By definition, "volatility" is the tendency of something to change quickly and unpredictably -- but when the trend of stock prices is moving chaotically and generally upward, it doesn't much disturb our sleep. No, the only kind of volatility that investors get excited about is the downward variety, and that type tends to make us a bit panicky. But it shouldn't.
In this episode of Motley Fool Answers, cohosts Alison Southwick and Robert Brokamp have invited former Fool Morgan Housel, now of venture capital firm Collaborative Fund, to the studio to talk about the right ways to respond to Mr. Market's wild ride, how we should think about those sharp and scary swings, what causes them, and also why the best investing strategy for you may not be the one that can make you the greatest returns. They also talk about the peculiar state of the IPO space today and why so many companies are hitting the market with multibillion-dollar valuations and hideous cash-burn rates. But first, it's a "What's Up, Bro?" segment reviewing the latest quarterly analysis from Fidelity on how Americans are doing on the retirement savings front.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
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This video was recorded on May 21, 2019.
Alison Southwick: This is Motley Fool Answers. I'm Alison Southwick and I'm joined, as always, by Robert Brokamp, personal finance expert here at The Motley Fool. Hello, Bro!
Robert Brokamp: Hello, Alison!
Southwick: In this week's episode -- whoa -- market volatility was just all the rage this last week, and so we have Morgan Housel, here, to soothe your rattled soul. And Bro is going to talk about something. I don't know what it's going to be. It's a surprise for everyone. All that and more on this week's episode of Motley Fool Answers.
Southwick: So, Bro, what's up?
Brokamp: Retirement accounts are up.
Southwick: Yay! That's really good news!
Brokamp: That's what's up. It is good news! And we know this because Fidelity has released recently its quarterly analysis of the more than 30 million IRAs, 401(k)s, and other retirement accounts that investors have with Fidelity. So it's a pretty good survey of what people have and how they're doing.
And this latest report is particularly interesting because not only do they provide the most recent numbers as of the end of the first quarter of this year -- so March of this year -- but they provided the numbers from March from 10 years ago, which was right when the stock market bottomed after the Great Recession. We've talked before about how well the stock market has done since then, but this report gives us an idea of how much retirement savers are doing [compared to] then.
So, let's dig into six questions about the average retirement saver that this report answers.
No. 1. How big is it? And of course I'm talking about 401(k) account balances reaching $103,700, an all-time high. It's up 8% since the end of 2018, so that first quarter, and to be honest, I was a little surprised at that. I thought it would be more, because in the first quarter of this year the S&P 500 was up almost 14% plus people are putting more money into their accounts. I think the bottom line, is, of course, that not everyone is invested completely in the stock market, which is a topic we'll hit on a little later.
How does that $103,700 compare to a decade ago? $46,000 was how much the average person had in their 401(k), so it's more than doubled. Again, that's good, but you might have expected more given how well the stock market has done. But 401(k)s are tricky, because these averages could include everyone who's been there for 30 years and someone who's only been there for six months, so they very helpfully broke out the numbers of account balances based on what generation you're a part of as well as numbers for someone who's actually been participating in the same account for a decade. If you look at someone who's been participating in the same account for a decade, the average balance is $297,000 vs. just $52,000 a decade ago. So it's up 466%.
Southwick: Not too shabby!
Brokamp: Very good! Very impressive! And just in case you're curious, the average balance for someone who's been investing for 10 years: millennials, $129,000; GenX, $268,000; boomers, $357,000. This is good news, especially when you hear stats about the average amount that someone has, especially if they're at the age where they're about to retire. For those who are participating in a 401(k) and have been saving they're doing pretty well. That's how much people have saved if they're actually saving.
No. 2. What percentage of employees are actually participating in a 401(k)? The answer to this really depends on whether or not the 401(k) automatically enrolls people or not. If the plan automatically enrolls you -- once you join the company you're put in the 401(k) -- 88% of employees participate. If they don't, 52%. Big difference! Clearly, people need a nudge to sign up for the 401(k), and we hear about the retirement crisis and how people haven't saved enough. Obviously one answer is just to make sure everyone gets put into the 401(k). Once you're in there, only 9% of people then change their mind and say they don't want to be in there. Once you're put in the 401(k), the vast majority of people stay in it.
Southwick: But we're only talking about a slice of people in this country who actually have access to a 401(k). Think of all the people who don't even have access to a 401(k). Who have to go through so many more hoops to save money for retirement. It's a huge barrier to entry.
Brokamp: It really is. A little bit more than half of employees are covered by a work plan...
Southwick: Whether it's a pension...
Brokamp: A 401(k), a 403(b), or something like that, which means almost half don't. Now you can still choose an IRA, but IRAs have lower contribution limits. Also, you can set up a solo 401(k) if you're self-employed, but that's kind of a hassle. So having a job with a work plan is a huge benefit.
One thing also that is higher is the amount you're automatically enrolled in. So a little less than half are automatically enrolling people at 4% or higher, which means that more than half of the employers are automatically enrolling people at less than 4%, which in my opinion is too low. I think you can get away with automatically enrolling people and having them contribute more than that. If they don't like it, they can always change it, but I think that's also another way to be helpful.
No. 3. How much are people saving? The average employee is deferring 8.8% to their 401(k). Employers are putting another average 4.7% for a total of 13.5%, another all-time high, which is pretty good. We've talked, before, about how I think people should be shooting for 15%. That's if you're starting in your 20s or maybe even your 30s.
Southwick: Before the match.
Brokamp: No, the match included.
Southwick: Oh, including the match!
Brokamp: Match included. And that's part of what we've done, here, at The Fool. If you contribute 9%, you get 6% for that 15%. So people probably should be saving a little bit more, but still this is pretty good news.
Southwick: Yeah. Now I need to hop into Namely and double-check how much I'm contributing to the platform.
Brokamp: So question No. 4. How are they investing? This gets back to that question of asset allocation and things like that. The report really celebrated the fact that people are more diversified. For example, they had this stat saying that only 10% of the people are either 100% in stocks or 0% in stocks. All-in or all-out. Compared to 2009, it was 25% of people who were all-in or all-out.
Personally, as a relatively aggressive investor and a typical Motley Fool, I'm actually fine being all stock, so I'm not sure this is a great thing necessarily to celebrate, especially since stocks have done so well over the last decade, but, I do think generally diversification is important.
And the reason people are becoming more diversified is the use of target date funds. A target date fund is just a single mutual fund that owns other mutual funds -- a mix of stocks, bonds, cash, international stocks, U.S. stocks. Currently, 52% of people with a 401(k) at Fidelity are exclusively invested in a target date fund compared to just 16% in 2009. And this also goes back to the automatic enrollment, because for planned, automatically enrolled employees 90% of those people are being enrolled in a target date fund. I think it's a great solution, especially for the hands-off investor; but, even the most aggressive allocations do have some cash and bonds, so if you are a more aggressive investor, you might want to fiddle with that a little bit.
Southwick: Yes, I'm in a target date fund and I was thinking I need to maybe start contributing to a farther-out target date, just to maybe get a little bit more aggressive.
Brokamp: It is interesting, because we just recently, on the 401(k) committee here at The Fool, evaluated our target date funds, and we felt that the ones that we had were too conservative, generally, and we've replaced them with another set that are more aggressive; but they get really conservative right before retirement, which some people think is good. But it's a debate about what they call the "glide path" should be. It is pretty complicated. Again, target date funds, I think, are generally good, but you do want to make sure you have the right ones.
Two more things from the report. No. 5, are retirees choosing the Roth or the traditional? And the answer for 401(k)s is overwhelmingly the traditional. Almost 90% of people are going with the traditional. Only 11% are going with the Roth. But interestingly, when you look at IRAs, it's different. With the IRAs, 52% are Roth. So what people are doing is they're using the traditional for the 401(k), but then opening a Roth IRA which I think makes a ton of sense.
I did this for many years. You get the tax diversification of having a little bit of both. Also, generally speaking, people are more aggressive in their IRAs, because they can buy individual stocks. And if you want one account to grow the most, it's the Roth IRA because the distributions are tax-free and you want your tax-free account to grow the most. I thought that was pretty interesting.
They also had a stat in here where they said the average 401(k) account was $103,000. The average IRA was $107,000. But when you look at the average total of people with both 401(k)s and IRAs with Fidelity, the total is over $300,000. And I actually sent them a question. Why is it that the combined is so much higher than the separate? And they said the people with IRAs and 401(k)s are much more engaged and they save more. They also tend to be a little bit older. But I certainly think it makes a lot of sense that if you have the money, to invest in both.
And finally, No. 6. What made me cry the most? Well, they had a stat on what people do with their 401(k)s when they leave their job and we've talked about this before. 36% of the people cash out their 401(k). They don't roll it over to the next 401(k). They don't roll it over to an IRA. They take the money -- which means they're paying taxes, they pay penalties if they're not 59 and a half, and they miss out on all that future growth.
It also makes me sad because I know a lot of people are doing this for reasons they have no choice over. They might have medical bills, or something like that, and I certainly have sympathy for that, but please, if you're ever thinking of doing this and you don't need the money, roll it over to an IRA. You're going to save yourself a lot of current bills -- in terms of taxes and penalties -- but you're going to be very grateful you kept that money invested when you retire. And that, Alison, is what's up.
Southwick: Dow bleeds overnight on 50% chance of Trump trade deal failure. Money managers are bracing for a sharp fall. And some guy on Twitter was copping "Enter Sandman" by saying, "Exit light. Enter night. Take my hand. We're down 600 points again." These are just some of the high lowlights from the last week of insane volatility.
At the time of recording this, the S&P has had a wild ride. It's at about 2,800. Up 300 points today but down about 100 from its high. And as you're listening to this I can only guess what sort of dystopian economic wonder hell you're living in three days later.
So joining us in the studio today -- actually just me -- is Morgan Housel, who's going to offer up his calming words and advice...?
Morgan Housel: That was so dramatic! You did a good job setting the scene!
Southwick: I know! It's tense!
Housel: Of how not to react to these messes.
Southwick: Oh, it's tense! Like how can you do it? I think about people like my dad who watches the news. He doesn't necessarily care about finance, but when you just casually watch the news and then suddenly you see headlines like, "Set your hair on fire! The market's down 300 points!" Then my dad's like, "Oh, well. It sounds like I should set my hair on fire. They say the market's..." But then you're like, "Well 300 points really isn't that much these days."
Housel: There's this thing. Every time the Dow falls at least 500 points, CNBC does a segment called Markets in Turmoil. And there's always this thing on Twitter where it's like, "OK, we're going to do this Markets in Turmoil segment again." And it's just like an indicator of the panic that goes on.
It's almost like this song and dance that goes on when the market falls. I first joined The Fool in 2007. Alison, how many times do you think you and I have done a podcast before to talk about market volatility? 30?
Southwick: We've done it a few times.
Housel: 15? A lot over the years!
Southwick: It's time well spent.
Housel: I think it's interesting that this kind of volatility, these kinds of declines, happen so frequently, but every time it happens there is this reaction within headlines. Within how investors react. And it's not a bad thing -- it's not a criticism of how the media reacts -- I just think it's an inherent part of investing. These declines, no matter how frequent they are -- even with the kind of declines that we've had in the last month -- is the kind of thing that we've had three or four times a year going back forever. It's still going to feel way worse than it should when it happens.
I always say, "Yeah, the Dow fell a thousand points last week, which is the first time it's happened since the last thousand-point decline that you don't remember anymore." The same thing happens all the time.
I think the proper framing for big volatility like this is there's a cost of admission for big market returns. If you want big returns over the long term, those don't come for free. You have to pay a price to get those. And the cost of admission for markets is, of course, volatility.
And there's two ways to look at that. You can look at it as a fee or a fine. A fee is you're paying the cost of admission and it's a good trade. You're paying the cost, but you're getting something great in return. A fine is you're not supposed to pay that. You're not supposed to get fines. You're supposed to avoid fines, so you try to avoid it.
And I think viewing volatility as a fee instead of a fine is the proper way to think about it. This is the cost that you're paying to do really well over time, but it's not a fine. You're not in trouble. You didn't do anything wrong. You don't have to avoid us. You don't have to feel guilty for dealing with this volatility. It's not a fine. It's just a fee that you're paying. You're just getting the bill. You're getting your quarterly bill to get long-term returns over time. That's what these volatility kind of spikes that we deal with every quarter, I think, mean for investors.
Southwick: Let's talk specifically about the recent market volatility. I did a little bit of homework. I think it's because of trade war. Retail sales. What's causing the recent market volatility?
Housel: I think whenever there's an attempt to say the market fell because of X, it's a dangerous path you're going down. Sometimes it can be fairly obvious. The best example is in 2008 during the financial crisis, Congress voted down the bank bailout and within seconds the Dow went from up 500 points to down 900 points. [With] that you can say that the market fell because of X.
Most of the time I think it's very difficult to pinpoint why the market's falling. If we want to say that the market had volatility in the last week because of the trade wars and developments between China and the United States, I think that makes a lot of sense. And two things come from that. One is that when the market has done very well, as it has over the last 10 years, and valuations are high, things are just much more sensitive to even a little bit of bad news. So even if there's a tiny news story that investors didn't expect, even the tiniest sliver of bad news can send the market tumbling.
That's not the case. If you go back to March of 2009 when valuations were low, even though bad news was coming in day after day -- unemployment was high, people were being laid off, and there was bad news everywhere -- the market was surging day after day. How markets react to news is just in context of the current valuations, and valuations are really high right now.
The other point is that most recessions -- most big economic events -- are not economic events. They're not financial events. They're political events. And I think that's hard for investors who say they like investing but they're not into politics. I think that's a fine mindset, but most recessions are political events and so the causes of recessions tend to be political events. Whether it's from the federal government or the Fed, that tends to be the trigger of most recessions.
When you look at something like a trade war, the economy is doing really well, right now, and has a lot of things going for it. If you look at it through the context that most recessions are caused by political events -- and that's not a partisan statement -- I think that goes on both sides. Just thinking what is going to cause the next recession. Could it be something like a trade war? It certainly doesn't help. So you put those two things together -- the high valuations and then the historic triggers of recessions and downfalls -- and if I had to make an explanation for why the market has been choppy lately, it would be that.
Southwick: I don't want to get too much into exactly how the sausage is made, but I think some of our listeners have an interest in knowing how the market works. What is actually happening here, when someone buys a stock or sells a stock? So in these moments of volatility, how I picture it is a bunch of bros on Wall Street yelling, "Sell, sell, sell." But that's just me watching Wall Street movies.
Housel: And that was 100% true as recently as 10 years ago. It's completely untrue whatsoever anymore. If you look at pictures of the New York Stock Exchange, today, where it used to be the bros yelling, "Sell, sell, sell," it used to have literally a thousand people on the floor. If you go back to the '80s, which was probably the peak of the human trading era, there was probably a thousand people on the floor of the New York Stock Exchange.
You go there today, and it's 20 people, 19 of whom are CNBC anchors. It's all been digitized, now. And so much of it still occurs at the New York Stock Exchange -- and then buildings in New Jersey and New York -- but it's all digitized. That doesn't necessarily change the function of markets. Things happen faster than they used to. But I think markets are still fairly efficient right now.
You can point to the Flash Crash of 2010 where the computers went crazy and the market fell 10% or so. But you also had in 1987, which was still heavily dominated by human traders, [when] the market fell 27% in one day, and that was during an era where it was still human traders. So I think markets are fairly efficient, right now, even if it's just a bunch of computers yelling at each other.
There's a bunch of crazy stories about the functioning of markets and how they've evolved over the last year to where it's all computerized trading. And my favorite example is there's two office buildings in New Jersey that account for the majority of stock trading in the United States. It's where a lot of hedge funds and high-frequency trading offices house their servers, and so that's where the trading takes place. There are these nondescript buildings, unmarked because they're high security. If you're a terrorist looking to take out the American economy, that's the building you want.
But within these servers, high-frequency trading became so competitive that there was a fight between high frequency traders to locate their servers closest to the end of the building that was near the cables that exited the building, because they were dealing with such small periods of time -- they call them picoseconds, which are one trillionth of a second -- that they were fighting over, that the amount of time it took for the light to travel through the cable to their server; they would have an advantage if their server was a little bit closer to where the cables came out of the building. So they were fighting for space within the building and where to locate the buildings. That's how competitive it became.
And then there were companies that wanted the shortest cable connecting their computer, because if they had a long cable it would take an extra picosecond for the light to travel through the long cable to reach their server, so they wanted the shortest cables possible. I think that sums up the extent to which it's become competitive down to this level of time; literally this astronomical period of time that's hard to wrap your head around.
But I think for day-to-day investors -- for most people listening to this -- it doesn't have a big impact. But the structure of the market, in terms of how trades are actually executed, has changed so much in the last 10 years. That's true at the institutional level -- for hedge funds, mutual funds, and whatnot.
For most people listening to this, if you are an individual investor and you want to buy 10 shares of Amazon, and you log into your E*Trade account, there's probably another investor in E*Trade who wants to sell 10 shares of Amazon, and so that trade is "internalized" at E*Trade. It doesn't go to the New York Stock Exchange. E*Trade takes care of it right there. They have enough customers that they can just swap it right then and there.
So for most of your trades, for people listening to this, that's how your trade takes place. It never even leaves your brokerage account. You're trading with another E*Trade customer or another TD Ameritrade or Schwab customer. But if you want to buy a million shares of Amazon, that's where you have the computers screaming at each other and fighting over picoseconds.
Southwick: Which is insane! As an individual investor, I can't fight over picoseconds.
Southwick: So what is your best advice? I have a feeling I know what your best advice is for individual investors, but let's hear it!
Housel: Well, the way to contextualize this is back in 2010 when there was the Flash Crash, if you weren't investing back then it was a period where out of the middle of nowhere, the market fell like 10% and then recovered instantly. It was just this flash crash. And we did a bunch of investigation at The Motley Fool at the time: this big research report on what happened, how it happened, and how it impacted investors.
And we set out at the time to find an individual investor who was harmed by the Flash Crash. And we couldn't find one. We could not find a single person who was actually a victim of this day. The market fell 10% and then rebounded immediately. Who was harmed by that? The answer was hardly anyone. If you had a standing stop-loss order, you may have been harmed by it, but other than that, this was just something that if you were a long-term investor -- or even if you were a short-term investor and you didn't happen to be logged into your brokerage account during this five-minute period when this happened -- it didn't matter. It wasn't that big of a deal.
And I think that's true when you think about high-frequency trading and the function of markets. Even to the extent that the function of markets has increased volatility relative to where it used to be, I don't think the evidence is that great for it. But for most investors the answer is it doesn't matter. It doesn't make much difference to you whatsoever. And even if what's going on behind the scenes are computers fighting over picoseconds, for you, the investor who's going to hold Amazon shares for the next 10 years, it doesn't make any difference whatsoever.
Southwick: I remember three or four years ago -- maybe even longer when you were here at The Motley Fool -- we were in the middle of a glorious bull market. We still are, but at the time -- three, four, or five years ago -- everyone thought this had been going on a little bit too long. I remember you were very honest about how you were building up your cash reserve, and you had more on the side. Since then, the market has continued to go up another bajillion percent.
Housel: Right. That's roughly right!
Southwick: It's about right!
Housel: It rounds to a bajillion.
Southwick: I wanted to hear your thoughts looking back on that. And I'm not here to be like, "You made the wrong decision!"
Housel: Oh, that's how it's coming off. I'm kidding!
Southwick: But the point is that this was a decision you made a few years ago. You would have made more money had it been in the market and then it wasn't, but OK, fine. How do you look back on some of your decisions and think, "No, that was still the right move because I was able to sleep well at night."
Housel: There's two things to bring up. One is the strategy for the big cash position is a matrix that when the market falls by X, I'm going to invest Y% of my cash. If the market falls 10%, I'm going to invest this percentage. If that loss goes to 20%, I'm going to put in more. So during that time -- let's go back to 2015 -- the market has had two 10% declines and one 20% decline. So during that period I have invested. I have drawn down portions of that cash.
I've been saving more cash, as well, which brings us to the second point, and this is how it works for me. I think most investors would not agree with this statement, but this gets back to the point that personal finance is more personal than it is finance. My goal for investing has always been not to maximize returns. It's to maximize how well I sleep at night.
And so when I look at the economy growing for 10 years, I think it just leads to complacency about the odds of the next recession. And if you look at a bull market that is now 10 years old -- which also leads to an overall complacency of the odds that it could have another crash or the fragility that could send it into another crash -- I feel totally fine with the amount of cash that I have on hand, and I've made three big transactions during big periods of volatility, the latest of which was the end of 2018 when the market fell 20%. I was able to put more cash to work.
Would I have earned more? If I had a time machine and I could go back, and I just invested all of my cash in 2015...
Southwick: Not taking into account how well you would have slept at night.
Housel: Which is a big thing, but let's leave that aside. Would I have earned higher returns? Yes, of course. But there's too many of those situations as investors to say, "If I could go back in time and do X, I would have been better off."
Southwick: If I could go back in time, I would have bought Amazon when I was 16 years old.
Housel: We could do this all day. But even with that, I have zero regrets about it. But I totally understand -- I have this conversation with investors a lot -- who don't understand that position. I don't see that as a debate, because if something else works for them, I think that's great, but this is what works for me and my family.
Southwick: So back off! Morgan Housel digging in, doubling down on his bad decision. No, I don't think that at all. I remember at the time that was a controversial take, because everyone here at The Motley Fool was like, "You should be fully invested all the time because the market is always awesome. And even when it's not, it's awesome!"
Housel: Here's another thing to wrap this into the personal context of how people make investment decisions not on a spreadsheet. They make them at the dinner table talking with their family about what works. If you go back to 2015, I had a newborn. My wife wasn't working. We just bought a house. It was a period in which if I was looking at my financial life, it would have made a lot of sense to say, "I'm not in a position to take as much risk right now as I might in a different portion of my life."
So if you are a Motley Fool member who is in their fifties or sixties, and your kids have moved out, and you have a much more substantial net worth than I did at the time in 2015, then it might make a lot of sense. Which just gets to the point that there's no "one-size-fits-all" answer in investing. This is hard to do if you're going on TV or writing an article or doing a podcast, where you want to give one-size-fits-all advice because there's a lot of people listening to this and you just want to say, "Here's what you should do."
Southwick: And they want to hear what they should do.
Housel: They want to hear the one answer. But I think the hard answer, but the truthful answer, is it depends on who you are. It depends on where you are in life. It depends on what your goals are. Your risk tolerance. What your future cash flow needs are going to be. There's so many different variables.
Southwick: Let's move on from market volatility because another thing that's been going on lately in the markets is IPOs, most notably Uber's, which I hear was a huge failure. Dun dun duh! And my response to that is, "A failure for who?" It always depends on who that person is as to your perspective on whether it's a failure or not. What do you think about the recent IPOs?
Housel: I think what's interesting -- and this is a big, historical anomaly if you compare the long history of IPOs -- is the percentage of companies that are going public in the last few years that are not profitable and basically have no prospects for profits. That is not normal.
Housel: But the percentage of companies that are in that situation over the last few years is most of them. And you look at companies like Uber or Lyft -- we are investors at the Collaborative Fund. Or Blue Apron. Or Snap. All these companies that are going public don't have any prospects for profitability and they are just cash incinerators.
I think an important dynamic that's taken place is in the last decade, the VC and private equity industry has grown enormously. It's literally trillions of dollars in which 20 years ago it was a fraction of that, which has made it so that private companies can stay private for longer.
So in a different era -- if you go back to the '90s, let's say -- Uber, and Lyft, and Airbnb, and Palantir, and SpaceX], all these companies would have gone public way earlier than they either are today or some of those companies are not even public yet. They would have gone public years and years ago when they were just out of the garage start-up phase.
Once you got a little momentum, traditionally that's when you went public. Today these companies are staying private for a long time and they're backed by venture capital funds and private equity funds. Those types of investors tend to have much more tolerance for the companies losing money. For net operating losses at the company level.
And therefore, by the time these companies go public -- like when Uber goes public, or Airbnb, or Lyft -- these companies are a big, established 10-year-old decabillion-dollar companies, but in terms of their internal financials -- their operating losses -- they're looking like brand new start-ups that are just bleeding money all over the place. And public markets don't have the appetite for that.
So it's this really weird dichotomy where you have these companies like Uber that when they're backed by venture capital funds, they're doing great and VCs will give them all the money they want and then the moment they become public companies, public investors look at their balance sheet and their income statements and say, "What the heck is this?"
This is not a business. Look at something like Uber and Lyft. I have to keep saying that we're investors in Lyft. This is not necessarily a criticism of the investors who have backed these. It's just the reality of where we're at. Every Uber and Lyft ride you take -- investors cover one-third of the cost of that ride. They lose money on every single ride. And that is not something that if you went back before the late 1990s would have ever been acceptable. And I think there's a big difference between a great product and a great business. And a lot of these companies are great products -- they're amazing products -- but they're not good businesses. That's the reality of it.
And just to contextualize the extent to which that did not used to be true, Michael Dell, from Dell Computers, posted last year the income statement that he used for when Dell Computer was one year old when he was running it out of his dorm room at the University of Texas I think it was. This is literally a dorm room company. Like he hasn't even graduated to the garage yet. This is dorm room.
He had 20% net profit margins. I honestly don't think there's a single well-known start-up today that has that. And that was when he was operating out of his dorm room. But I think that was expected back then. If you go back to that era, if you had a business, the idea was of course you're going to be profitable. You're not a business unless you're profitable.
So it's very different expectations, today, at the VC level. And I don't know if that's a bad thing. I think it's too early to tell whether that's a bad thing because companies that don't have to focus on quarterly profits, these days, can focus more on really building a great product and whatnot; but there has to be some balance on the other side. And when these companies go public, like Uber and Lyft have recently, they realize that that other side is completely different than the side in which they've lived in for the previous decade.
Southwick: While I was looking for the doomsday article headlines today, one of the big ones was that Beyoncé was going to make a ton of money off of Uber. Did you see this?
Housel: I read this, this morning.
Southwick: I only read the headline.
Housel: She's something. There's two parts of this. And it didn't look like the most reputable source, but it's a good story, so let's run with it.
Southwick: We should absolutely run with it. I read the headline and I thought, "No wonder Uber's not profitable. They offered Beyoncé $6 million."
Housel: That was my thought, too. That's what actually made me think, "That doesn't sound right." But let's run with it.
Southwick: A lesson in reading beyond the headlines.
Housel: Apparently Beyoncé performed for Uber in, I think, 2013 and they paid her $6 million. And she opted to take the payment in stock, and that stock is now worth $300 million.
Southwick: Smart move!
Housel: I have 50% faith that that's accurate, but let's go with it. The other story that I know is accurate is that Beyoncé performed at Coachella last year. Her fee for that was $8 million, but instead of taking the $8 million, she said, "Just give me the rights to the video. I'm going to record this performance, and that's mine. That's my compensation." She sold those rights to Netflix for $60 million. You hear these stories and think these are some very smart people. She declined her $8 million fee and ended up making $60 million off of it.
Southwick: And what's she going to do with another $8 million? Make even more off of it.
Housel: I love the stories of the people who end up making more money from these side businesses than they do from their actual careers. Michael Jordan made so much more money from Nike than he ever did from basketball. Shaq is another person who's made so much money from investing his basketball earnings than he did from basketball. And you have other people like Jay-Z and Beyoncé that make a fortune outside of their day jobs.
Southwick: How do I invest in Beyoncé? Can I get some equity in Beyoncé?
Housel: Did she IPO?
Southwick: She should IPO!
Housel: She should. She should go public.
Southwick: I would totally invest in her because she's very profitable!
Housel: Yes! More than all these companies!
Southwick: All right, Morgan, well, thank you for joining us again!
Housel: Thanks for having me!
Southwick: If you listeners want more Morgan, and I know you do, head to CollaborativeFund.com. Morgan is a partner at the Collaborative Fund and you also write for them. Is that accurate to say you're a partner?
Housel: Like the Beyoncé headline, let's just run with it.
Southwick: He's there. He's at the Collaborative Fund. Head there and you can read all his articles. Also follow him on Twitter. He gives good Twitter, so there you go. @MorganHousel? Is that what you are on Twitter?
Housel: That's right!
Southwick: There you. M-O-R-G-A-N-H-O-U-S-E-L. Morgan, thanks again!
Housel: Thanks for having me!
Southwick: Well, that's the show! It's edited volatile-y by Rick Engdahl. Hey, drop us a line! We're at Answers@Fool.com. We have a Mailbag episode coming up. I believe Emily is going to be joining us again.
Brokamp: I believe so.
Southwick: So great! She was great last time!
Brokamp: She was!
Southwick: I'm really excited to have her back in the studio! So yes, send us your questions about investing. That's really going to be her sweet spot. I guess Bro can answer your questions about other stuff.
Brokamp: We'll see! See if I feel like it.
Southwick: Whatever! You have to whether you like it or not. This is a ride or die situation on Motley Fool Answers. We are all stuck in this together. Well, for Robert Brokamp, I'm Alison Southwick. Stay Foolish, everybody!
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Alison Southwick has no position in any of the stocks mentioned. Morgan Housel has no position in any of the stocks mentioned. Robert Brokamp, CFP has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon, Nike, and Twitter. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.