Latest / Choppin’ It Up by Bloomberg Intelligence / Northeastern’s Muscolino on Investing in Markets

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Northeastern’s Muscolino on Investing in Markets · Choppin’ It Up by Bloomberg Intelligence

0:13
Speaker 1: Welcome to Chopping It Up.
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Speaker 2: I'm Mike Halen, the Senior Restaurant and Food Service Analyst
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Speaker 2: at Bloomberg Intelligence. My guest today is Vincent Muscolino, Senior
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Speaker 2: Lecturer of Finance at Northeastern University and a former portfolio
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Speaker 2: manager with more than two decades of experience in the
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Speaker 2: investment industry. He's also one of my favorite clients. Thanks
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Speaker 2: for doing this, Vinny.
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Speaker 3: Thank you. Glad to be here.
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Speaker 1: I'm pumped for this.
0:38
Speaker 2: As we were just saying offline, we could make an
0:40
Speaker 2: episode that lasts all day. Maybe this is part one
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Speaker 2: of many. But yeah, man, let's go. This is going
0:46
Speaker 2: to be a little different. We're not going to be
0:48
Speaker 2: focused as much on restaurants, more so the investment process.
0:52
Speaker 1: So let's do it.
0:53
Speaker 2: Before we get into some of the tools that you
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Speaker 2: use to evaluate an investment, take us through your career.
0:59
Speaker 1: What attracted you to.
1:00
Speaker 2: The markets and kind of how did your investment process
1:03
Speaker 2: evolve as you moved from analyst to portfolio manager?
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Speaker 3: So I started out, um, in, um, uh, the technology industry.
1:13
Speaker 3: And my, my goal at the time was, um, you know,
1:17
Speaker 3: in the software space in particular, you know, let me
1:20
Speaker 3: kind of see a company on the finance side internally. Uh,
1:24
Speaker 3: and we were in the process of going private and
1:26
Speaker 3: then going public again. Uh, and then sort of work
1:29
Speaker 3: my way back, uh, through my, my graduate school initiatives, uh,
1:34
Speaker 3: to get, um, that completed and move over to Wall Street.
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Speaker 3: So when I finished that process, one of the angles
1:42
Speaker 3: that I wanted to use, you and I have talked
1:44
Speaker 3: about this a lot actually, is when I joined the
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Speaker 3: buy side in particular, I want to be doing research
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Speaker 3: and owning positions where I feel that I can envision
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Speaker 3: what a CEO and CFO is doing internally. So a
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Speaker 3: lot of what I sort of developed for skills internal
2:01
Speaker 3: to a company was were designed so that I could then,
2:04
Speaker 3: when I was doing, you know, investment research and interviewing
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Speaker 3: management teams and then modeling off of my assumptions, you know,
2:11
Speaker 3: that if I interviewed a CEO or CFO, whether it's
2:14
Speaker 3: in our offices, whether it was at one of those
2:16
Speaker 3: fancy hotels across the coast, that one of my objectives
2:20
Speaker 3: would be, you know, what is the body language of
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Speaker 3: how they answer these questions? And when we would run
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Speaker 3: a business internally, what will we do, you know, as
2:27
Speaker 3: we led up to the quiet period? And what will
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Speaker 3: we do during the quiet period? And And what would
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Speaker 3: our five-year plan look like versus our one-year plan versus
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Speaker 3: our three-month forecast? And so as I kind of jumped
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Speaker 3: from conference to conference, my first role was as a
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Speaker 3: technology analyst, but ultimately I was asked to rotate through
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Speaker 3: all the S & P 500 sectors. So I spent
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Speaker 3: time covering not just technology, but I spent time in
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Speaker 3: electric utilities. I spent time in consumer staples, restaurants, and
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Speaker 3: also things like airlines, railroads, and And the UPS is
3:04
Speaker 3: in FedEx, is the world transportation. And one of my
3:07
Speaker 3: goals there is, you know, is to be able to develop,
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Speaker 3: and my company sort of supported it, a total view
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Speaker 3: of what's going on across sectors and industries. You know,
3:17
Speaker 3: we have, what, 11-ish S & P sectors and 160
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Speaker 3: to 170-ish, depending on how you define it, industries. And
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Speaker 3: even when we launched a tech fund at one point,
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Speaker 3: you know, as well, and then I moved over to
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Speaker 3: portfolio management where I had to essentially be knowledgeable of
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Speaker 3: the entirety of the planet from an investment perspective. And
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Speaker 3: so that rotation, I always teach students to develop a
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Speaker 3: passion for an industry that you really truly want to
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Speaker 3: know and embrace, some companies within it, and then go
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Speaker 3: about the task of learning anything and everything about it.
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Speaker 3: And that passion comes across. When I was out there
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Speaker 3: interviewing to get to Wall Street, I'll never forget one
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Speaker 3: of my companies I interviewed with. I had a really
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Speaker 3: good referral and things like that. And someone said to me,
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Speaker 3: you know, I've never seen someone who truly had the
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Speaker 3: passion not cross into landing a job in this world, right?
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Speaker 3: And so I always encourage young folks in today's world
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Speaker 3: to develop. And I had a student I also teach
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Speaker 3: as part of for the last 15 years. I've been
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Speaker 3: teaching at Northeastern, as you mentioned. I had a student
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Speaker 3: years ago that she could tell me anything and everything
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Speaker 3: about the electric utility industry. That was her passion. If
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Speaker 3: you think about it, 50 states, 50 different sets of rules.
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Speaker 3: And she just embraced it in her industry and company
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Speaker 3: research because she loved it, came across, and she landed
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Speaker 3: her dream job. And so I think that that's a,
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Speaker 3: you know, that passion is, my point is with my,
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Speaker 3: how I got in, they're transferable skills, right? I'm sure
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Speaker 3: that you've had different applications of these things, you know,
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Speaker 3: looking at different sectors. And for me, people would say
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Speaker 3: to me when I ran the tech fund, we don't understand.
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Speaker 3: Even my colleagues sometimes, you know, you're running the tech fund.
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Speaker 3: Why do you want to look at what Procter &
5:00
Speaker 3: Gamble is doing? And I'll be like, I need to
5:03
Speaker 3: know if they're spending money. They're spending money. They're part
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Speaker 3: of the customers that these tech companies have, right? And
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Speaker 3: I think even in today's world, if you think about
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Speaker 3: the AI build-out, you know, especially in this, I'll just
5:13
Speaker 3: talk about the software space for a minute here, you know,
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Speaker 3: A lot of software companies are telling you, we're going
5:18
Speaker 3: to get this. We have sticky customers who have to
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Speaker 3: deploy AI, and most likely they have to deploy it
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Speaker 3: through our software capabilities. You can't just pick this stuff
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Speaker 3: up and rip it out. But you wouldn't really be
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Speaker 3: able to tune into those types of things if you don't.
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Speaker 3: tune into the 11 sectors and 170-ish, 65, 70-ish industries
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Speaker 3: in some way.
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Speaker 2: Yeah, I was actually going to ask you about that
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Speaker 2: because today we're to level set. This is Monday, September 14th.
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Speaker 2: You know, AI Armageddon was the talk of the weekend.
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Speaker 2: And today, software stocks are absolutely ripping because, you know,
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Speaker 2: of concerns about cybersecurity and things of that nature. So, Yeah,
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Speaker 2: we've seen quite a shift from, you know, originally the
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Speaker 2: software names getting wrecked at the end of last year
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Speaker 2: and into this year, and then having big time reversals
6:14
Speaker 2: and the opposite move for some of the memory and
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Speaker 2: chip stocks.
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Speaker 3: If you'd have told me, I just talked to my students,
6:19
Speaker 3: we started the semester last week, and I said, if
6:21
Speaker 3: you'd have told me that I would ever see, you know,
6:25
Speaker 3: valuations flipped for semis versus software, you know, software for
6:28
Speaker 3: multiple decades now I've had, multiple of revenue, multiple of
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Speaker 3: cash flows, 10 times revenue, many of them, 20, 30
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Speaker 3: times cash flow, many of them. And semis have always
6:39
Speaker 3: been cyclical, right? So you always have to be cautious
6:42
Speaker 3: about inventory build and then charge-offs. And I just bought
6:46
Speaker 3: a SanDisk two-terabyte drive, a solid-state drive on Amazon. And
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Speaker 3: I said, how unfortunate. I had bought one a year
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Speaker 3: ago and it was maybe, I don't know, 170 bucks.
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Speaker 3: And now they're almost 700 bucks, right? But you should
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Speaker 3: see the price volatility on those products, even within, that's
7:06
Speaker 3: just a consumer, right? Imagine what could potentially be going
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Speaker 3: on within enterprises. I mean, you know, the prices are fluctuating.
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Speaker 3: If you were to tune into Best Buy, see, this
7:15
Speaker 3: is a research angle, right? Amazon and some of those players,
7:17
Speaker 3: you're seeing, you know, 5%, 10%, 20% price fluctuations almost
7:21
Speaker 3: weekly in some of those consumer products, right? So imagine
7:25
Speaker 3: if you did have this AI slowdown and price points
7:30
Speaker 3: had to adjust. What ends up happening a lot of times, right?
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Speaker 3: And especially in semis, customers will double order. Happened during
7:36
Speaker 3: the internet bubble. Happened with Cisco, right? Some of those
7:39
Speaker 3: companies because they wanted to be a shorter product. And
7:42
Speaker 3: then when things kind of look more visually computable and
7:47
Speaker 3: the growth rates seem to be more rational, you know,
7:50
Speaker 3: that's when the margin hits started, right? So that flipping
7:53
Speaker 3: is just crazy to me. Maybe if they had both
7:55
Speaker 3: stayed at high multiples at some point, but I do
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Speaker 3: think that the stickiness of higher valuations, you know, seems
8:02
Speaker 3: to be more stomach turning for what's happened in semis.
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Speaker 3: And I think there was someone from Oakmark on CNBC
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Speaker 3: last week in the morning, you know, talking, they have
8:13
Speaker 3: a seven year horizon. And he said, you know, we
8:16
Speaker 3: really think that software is really attractive. So I think
8:20
Speaker 3: software has reacted to the slowdown in top line concerns.
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Speaker 3: But I don't think there's been a lot about the
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Speaker 3: productivity they could gain from advanced technology right on the
8:30
Speaker 3: cost side, right?
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Speaker 1: Yeah, it's interesting.
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Speaker 2: And, you know, to your point, the memory and chips
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Speaker 2: are commodities, right? And so that's why we see some
8:37
Speaker 2: of those wide fluctuations in the price.
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Speaker 3: And price can come down and maybe we, you know,
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Speaker 3: there's sensitivity to that. But if cost comes down, you know,
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Speaker 3: we pay attention to that too. Software hasn't really gotten
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Speaker 3: the benefit of the fact that the cost line could improve.
8:52
Speaker 3: I ultimately moved, um, into, um, large cap portfolios. And
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Speaker 3: then I, I was, um, uh, worked with a hedge
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Speaker 3: funds for several years as well. So a fundamental and
9:02
Speaker 3: quantitative long short. So I've spent a lot of time on, on,
9:06
Speaker 3: you know, researching the short world and, and, and work
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Speaker 3: a lot of that into my, um, you know, academic, um,
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Speaker 3: and I run a Bloomberg lab on campus as a
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Speaker 3: Bloomberg expert as well. So. Very cool.
9:18
Speaker 2: Um, Yeah, we'll get into the stocks, individual stocks, and
9:21
Speaker 2: then we'll talk a little bit about portfolio management because
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Speaker 2: I definitely want to pick your brain about that. So
9:27
Speaker 2: when you're teaching your students how to analyze a stock,
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Speaker 2: where do you have them start? And what's the framework
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Speaker 2: for going from this company looks kind of interesting to
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Speaker 2: I want to own it?
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Speaker 3: So my perspective is sometimes just for fun, I say
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Speaker 3: it's 100% science and 100% art, right? Which is mathematically impossible.
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Speaker 3: But my point is, You have to really be able
9:51
Speaker 3: to dive into the company, the industry, the drivers of
9:56
Speaker 3: the industry, drivers of the companies, the market shares, who's
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Speaker 3: taking share, who's losing share, what's going on with the
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Speaker 3: competitive framework, what's the board composition, what's the management composition,
10:07
Speaker 3: and all that traditional, you see a lot on the
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Speaker 3: buy side and on the sell side. If you don't
10:13
Speaker 3: know the products and the product cycles and what's expected
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Speaker 3: to drive potential financial numbers, then it's sort of garbage in,
10:21
Speaker 3: garbage out when you get into your financial modeling, right?
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Speaker 3: So when students come into investments and portfolio management and
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Speaker 3: behavioral finance, it's always a lot of fun to teach
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Speaker 3: as well. I think it's a light bulb when they say, wow,
10:34
Speaker 3: you know, we have to really start thinking about, you know,
10:37
Speaker 3: having all this understanding before we make an assumption on
10:40
Speaker 3: revenue and revenue growth. And, right, so that's always an
10:43
Speaker 3: important starting point. And I always do start with that.
10:46
Speaker 3: I want you to sort of become deeper you know,
10:49
Speaker 3: critical thinkers, but deeper researchers, deeper analysts, right? And think
10:55
Speaker 3: about that passion for an industry. And then I'll do
10:58
Speaker 3: a semester-long portfolio simulation where they run a simulated $ 10
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Speaker 3: million portfolio and they have to make sector and industry
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Speaker 3: allocations and then, you know, populate those sectors and industries
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Speaker 3: with specific companies, right? And so part of that view,
11:14
Speaker 3: when they start deploying their simulated $ 10 million, it's always interesting,
11:17
Speaker 3: even though it's simulated. It's like it's real. Everyone's really
11:20
Speaker 3: sensitive to spending that dollar, right? And it's important to
11:24
Speaker 3: think about what's going on with the Federal Reserve. What's
11:26
Speaker 3: the macro look like, you know, and what does it
11:29
Speaker 3: look like not just in the U.S. but globally? And
11:32
Speaker 3: then use that as sort of your investment framework. Think
11:35
Speaker 3: about it as sort of an investment policy. And then
11:38
Speaker 3: set an objective strategy process and risk controls. And by
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Speaker 3: the way, I also teach personal financial planning, which I love.
11:46
Speaker 3: you know, students immerse them because it's for the rest
11:49
Speaker 3: of their lives, right? And they have to think about
11:51
Speaker 3: asset allocation and they have to think about dollar cost
11:54
Speaker 3: averaging and not being unnerved by fear and greed, which
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Speaker 3: is a big, you know, behavioral finance concept. You know,
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Speaker 3: we fear losses multiples more than we get excited about gains,
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Speaker 3: which is just a fascinating, you know, behavioral and investment process, right?
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Speaker 3: I used to always say running portfolios that if I
12:13
Speaker 3: felt like I was going to throw out I should
12:17
Speaker 3: be adding to positions, right? Because you feel it as humans, right?
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Speaker 3: And the human part really has to be worked into
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Speaker 3: the finance part, you know? And you could talk all
12:28
Speaker 3: day long about something has a cheap valuation. And I mean,
12:31
Speaker 3: when I was starting out, I can tell you how
12:32
Speaker 3: many portfolios will pull up a chart and then stare
12:35
Speaker 3: at me like with a blank look when I was
12:37
Speaker 3: saying how something was at nine times earnings and, you know,
12:41
Speaker 3: one times revenue and, you know, the, the, you know,
12:44
Speaker 3: the shorts were raising the, pressing the short up and
12:46
Speaker 3: the numbers looked like they were plateauing and things like that, right?
12:49
Speaker 3: So you really have to get that front end blended
12:52
Speaker 3: to the quantity. And then obviously learning to and applying
12:56
Speaker 3: what's going on with consensus expectations and what's beatable. I'll
12:59
Speaker 3: tell you on our hedge funds, we used a lot
13:01
Speaker 3: of products that are a lot like Bloomberg's Alt-D, right?
13:05
Speaker 3: As part of the, you know, part of the inputs,
13:08
Speaker 3: you know, for us, especially on the short side, right?
13:11
Speaker 3: Where One of the first things I learned by someone
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Speaker 3: who took me aside when I got into Wall Street was, hey,
13:17
Speaker 3: you know, we see that you're looking at a company here,
13:19
Speaker 3: you're thinking of pitching it. I have to tell you,
13:20
Speaker 3: I noticed that it's heavily shorted, and I'm not going
13:23
Speaker 3: to tell you what to do. But I know this, right,
13:27
Speaker 3: that the shorts do a lot of work, maybe more
13:29
Speaker 3: work than on the fundamental side, and they have infinite risk.
13:34
Speaker 3: So they're spending more money on resources. Uh, and you really,
13:38
Speaker 3: really want to know exactly what the short thesis is.
13:41
Speaker 3: And if you're going to bet against it, that's great,
13:43
Speaker 3: you know, but, um, uh, you know, it's something that
13:47
Speaker 3: we have to incorporate into our analysis. That's something I
13:50
Speaker 3: emphasize all the time, you know, and get that, find
13:54
Speaker 3: out why short interest is rising or falling and, see
13:57
Speaker 3: what the fundamentals reason. Sometimes you'll see it in sectors
13:59
Speaker 3: and industries too, not just company by company.
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Speaker 2: My first mentor in a stock business used to say,
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Speaker 2: this business is more art than science.
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Speaker 1: So very similar to yours.
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Speaker 3: Exactly. I actually use those words, right? 100% art, 100% science.
14:12
Speaker 3: I know the math doesn't add up, but I want
14:14
Speaker 3: you equally focused on both, right? Yeah.
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Speaker 2: I mean, you know, in a business with so many
14:19
Speaker 2: unknown variables, right? And you have to make so many
14:22
Speaker 2: educated guesses throughout your model.
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Speaker 3: It really is. And it's the emotion that causes a
14:27
Speaker 3: lot of the variability. And, you know, I mean, not
14:31
Speaker 3: to highlight the restaurant sector, but just for fun, I
14:34
Speaker 3: think it's down, what, 12%, 13% in the last 30 days, right?
14:37
Speaker 3: I mean, that's a big move. And retailers have kind
14:41
Speaker 3: of flipped, obviously. And so we talked a little bit
14:43
Speaker 3: about the drone stocks, right, and how the psychology pushed
14:47
Speaker 3: them up to, you know, really dramatic multiples. And psychology,
14:51
Speaker 3: in part, has also pushed them down. In fact, in
14:53
Speaker 3: some of those cases, you could argue that, you know,
14:56
Speaker 3: demand has improved, right? But the art part of it
14:59
Speaker 3: is really moving the stocks. Yeah.
15:02
Speaker 2: And so, you know, to your point, you know, restaurants
15:04
Speaker 2: and retail have been hit pretty hard by this advance
15:07
Speaker 2: in oil prices, right? Oil's ripped higher and you have
15:10
Speaker 2: a lot of these momentum hedge funds and automated trading
15:15
Speaker 2: hedge funds just, you know, pressing shorts in restaurants where
15:18
Speaker 2: they can. You know, in my trading days, what I'd
15:21
Speaker 2: be doing is, and what I do for restaurants is,
15:24
Speaker 2: looking for names that are holding up in this, right?
15:27
Speaker 1: It's like, who's acting well?
15:28
Speaker 2: What restaurants are flat or down less than their peers,
15:33
Speaker 2: or maybe even a little bit up in this environment?
15:36
Speaker 2: Because whenever oil does break, you would expect either short
15:40
Speaker 2: covering or some longer term investors to get involved in
15:43
Speaker 2: the space.
15:45
Speaker 3: I have to tell you, you know, working on the
15:47
Speaker 3: inside of a company, preparing quarterly conference calls, getting, you know,
15:51
Speaker 3: contributing to is what we're going to tell the outside world, right?
15:54
Speaker 3: Like I said, to me, I'm a big believer. There's
15:55
Speaker 3: been some interesting studies that are out there that talk
16:00
Speaker 3: about the quiet period. And some people take it as
16:03
Speaker 3: far as the last three or four days. You know,
16:05
Speaker 3: that's when information internally becomes super sensitive, right? And it's
16:11
Speaker 3: really hard. There's so many players involved to get ready
16:15
Speaker 3: for those conference calls and the scripts have to be
16:17
Speaker 3: written and they have to go through general counsels and
16:19
Speaker 3: all this stuff that You know, there's some interesting studies
16:22
Speaker 3: out there saying that directionally, and again, this is a
16:26
Speaker 3: little bit about thinking, you know, maybe what's going on
16:29
Speaker 3: with hedge fund positioning and things like that. But directionally,
16:32
Speaker 3: those ticks up or down leading into that print and
16:36
Speaker 3: that call have a better directional batting average than what
16:41
Speaker 3: you would think normally. And we can look and dispute
16:44
Speaker 3: some of these for sure, but there's been some intuitively
16:47
Speaker 3: in the art side, you could see that, right? Because...
16:50
Speaker 3: You can only put a cap on, you have to
16:54
Speaker 3: prepare stuff. You can't control the secrecy perfectly 100%. And under,
16:59
Speaker 3: what would you say, it looks like it's underperforming. We're
17:05
Speaker 3: always looking for reasons, right? And you have to become
17:07
Speaker 3: really astute to that.
17:08
Speaker 2: If you pay attention to price, volume, and volatility, it
17:11
Speaker 2: sure seems like there's a lot of leaks out there.
17:13
Speaker 2: And not necessarily, I'm not necessarily talking about restaurants, but
17:16
Speaker 2: just in general, you could see around the, trading of
17:19
Speaker 2: the S & P 500 futures and oil futures around
17:22
Speaker 2: war announcements, right?
17:24
Speaker 3: Oh, my goodness, yes. There's been a lot of, I mean,
17:27
Speaker 3: I thought it was interesting, for instance, when oil was
17:30
Speaker 3: coming out in the night, nobody was really, really aware
17:34
Speaker 3: of it, right? Because they were doing it quietly. But
17:36
Speaker 3: the markets were pushing the price of oil down. It seemed,
17:40
Speaker 3: and there was an explanation, but there certainly was, right?
17:43
Speaker 3: There were millions of barrels working their way out with
17:45
Speaker 3: transponders off and all that great stuff. Even the Bloomberg
17:49
Speaker 3: BMAP function wasn't able to track it because they were
17:51
Speaker 3: turning their transponders off.
17:54
Speaker 1: Yeah, it's wild, man. One more on the short side.
17:58
Speaker 2: How do you distinguish a crowded short that's potentially setting
18:01
Speaker 2: up for a squeeze?
18:04
Speaker 3: You know, technicals is part of, fundamentally, maybe Warren Buffett
18:09
Speaker 3: doesn't look at a chart, but I would probably say
18:11
Speaker 3: maybe he does, right? Because he always says, be fearful
18:14
Speaker 3: when others are greedy and be greedy when others are fearful.
18:17
Speaker 3: And he kind of sometimes uses the words kid in
18:19
Speaker 3: a candy shop. Yeah, if the assets I want to
18:22
Speaker 3: own are going through a sell-off, then part of me
18:26
Speaker 3: is excited to add to those positions, right? And that's
18:28
Speaker 3: part of the way that you control that emotion. If
18:30
Speaker 3: you feel that you truly have an investment you want
18:33
Speaker 3: to live with for a long period of time, then
18:36
Speaker 3: dips in opportunity lead to making you feel maybe uncomfortable
18:41
Speaker 3: about the correction, but comfortable about the fact that you're
18:44
Speaker 3: adding to it. And over long periods of time, you
18:45
Speaker 3: could argue in those positions. dollar cost averaging serves you well, right?
18:49
Speaker 3: But I've done a lot of simulations and back tests
18:52
Speaker 3: on things like 52-week effects. My art view would be
18:59
Speaker 3: new highs bring new highs. And I'm curious to see
19:02
Speaker 3: what your view on that is. And my art view
19:05
Speaker 3: would also be that new lows bring new lows. And
19:07
Speaker 3: those are technicals in some respects. But if you have
19:11
Speaker 3: enough institutional money and retail money, but generally it's institutional
19:15
Speaker 3: money that can You know, you can look at blocks, right?
19:18
Speaker 3: Are you seeing block purchases above 10,000, block sales above 10,000?
19:23
Speaker 3: And you get a sense of, could there be Wall
19:26
Speaker 3: Street research working into the buying and selling? And so
19:31
Speaker 3: I'd be hard-pressed, and I've done simulations and backtests to
19:33
Speaker 3: test this out, which often does support it, that a
19:37
Speaker 3: new 52-week high is not going to lead to more
19:40
Speaker 3: 52-week highs, right? And similarly, a first 52-week low is
19:46
Speaker 3: not going to lead to more 52-week lows. So it's
19:49
Speaker 3: a little bit... wise potentially to not try and catch
19:53
Speaker 3: the falling knife to the downside and to not be
19:57
Speaker 3: too fearful of the 52-week high if there's a fundamental
20:01
Speaker 3: shift in what's driving value. And that would be part
20:04
Speaker 3: of what's kept people in semis, including the Sandez is
20:07
Speaker 3: the revisions were so aggressive to the upside, it's unlikely
20:11
Speaker 3: that those revisions might not have followed through. In fact,
20:14
Speaker 3: they probably will, and that's what we've seen, right? And then,
20:17
Speaker 3: so you've got to blend that with, that's where really
20:20
Speaker 3: a lot of crowded shorts people get crushed, right? Because
20:23
Speaker 3: maybe they're not embracing the technicals, and they're certainly maybe
20:27
Speaker 3: viewing the fundamental numbers coming out as potentially maybe too
20:32
Speaker 3: much versus history, right? We always have to look whether
20:35
Speaker 3: or not there's something fundamental That is at least changing things,
20:39
Speaker 3: if not somewhat, maybe more than somewhat. Maybe it can
20:41
Speaker 3: swing too far, but you have to respect that in between. Yeah.
20:46
Speaker 2: Market structure may be, you know, exacerbating these moves as well.
20:51
Speaker 2: You know, we see, I don't know, it sure seems with...
20:55
Speaker 2: AI and machine learning and all of these automated trading
21:00
Speaker 2: strategies that are using momentum to make their decisions, systematic
21:04
Speaker 2: buying throughout the market seems to make these moves more exaggerated,
21:10
Speaker 2: both to the upside and the downside. I mean, look
21:13
Speaker 2: at how fast we rallied off the lows in April.
21:15
Speaker 2: I mean, it was apparently, you know, there had never
21:19
Speaker 2: been anything close to a rally that quick.
21:22
Speaker 3: In behavioral finance, we talk a lot about the fear
21:24
Speaker 3: and greed index, right? And if you can take that
21:26
Speaker 3: to the sector and industry level, you can really start
21:29
Speaker 3: getting a comfort level around sentiment, right? And I will say,
21:33
Speaker 3: if you look at that time period, if I remember correctly,
21:36
Speaker 3: we were spending time, well, let me say two things,
21:39
Speaker 3: in extreme fear, right? And what happens in extreme fear?
21:44
Speaker 3: information comes out not as bad as expected, which is
21:47
Speaker 3: a positive for stocks, right? And in extreme greed, I
21:50
Speaker 3: always say, going back to the analogy, if you feel
21:53
Speaker 3: like you feel it in the piteous stomach, think about
21:55
Speaker 3: that week one of the NFL, right? Where, you know,
21:58
Speaker 3: you're getting that adrenaline, but you also got to manage
22:03
Speaker 3: it to win a game or Or, you know, maybe
22:07
Speaker 3: there's sometimes that doesn't work out. Right. I was watching
22:10
Speaker 3: a missed point after last night in the game. I
22:12
Speaker 3: don't know if you watched that game last night, but
22:14
Speaker 3: there was a taunting penalty. You know, they were going
22:17
Speaker 3: to be within one touchdown and they had to kick
22:20
Speaker 3: the field goal from an extra 15 yards out and
22:22
Speaker 3: missed it. So they went into the last five minutes
22:25
Speaker 3: of the game needing two scores instead of one. Right.
22:28
Speaker 3: So the adrenaline can swing both ways. But I think
22:31
Speaker 3: if you're on the adrenaline side where you're feeling greedy,
22:35
Speaker 3: I think I've observed this in real world industry. If
22:38
Speaker 3: more people are out golfing, then they're not watching their
22:41
Speaker 3: portfolios as much. And negative surprise can really be a surprise.
22:46
Speaker 3: But the additional golfing could come from the fact that
22:50
Speaker 3: feeling good, right? But if we're in extreme greed, you know,
22:53
Speaker 3: really good news might not be good enough. And AI
22:56
Speaker 3: moves have gone through that cycle multiple times here in
22:58
Speaker 3: the last year and a half, right? And again, if
23:01
Speaker 3: it's super negative, then the path of least resistance could
23:05
Speaker 3: be not as bad as expected. And maybe you get
23:08
Speaker 3: some valuation measures, but you have to have these other
23:11
Speaker 3: tailwinds to start thinking that a security can rebuild. If
23:14
Speaker 3: you were to look at the mortgage crisis, right, you
23:16
Speaker 3: see some interesting historical analogies, right? Let's go back to
23:20
Speaker 3: the internet bubble actually before that. Let's even go back
23:23
Speaker 3: further than that. If you look at the 90s, we
23:26
Speaker 3: had a market that really worked really strongly throughout the decade,
23:31
Speaker 3: despite higher interest rates, maybe in the sixes range. We're
23:34
Speaker 3: approaching the five-ish now. What was part of that tailwind? Well,
23:38
Speaker 3: you had amazing GDP, right? You had productivity. You had
23:43
Speaker 3: numbers that on the margin were to the upside. You
23:46
Speaker 3: had the Gillettes and the Dizzies of the world able
23:48
Speaker 3: to deliver technology like double-digit revenue and profit. I remember,
23:53
Speaker 3: you know, stretches where Gillette was doing 25%, 30%. quarterly
23:58
Speaker 3: profit growth, right? That's amazing, right? And then you even had,
24:02
Speaker 3: if you just look at sort of the Washington, D.C. perspective,
24:07
Speaker 3: you know, you had a lot of fearful things going on, impeachment,
24:10
Speaker 3: things like that, which sort of allowed that climb the
24:13
Speaker 3: wall of worry. And again, be fearful when others are greedy,
24:17
Speaker 3: be greedy when others are fearful. Once the internet bubble happened,
24:20
Speaker 3: I mean, you could buy almost any initial public offering
24:23
Speaker 3: at one point They'd price them, file the documents at
24:30
Speaker 3: 12 to 14, price it at 30. At some point,
24:33
Speaker 3: they were pricing them at 50, 100, 150. And if
24:37
Speaker 3: some brokerage officers were using coin flips to allocate the shares, right?
24:41
Speaker 3: And I can remember many times when those securities would
24:44
Speaker 3: open at $ 300, $ 400 a share. And, you know, it
24:48
Speaker 3: was truly the greed side of the fair and greed index. But,
24:51
Speaker 3: you know, these two extremes, work for a period of
24:57
Speaker 3: time while they're working, right? Before, you know, you start
25:00
Speaker 3: to see those other factors, right? Will the deals stop
25:02
Speaker 3: going to a premium? And once deals are working, there's
25:05
Speaker 3: a whole lot more banking opportunity. And so the lesser quality,
25:09
Speaker 3: the good quality comes out to lead the space. The
25:12
Speaker 3: lesser quality now starts to work its way through because
25:15
Speaker 3: there's an appetite for raising capital, you know? And then
25:20
Speaker 3: if you go into 2005, 2006, 2007, you know, you
25:23
Speaker 3: had a lot going on in housing and securitization became explosive.
25:28
Speaker 3: And companies like Citi were saying, we're going to be
25:31
Speaker 3: the supermarket to the world. Supermarkets are great, stable, you know, price, volume, revenue,
25:38
Speaker 3: low margin, predictable business. But financials are always going to
25:41
Speaker 3: have volatility. And, you know, and if you look at
25:44
Speaker 3: sort of, you know, triple A rated, A rated, I
25:47
Speaker 3: should say, A rated companies in 05, 06, you know,
25:50
Speaker 3: many of them were, several, actually several, but there were
25:53
Speaker 3: a good grouping of them that were approaching bankruptcy in 07-08. So,
25:59
Speaker 3: you know, greed. And then if you look at the
26:01
Speaker 3: VIX as a measure of uncertainty, you know, by the
26:06
Speaker 3: time the S & P got to say $ 600 back then,
26:10
Speaker 3: it had come down a lot. And you could calculate,
26:12
Speaker 3: it took a long time for S & P earnings
26:14
Speaker 3: to be revised. I remember at the time, I think
26:16
Speaker 3: there were originally $ 95 a share, and then 06, 07
26:20
Speaker 3: was rolling out. Well, things are starting to get bumpy.
26:22
Speaker 3: Advanced decline lines were breaking down. Receivables and inventories were
26:28
Speaker 3: expanding on balance sheets so the companies could meet and
26:32
Speaker 3: beat numbers with lesser quality. And so the VIX started
26:36
Speaker 3: climbing a little bit, suggesting that bid-ask spreads were widening
26:39
Speaker 3: and we weren't sure where we were going. But ultimately...
26:44
Speaker 3: It took those estimates to come down from 95 until
26:47
Speaker 3: peak uncertainty where the VIX spiked to almost 90, where
26:51
Speaker 3: that estimate ultimately went to, I think it was like
26:54
Speaker 3: 55 or something, just estimating right now from memory. And
26:57
Speaker 3: that was the bottom. And then from that point on,
26:59
Speaker 3: 55 was easy to beat because we got to this
27:01
Speaker 3: uncertain emotional trough. The VIX came down as we got
27:05
Speaker 3: clarity on TARP and bailouts and all that stuff. And
27:09
Speaker 3: then we sort of climbed that Federal Reserve lowering rates.
27:12
Speaker 3: Climb that wall, were we really for a decade? If
27:14
Speaker 3: we go to the pandemic more recently, think about how
27:17
Speaker 3: difficult that was as a personal situation in life. And
27:22
Speaker 3: from the financial market perspective, think about the uncertainty we felt.
27:26
Speaker 3: I remember going into a supermarket in March. We got
27:29
Speaker 3: to buy packaged goods. There was nothing on the shelf,
27:33
Speaker 3: canned goods-wise. There was three cans, spaghetti with butter. And
27:40
Speaker 3: I looked at it and I was saying... That is
27:42
Speaker 3: the epitome of laziness. But you know what? I don't
27:44
Speaker 3: know what's happening. I'm buying all three cans. If nothing else,
27:48
Speaker 3: I need to experience what canned spaghetti and butter is
27:50
Speaker 3: all about. And I remember coming home, my wife laughing
27:53
Speaker 3: at me, right? And so that peak uncertainty would get
27:56
Speaker 3: rolled over in the market. We can pull up the
27:58
Speaker 3: chart in Bloomberg, but I forget. It was probably maybe
28:01
Speaker 3: we're up 20 or something to like down some meaningful amount.
28:05
Speaker 3: The VIX, it took that long for the VIX to,
28:08
Speaker 3: I think it actually exceeded the 08-09 spike. And it
28:11
Speaker 3: put in that financial markets bottom that really, I could argue,
28:15
Speaker 3: was still rattling to this day from the tailwind. If
28:17
Speaker 3: you really think back to the pandemic of 1918, if
28:20
Speaker 3: we really wanted to respect history, a lot of the
28:24
Speaker 3: behavioral finance and emotion and market things that have subsequently
28:28
Speaker 3: followed in this decade, roll, roll, overlay pretty interestingly well
28:34
Speaker 3: to some of the things that transpired, uh, in, in, uh,
28:37
Speaker 3: you know, 1918 through the follow-on period there, right? And,
28:42
Speaker 3: you know, there's the book that was written about the crash,
28:46
Speaker 3: you know, I think it was last year. And, you know, it's,
28:51
Speaker 3: thinking about it, the timing of that book is amazing, right?
28:54
Speaker 3: Because we're approaching a 29, even though it's 100 years later. Yeah.
28:59
Speaker 3: But you have a lot of these things. But, you know,
29:01
Speaker 3: the upward moving rates, you know, the one thing that
29:04
Speaker 3: did pop the internet bubble was the Federal Reserve finally said,
29:07
Speaker 3: Irrational Exuberance with Alan Greenspan. And I remember lots of,
29:11
Speaker 3: I was running a tech fund back then and all
29:13
Speaker 3: my peers going to conferences and all that stuff and
29:16
Speaker 3: everything being whispered at the conference had nothing to do
29:18
Speaker 3: with what was being published in research, right? It was
29:21
Speaker 3: completely disconnected, right? In terms of when things didn't feel
29:27
Speaker 3: right with the underperforming stocks. And every tech analyst was
29:32
Speaker 3: really looking at technology performance. And all these product roadmaps
29:36
Speaker 3: were saying, we need Alan Greenspan to stop raising rates.
29:39
Speaker 3: We need him to cut rates. And all that fundamental
29:42
Speaker 3: work started to feel like it was going away because
29:44
Speaker 3: the tech sector was just looking for that macro bailout, right?
29:49
Speaker 1: Yeah.
29:50
Speaker 2: Early on, you know, you mentioned a little bit about,
29:52
Speaker 2: you know, expectations and things. And we've talked recently about,
29:57
Speaker 2: you know, some of my names, Cracker Barrel and Wendy's,
30:00
Speaker 2: I think, are two that we've discussed where, you know,
30:03
Speaker 2: things are going to go from bad to less bad.
30:07
Speaker 1: And that can be very good for an investment, right?
30:11
Speaker 3: It's so interesting. Wendy's has... amazing cash flow considering where
30:18
Speaker 3: the valuation is now. It's not anywhere near historical, but
30:21
Speaker 3: if I were to look at the expectation for 20,
30:24
Speaker 3: I think this year, next year, you know, it's several
30:28
Speaker 3: hundred million dollars of free cash flow. And I think
30:31
Speaker 3: the enterprise value, I'm just doing it from memory, I
30:33
Speaker 3: think it's around four or five million if you include, billion,
30:35
Speaker 3: I'm sorry, if you include all the leases as debt.
30:38
Speaker 3: And we could debate this, are leases debt or not?
30:41
Speaker 3: I'd be curious to see your view on that. But
30:43
Speaker 3: one thing, I'll make another analogy. One of my career
30:47
Speaker 3: stocks years ago was Apple. And I remember owning it
30:51
Speaker 3: in large quantity within some of our funds. I was
30:55
Speaker 3: the analyst for hardware. And I remember at one point
30:59
Speaker 3: it was trading at somewhere around, this has been lots
31:01
Speaker 3: of splits, but roughly $ 6- ish. I'm going to use that
31:05
Speaker 3: as a number. They had, I don't know, let's say
31:08
Speaker 3: $ 3 to $ 4 of cash. $ 1 to $ 2 of real estate,
31:11
Speaker 3: depending on how you're valuing these things before tax, after tax.
31:16
Speaker 3: But whatever, there was going to be taxable issues. And
31:19
Speaker 3: they had a business. So one way or another, you're
31:22
Speaker 3: sort of getting the business for free. What else did
31:24
Speaker 3: they have? Amazing R & D investment, right? They weren't
31:27
Speaker 3: cutting back on that. And I remember there was a
31:29
Speaker 3: rumor at one point that they were going to buy
31:30
Speaker 3: a music studio. I think it was Sony's. And I
31:33
Speaker 3: remember doing a lot of research on exploring that and
31:36
Speaker 3: even sort of talking to the company and things like that.
31:39
Speaker 3: And one thing that they were always pretty upfront about
31:41
Speaker 3: is we would never do something stupid with our cash because,
31:44
Speaker 3: you know, we were on the brink at one point.
31:46
Speaker 3: But there's a perfect example, you know, standard deviation and other,
31:50
Speaker 3: you know, finance terms leading to this extraordinary opportunity. I
31:53
Speaker 3: can't tell you, you know, even how many analysts I
31:55
Speaker 3: talked to, well, you know, what could go right? It's
31:58
Speaker 3: hard to get people to think about what could go right.
32:01
Speaker 3: My work was that there was a new form factor coming.
32:04
Speaker 3: It was hard to pin it down 100%, but I
32:06
Speaker 3: knew that the R & D was leading to something
32:08
Speaker 3: that was you know, developing. And that was sort of
32:11
Speaker 3: the bet, if I use that word. And the thing
32:13
Speaker 3: about that is, if your market share is 2% and
32:16
Speaker 3: you have some of these other factors, but it's the
32:18
Speaker 3: R & D engine that could lead to positive surprise.
32:21
Speaker 3: You know, when I worked in industry before Wall Street,
32:24
Speaker 3: one of the things I really grew to respect was,
32:26
Speaker 3: you know, you have to have, if you're going to
32:28
Speaker 3: create value, a promise of growth opportunity somewhere within your
32:32
Speaker 3: investment universe of your public company. And even if it's like,
32:38
Speaker 3: you know, where one of my firms, if they had
32:41
Speaker 3: a new data-driven product, it was a database company, they
32:44
Speaker 3: had a new data warehousing-type product where you can do
32:47
Speaker 3: intelligent analysis of data, not just assemble the data and
32:50
Speaker 3: things like that. And most of the R & D
32:54
Speaker 3: focused on restructuring periods. We're not stopping that. In fact,
32:57
Speaker 3: that's going to get fueled with extra love. And that
33:00
Speaker 3: ultimately led to that company being sold twice, a billion
33:03
Speaker 3: dollars once and a billion dollars a second time for
33:05
Speaker 3: the assets that were remaining, right? So... You know, companies
33:09
Speaker 3: have to have that, what's the growth driver going to be?
33:12
Speaker 3: And then valuation can become your friend. Because if a
33:15
Speaker 3: name that's trading at a multiple of cash or 9
33:17
Speaker 3: or 8 PE starts to deliver, you know, you've got
33:22
Speaker 3: a lot of runway to the upsides. One of the
33:23
Speaker 3: reasons why when we look at semis these days, people
33:26
Speaker 3: might look at Micron and say, well, it still only
33:28
Speaker 3: has a PE of 8. Because if they tend to historically,
33:32
Speaker 3: depending on how you think about it, the number is
33:33
Speaker 3: going to continue being, the projection is going to, keep
33:37
Speaker 3: moving higher? Are they deliverable? But, you know, if the
33:41
Speaker 3: multiple was 50, we'd be having a different conversation, right?
33:45
Speaker 3: So if you can get to the point where you
33:48
Speaker 3: thought a little bit growthy and valuation is attractive, I
33:51
Speaker 3: could make an argument that that was one of the
33:53
Speaker 3: things about the cracker barrel bottom, right? Is at some
33:56
Speaker 3: point it didn't want to go lower. And if you
34:00
Speaker 3: think about the body language of what a stock like
34:02
Speaker 3: that might be communicating when there's a high short interest,
34:06
Speaker 3: I mean, when they stop going down, there's a chance
34:08
Speaker 3: it could go up. And that's a lot of my
34:10
Speaker 3: analysis on Apple all those years. Hey, listen, analysts, maybe
34:13
Speaker 3: they only have 1% market share in computers, but, you know,
34:17
Speaker 3: Microsoft has 87% market share in operating systems or, you know,
34:22
Speaker 3: how much higher can that really go? If you're starting
34:24
Speaker 3: life out at a low market share, hey, if something
34:26
Speaker 3: goes right, you know, you can dream a little bit
34:29
Speaker 3: about where return could come from. And if something goes wrong,
34:32
Speaker 3: you have downside support, maybe even private equity support and
34:36
Speaker 3: rumors and all those things that happen. And we're seeing
34:38
Speaker 3: some of those, obviously, in the Wendy's of the world,
34:41
Speaker 3: you know, some of the executive changes at Cracker Barrel
34:44
Speaker 3: and things like that. Cracker Barrel has three meals a day.
34:47
Speaker 3: We talked a little bit about that, right? So there's
34:49
Speaker 3: a little bit of hedge against, you know, a Ruby
34:52
Speaker 3: Tuesday that ultimately, you know, had a really difficult outcome, right? But,
34:56
Speaker 3: you know, if you can leverage your plant and equipment
34:58
Speaker 3: three times a day versus once, or twice, you know,
35:02
Speaker 3: a good handful of companies that have been public and
35:04
Speaker 3: private that are just primarily dinner occasion places, right? I
35:08
Speaker 3: think that would be a little bit more of an
35:10
Speaker 3: investment worry for the long term if I was a
35:13
Speaker 3: Warren Buffett approach, you know, because those concepts can come
35:17
Speaker 3: and go. The capital spending can really become concerning. And
35:22
Speaker 3: going back to my point on leases, you know, accounting
35:25
Speaker 3: rules change where we now have to look at them
35:27
Speaker 3: as on balance sheet versus off balance sheet. You used
35:29
Speaker 3: to have to hunt for that stuff. You know, a
35:31
Speaker 3: lot of analysts, not just restaurants, but retailers would look
35:35
Speaker 3: at leases and say, well, technically you can get out
35:37
Speaker 3: of them. I mean, even the pandemic, look how much
35:39
Speaker 3: lease leverage companies had trying to restructure them. Is it
35:43
Speaker 3: really debt the way contractual, you know, fixed income debt is? Well,
35:47
Speaker 3: it's a little bit different of an animal. You can
35:49
Speaker 3: reposition them, sublease them, right? Do you have all these
35:52
Speaker 3: other variables that are not the same as sort of
35:55
Speaker 3: debt foreclosure risk, if I were to use that word,
35:58
Speaker 3: when you have a lot of fixed income debt versus leases.
36:01
Speaker 3: I do think that the noise factor, when we look at,
36:03
Speaker 3: even like, for instance, we look at the key statistics
36:05
Speaker 3: page on Bloomberg and we see the debt, we have
36:07
Speaker 3: to make sure we know how much of that is
36:09
Speaker 3: leases versus, you know, true, you know, regular debt with
36:13
Speaker 3: a maturity. For sure.
36:15
Speaker 2: One of the things I find most fascinating, you know,
36:19
Speaker 2: in behavioral finance is, you know, to your point, how
36:22
Speaker 2: some of these names that are beaten down take so...
36:25
Speaker 2: Sometimes it takes a while for the valuation to catch
36:28
Speaker 2: up to the actual.
36:30
Speaker 1: Growth, right?
36:31
Speaker 2: And behaviorally, you know, whatever it is, it's, you know,
36:34
Speaker 2: the sell side don't want to pitch it because they
36:37
Speaker 2: got burned on this name, you know, a year ago
36:40
Speaker 2: or two years ago.
36:41
Speaker 3: And.
36:42
Speaker 2: buy side analysts don't want to pitch it to their
36:44
Speaker 2: PMs because they lost money on it.
36:45
Speaker 1: The PMs don't want to pitch it to the investors
36:47
Speaker 1: because it was such a disaster, right?
36:49
Speaker 2: And how that we end up seeing some of these
36:51
Speaker 2: turns take maybe longer than they should for some of
36:55
Speaker 2: these beaten down names.
36:57
Speaker 3: So I had a colleague that worked at several different companies,
37:00
Speaker 3: industry colleague, I know really well too, on the investor
37:05
Speaker 3: relations side of public companies and some really, really, really
37:08
Speaker 3: cool companies. And she, One of her career shingles was
37:15
Speaker 3: going to companies that have heavily short positions and try
37:20
Speaker 3: to help, not just through the investor relations senior role,
37:23
Speaker 3: but also, you know, business development, getting the body language
37:26
Speaker 3: of communication to the street, finding out, you know, one
37:30
Speaker 3: of the things that's really important. And I've seen many
37:32
Speaker 3: management teams will say, I'm not meeting with someone short.
37:35
Speaker 3: They want to earn a stock. Others might say, I
37:39
Speaker 3: want to know what their, you know, telling the world
37:41
Speaker 3: out there so I can figure out, you know, what's
37:44
Speaker 3: out there and what's, you know, fact from fiction and
37:46
Speaker 3: address it, right? And probably I would think that that
37:50
Speaker 3: we could, I'm curious what your view on that, but
37:52
Speaker 3: I think that that's potential. Plus, how would you know
37:54
Speaker 3: if a competitor has a hot product that analysts are,
37:58
Speaker 3: you know, going, you know, sniffing out in looking at
38:01
Speaker 3: a competitor to you. And if you're not talking to
38:04
Speaker 3: those people, having these meetings with the entire industry, you
38:08
Speaker 3: as a CEO or CFO are not going to know
38:10
Speaker 3: exactly what's happening in the competitive set that you're competing with, right?
38:13
Speaker 3: But one thing that she would get excited about is
38:16
Speaker 3: if they could get on an execution path, articulate the
38:19
Speaker 3: growth drivers, articulate the right timeline, and put at some
38:23
Speaker 3: point on the long onlys in particular, right? Because put
38:27
Speaker 3: an end to the puking out of the stock. And
38:29
Speaker 3: that's a very great trader term. I'm sure you remember
38:32
Speaker 3: that term, right? Where if you are mad that a
38:36
Speaker 3: company lost you money and then you get into, for instance,
38:39
Speaker 3: mutual fund tax season where you're offsetting gains that you
38:45
Speaker 3: might have to, you know, pass on to your, your
38:47
Speaker 3: mutual fund shareholders, but, you know, with capital losses of
38:50
Speaker 3: positions that you have lost confidence in, or maybe you're
38:54
Speaker 3: just angry that they, you know, they contributed negatively to
38:58
Speaker 3: what you were trying to accomplish. Those names go out
39:00
Speaker 3: the door. I think following the fiscal calendar of, of, of, um,
39:05
Speaker 3: Different mutual fund firms have different fiscal periods for that
39:07
Speaker 3: tax period. But you can use relative strength. You could
39:11
Speaker 3: use RSI and things that might help you kind of
39:14
Speaker 3: see when names are washed out as technicals as well.
39:17
Speaker 3: But being attuned to that, that's why when you get
39:19
Speaker 3: to the end of the actual calendar year, you see
39:23
Speaker 3: a lot of media coverage maybe of tax selling in December,
39:26
Speaker 3: late December. Most of the institutional tax selling is long gone.
39:29
Speaker 3: end of summer, early September, maybe October for the big
39:32
Speaker 3: block positions. And a lot of times maybe you might
39:35
Speaker 3: see it. If you look at names that have had
39:37
Speaker 3: negative returns for the year, I think that sort of
39:42
Speaker 3: behavioral feel for the fact that It doesn't want to
39:46
Speaker 3: really go down anymore. You want bad news starts to
39:49
Speaker 3: play together and then whoever got out got out. And
39:51
Speaker 3: if it's a new clean piece of paper investment for you,
39:54
Speaker 3: there's some positivity around the energy of those new investors, right?
39:57
Speaker 3: I think the holders function in Bloomberg is really valuable
40:01
Speaker 3: to look at. I always sort it by, you know,
40:04
Speaker 3: are the big firms adding? And by the way, have
40:06
Speaker 3: they started selling, right? I mean, you and I talked
40:10
Speaker 3: about a name earlier this summer. Who's selling? And then
40:13
Speaker 3: eventually you look at the report and you'll see maybe
40:15
Speaker 3: a large holder had started bleeding a little bit out
40:18
Speaker 3: in March or April. Well, if they started on the margin,
40:22
Speaker 3: it could be that that could be the beginning of
40:25
Speaker 3: going a lot further, right? And the flip side of
40:27
Speaker 3: that can happen. You got a multi-trillion dollar asset firm
40:30
Speaker 3: out there that's now showing up in a name. they're
40:32
Speaker 3: doing a lot of work. They might keep raising the
40:35
Speaker 3: position or, you know, that could be a sign of, of, um,
40:38
Speaker 3: interest in the name across some institutional demand too. Yeah,
40:42
Speaker 3: for sure.
40:43
Speaker 2: I had, um, I had a great interaction with Popeyes.
40:46
Speaker 2: I visited the company in late, I think it was
40:48
Speaker 2: late 2012. Um, the stock was low teens. I think
40:53
Speaker 2: eventually it got bought out by, um, uh, restaurant brands
40:57
Speaker 2: for over $ 60, almost $ 70 a share. But, uh, I
41:00
Speaker 2: had a meeting and I go into all my meetings
41:02
Speaker 2: where I don't like the company, right? Like you have
41:04
Speaker 2: to prove it to me, you know, uh, and going
41:07
Speaker 2: back to my mentor again, uh, RIP Joe Pisa, you know, he,
41:12
Speaker 2: he used to tell me, um, there'll always be another
41:16
Speaker 2: girl to kiss.
41:17
Speaker 3: Right.
41:17
Speaker 2: So like, you know, there's, there's always something else to pitch.
41:20
Speaker 2: I don't have to pitch anything.
41:22
Speaker 3: Right.
41:22
Speaker 2: So, I go into the meeting negative and it's an
41:25
Speaker 2: amazing meeting. And at the end of the meeting, I'm like,
41:28
Speaker 2: why is your stock so cheap? And almost in unison, they're.
41:30
Speaker 1: Like, that's why we brought you here.
41:32
Speaker 2: It was such a cool meeting, but it's interesting, especially
41:38
Speaker 2: with small caps, right? How small caps can like fall
41:41
Speaker 2: out of favor and like people don't want to hear it.
41:44
Speaker 1: They don't want to hear the pitch.
41:46
Speaker 3: And, you know, most small cap portfolios have to be
41:48
Speaker 3: run with a lot more names because liquidity is a
41:51
Speaker 3: challenge if they don't work. Candidly, if you're in growth mode,
41:55
Speaker 3: liquidity is a challenge. You're adding more to the names
41:57
Speaker 3: that you like. So, you know, there's a natural pushing
41:59
Speaker 3: names up and there's a natural pushing names down, I
42:03
Speaker 3: would say, a little bit from an institutional perspective too. But, yeah, liquidity.
42:07
Speaker 3: And now, you know, there's a couple of numbers I
42:10
Speaker 3: thought we were going there a little bit earlier. I
42:13
Speaker 3: wanted to add to it. There was an interesting piece
42:15
Speaker 3: this morning that, But ahead of the Fed meeting on Wednesday,
42:19
Speaker 3: I forget what the number was, $ 142, 000 calls bought on
42:24
Speaker 3: the VIX versus $ 40, 000 puts. By the way, with an
42:28
Speaker 3: expiration of a few days from now, right? So that
42:32
Speaker 3: goes back to, you know, I mean, if you look
42:35
Speaker 3: at what's happened in terms of they did away with
42:38
Speaker 3: the $ 25, 000 minimum. for account size if you want to
42:43
Speaker 3: day trade, right? You used to have to have a
42:46
Speaker 3: minimum dollar amount. And I think it was SoFi was
42:48
Speaker 3: on one time saying a big part of the flows
42:50
Speaker 3: that they're seeing in Bitcoin is those small accounts that
42:54
Speaker 3: are able to now transact without that limitation. I mean,
42:57
Speaker 3: daily options activity is just stunning, not just on things
43:01
Speaker 3: like the VIX and the S & P, stock by stock,
43:04
Speaker 3: you know? And I mean, there's so many different studies
43:08
Speaker 3: about what happens with options. But obviously a large percentage
43:11
Speaker 3: of them expire worthless. I'll say sort of you're betting
43:15
Speaker 3: against the house in some respects. But, you know, you
43:18
Speaker 3: go into a casino, you're going for the big score
43:20
Speaker 3: knowing that your odds are tough too. But that daily
43:23
Speaker 3: options activity is kind of, has kept the VIX at really, really,
43:27
Speaker 3: really low levels. When I talk about those two spikes
43:29
Speaker 3: to 90, the flip side of that is maybe extended
43:32
Speaker 3: multi-year period where it stayed at mid-teens to 20 levels
43:35
Speaker 3: when we had you know, the part of it is what,
43:37
Speaker 3: you know, we sort of know the trend, right? So
43:39
Speaker 3: if the trend is good, maybe a low VIX is
43:41
Speaker 3: saying it keeps fueling itself. When it starts saying uncertainty,
43:45
Speaker 3: there could be a reversal of trend, and that's sort
43:47
Speaker 3: of where caution might be a little bit. But even now,
43:50
Speaker 3: we're in a, you know, when I go back to
43:51
Speaker 3: fear and greed, we're in fear territory. So even with
43:54
Speaker 3: today's AI news, there was a little bit of nibbling.
43:56
Speaker 3: And then when you think about call buying, I mean,
44:00
Speaker 3: two to one on volatility, that's kind of a, If
44:04
Speaker 3: we end up doing the reverse, be fearful when others
44:06
Speaker 3: are greedy, be greedy, someone's making a lot of money
44:08
Speaker 3: on expiring call options if the Federal Reserve is a
44:12
Speaker 3: non-event on Wednesday. And I think they articulate a lot
44:14
Speaker 3: of what they're going to do. The betting markets are saying, what, 88% increase, right?
44:21
Speaker 3: So maybe the bet is, oh, no, they're not going
44:23
Speaker 3: to increase. I don't know. That data surprised me. Another
44:26
Speaker 3: interesting thing I was listening to recently, I forget if
44:28
Speaker 3: it was Bloomberg Radio or it was CNBC, but someone
44:33
Speaker 3: was on saying what you just said, right? I mean,
44:35
Speaker 3: it's a great story. I hear you. It's a lot, right?
44:38
Speaker 3: Like a PM, you're an analyst, and a PM is
44:41
Speaker 3: listening to all the great work you've done. And you hear,
44:43
Speaker 3: I hear you. It's like, la, la, la. because someone
44:48
Speaker 3: made the actual comment to one of these interviewers about,
44:51
Speaker 3: you know, what's priced into the market, fear or greed,
44:54
Speaker 3: things like that. Should you own, if you look at
44:56
Speaker 3: the S & P, I don't know, if you look at,
44:59
Speaker 3: trillion dollar or more market cap. So I think JP
45:01
Speaker 3: Morgan's is tucked in at 995, not even including those.
45:04
Speaker 3: For a 60, 70 trillion dollar S & P, depending
45:07
Speaker 3: on volatility, I don't know, 30 to 40 trillion is
45:10
Speaker 3: 10 companies. And yet the dream of 500 names of
45:13
Speaker 3: diversification is different than the visual of the S &
45:17
Speaker 3: P 500. So, you know, the point about owning Meg
45:23
Speaker 3: 7 and some of these really expensive names and not
45:25
Speaker 3: sector rotating is I like what you're saying about some
45:28
Speaker 3: of these undervalued sectors, but I need to be, this
45:31
Speaker 3: was what was the quote. It wasn't named, but was used.
45:35
Speaker 3: I need to be employed, but in the next six months.
45:38
Speaker 3: So there's your behavioral finance fact on what you just said.
45:43
Speaker 3: I need to be employed. It could be.
45:45
Speaker 1: It's safety in numbers, man, or safety in numbers.
45:49
Speaker 3: Yeah. I need to be employed, right?
45:52
Speaker 2: You know, but I have up on my Twitter banner,
45:55
Speaker 2: you know, in the background is, um, was it don't
45:57
Speaker 2: be afraid of being outnumbered, you know, eagles fly alone
46:01
Speaker 2: and pigeons.
46:02
Speaker 1: Flock together, right?
46:03
Speaker 2: So if you want to be good in this business,
46:05
Speaker 2: you have to have, you know, the guts to go
46:08
Speaker 2: against the crowd, you know?
46:11
Speaker 3: It's totally true, right? Because I mean, when I mentioned
46:14
Speaker 3: 52-week lows and highs, the flip side of that is
46:17
Speaker 3: accumulation distribution going on when those things are happening and
46:21
Speaker 3: or exhaustion, right? Meaning that if you're on your 27th
46:24
Speaker 3: 52-week low, you know, you might be closer to, if
46:30
Speaker 3: you have valuation and other factors that matter fundamentally, you know,
46:34
Speaker 3: you might be more closer to a defensive position being
46:38
Speaker 3: established or grown. And, you know, if you're on your
46:41
Speaker 3: 152-week high or something, you know, if you've been deep
46:44
Speaker 3: into it, you know, you really have to take a
46:46
Speaker 3: close look and say, what is discounted now at these
46:48
Speaker 3: levels in both cases, right? Whether it's fear on the
46:52
Speaker 3: low end or greed on the high end, right? All right.
46:55
Speaker 2: So what's the behavioral mistake you've seen professional investors make
46:59
Speaker 2: most frequently?
47:00
Speaker 3: Wow, that's a great question. Well, I definitely would say
47:03
Speaker 3: not investigating short interest. I mean, and I'm going to
47:07
Speaker 3: add two very, a lot of times I like to
47:09
Speaker 3: talk to students about, listen, there's two sides to finance, right?
47:13
Speaker 3: Corporate finance, you know, you want to get a sense
47:16
Speaker 3: of what a CEO and CFO is doing internally that
47:18
Speaker 3: may be indicative of what it's signaling to us as
47:22
Speaker 3: external eyes and ears trying to do due diligence to
47:24
Speaker 3: keep them in a balanced way, right? So I would
47:31
Speaker 3: say I've talked to many over the years. I was like, oh, yeah,
47:36
Speaker 3: it's down. It must have just been some shorting and
47:38
Speaker 3: just kind of fluffing it off, right? But you always
47:42
Speaker 3: want to know, is there, you know, what, first of all,
47:45
Speaker 3: you should always want to know what the short story
47:47
Speaker 3: might be out there because fundamentally, I've done a lot
47:50
Speaker 3: of simulations and backtests using, um, a lot of the
47:53
Speaker 3: different EQS and FTST and different Bloomberg tools. And if
47:58
Speaker 3: you do it on a sector basis, and if you
48:00
Speaker 3: do it on a factor basis, like inside of buying
48:03
Speaker 3: and gross margin expansion, do you know short selling performs
48:06
Speaker 3: really well as an alpha generator, despite the fact that
48:11
Speaker 3: the market is historically, over chunk years, gone to all-time highs.
48:15
Speaker 3: So what that is telling us, and I think CEOs
48:18
Speaker 3: and CFOs internally, and investors and analysts from the outside
48:22
Speaker 3: looking in, what it tells us is that they should
48:25
Speaker 3: spend their time understanding at least what is the drumbeat. And,
48:31
Speaker 3: you know, if you bet against that drumbeat, you should
48:34
Speaker 3: at least know that you bet against it. Right? And
48:37
Speaker 3: then ultimately you can make that bet. But I think
48:39
Speaker 3: it's a little bit less fiduciary to not pay attention
48:44
Speaker 3: to what's driving it and have a view on it.
48:47
Speaker 3: So I would say that is something. The other thing
48:50
Speaker 3: I would say is, you know, when you have growth,
48:52
Speaker 3: especially revenue growth, cash flow sometimes gets underloved, maybe sometimes
48:58
Speaker 3: more than that, right? And again, if you know that
49:01
Speaker 3: a company is deliberately investing razor, razor blade, perfect. But
49:06
Speaker 3: you still would want to have your hands around not
49:09
Speaker 3: just operating in free cash flow trends and projections, but
49:13
Speaker 3: where could management have discretion that it's signaling to us
49:17
Speaker 3: good news and bad news, right? So if receivables are expanding,
49:21
Speaker 3: if DSOs are rising, and or if inventory days are
49:24
Speaker 3: expanding or declining, because you can get, you know, I'm
49:28
Speaker 3: hedging good news if customers are paying early. I mean,
49:32
Speaker 3: in some of Apple's best product cycles, there were reports
49:35
Speaker 3: that customers were paying in cash to get to the
49:37
Speaker 3: front of the line. That's a whole better way to
49:39
Speaker 3: manage your working capital than 30-day receivables, right? And so
49:47
Speaker 3: when products start to become a little bit short in availability, intuitively,
49:53
Speaker 3: I mean, in any business, wouldn't we rather have our
49:56
Speaker 3: cash up front than if a customer wants to pay
49:59
Speaker 3: us more generously, why would we want to be financing
50:01
Speaker 3: that customer? And there's many businesses, you know. The auto industry,
50:05
Speaker 3: Ford has Ford Motor Credit, right? They're financing their customers.
50:08
Speaker 3: If they're stretching and loosening that, you know, receivable approach
50:15
Speaker 3: or using inventory and balancing those, quality of earnings is
50:18
Speaker 3: something that I think, you know, should get more attention
50:21
Speaker 3: than it does. When you combine that with short trends,
50:24
Speaker 3: because a lot of forensic accounting firms that sell great
50:27
Speaker 3: short selling services, And, you know, Microsoft got flagged by
50:30
Speaker 3: the SEC many, many, many years ago for being too conservative.
50:35
Speaker 3: So their cash flow was showing good stuff. And I've
50:38
Speaker 3: heard many tech companies that say, the sales team, if
50:41
Speaker 3: we made our numbers with a week to go, go
50:43
Speaker 3: take a vacation and start the next quarter ahead of
50:46
Speaker 3: the curve with those customer deals that you'll invoice on
50:51
Speaker 3: October 1st and 5th and 10th instead of September 20th, 25th,
50:55
Speaker 3: 29th and 30th. So The body language of a company
50:59
Speaker 3: and what management is doing, you know, you want to
51:02
Speaker 3: connect the art that you and I talked about with
51:05
Speaker 3: the numbers that can signal some of that. You know,
51:07
Speaker 3: like what's trending. And I look at them sequentially because,
51:11
Speaker 3: you know, balance sheets can balloon up sequentially, not year
51:14
Speaker 3: over year. A lot of times people look at year
51:16
Speaker 3: over year or they don't look at acceleration or deceleration.
51:22
Speaker 3: Or many times they look at it and discount it
51:24
Speaker 3: or just say, oh, yeah, it's a cash flow statement.
51:26
Speaker 3: But I I always tell my students when you're interviewing,
51:29
Speaker 3: bring up the words changes in non-cash working capital. And
51:32
Speaker 3: some companies use that on their cash flow statements. Other
51:35
Speaker 3: companies use changes in operating assets and liabilities, different terms.
51:39
Speaker 3: If you go to the Bloomberg FA page and some
51:43
Speaker 3: of the– you'll see that those words are also used
51:46
Speaker 3: to kind of standardize the data too. The point is
51:51
Speaker 3: it's a grouping of– it's basically, you know, we're thinking
51:54
Speaker 3: about non-cash– Current assets minus non-debt current liabilities, right? So
52:00
Speaker 3: you're not looking at short-term debt. You're not looking at cash.
52:02
Speaker 3: So it's basically receivables, inventories, deferred revenue. Think about if
52:06
Speaker 3: you're Costco. If you're selling memberships, your business is healthier.
52:09
Speaker 3: We start seeing that membership deferred revenue rollover. We should
52:13
Speaker 3: have some fundamental concerns about future earnings revisions. And if
52:17
Speaker 3: management has used discretion to stretch EPS to beat by
52:20
Speaker 3: a penny or two, if that doesn't come to fruition,
52:23
Speaker 3: they're going to have to reverse revenue. And, you know,
52:25
Speaker 3: when things unwind, we start seeing a lot of, you know,
52:29
Speaker 3: big misses and charge offs and all that other stuff. Right.
52:33
Speaker 3: So I think that those are areas that I think,
52:36
Speaker 3: you know, because it's so nice to hear a CEO,
52:40
Speaker 3: you know, do that pitch and hear all the great stuff,
52:42
Speaker 3: but maybe not wonder about, you know, what might not
52:46
Speaker 3: be going on. I always take the opposite view is
52:47
Speaker 3: what I say. Yeah. Yeah.
52:49
Speaker 2: And, uh, the point you make about watching, looking at
52:52
Speaker 2: things sequentially as well as year over year is so
52:54
Speaker 2: important because, you know, what I said earlier about bad
52:57
Speaker 2: to less bad in terms of, you know, revenue growth,
53:00
Speaker 2: same thing works on the opposite side. So you have
53:03
Speaker 2: a company that's had blockbuster growth and it starts to decelerate,
53:07
Speaker 2: you know, that's sometimes enough for hedge funds to just
53:09
Speaker 2: start shorting the heck out of some of these things.
53:12
Speaker 3: It's a fantastic point, right? And, you know, you and
53:14
Speaker 3: I talk about a lot of names that easier comps, right? Well,
53:18
Speaker 3: If you're short, hoping for a short thesis, you are
53:21
Speaker 3: swimming with the tide in your face, you know, because
53:26
Speaker 3: people can latch on to easier comps if the company delivers, right?
53:29
Speaker 3: And difficult comps, there's so many amazing companies out there.
53:33
Speaker 3: But when they start lapping difficult comps, we see that,
53:36
Speaker 3: you know, they report it looks great. The stock doesn't
53:39
Speaker 3: perform or gaps up and closes down on the day.
53:42
Speaker 3: So those are real. And those are real. They're real numbers.
53:46
Speaker 3: but they also are part of decision-making. Maybe we could argue, okay, well,
53:52
Speaker 3: is that a three- to six-month driver? Is it a five-
53:56
Speaker 3: or ten-year driver? Maybe, maybe not, right? I mean, Starbucks
53:59
Speaker 3: wouldn't have gotten to the size it is. McDonald's wouldn't
54:01
Speaker 3: have gotten to the size it is without being able
54:04
Speaker 3: to manage those laps. But somewhere in between, McDonald's is down, what,
54:07
Speaker 3: almost 100 points this year from its highs? I mean,
54:10
Speaker 3: that's a pretty big That's a painful portfolio. I don't
54:14
Speaker 3: even know that it's hit the new... One of them
54:16
Speaker 3: I was looking at in the group hasn't even hit
54:18
Speaker 3: the new low list yet. I think it's like October 14th.
54:19
Speaker 3: I forget which name it is. You know, if you
54:22
Speaker 3: make a... I don't remember if it was Yum or...
54:25
Speaker 3: Maybe not Yum, but it could have been Starbucks. But
54:28
Speaker 3: the point is, you make that first new low, it
54:30
Speaker 3: starts flashing red on the screen. It brings in a
54:33
Speaker 3: different type of research, potentially, or perspective. It makes a
54:37
Speaker 3: first new high... It starts flashing green when you bring
54:40
Speaker 3: up a quote. It drives the way the brain thinks
54:44
Speaker 3: to do that additional increment of analysis. For sure. All right.
54:50
Speaker 2: What's one lesson, investing lesson you learned the hard way
54:54
Speaker 2: that you want your students to understand before they put
54:57
Speaker 2: real money to work?
54:58
Speaker 3: So I had two companies a long time ago that
55:02
Speaker 3: had short positions and deteriorating fundamentals, right? One of them
55:08
Speaker 3: was heavily shorted, so the acceleration and negative free cash
55:11
Speaker 3: flow wasn't enough to cause a short squeeze that ran
55:15
Speaker 3: us over, right? And to your point, right, I mean,
55:19
Speaker 3: the technicals that can happen, and what drove it was
55:21
Speaker 3: management came through Boston and New York with a roadshow
55:25
Speaker 3: to try and save the company. And it was a big,
55:27
Speaker 3: you know, energy company. And it was all, you know,
55:32
Speaker 3: fluff that ultimately ended up being proven as non-real. The
55:38
Speaker 3: crowded short hurt, but the discipline of having risk control helped, right?
55:44
Speaker 3: Because if you pick your risk control, 20%, 10%, right?
55:48
Speaker 3: If I get it wrong, the way it's performing at
55:52
Speaker 3: some level, once the risk control discipline is triggered, maybe
55:56
Speaker 3: my analysis was off. Maybe my timing was off, right?
56:00
Speaker 3: And so there was a good part of that is
56:02
Speaker 3: that this point of covering the short was a hedge fund,
56:06
Speaker 3: you know, kept. kept it out of a lot more pain,
56:10
Speaker 3: and then we were able to reload it and watch
56:12
Speaker 3: it work its way closer to near zero in a bankruptcy, right?
56:16
Speaker 3: So that was an interesting lesson that don't, you know,
56:20
Speaker 3: it's not just, you've got to make sure the op
56:23
Speaker 3: pod is always in the end, having a disciplined risk control.
56:26
Speaker 3: Being able to accept, maybe my analysis is wrong. And
56:28
Speaker 3: another one where it was a death care company, and
56:32
Speaker 3: I remember going to an analyst meeting at a location,
56:35
Speaker 3: it was a residential location with a, racquetball court in
56:38
Speaker 3: the basement. It was amazing. And I was like, wow,
56:42
Speaker 3: this is interesting spending. But the business model was changing.
56:47
Speaker 3: So it was a roll-up story, which I think roll-ups
56:50
Speaker 3: you really have to do your work on because they
56:51
Speaker 3: can be painful. It's easy to show growth, but the
56:56
Speaker 3: capital decision-making can turn problematic, right? Because number one, if
57:01
Speaker 3: it's an industry that has roll-up, you're driving the cost
57:04
Speaker 3: of the assets everyone's acquiring faster. And more and more
57:07
Speaker 3: companies went public in death care. They got more equity
57:10
Speaker 3: capital to start chasing up the price of cost of
57:13
Speaker 3: funeral homes. Funeral homes are cash flow friendly businesses. Typically,
57:18
Speaker 3: many at one sales, you have to pay on a
57:20
Speaker 3: credit card. You know, they've gotten into over the years
57:23
Speaker 3: a little bit more financing to try and drive the business.
57:26
Speaker 3: But I'll make the analogy to restaurants and retailers, right?
57:29
Speaker 3: They get their cash either instantly when we use cash
57:32
Speaker 3: and now we use all these different Apple Pay. But still,
57:34
Speaker 3: they're getting their money in two to three days. accepting
57:37
Speaker 3: some sort of short credit card from the company, and
57:40
Speaker 3: they're paying their payables in 35, 40, 50, 60 days.
57:44
Speaker 3: So you can grow your business without having to finance
57:47
Speaker 3: working capital. Negative free cash flow is more attractive mathematically
57:52
Speaker 3: than Boeing, where it has, at one point when it
57:55
Speaker 3: had the fax problems, over a year worth of inventory
57:58
Speaker 3: sitting in deserts or wherever they were parking with them,
58:00
Speaker 3: and they'd already put all the money into the receivables
58:03
Speaker 3: and working capital, and they weren't able to And that
58:06
Speaker 3: really killed their cash flow. So because it was getting
58:10
Speaker 3: expensive and typical to reallocate money that you could easily
58:13
Speaker 3: raise because roll-ups were working in death care, let's diversify.
58:17
Speaker 3: Where would you diversify a funeral home business? This is
58:20
Speaker 3: one I always use with students. What lateral area might
58:24
Speaker 3: you take that business that would seem to be synergistic?
58:28
Speaker 2: You know, maybe you can buy land that could be
58:30
Speaker 2: used for a graveyard, something like that, right?
58:33
Speaker 3: Cemeteries, right? And some people say flower shops, right? But
58:37
Speaker 3: as they expanded the cemetery business model, it's a real
58:41
Speaker 3: estate business. And you buy a piece of land for
58:43
Speaker 3: $ 10 million. You carve it up and sell it for,
58:46
Speaker 3: I don't know, $ 5, 000 a piece. You annuitize it so
58:49
Speaker 3: you don't get paid. And you get paid over the
58:51
Speaker 3: course of hopefully 30 years or more if it's pre-selling versus,
58:56
Speaker 3: you know, at once. So the cash flow is the
58:59
Speaker 3: complete opposite. So I was thinking, yeah, but the industry,
59:03
Speaker 3: it's death care. It will always be recurring. It will
59:07
Speaker 3: always lead the business. And it did it, right? All
59:10
Speaker 3: that pricing pressure, the change in the cash flow profile,
59:13
Speaker 3: and then margins did come under pressure. And fortunately, lifespans
59:18
Speaker 3: did get longer, but it really, really didn't, I mean,
59:21
Speaker 3: collapse the industry for a long period of time. And
59:24
Speaker 3: so I guess my point is don't always let what
59:26
Speaker 3: seems to be a predictable end market way more than
59:32
Speaker 3: it should, number one. But more importantly, when the business
59:34
Speaker 3: model is shifting, the risk profile can shift as well.
59:39
Speaker 3: And this was a company that had 20% earnings growth
59:42
Speaker 3: in bankruptcy because it was the liquidity that took it
59:46
Speaker 3: into bankruptcy. But it just goes to show you how
59:50
Speaker 3: printed income statement numbers are way different than free cash flow. right?
59:57
Speaker 3: And that's always important. I always say, start with the
59:59
Speaker 3: cash flow statement and with the cash flow statement. Work
1:00:03
Speaker 3: your way to the income statement and see what's driving,
1:00:05
Speaker 3: you know, those management behavioral decisions with that changes in
1:00:09
Speaker 3: non-cash working capital and capital spending and other things. I mean, look,
1:00:13
Speaker 3: how many restaurants do we see that just get overzealous
1:00:16
Speaker 3: on expansion, right? And then retracting, it's brutal.
1:00:19
Speaker 1: So chase an evaluation from Wall Street maniacs like me.
1:00:22
Speaker 3: I'll never forget doing a Bloomberg, uh, Bull Bear, um, debate.
1:00:26
Speaker 3: I used to do a lot of TV on Bloomberg, CNBC, CNN.
1:00:30
Speaker 3: And I remember I was pitching McDonald's and my counterpart,
1:00:34
Speaker 3: who did a great job, you know, with the bear case,
1:00:36
Speaker 3: you know, too many stores. I think by one point
1:00:38
Speaker 3: McDonald's was practically putting stores, maybe two in one town, right?
1:00:43
Speaker 3: I mean, you're cannibalizing the revenue with twice the plant
1:00:46
Speaker 3: and equipment, right? And so I remember meeting with the
1:00:49
Speaker 3: new management and I remember going to a big analyst
1:00:52
Speaker 3: meeting in Times Square and and they had just hired
1:00:54
Speaker 3: a new direct head of marketing. No, no one was
1:00:57
Speaker 3: meeting with him. So I got to sit on this beautiful,
1:01:01
Speaker 3: you know, analyst meeting. And that's like a record still
1:01:05
Speaker 3: is right. Record Times Square, record McDonald's location. Right. And
1:01:09
Speaker 3: I got all the time I wanted. And he told
1:01:11
Speaker 3: me everything about, Hey, you know what you watch. I had,
1:01:14
Speaker 3: I had, I had sent a letter to the board.
1:01:16
Speaker 3: They embraced it. I told them that I had It
1:01:18
Speaker 3: was a big part of the strategic change that turned
1:01:20
Speaker 3: Dotson into Nissan and helped turn that marketing story around.
1:01:24
Speaker 3: I did some things with GM. I want to bring
1:01:27
Speaker 3: Ronald McDonald back, show him diving off of Olympic diving boards.
1:01:32
Speaker 3: It was the beginning of the I'm Loving It campaign,
1:01:34
Speaker 3: which still, it probably could go on forever, right? Just
1:01:37
Speaker 3: like have a Coke and a smile. And I was
1:01:40
Speaker 3: literally the only analyst, for the most part, sitting with
1:01:42
Speaker 3: this newly hired marketing person while everyone else was looking
1:01:47
Speaker 3: for Are you going to meet or miss by a penny,
1:01:50
Speaker 3: you know, in three weeks from now, right? And that
1:01:53
Speaker 3: completely changed my view on if this turns around. It's
1:01:57
Speaker 3: like the Apple example. I remember the stock was at
1:01:59
Speaker 3: 24 bucks. You know, I don't know. If you assess
1:02:03
Speaker 3: real estate value at market value, plus a business, you know,
1:02:08
Speaker 3: plus a strategy to try and redirect it. And probably
1:02:11
Speaker 3: most important was we're going to put the businesses into silos.
1:02:14
Speaker 3: If you're the management team, You're not going to cover Chipotle, McDonald's,
1:02:19
Speaker 3: Boston Market. You're a McDonald's executive. You're focused on McDonald's.
1:02:24
Speaker 3: We're going to give Chipotle to the Chipotle executive team only.
1:02:27
Speaker 3: We're going to Boston Market to a Boston team only.
1:02:30
Speaker 3: And my view on TV was this Chipotle asset is
1:02:33
Speaker 3: going to be something big, especially with this new focus
1:02:36
Speaker 3: and the fact that it's an attractive end market opportunity. Yeah,
1:02:40
Speaker 3: they have one or two restaurants was the kind of counterpoint.
1:02:43
Speaker 3: I mean, it was worth more than McDonald's at one point.
1:02:46
Speaker 3: And obviously, even today, a gigantic company. And investors got
1:02:50
Speaker 3: that spin out and all that other great stuff. And
1:02:53
Speaker 3: McDonald's fixed itself, which was even better. I'll never forget
1:02:56
Speaker 3: Jim Cantalupo's first analyst meeting. Maybe it was just before,
1:02:59
Speaker 3: a conference call before this analyst meeting. He took over
1:03:03
Speaker 3: and he said, listen, we're going to caramelize the buns.
1:03:06
Speaker 3: And everyone was like, what? This is your strategy? And
1:03:09
Speaker 3: he's like, listen, we can't be giving customers hot internal
1:03:15
Speaker 3: sandwich with a stale bun, right, with a non-voiced bun.
1:03:20
Speaker 3: We have to have quality, friendliness, and, you know, we
1:03:23
Speaker 3: have to have clean bathrooms. We have to do some
1:03:25
Speaker 3: plant and equipment. And it was just, yeah, yeah, come on.
1:03:28
Speaker 3: You're going to run the business? That's not going to help.
1:03:30
Speaker 3: And you tell me so brilliantly successfully over and over,
1:03:34
Speaker 3: you need to have good operating and good operators to
1:03:36
Speaker 3: create value in restaurants in particular. But I would say
1:03:39
Speaker 3: that's true in retail. That's probably true in every business too, right? Yeah.
1:03:42
Speaker 3: And I'll never forget, you know, how operating the business,
1:03:45
Speaker 3: it had legs forever. And when you would talk to
1:03:49
Speaker 3: that team one-on-one, they just knew that if they could execute,
1:03:53
Speaker 3: they were just sitting on gold. That's awesome.
1:03:56
Speaker 2: I have, all right, just real quick, I'm going to
1:03:58
Speaker 2: share one of my toughest lessons because you said, you
1:04:01
Speaker 2: told me I don't talk about my losers enough. I
1:04:04
Speaker 2: only talk about my winners. But in fairness, you know,
1:04:07
Speaker 2: my batting record Average is very good. Take-Two Interactive in
1:04:13
Speaker 2: the 2000s. I was still playing video games and I
1:04:16
Speaker 2: was on the trading desk and I thought that was
1:04:19
Speaker 2: the year that 2K basketball overtook EA Sports. And, uh,
1:04:24
Speaker 2: it was just a much better product. Um, and you know,
1:04:28
Speaker 2: the numbers keep coming in good and, um, I keep
1:04:31
Speaker 2: buying this stock as it's going down. And, um, sure enough,
1:04:35
Speaker 2: they ended up missing earnings. And the tough lesson I
1:04:38
Speaker 2: learned there was like a good product doesn't equal a good, uh,
1:04:42
Speaker 2: management team or, or a good stock or a good company.
1:04:45
Speaker 3: Right.
1:04:46
Speaker 1: And I think that served me pretty well in restaurants.
1:04:49
Speaker 3: Yeah, that is so true. Right. And, you know, um,
1:04:52
Speaker 3: I mean, a good company is not always a good
1:04:54
Speaker 3: stock and a good product is not always, totally. And
1:04:57
Speaker 3: I think at the end of the day, the mosaic
1:04:59
Speaker 3: comes together from lots of pieces, right? And you say
1:05:03
Speaker 3: it a lot too. I mean, in our hedge fund world,
1:05:06
Speaker 3: we would always say downside first, right? Because you think
1:05:08
Speaker 3: about it, a hedge fund is very focused on absolute value, right?
1:05:12
Speaker 3: I mean, if you don't protect the client money first
1:05:15
Speaker 3: and then focus on producing returns. And actually, you know, the...
1:05:19
Speaker 3: Whether it's 2-20 or there's hedge fund managers out there
1:05:22
Speaker 3: that are 3-50, right, because they've got such an amazing
1:05:25
Speaker 3: track record. But, you know, you have to protect the
1:05:28
Speaker 3: downside first. And you maybe want to think also about
1:05:30
Speaker 3: the fact that the upside should be 2-1 or 3-1
1:05:32
Speaker 3: or 4-1, right? And so, but live to play another day, right,
1:05:36
Speaker 3: is really kind of how you want to think about
1:05:38
Speaker 3: risk and reward, right?
1:05:40
Speaker 1: For sure. Dude, this has been awesome.
1:05:42
Speaker 2: Like I said, we could do this all day because
1:05:44
Speaker 2: I only got to probably about a third of my
1:05:46
Speaker 2: questions for you.
1:05:48
Speaker 1: Thanks for doing this, Vinny. This was awesome. We got
1:05:50
Speaker 1: to do it again.
1:05:50
Speaker 3: I look forward to the follow-up.
1:05:53
Speaker 1: Awesome, man.
1:05:54
Speaker 2: I also want to thank the audience for listening in.
1:05:56
Speaker 2: If you enjoyed the conversation, check back soon for an
1:05:59
Speaker 2: interview with Roland Gonzalez, CEO at Church's Chicken.