Making it in the Movies: Lessons on Diversification

Lessons on the stock market can come from the strangest of places. In this week’s blog, we examine how the tactics of movie producer Jason Blum mirror that of a great investor.

NPR’s Planet Money has to be one of my favorite podcasts. Taking an alternative look at the global economy and how it works, Planet Money is extremely useful for reminding yourself that financial literacy isn’t just reserved for those with a ‘head for numbers’.

It was a recent Planet Money episode called ‘The Business Behind Get Out’ that really caught my attention though. This particular feature focused on the recently released movie, ‘Get Out’ – which has undoubtedly been one of the most successful films of 2017. Pulling in roughly $194.9 million at the box office so far this year, ‘Get Out’ is being praised across the board as both a critical and financial hit.

The Planet Money staff aren’t movie critics though, so this episode unsurprisingly took more of a behind-the-screens look at the film’s success.

‘Get Out’ was produced by Blumhouse Production – a company owned by a man named Jason Blum. Best known amongst movie buffs as the producer of critically acclaimed movies like ‘Whiplash’ and ‘Split’, Blum has built a reputation of late for producing some great flicks.

There’s also another, far more interesting, string to the Blum’s bow however. Although he might be known as a pretty successful producer around Hollywood circles, Jason Blum is also the most profitable by far.

Makes sense, you might think. He’s behind some of the biggest movies of the past few years – of course he’s rolling in it!

But if you were to look at the return on investment (ROI) of every movie made in the last 20 years, Blumhouse movies make up six of the top twenty – including the top spot.

That’s incredible!

So should we assume that Jason Blum is a creative genius? I mean, to have been behind six of the most profitable movies of the last two decades is the feat of an artistic prodigy, right?

Not exactly.

In actual fact, Blum is far more of a business genius. Make no mistake about it, there are some real stinkers in Blum’s back catalog too (remember ‘The Boy Next Door’?).

However, what Blum has done is formulated a unique approach towards selecting the movies his company decides to produce that has paid off for him big time. Interestingly for us, it’s also a technique that is startlingly similar to the way in which a good investor approaches a long-term portfolio.

He diversifies.

Scrimp and Save

Blum never subscribed to the idea of big-budget Hollywood blockbusters that cost more money to make than the GDP of a small country. Instead, he finds scripts that he thinks have the potential to become a great movie on a low budget. Blum is fastidious with this approach. No matter how good the script might be – if it requires a big budget, he’s not interested.

Take ‘Paranormal Activity’ for example. This is a movie that scared the living daylights out of half the globe, but also happens to be the most profitable movie ever made.

Blum read the script and loved it. But he also loved the fact that it could be made on a very low budget. And by low budget, we’re talking ‘skeleton crew, one location, handy-cam’ low budget.

Paranormal Activity ended up costing Blumhouse just $15,000 to make. But once it hit the theaters, it pulled in an eye-watering $200 million at the box-office. Talk about a return on investment!

Blum’s tactic is impressive, but it wasn’t the only thing that struck me about his success. Instead, I was a bit more interested in the fact that Blum tends to make as much as 10 films a year – quite a lot for the size of his company.

Of course, Blum can’t work his movie magic on every single one of these productions. In fact, it’s estimated that about 40% of the films he makes end up going straight to video, or maybe some hidden part of Netflix.

If you want to put it bluntly – they’re total failures.

But it is this very fact that makes me think Jason Blum would be a very successful investor.

Failure

We can all remember some of the biggest movie flops in history, but what made these movies such catastrophic fails wasn’t just the gulf between the capital invested and returned. It was also the amount of time, energy, resources, and expectations invested into them.

Some studios peg their entire year on the success of one or two movies. That means that if their movie flops, so does their year.

Not Jason Blum. By stretching a budget that could be spent on just one blockbuster across ten different projects, Blum isn’t just hedging his bets – he’s also making sure that his company’s success isn’t dependent on the rise and fall of one production.

Sure, four out of every ten movies he produces in a year might be consigned to the scrap heap. But that means that six will likely do well. One might even go on to become the most profitable film ever made!

This is perhaps one of the best comparisons I can find for the notion of diversification.

At Rubicoin, we can’t overstate the importance of not investing all your money into one company or industry. Putting all of your capital in one place means that, should the industry stutter – as it is prone to do – your entire investment portfolio could be wiped out.

But the one part of diversification that most people struggle with is accepting the fact that there probably will be failures.

It’s tough. As human beings, we’re psychologically hardwired to try and avoid loss. I’m sure you worked very had to earn the money you’re putting into investments, so it’s very disheartening to see shares fall into the red after you buy them.

But accepting this failure is crucial to a well-balanced and less risky portfolio. Towards the end of the nineties, tech stocks were in the ascendancy and many people decided to maximize their returns by investing everything they could into the industry. Why would you waste money on mediocre returns when you could lap up all that tech had to offer?

And sure, they probably made some pretty impressive gains while everything was on the up. But all it takes is a quick Google search to tell you exactly what happened once the bubble burst (spoiler alert – it wasn’t pretty).

A diversified portfolio wouldn’t have saved your losses on tech stocks at that time, but it would have saved your overall portfolio. If the entirety of your money wasn’t dependent on one industry, the more modest gains of your other investments would have started to look pretty good next to some plummeting tech stocks.

Diversification

The hosts of this particular Planet Money episode describe Blum’s approach as “making lots of little bets and letting the market decide on the winner.”

And though I hate using the term “bet” in relation to the stock market, I think this is a pretty accurate analogy of how you should diversify your investment portfolio.

The markets are fickle, and you never know what company or industry is next on the chopping block until it’s too late. But taking Blum’s approach and spreading your available money over a diverse selection of investments helps you to reduce the overall risk to your portfolio.

In a way, that’s exactly what we do here at Rubicoin with our Invest app. We know that every single one of the stocks we add to the showroom won’t succeed – that’s impossible. But by following the same set of principles some of the world’s greatest investing minds have created, we aim to get it right about 60-70% of the time.

That’s all it can take to become massively successful.

Remember, a key part of diversification means that you’re also getting exposure to a wide range of companies. As such, you’re much more likely to find that one stock that will bring you those Paranormal Activity levels of return.

 

Browse our diverse showroom of companies right now – for free! Download Invest for Rubicoin, available on iOS and Android.

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