next President of the United States that are Democrats, and a lot of them are picking as their Boogeyman. Not elites, but big corporations. And Google and Facebook are duly afraid of that future.


Hill: Derek's book is Hit Makers: The Science of Popularity in an Age of Distraction. It is available everywhere. That's going to do it for this week's show. Our producer is Mac Greer. Our engineer is Steve Broido. I'm Chris Hill. Thanks for listening! We'll see you next week!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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