In this episode of MarketFoolery, Chris Hill talks with Fool analyst Jason Moser about some of today's business news. In light of the Golden Globe nominations, they discuss the streaming scene today and how companies like FX, Netflix (NFLX +1.15%), Disney, Comcast, and others fit into it.
Then, a reflection on the life and legacy of Paul Volcker, whose unpopular-at-the-time choices definitely paid off in the end. They also answer some listener questions -- what's the point of buying a large cap like Apple or Microsoft if you're already invested in them through indexes like the S&P 500? Tune in to find out more.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on Dec. 9, 2019.
Chris Hill: It's Monday, December 9th. Welcome to MarketFoolery! I'm Chris Hill. With me in studio, Jason Moser. Thanks for being here!
Jason Moser: Howdy!
Hill: We're going to look at large-cap stocks relative to index funds. We're going to pour one out for Paul Volcker. But we're going to start with the entertainment industry.
The Golden Globe nominations came out this morning for film and television. The most nominations in film went to Netflix with 17 nominations, followed by Sony and Disney with second and third most respectively. Most nominations in television, Netflix with 17, HBO second, Hulu third, and I will just add parenthetically, broadcast TV completely shut out of the nominations for television.
Where do you want to go with this? We were talking a little bit this morning about this. Obviously, this is a nice feather in the cap for Netflix. And I think part of the reason is not just because it's nice to get this kind of recognition, but also because, for anyone who's wondering about the money they're spending on content, Ted Sarandos can point to this and say, "No, I feel like from a quality standpoint, we're doing pretty well."
Moser: Yeah. I'm not surprised by this. It really feels like this just reiterates what we've been watching play out over the last several years. We're seeing the old legacy providers really take a hit on the content side. I think a lot of that has to do with the fact they've been hamstrung by old school advertising models and limitations on the type of content they can produce. We saw Netflix jump in there early on, see the power of the disruption that the internet has provided, and then a lot of other companies have started to follow suit.
I'm not one that really focuses or cares much about what award shows say or what critics say when it comes to content, but with that said, I think that these types of awards, just even these types of nominations, regardless of whether they win or not, these types of nominations certainly help get this type of stuff on viewers' radars. And I think that is probably one of the biggest benefits of all, is that it is more or less free publicity. I say "free;" obviously, they're paying a lot of money to produce this stuff, but it is publicity that helps get a lot of this stuff on viewers' radars. And as we enter this phase of more content than we ever have time to watch, it's nice to know what is bubbling to the surface there as the must-see TV and films and whatnot. And I think, honestly, we've talked about this golden age for television, it really feels like films have had a tough go of it, and I think part of the proof there is just this constant need to reboot everything, and these reboots are just so uncompelling from so many different angles. It's nice to see your Netflixes and Disneys and HBOs taking these creative moonshots, so to speak, and seeing some of them pay off.
Hill: Absolutely. I think you're completely right, particularly when it comes to the fact that we know that smaller networks -- whether it's FX or AMC, some of these other ... I don't want to say niche, but I guess, just from a content creation standpoint, in a way, they are niche, because they're not producing a lot of original stuff. But, part of their pitch to show runners is, "We can give you a lot more oxygen in terms of promotion," because the fact of the matter is, Netflix, obviously they're going to promote their bigger hits and bigger budget items more, but just the sheer number of original things that Netflix is producing in a calendar year is in the hundreds. And so, as they continue to invest in things like stand-up comedy, there's only so much promotion they're going to give a new comedy special, no matter who's doing it. They're going to say, "Yeah, Jason, you've got a new hour stand-up special. That's great. We're going to give you about three days' worth of promotion. It'll be on social media. Maybe a billboard or two. And that's going to be it." So, this really does afford them, as you said, this bonus opportunity to promote, "Oh, yeah, The Irishman. Yeah, it's a long film, but apparently it's a great film because it's getting all these award nomination."
Moser: I'm so torn on The Irishman. I want to watch it, but I know I'm not going to have the patience to finish it. And it's like, it's going to be an amalgamation of a lot of movies we've already seen with these guys, and you're going to kind of know how it ends anyway, so do I need to bother, really? And then you've got Scorsese out there just begging you not to watch it on your phone, but it's four hours, man! There's going to be some time spent watching this thing on my phone!
Netflix is a very interesting situation right now, because it has such a head start on all of these other streaming services that are coming to market, HBO included. When you look at some of these numbers regarding content spend, it's actually astounding, I think. Netflix is going to spend around $15 billion content this year. You compare that with something like Disney+. They're going to spend about a billion here in this first year. Now, that'll continue to go up as time goes on. They're just getting started. But then, you look at something like Comcast's Peacock, which is going to be the NBC service. They're talking about spending $2 billion over the first two years to grow out that service. And really, all we've recognized that service for, more than anything, is probably just the fact that it's going to have The Office once The Office leaves Netflix. My point is that a lot of these other services don't spend nearly as much on content. That can be an advantage or a disadvantage, depending on what your perspective is. Netflix is trying to build a service that scratches an itch for everybody. So, they have this wide cross-section of content that they're building out, and it costs a lot of money to do that. If that's going to be their strategy, they're going to need to keep on doing that. That requires a lot of capital, and they're going to have to figure out ways to raise it. HBO, Peacock, Amazon, Disney+ to a lesser extent, they are focused a little bit more on a specific world and what they know, where the content spend might not be as heavy, but their catalog is going to be more limited. That's by design. So then, it is just a matter of how these all come together, and how we as consumers are going to pick and choose which services we ultimately want. Price is going to take part of it, but people are going to pay up for what they want to see. So, again, I feel like with Netflix having such a great head start, it's terrific from a consumer side. But now, from the investor side, you have to start asking yourself, how much more room can they raise prices versus something like a Disney+, where it looks like they have a lot of room to raise prices, but they're also getting started?
Hill: You mentioned the number of sequels that we've seen, or the reboots that we've seen. I agree with you. From a creative standpoint, it's hard to get excited about that. I think from a business standpoint, when you look at the box office numbers for this year, and the fact that right now, The Lion King remake is No. 2 at the box office, for anyone questioning Disney's movie strategy, you can stop. [laughs] Disney is on pace to do about $10 billion at the box office this year. The biggest year they had was 2016, just over $7.5 billion. And I'm not even including the Fox properties. You include those, it gets you closer to $12 billion. But it's really phenomenal what they've built. Good luck to whoever gets to succeed Bob Iger.
Moser: Yeah. They've got their work cut out for them. But I tell you, it is amazing that even when Disney puts out something that you might not initially think you care all that much about, then at some point or another, you end up seeing it for one reason or another, and you discover, "Wow, man, I really enjoyed that." The most recent example for me was, over Thanksgiving break, we were down at the river for the holiday, and we keep that house disconnected from the internet, mostly just because we're not there all the time and just don't want to waste the money. But, we have a DVD player there. Believe it or not, those still exist. And Redbox --
Hill: [laughs] I love Redbox.
Moser: We put it to good use there. And we got Disney's real-life Aladdin. We got the recent make of Aladdin. And I have to admit, when it came out in the theaters, I didn't really care. Now, part of that is because I just don't want to get off my lazy butt and go to a movie theater anymore. But man, we got that DVD, watched it, I really enjoyed that movie. Same thing with Toy Story 4. Mac Greer, be quiet, sit back. I know you didn't like it. I thought Toy Story 4 was a lot of fun. I wouldn't have given it the time of day in the movie theater. So, it's really nice to see these companies being able to fully realize the value in a lot of these properties well beyond their lives in the theater. And I suspect that's only going to become more the case as time goes on.
Hill: Paul Volcker has passed away. For those unfamiliar, he was the chairman of the Federal Reserve from 1979 to 1987. He was 92 years old. Obviously, thinking of Volker's family and friends. The phrase "larger than life" gets thrown around, probably more than it should. Paul Volcker was one of those people who was larger than life in part because he was, I think, 6'7. Just cut this enormous figure. I will tweet out the fantastic obituary that Neil Irwin did in the Washington Post today. It doesn't just give you color on Paul Volcker's life and his work; but it also provides, I think, a very good, and in some ways, much needed context for what he did when he was chairman of the Federal Reserve. Essentially, he had been on the job for about two months late 1979, and came out and just decided, "With prices and wages rising to unsustainable degrees, we have to choke off the supply of money." And it's one of those things that absolutely, in hindsight, he gets all the credit in the world, as he should. It was absolutely the right thing to do. But at the time, and for the subsequent, I would say, two and a half to three years, it was really, really hard. Yes, he had fans on both sides of the aisle. He worked for Democratic presidents and Republican presidents. He also had detractors on both sides of the aisle. And I'm sure on YouTube, there's probably footage of Congressional hearings from the early 1980s where he's up there just getting ripped from both sides. But, just, an incredibly impressive person.
Moser: Absolutely. I tell you, I saw a tweet this morning from our friend Morgan Housel. When I read his tweet, it was exactly what I was thinking, what he said. He said, "We lost Jack Bogle and Paul Volcker in 2019, two men who were at times willing to look like idiots during their careers because it was the right thing to do for the broader good." I think he was absolutely right. At the time, his monetary policy was questioned by many. When you're talking about interest rates as high as they were, and also inflation rates as high as they were, it was a unique time in our country's history. Like most things, as our country grows, as things change, we introduce more tools into our toolbox, and ways to deal with things. But he made some decisions at the time that were seen as harmful to a lot of people. And there were a lot of people that protested that. There was a lot of noise made here in D.C. about that. You look back at it now, there's no question it was the right thing to do.
I think you hear a lot about today how inflation is dictating Fed policy. I really do think a lot of that is because of what he did. I think in hindsight, we look at what he did and how he was right in what he did. It's understandable now why inflation is such a hot button issue. You really need to have that under control in order to be able to control everything else.
Hill: Just to add one more number to what you said. He makes this decision in late 1979. Unemployment is at 6%. Two and a half years later, it's at nearly 11%. So, yeah, as you said, there was definitely a lot of pain. In the context of history, it is short-term pain, but it was real pain, and people losing their jobs as a result of that.
My enduring image of Volker is from the Academy Award-winning documentary Inside Job, Charles Ferguson's great movie about the Great Recession. One of the things Ferguson does as a director in that movie is, there are moments in the documentary where he's getting ready to introduce a new commentator, and you hear someone else talking, and Ferguson shows essentially a setup shot of the person who's about to be interviewed. And in the case of Volker, it's Volker sitting in a chair, probably in his office in New York City, and there's a production assistant behind him adjusting the lighting. So, just picture this very large man sitting comfortably in a chair. In his left hand are a stack of papers that he's reading, and in his right hand is what appears to be a whiskey on the rocks.
And I just thought, "That's perfect," that Volker just said, "Sure, you want to interview me? Come to my office. Yeah, come around five. You need a little time to set up the lights? Fine, I'm just going to be reading and having my first drink of the day."
Moser: Cigar and whiskey. He's a man's man, old tall Paul. I think, as time goes on, we'll look back at him with just more and more fondness. Again, we see those examples. We do this stuff with our kids all the time. "You may not understand the logic of my decision today, but years from now, trust me, you'll appreciate the fact that you ate your vegetables," or whatever it may be. He was just having to communicate that to an entire country. And it's probably a safe bet, the entire country doesn't have as firm a grasp of monetary policy.
Hill: Nor should it.
Moser: No, it shouldn't. That's why we're here, right?
Hill: Right, exactly. Our email address is [email protected]. Keep the emails coming, by the way. A bunch of people emailing in holiday song suggestions, which I am happy to forward on to producer Dan Boyd.
This is a question from Mike in Ohio. It was a pretty lengthy question that he boiled down to the following: "What I really want to know is why buy into large-cap stocks that are heavily weighted in index funds? You technically already own them, and much of their growth is already realized at this point, where owning them does not help me beat the market, as they are basically the market." He kicked off the email by saying, "Why would I buy Apple? If I've got index funds, and Apple is represented in there to a degree higher than smaller companies in the S&P 500, why would I buy Apple?"
Moser: Yeah, I think that's a fair question. If you're looking at something like an S&P index fund, that's market cap weighted, it's going to favor the bigger companies, and Apple's certainly one of those, along with [Alphabet], Microsoft, and many others. I think it's a fair question. I think that the answer is that ultimately, not all large-caps are created equal, and they're not all the same. To be sure, if you look over the last five years, for example, Apple and Microsoft have outperformed the market handily, while Oracle has not. You ask yourself why you would be invested in a fund, in an S&P 500 index fund, for example. You're looking to do that for any number of reasons, but diversification is obviously one that comes to mind. It gives you ownership of a lot of different businesses as opposed to trying to pick and choose.
Now, if you are in the mindset of wanting to pick and choose, I don't think looking at large-caps as "companies that are so big they can't grow anymore" is a good way to look at it. We've seen time and time again; a lot of these large-caps continue to disprove that. Part of the reason is because technology continues to change the game for so many of these companies. If you're looking just at the future, when it comes to things like cloud computing, for example, we're really now starting to realize the returns on all of those investments. Look forward a little bit further at spatial computing and augmented reality and virtual reality, mixed reality, those are going to be catalysts that help these big companies that have been making big investments in those spaces for years to come as well. Plus, you look at these large-caps that typically can afford to pay a dividend. They can raise that dividend. They make a lot of cash. They can buy back a lot of shares. So, the business doesn't necessarily have to be growing at some breakneck rate in order for you to still realize outsized returns as an investor.
So ultimately, I think that when you start talking about large-caps, recognize the fact that not all large-caps are created equal. Look to see how they've performed over time. And if you're looking to invest in individual large-caps, I think you can find some pretty compelling ideas out there, companies that terrific track records, that have a lot in the pipeline here for the coming years.
Hill: Jason Moser, thanks for being here!
Moser: Thank you!
Hill: As always, people on the program have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. The show's mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow.
