Men in Thongs and Beer (and Superbowl Ads)

UPDATE from class: Thanks to Azar for the pointer to the incredibly funny iPhone ad spoof: http://www.youtube.com/watch?v=1xXNoB3t8vM. And thanks to Prof Bell for two decades of Superbowl ads.


Rolling Rock (beer) tries to leave an impression by making the ad provocative and scandalous.

If you thought you had seen it all in class with the $400 Gucci "man purse," try this: The Rolling Rock "Man in Thongs" ad. A less graphic version of this ad where the VP Marketing pretends to be apologizing, is actually live on TV. You can see his blog here.

Another ad that features the beer ape and the ad with him apologizing...

I dug up the intented takeaway of a related ad plan for the same product here. Bob Lachky, EVP Global Industry Development at Anheuser-Busch, sez:

I also think the cross-platform advertising approach that we are using on Rolling Rock is a great example. It’s kind of like the wardrobe malfunction model. You let people know about it one way, you show it to them like it’s the forbidden fruit. We’re going to run some TV spots (this week) featuring the next faux pas of the Rolling Rock marketing director. He’s going to be like we’re making a mistake, Oh, my gosh, we’re going to put this in on the Super Bowl and it features men in thongs. Research told us this was gong to be great because after all men in Europe wear thongs. Obviously it doesn’t run on the Super Bowl but the day after Super Bowl your guy comes back on TV and says I thought I made the right call but obviously I didn’t. The people in the know have obviously gone to the Web site to see the forbidden Internet piece. It’s a fun way of using TV as a tease and the payoff to the consumer is actually being delivered through the Internet. When you have a limited budget and you’ve got a portfolio our size we had better embrace new media because it is more efficient and it is more in line with the target audience than traditional media is. Not every brand can be a TV brand nor should every brand be a TV brand. In many cases it’s probably not right for the evolution of the brand.

Get Serious

While we're on the topic of adverts and promotions, checkout Serious to get a glimpse of what form your junk mail is going to take in the future! I think its a pretty neat idea.

Crash the Superbowl

When I recently read about Yahoo's acquisition of Jumpcut, I was starting to wonder exactly how these companies are going to make money.

Turns out Jumpcut is used as an enabler in the viral marketing/user-generated ad contest Doritos. It seems to have the effect of a viral buzz effect in online social networks while simultaneously getting some high quality ads for Doritos.

If you haven't already, take a look at the ads in Crash the Superbowl. What I couldn't help notice is that 3 out of the 5 ads seem to be using some type of accident for humor.

While we're on the topic of user created ad contests, check out some submissions for the Dove's user created ad contest (which was open only to women), supposed to air on Feb 25 during an Oscar commercial break.

If you are from my Wharton class, you may find this description of the JumpCut CEO at VentureBeat somewhat amusing: "He then enrolled into Stanford’s MBA program, where they teach you to start companies."

While we're thinking about monetizing social networking and user generated content, you may also find Prof Percival's comments on valuing social networking ventures quite interesting:

If MySpace becomes the model, social networking sites will be quite different from the classic dot-com bubble companies which tried to cash in big by going public while staying independent. The risks are not the same when an iffy venture is part of something bigger, says John R. Percival, adjunct professor of finance at Wharton. "This is kind of like the oil and gas business. The risk might not be as great as you think, and a high valuation might be justified."

A small, independent oil driller faces a huge risk in drilling a new hole, which may be dry, he says. Compared to that, risks from changing oil prices and demand are relatively small. But the situation is reversed when the driller is part of a bigger enterprise that drills many wells. A dry hole here and there doesn't matter, but changes in oil prices and demand do.

Social networking sites may be risky for their founders and the venture capital firms that fund them in the early years, but they don't appear to be pumping huge amounts of risk to the marketplace the way tech firms did in the late 1990s. "If you have a little bit of money invested in this and you're already invested in other things," says Percival, "frankly the risk is not as big as you think."

Book Review: Magic Formula Investing - The Little Book That Beats the Market

A friend recommended Joel Greenblatt's Little Book about a year back. It starts out sounding like a joke or some kind of a hoax but it should takeall of 1-2 hours to read the entire book and I strongly recommend it - both for adults and teenagers!

Before I proceed to review the Magic Formula, the following points represent my underlying investing philosophy:

1. The market is noisy (capricious) in the short run, efficient (values companies efficiently) in the long run. I believe in mean reversion, that is, temporarily undervalued stocks are likely to rebound back to their 'true' values.
   
2. Given my net worth, I don't see any value in paying someone to manage my money. As a result, I am not too excited by mutual funds. I prefer ETFs.
   
3. I'm too lazy to keep constant track of my portfolio and I hate transaction costs. I therefore like buy-and-hold approaches.
   
4. Diversification globally is goodness.
   

Written in a tongue-in-cheek style, Greenblatt appeals to the child in you, quite literally, to educate you on time tested concepts of value investing. Overall a good book targeted at the mainstream public that not only builds an appreciation for the rationale behind value investing but also gives you an almost mechanical method to invest using the "Magic Formula." Here's a quick summary of MFI...

Greenblatt's basic theory is that its pretty hard for most people (and especially individual investors) to reliably forecast future growth. He therefore recommends that the individual investor simply focus on buying good companies at a good bargain. Good, as defined by MFI, is used for a company with a high ROIC (return on invested capital) and you separate a good bargain from a bad one by looking at the Earnings Yield (EY).

With ratios, its basically garbage in, garbage out. We need to look under the numbers and see how they're calculated. Greenblatt defines them as follows:

ROIC = EBIT/(Working Capital + Fixed Assets),
where EBIT: Earnings before Interest & Taxes
EY = EBIT/EV,
where EV, the Enterprise Value = Market Cap+Net Interest Bearing Debt

The reason he adds back debt to EV is to make sure the Earnings Yield is not affected at all by the debt-to-equity ratio. He also wants to compare companies at different debt and hence tax levels.

The basic steps to building an MFI portfolio is as follows:

1. Create a composite ranking of companies by ROIC and EY.
2. Buy stocks for 20-30 of them (you could do it gradually)
   
3. At the end of the year, review and:
1. sell losers 1 day before before the end of the year
2. sell winners 1 day after the year end
3. replace losers with new companies, go back to 1.
   

Based on back testing (17 years), the magic formula has yielded annual returns in excess of 30%. There hasn't been any 3 yr period with negative returns.

This method has some nice attributes: almost mechanical, focus on the portfolio and not individual companies/stocks, not much churn. Note that he recommends this for average individual investors who are not into doing a great deal of diligence on the companies.

Here's the best part. There's an MFI website, www.magicformulainvesting.com, which allows you to screen companies based on the ROIC, EY criteria.

ROIC or ROE or ROA?

ROE is return/book value of equity. This doesn't take into account the debt capital. ROA is return/book value of assets, which can include accounting gobbledygook like goodwill. In addition, Greenblatt removes uninvested cash from assets, and adds payables since in effect they are an interest-free financing of operations.

Not many have been able to reproduce the MFI screens. If you understand exactly how he calculates ROIC, do let me know!

Commissions?

As a Schwab customer, I'm looking at transaction costs of 25 (size of my MFI portfolio) times $12 = approx 300-600 depending on when you bought and when you started replacing them. Check out www.interactivebrokers.com or www.foliofn.com. I tend to holder longer than 1 year.

No Utilities, Financials & ADRs

To keep things simple the vanilla ROIC and EY don't apply to the capital structure of financials, possibly because they are usually highly levered.

Isn't Earnings an accounting artifact?

Earnings could be inflated temporarily by creative accounting! An equity from the MFI screen could be the subject of earnings restatement. I don't believe vanilla ROIC or EY can guard against that. Greenblatt remarks that sophisticated investors such as himself can calculate forward-looking versions of these parameters.

Macroeconomic factors

Capital intensive industries tend to be cyclical. The MFI screening criteria doesn't seem to account for business cycles that may affect industry fundamentals.

Micro ($50m-$300m) vs Small ($300m-$2b) vs Mid ($2b-$10b) vs Large cap ($10b+)

In my experience micro and small cap pickings from MFI have shown a lot of volatility AND negative returns. My recommendation is to stick with mid & large cap.