I’ve never really been much of a movie guy.
I’ve always found the genre extremely predictable. The nerdy guy always gets the girl, something we know doesn’t happen in real life. Good guys always win, sometimes via dubious methods. Seth Rogan shows up far too often, making some sort of marijuana joke. And so on.
I prefer sports. There’s the potential for something amazing and unbelievable to happen every time you turn on a baseball game. Not every game will get you a mother f’ing bat flip, but at least there’s potential for such a thing to happen. When was the last time you were truly shocked when watching a movie?
I will continue to go to the odd movie because my wife likes them and I like her (and popcorn. Mostly popcorn.). But I’m never going to be the guy who buys movies. I don’t even get my money’s worth on our Netflix subscription, and that’s cheap as hell. At the rate I’m going, I won’t get through That 70s Show until 2031.
I’m still pretty interested in the movie business though, a model that I think many investors could learn a thing or two from.
Invest like movies
You’ve probably noticed a trend over the last few years. It seems like there’s always a movie playing about superheroes.
Back in the 80s and 90s, it was really only Batman and Superman movies that got made. Then Spiderman happened in the early-2000s, paving the way for Fantastic Four, Ironman, Captain America, Avengers, and other things us COOL KIDZ used to make fun of you for reading back in high school.
Honestly. Crack open a real book, nerd.
There’s a reason why these movies continue to get made. They’re pretty much guaranteed money makers. The studio makes them for about $75 million and they do $100-$150 million at the box office. The odd one flops, like Daredevil, but most do pretty good.
These are the movie industry’s equivalent of blue chip stocks. They’re boring, but they’re proven to be successful.
Then there’s the other movies studios green light. These range from weird things starring big name actors to neat concepts starring a bunch of relative unknowns. These movies don’t cost much to produce and they tend to not get much attention. Most of them end up as giant flops.
But every now and again, one ends up being a huge hit. Paranormal Activity, a 2007 movie that was made to look like it was shot by a bunch of security cameras, cost $450,000 to make. That’s pretty much the equivalent of a studio fishing the change out of one pocket. It ended up doing nearly $100 million in revenue, a return on investment of almost 20,000%.
The Blair Witch Project, a movie I’ve actually seen, had a budget of $60,000. It grossed $248 million worldwide. That’s a return of…carry the one…a metric assload.
I don’t want to make it sound like these movies are the norm, because they’re not. For every Blair Witch Project and Paranormal Activity, there are thousands of movies that bombed so bad the director’s mom didn’t even watch them.
The reason why the system works is because the successes are so huge. If you make $1,000 for investing a dollar, you can throw money at a lot of failures and still make a decent profit.
How you can invest that way
There’s no easy way for you to throw your money at something that can return 10,000% or 20,000%. As much as you think a penny stock is capable of that, it isn’t.
What you can do is switch your mindset to focusing on what the cool kids call asymmetrical bets. Basically, you invest in things that might not have a huge chance of paying off, but if they do, you get paid handsomely.
I tried this back about 18 months ago when I invested in Penn West. I thought the company had great potential–provided the price of oil recovered. If crude ended up back somewhere near historical norms, I thought a 200% or 300% return was likely. If not, the most I could lose was 100% of my money. I called it coin flip investing.
This trade didn’t work, and I got out a few months ago, losing a little more than 50% on the deal. You might scoff and call it a failure, but I don’t. It was a small position (far below 1% of my portfolio), and I still got out of it with some capital intact.
I also learned a valuable lesson about not making that kind of bet on a company that has no pricing power. There was nothing Penn West could do except ask the flying spaghetti monster for help. That’s not a successful business strategy. The idea was sound. It was just the implementation that was bad.
You don’t have to just invest in stocks this way. You can start your own business, provided it’s in something that has the ability to scale. I’m a freelance writer. Unless I start hiring out my work, it’s not something that can get any bigger than the amount of time I put into it. But I do work for folks who have websites that can scale up.
You can also invest in something that somebody else can run. I do private mortgages. I know someone who has a gym. Rental property is another common choice. That doesn’t scale as fast as a home run movie, but the nice thing is it’s only marginally harder to run a four suite apartment building than an individual house.
Just remember, the majority of your portfolio shouldn’t be in this stuff. Like with Hollywood, keep most of your holdings in the tried and true. Dedicate only a small portion of your portfolio to swinging for the fences.