Latest / Masters in Business / Michael Mauboussin on How to Read Stock Prices (Podcast)

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Michael Mauboussin on How to Read Stock Prices (Podcast) · Masters in Business

• 0:02
  Speaker 1: This is Mesters in Business with very Results on Blueberg Radio.
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  Speaker 1: This week on the podcast, I have an extra special guest,
• 0:11
  Speaker 1: returning Champion, Michael Mobison. He is on the buy side
• 0:15
  Speaker 1: people thinking. When I say that Michael is at Counterpoint
• 0:18
  Speaker 1: Global at Morgan Stanley Investment Management, it's not Morgan Stanley,
• 0:22
  Speaker 1: the big seal side broker dealer. It's a totally different division,
• 0:26
  Speaker 1: their asset management division. We really spend a lot of
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  Speaker 1: time talking about UH the new edition of his book,
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  Speaker 1: Expectations Investing. What I love about Michael is how thoughtful
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  Speaker 1: he is, how interesting his approach to investing, thinking about markets,
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  Speaker 1: individual companies value UH and basically the approach he brings
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  Speaker 1: to research to the investment community. He's been writing and
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  Speaker 1: publishing about markets for literally decades, not just his many books,
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  Speaker 1: which I'll include in my notes, but the research papers
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  Speaker 1: he puts out and shares with the public. They're always
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  Speaker 1: interesting and thoughtful, and I frequently find myself looking at these,
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  Speaker 1: reading these and going huh cock in my head, I
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  Speaker 1: hadn't thought about that. That's a really interesting take on
• 1:17
  Speaker 1: a very fundamental idea, and I'm I'm glad I had
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  Speaker 1: the opportunity to give this a thought. I found this
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  Speaker 1: to be a master class in valuation and how to
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  Speaker 1: think about what a company's proper potential value is, what
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  Speaker 1: your expectation for investing in that company should be. Uh,
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  Speaker 1: it's no surprise he's been teaching at Columbia for I
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  Speaker 1: don't know twenty years as an adjunct professor in the
• 1:43
  Speaker 1: Business School. I'm gonna stop babbling and say, with no
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  Speaker 1: further ado, my conversation with Morgan Stanley's Michael Mobison. This
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  Speaker 1: is Mesters in Business with very Results on Bloomberg Radio.
• 2:00
  Speaker 1: My very extra special guest this week is Michael Mobisan.
• 2:04
  Speaker 1: He is the head of Concealing It Research at Counterpoint Global,
• 2:08
  Speaker 1: which is part of Morgan Stanley's investment management group. It's
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  Speaker 1: the bye side part, not the sell side part of
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  Speaker 1: Morgan Stanley. Previously, he was head of Global financial Strategies
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  Speaker 1: at Credit Swiss and before that, chief investment strategist at
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  Speaker 1: leg Mason Capital Management, working with the famed investor Bill
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  Speaker 1: Miller during his incredible streak. He is also a professor
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  Speaker 1: of finance at Columbia Business School and Chairman of the
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  Speaker 1: Board of Trustees at the Santa Fe Institute. Michael Mobisan,
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  Speaker 1: Welcome back to Bloomberg. Awesome to be with you, Barry.
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  Speaker 1: Always a blast, and it's so good to be with you.
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  Speaker 1: You know, I don't do this. I don't throw my
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  Speaker 1: arms up when I'm doing it at home remote using
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  Speaker 1: a Comrex machine to jack into the Bloomberg machinery. It's
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  Speaker 1: nice to be in the studio and look at you.
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  Speaker 1: I I have four hours worth the questions for you,
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  Speaker 1: so we'll we'll see if we can get through some
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  Speaker 1: of them. But let's start talking about your most recent book,
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  Speaker 1: which I hold in my hands, Expectations investing, reading stock
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  Speaker 1: prices for better returns. So you first wrote this twenty
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  Speaker 1: years ago with your co author is Alfred Rappaport. What
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  Speaker 1: made you decide to um revisit this and reissue this
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  Speaker 1: twenty something years later? Yeah? Why should first tell you
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  Speaker 1: a little bit about the background of the first book?
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  Speaker 1: And and I was, you know, I was a someone
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  Speaker 1: had no business experience, coming onto Wall Street and read
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  Speaker 1: a copy of Owl's book Creating Shoulder Value in the
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  Speaker 1: late nineteen eighties, and it was for me a professional epiphany.
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  Speaker 1: And I say that because it really everything I've done
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  Speaker 1: professionally has come and rift off of this, so it's
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  Speaker 1: really standing on the shoulder of giants. And so al
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  Speaker 1: Rapaport has been an incredible mentor and collaborator for me.
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  Speaker 1: So that book, by the way, it was aimed at
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  Speaker 1: corporate executives about building value. And there were three lessons
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  Speaker 1: in there that I always have taken with me. One
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  Speaker 1: is it's about cash flows and not accounting numbers, you know.
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  Speaker 1: And it's funny, Barry that we seem to relearn this
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  Speaker 1: lesson from time and time, but we'll probably get into
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  Speaker 1: it in some degree. But I think today we're at
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  Speaker 1: a particularly interesting time and markets where because of the
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  Speaker 1: way the accounting works and because of the way the
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  Speaker 1: economy is moving, uh, you have to really follow the
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  Speaker 1: cash trail more than ever. The second thing is he said,
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  Speaker 1: you know, to do intelligent valuation work, you have to
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  Speaker 1: understand both finance and strategy. And I think this is
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  Speaker 1: something else people feel very free throwing multiples around and
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  Speaker 1: so on and so forth without really doing the proper
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  Speaker 1: strategy analysis. And I think that was a second lesson.
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  Speaker 1: And then the third thing, this is my build up
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  Speaker 1: to your answer your question. The third thing was the
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  Speaker 1: original book catch chapter seven was called stock market signals
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  Speaker 1: to managers, and the argument was, hey, executive, if you
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  Speaker 1: want to understand how to allocate capital judiciously, even set
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  Speaker 1: up incentives, you need to understand what the markets pricing
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  Speaker 1: into your stock. So that obviously has direct implications for investors.
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  Speaker 1: And that ended up, you know, we end up collaborating
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  Speaker 1: on the original version aimed at investors called Expectations Investing.
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  Speaker 1: Now I'm glad you're sitting down because the original version
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  Speaker 1: came out September two thousand and one, like literally twenty
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  Speaker 1: years ago, the day before the Greatest that the greatest
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  Speaker 1: not natural tragedy, and by the way, much less significantly
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  Speaker 1: in the midst of a three bear three year bear market. Right.
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  Speaker 1: So um, And by the way, I thought, you know,
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  Speaker 1: many of the ideas and the books stood up over time.
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  Speaker 1: But I had been teaching from this these principles for
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  Speaker 1: a long time and so you know, and part of
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  Speaker 1: was COVID induced, but I was, you know, and I'm
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  Speaker 1: in constant conversation with with Al, and I said to him,
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  Speaker 1: you know, there's enough that's gone on in the world,
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  Speaker 1: uh that I think we it's time for us to
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  Speaker 1: take another swing at this, which is bring in what
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  Speaker 1: is new, freshen up our case studies and uh like,
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  Speaker 1: let's focus on what worked still and what's still is good,
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  Speaker 1: but let's bring it in and make it more contemporary.
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  Speaker 1: So I just thought it was and and and and
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  Speaker 1: and in teaching it, what lessons have I learned? And
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  Speaker 1: how to communicate some of the ideas effectively, what matters
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  Speaker 1: and what. So we ended up only getting rid of
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  Speaker 1: one chapter, replacing one chapter altogether. But there's so much
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  Speaker 1: about it. So the bones are basically the same, but
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  Speaker 1: there's so much about it that's brand new in terms
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  Speaker 1: of the case studies and again reflecting how the world
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  Speaker 1: has changed in the last twenty years. And for people
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  Speaker 1: who may not be familiar with Alfred Rappaport, he's a
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  Speaker 1: professor professor at Kellogg and and he's done a ton
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  Speaker 1: of work on how to create long term value and
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  Speaker 1: overcome short term is um amongst investors and corporate managers.
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  Speaker 1: Tell us a little bit about that background. Yeah, I
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  Speaker 1: mean that's it. I mean, look, I think that he
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  Speaker 1: um is gonna he is one of the great sort
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  Speaker 1: of academics, uh in this whole area in the last
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  Speaker 1: half century. Um. His PhD is in accounting, by the way,
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  Speaker 1: I should mention, but he's made very important contra usians
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  Speaker 1: in accounting, in finance, and as I mentioned, was one
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  Speaker 1: of the great synthesizers of bringing together strategy and finance.
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  Speaker 1: He by the way, did a lot of the executive
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  Speaker 1: programs a Kellogg and had a literally a world famous
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  Speaker 1: program called Merger Week. And if you were anybody in
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  Speaker 1: the mergers and acquisitions world, in the corporate world in
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  Speaker 1: the eighties and nineties, you the mecca was to go
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  Speaker 1: to Kellogg to do Merger Week and learn about this.
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  Speaker 1: And so yeah, I mean, he's just a tremendous a
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  Speaker 1: tremendous resource. Now he's in he is in his late eighties. Now,
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  Speaker 1: he by the way, could not be better. I mean
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  Speaker 1: I talked to him almost every single day and sharpened
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  Speaker 1: and you know, just intellectually, so curious, a very avid reader.
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  Speaker 1: I mean, so really going, still going, really really strong.
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  Speaker 1: But um, and it's by the way, total delight. Is
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  Speaker 1: always total delight working with him, in part for for
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  Speaker 1: for the joint learning that goes on, but also to
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  Speaker 1: have someone to be a reality check when you're sort
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  Speaker 1: of going off a little bit and need a little
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  Speaker 1: of course, correction. He's the old professor that sort of
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  Speaker 1: brings you back into line, which is powerful. That's great.
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  Speaker 1: Everybody needs a Jimney Cricket on their shoulder to make
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  Speaker 1: sure they're not, you know, they're not going off to
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  Speaker 1: never Neverland. So there are a bunch of quotes from
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  Speaker 1: the book I want to get into, but I have
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  Speaker 1: to start with one that that's so macro and all encompassing.
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  Speaker 1: It really talks to the theme of the book, which
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  Speaker 1: is when investors talk about expectations, they're usually talking about
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  Speaker 1: the wrong expectations. Explain, well, I think that, Um, it's
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  Speaker 1: interesting that when people talk about what a stock is worth,
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  Speaker 1: and you should you should correct me if you hear
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  Speaker 1: something differently, it's almost always some multiple of some sort
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  Speaker 1: of earnings metric PE to say, the very least and
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  Speaker 1: then a million variations r P E or e VD
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  Speaker 1: or something like that. Right, And so the basic argument is,
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  Speaker 1: at um, multiples are shorthand for what is a broader
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  Speaker 1: valuation process, and multiples embedding them lots of assumptions about
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  Speaker 1: how the world works, including assumptions about returns on capital
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  Speaker 1: and growth and so forth. And then as we'll talk
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  Speaker 1: about and probably more detail. Measures like earnings or even
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  Speaker 1: even daw themselves um can be very unreliable measures or
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  Speaker 1: metrics of value creation. So so when they say, oh,
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  Speaker 1: at at X multiple, that it looks like low expectations,
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  Speaker 1: or it's cheap in quotation marks, or it's expensive in
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  Speaker 1: quotation marks, they're really they really don't know exactly. They
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  Speaker 1: haven't unpacked exactly what the story is. Whereas I think
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  Speaker 1: we'd all agree a lease in theory that the value
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  Speaker 1: of the business is the present value the cash flows.
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  Speaker 1: The argument I always like to make is, let's let's
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  Speaker 1: lay the lay bare on the table what those assumptions are,
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  Speaker 1: what the underlying economic assumptions are, and then debate them. Right,
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  Speaker 1: we may not agree or come down in the same
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  Speaker 1: place on these things, but at least we note we're
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  Speaker 1: dealing with versus uh, these these these using putting together
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  Speaker 1: a multiple, these two things that are neither which on
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  Speaker 1: their own are very helpful. So so let me take
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  Speaker 1: a swing at this and you tell me if I'm
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  Speaker 1: on the money or or off. So when we look
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  Speaker 1: at earnings, a lot of different things go into making
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  Speaker 1: earnings high or low, cheaper, expensive, And if you're just
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  Speaker 1: looking at that net number, you're blind to all the
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  Speaker 1: moving parts that might be temporary one offs or potentially
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  Speaker 1: reflect fast future growth. Just looking at the number itself
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  Speaker 1: relative to price doesn't give you a complete picture. Is
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  Speaker 1: that a fair? That? That for sure is true? And
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  Speaker 1: then there's another component of it that's probably even more compelling,
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  Speaker 1: which is growing earnings is not synonymous with growing value.
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  Speaker 1: So saying that differently, if you invest in your business
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  Speaker 1: and your earning exactly your cost to capital, growth doesn't
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  Speaker 1: make any doesn't add any value whatsoever. And so uh
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  Speaker 1: so so so earnings growth be good, it can be bad,
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  Speaker 1: it can be indifferent, and so you just don't know that.
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  Speaker 1: So saying this differently, company A and company be same
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  Speaker 1: earnings growth rates, but the very different value creation prospects
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  Speaker 1: you can't tell. You know, the multiples are going to
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  Speaker 1: be different, and they should be different, but the earning
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  Speaker 1: the earning number in and of itself doesn't tell you
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  Speaker 1: the answer. And then the other question that comes out
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  Speaker 1: of this that I felt was really fascinating, what sort
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  Speaker 1: of expectations should investors have from reading stock prices? And
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  Speaker 1: how can the ordinary investor read stock prices? Yeah? So
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  Speaker 1: this I mean this gets to the heart of it.
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  Speaker 1: And you know, Barry, I was trying to do a
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  Speaker 1: little bit even and working on this book, I was
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  Speaker 1: trying to get a little bit of the psychology of
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  Speaker 1: this because it seems fascinating to me that people love
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  Speaker 1: to think that they can figure out the value and
• 11:47
  Speaker 1: then they're going to compare the value to the price. Right,
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  Speaker 1: So there they feel like their job is to figure
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  Speaker 1: out why identifying intrinsic value sided discounts premium and what
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  Speaker 1: this The premise of this book is obviously just to
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  Speaker 1: reverse the whole process and just say, like, there's only
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  Speaker 1: one thing we know for sure, and that's the stock price. Right. Again,
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  Speaker 1: you may not may like it or not, like it
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  Speaker 1: doesn't matter. It is something we know for sure. It's
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  Speaker 1: an objective number versus what's essentially an opinion. So then
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  Speaker 1: we say we're going to reverse engineer what has to
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  Speaker 1: happen for that thing to make sense, and then try
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  Speaker 1: to judge whether that is sensible. Now that to me,
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  Speaker 1: the most powerful and vivid metaphor is the handicapper. So
• 12:27
  Speaker 1: you go off to the horse races to figure out
• 12:29
  Speaker 1: and and presuming you'd like to make money, there are
• 12:32
  Speaker 1: two things that are really important, right. One is the
• 12:34
  Speaker 1: odds on the toe board, which is telling you which
• 12:37
  Speaker 1: horse or horses are likely to win. The second is
• 12:39
  Speaker 1: how fast the horse is going to run, right, And
• 12:42
  Speaker 1: so it's the combination of these two things that it's important.
• 12:44
  Speaker 1: But often starting with the toe boards a very sensible
• 12:46
  Speaker 1: thing because you say, all right, well, you know, is
• 12:48
  Speaker 1: this a favorite or is this a long shot whatever
• 12:50
  Speaker 1: whatever it is. So this is basically saying, let's do
• 12:54
  Speaker 1: these things backwards. And by the way, there's a there's
• 12:57
  Speaker 1: a fascinating guy who you by the way, you should
• 12:58
  Speaker 1: get him on sometime. He's really interesting and a kind
• 13:00
  Speaker 1: of Stephen Christ. Do you know Steve? Do you know
• 13:04
  Speaker 1: Stephen Christ? And the way he's a he's an interesting guy,
• 13:07
  Speaker 1: um he and he's written a lot. By the way.
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  Speaker 1: He wrote a chapter in a book called It's called
• 13:11
  Speaker 1: kristin Value is a thirteen page chapter which is one
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  Speaker 1: of the best chapters about investing I've ever read, even
• 13:17
  Speaker 1: though it's about handicapping and Chris sort of talks about
• 13:20
  Speaker 1: you know, it's it's about this miss pricing between odds
• 13:23
  Speaker 1: and and and performance and so forth. But one of
• 13:26
  Speaker 1: the one of the lines in there he loves. He
• 13:28
  Speaker 1: says that I love. He says, you know, everybody thinks
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  Speaker 1: that they're doing this thing, but very few people actually do.
• 13:32
  Speaker 1: And I think that's the same thing for for investing.
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  Speaker 1: So when when you explain expectations investing the basic principle,
• 13:38
  Speaker 1: people go, yeah, well, it's kind of what I'm doing,
• 13:40
  Speaker 1: and isn't it And and the answer is that's known
• 13:42
  Speaker 1: and not really what you're doing. Right. So so there
• 13:45
  Speaker 1: are really three steps in the process, which you'll probably
• 13:47
  Speaker 1: get to you. But one is to say what has
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  Speaker 1: to happen for today's stock price to make sense, right,
• 13:52
  Speaker 1: So that's just basically where is the bar set? And
• 13:55
  Speaker 1: then step two is introducing you know, sort of more
• 13:57
  Speaker 1: high falutin strategic and financial now to determine whether company's
• 14:01
  Speaker 1: gonna outperform, that expectations underperform, or g it's going to
• 14:05
  Speaker 1: be I have no strong opinion one or another. And
• 14:07
  Speaker 1: then step three is to make by cell and hold
• 14:10
  Speaker 1: uh uh decisions as a consequence. So in the book
• 14:15
  Speaker 1: you we're going to talk about earnings now, but I
• 14:17
  Speaker 1: have to bring up the broad changes you identify in
• 14:21
  Speaker 1: the market, and and we're going to circle back to
• 14:24
  Speaker 1: these but I want to reference these relative to earnings.
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  Speaker 1: The shift from active to passive, the rise of intangibles,
• 14:32
  Speaker 1: the move from public investing to private investing, and then
• 14:35
  Speaker 1: the major changes in accounting rules. All four of those
• 14:39
  Speaker 1: things have changed since the first version of this book.
• 14:43
  Speaker 1: How significant are they to how earnings are accounted for
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  Speaker 1: and valued by investors? So, I mean, maybe we can
• 14:52
  Speaker 1: part these a little bit because I think the active
• 14:54
  Speaker 1: too passive thing would affect you know, if it affects anything,
• 14:58
  Speaker 1: would be things like markets more or less efficient and
• 15:01
  Speaker 1: things like that. So I don't know that that's a
• 15:04
  Speaker 1: big thing for what we're talking about in terms of earnings.
• 15:07
  Speaker 1: And the other one is public to private And you know,
• 15:10
  Speaker 1: even since we wrote this book there I think there
• 15:11
  Speaker 1: are a third fewer public companies than there were twenty
• 15:15
  Speaker 1: years ago. But on that point, keep in minds someone
• 15:18
  Speaker 1: there's been some studies done and a huge swath of
• 15:21
  Speaker 1: those were penny stocks that got kicked off the nas
• 15:25
  Speaker 1: deck and onto the paint and nobody really cares about them. Yeah,
• 15:28
  Speaker 1: that's that is absolutely correct, and so but the nature
• 15:31
  Speaker 1: of these companies have changed, it in the market caps
• 15:33
  Speaker 1: and so forth. But again that I'm not sure that's
• 15:35
  Speaker 1: a big story for earnings. I think the one that
• 15:38
  Speaker 1: I mean accounting changes, but I think the really big
• 15:40
  Speaker 1: one is this rise of intangibles that you pointed out,
• 15:43
  Speaker 1: And just to give well, first of all, let's go
• 15:46
  Speaker 1: back a little bit even further in history. Back in
• 15:48
  Speaker 1: the nineteen seventies, tangible investment, so tangible physical things, think
• 15:53
  Speaker 1: tractor factories and truck machines, drills, all that, right, those
• 15:58
  Speaker 1: were twice the level of intangible investments and intangible by
• 16:02
  Speaker 1: definition non physical, so think now branding, software, code, all
• 16:09
  Speaker 1: these kinds. Okay, right, So two to one tangible to intangible.
• 16:13
  Speaker 1: At the time we wrote the book so called two
• 16:15
  Speaker 1: thousand and one, twenty years ago, they were the first
• 16:18
  Speaker 1: version of the book. They were at parody. And our
• 16:22
  Speaker 1: estimate is, for one that intangibles will be more than
• 16:27
  Speaker 1: two times tangible. So in the last twenty years alone,
• 16:30
  Speaker 1: they you could sort of say they started the race
• 16:32
  Speaker 1: basically neck and neck, and now it's much much more intangible.
• 16:36
  Speaker 1: So why why is that important? Like why do we
• 16:38
  Speaker 1: care about that? That's important because tangible assets, the way
• 16:42
  Speaker 1: the accounts record them is they're capitalized on the balance sheet, right,
• 16:46
  Speaker 1: it's a it's property, plant, and equipment, which we then
• 16:48
  Speaker 1: depreciate over time, so it does show up in the
• 16:51
  Speaker 1: income statement, but primarily in the form of depreciation. By contrast,
• 16:55
  Speaker 1: intangible investments are fully expensed. Now. The most famous of
• 16:59
  Speaker 1: these research and development, and we've known that since the
• 17:02
  Speaker 1: nineteen seventies, the fast we decided that that R and
• 17:04
  Speaker 1: D should be expensed, and there's debate about there's been
• 17:07
  Speaker 1: builby about that for a very long time. But now
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  Speaker 1: R and D is only a quarter of total intangible investment.
• 17:12
  Speaker 1: So there's lots of other stuff that's going on that's
• 17:15
  Speaker 1: all expensed. So what does that mean, all things being equal,
• 17:17
  Speaker 1: The answer is earnings are a lot lower than they
• 17:20
  Speaker 1: would otherwise be. I always like to point out that, uh,
• 17:23
  Speaker 1: you know, great companies like Walmart, great companies like home Depot,
• 17:29
  Speaker 1: for the first ten or fifteen years, they republic had
• 17:31
  Speaker 1: negative free cash flow, right, which their investments were bigger
• 17:34
  Speaker 1: than their earnings. That they had positive earnings. Was that
• 17:38
  Speaker 1: a problem, No, it's fantastic, right, because their investments had
• 17:41
  Speaker 1: very high returns on on capital and so and by
• 17:44
  Speaker 1: the way, Walmart, for example, it's first fifte years tripled
• 17:47
  Speaker 1: the performance of the stock market. Right, it crushed it.
• 17:49
  Speaker 1: And when you do the that's a substantial compounding advantage. Right.
• 17:54
  Speaker 1: But the problem is now where we're conflating investments and
• 17:58
  Speaker 1: expenses on the income statement and don't see that. We
• 18:00
  Speaker 1: can't unpack those things and just to just to jump
• 18:03
  Speaker 1: in places like Walmart and Home Depot and those just
• 18:07
  Speaker 1: they're buying land, they're putting up new stores, they're expanding,
• 18:10
  Speaker 1: so that sort of tangibles does show up on the
• 18:13
  Speaker 1: balance sheet, that's right, and that's the whole point. So
• 18:15
  Speaker 1: they're there. And by the way, even Walmart, Walmart for
• 18:18
  Speaker 1: sure was an early user of technology. Right. If you
• 18:20
  Speaker 1: read Sam Walton's book, which probably everybody should, it's a
• 18:23
  Speaker 1: fantastic I reread that memoir just last year. It's just awesome.
• 18:27
  Speaker 1: You know, they were early users of technology, so they
• 18:29
  Speaker 1: were early intangible users as well. But you're exactly right.
• 18:32
  Speaker 1: The vast majority of their investments were physical you can
• 18:36
  Speaker 1: you can kick it and so and so forth, whereas
• 18:38
  Speaker 1: other other companies that is not the case. So yes,
• 18:41
  Speaker 1: so that to me is a that's a watershed change,
• 18:44
  Speaker 1: and that's why earnings Again, if you're focusing on cash flow,
• 18:48
  Speaker 1: these things become much less important because we're getting to
• 18:51
  Speaker 1: the ultimate route. Answer. Uh, but if you're simply using
• 18:55
  Speaker 1: multiples or some sort of shorthands, you're gonna just miss
• 18:58
  Speaker 1: this very significant development. So so people love to point
• 19:01
  Speaker 1: out how expensive the stock market is and how pricey
• 19:05
  Speaker 1: that we used to call them fang but now with Facebook,
• 19:08
  Speaker 1: I don't know what the alt call it anymore. But um,
• 19:10
  Speaker 1: if we look at the top ten or twenty technology companies,
• 19:15
  Speaker 1: or or the top of the S and P five
• 19:18
  Speaker 1: hundred by market cap, those appear to be pricey. But
• 19:23
  Speaker 1: these are all companies that have massive investments and intangibles.
• 19:27
  Speaker 1: So it's Google, it's Apple, it's Netflix, it's Microsoft, it's Facebook.
• 19:32
  Speaker 1: Go down the list, it's in Vidio. All these companies
• 19:35
  Speaker 1: are They own software, they own patents, they own processes.
• 19:40
  Speaker 1: Does this imply that these pricey technology companies I left
• 19:45
  Speaker 1: out Tesla from the list. Are are these so called
• 19:48
  Speaker 1: pricey tech companies that have so much sunk into intangibles?
• 19:54
  Speaker 1: Are these perhaps less pricey than the average stock analysts
• 19:58
  Speaker 1: believes if you're using additional multiple as, you get a
• 20:01
  Speaker 1: very different picture. And you know, we recently wrote a
• 20:03
  Speaker 1: report called uh, it's called classifying for clarity, where we
• 20:07
  Speaker 1: talked about argue. We argued that certain things should be
• 20:09
  Speaker 1: restated in the statement of cash flows. And we use
• 20:12
  Speaker 1: as our case study Amazon dot Com. Right, so, one
• 20:14
  Speaker 1: of these companies and Amazon back, our calculation or our
• 20:19
  Speaker 1: estimate is at Amazon's intangible investments in or forty four
• 20:23
  Speaker 1: billion dollars and you, uh, they're if you amortize, if
• 20:28
  Speaker 1: you build old schedule and advertise it, it it still comes
• 20:30
  Speaker 1: out to nineteen billion dollars of net profit increase. Now,
• 20:34
  Speaker 1: Amazon's profits last year about twenty billion. So so just
• 20:38
  Speaker 1: if you accept as you doubled the profits right now,
• 20:40
  Speaker 1: if you know you we could quibble about the details
• 20:43
  Speaker 1: of that so and so worth, but basically that is no,
• 20:46
  Speaker 1: that's exactly right. And the IBADAT numbers don't quite double,
• 20:50
  Speaker 1: but they close to double. And so now the flip
• 20:53
  Speaker 1: side of all that, that's you know, the earnings are better,
• 20:55
  Speaker 1: but let's also recognize the investments are a lot higher
• 20:58
  Speaker 1: than what is reported to And so I always say
• 21:02
  Speaker 1: the job of an investors to understand the magnitude of
• 21:04
  Speaker 1: investments and the return on investments, to understand future profits
• 21:07
  Speaker 1: and so for a company like Amazon, they're earning a
• 21:10
  Speaker 1: lot more than people, at least what they seem to report,
• 21:13
  Speaker 1: but they're also investing a lot more. So you know,
• 21:15
  Speaker 1: there's still lots of judgment as to what those investments
• 21:17
  Speaker 1: will pay off and so and so forth. But you're
• 21:19
  Speaker 1: exactly right, it's a very distorted picture, you know, without commentary.
• 21:24
  Speaker 1: So this is the whole thing about you know, the
• 21:25
  Speaker 1: market used to trade at this multiple. You know, it's
• 21:28
  Speaker 1: just the underlying uh nature of our markets. Our businesses
• 21:34
  Speaker 1: are enterprises are so different today that I think that
• 21:37
  Speaker 1: those sort of comparisons seem to be very simplistic. And
• 21:40
  Speaker 1: then just throw in the whole interest rate thing as
• 21:43
  Speaker 1: another curveball to how do you calculate cause the capital
• 21:47
  Speaker 1: is so cheap, does that artificially does that artificially enhanced
• 21:51
  Speaker 1: ownings or our companies taking advantage of that. It's it's
• 21:55
  Speaker 1: not a one off. Oh look, capital is cheap, therefore
• 21:59
  Speaker 1: ownings are fire. It's our money is free, our companies
• 22:04
  Speaker 1: opportunistically taking advantage of that window when it presents itself. Right,
• 22:08
  Speaker 1: I don't if that's a common But on a related
• 22:13
  Speaker 1: note to the intangible, it's just popped into my head. Um.
• 22:16
  Speaker 1: Joe Davis, who is the chief economist at Vanguard, did
• 22:19
  Speaker 1: a research paper I don't know a year or two
• 22:21
  Speaker 1: ago discussing the rise of intangibles as a predictor of
• 22:26
  Speaker 1: which regions around the world, Which countries around the world
• 22:29
  Speaker 1: our prime for growth. When you start to see patents
• 22:33
  Speaker 1: and software processes and copyrights expand in a given nation,
• 22:39
  Speaker 1: you should expect their GDP and their stock market to
• 22:42
  Speaker 1: subsequently respond to that, usually uh, in a positive correlation.
• 22:46
  Speaker 1: I mean, I'd love to see that. It makes sense,
• 22:48
  Speaker 1: it makes complete sense to me. And again, it's just
• 22:50
  Speaker 1: another indication of how things have changed. Right Whereas we
• 22:53
  Speaker 1: may have said a generation or two before, if those
• 22:56
  Speaker 1: factories are popping up and those good blue color jobs
• 22:59
  Speaker 1: right now, you're something different is sort of a leading
• 23:01
  Speaker 1: indicator of future wealth creat That's right. If you have
• 23:04
  Speaker 1: a bunch of coders showing up in a particular area,
• 23:08
  Speaker 1: that might mean something positive for for the economy and
• 23:10
  Speaker 1: for that stock market. So so let's bring this back
• 23:13
  Speaker 1: to trying to figure out value. What do earnings actually
• 23:17
  Speaker 1: tell us about a company's value? Well, I mean, earnings
• 23:20
  Speaker 1: are just part of the equation, right, and so Uh.
• 23:23
  Speaker 1: We argue very early on the book that earnings telling
• 23:26
  Speaker 1: you very little. In fact, the appendix to chapter one
• 23:28
  Speaker 1: shows again that earnings by themselves do not even tell
• 23:32
  Speaker 1: you about value or value creation. So the what we
• 23:36
  Speaker 1: focus on is a very standard finance way to think
• 23:39
  Speaker 1: about this, which is free cash flow. And free cash
• 23:41
  Speaker 1: flow is the pool available pool of capital available to
• 23:44
  Speaker 1: all capital providers. You know, bury besides doing all the
• 23:47
  Speaker 1: stuff you do, you're a business owner, so you know
• 23:49
  Speaker 1: exactly how this. You have money coming in and money
• 23:51
  Speaker 1: going out, and you sort of know how you have
• 23:53
  Speaker 1: to think about this kind of stuff. We just roll
• 23:55
  Speaker 1: all our cash into uh, you know, shibu imu and
• 23:59
  Speaker 1: exactly dol coins and we just let it roll. So
• 24:01
  Speaker 1: we're that's it's been. It's been speculative, but it's been
• 24:05
  Speaker 1: working out. It's been working out great. And that's the
• 24:07
  Speaker 1: deep value analysis on that one. And so yeah, so um.
• 24:12
  Speaker 1: The so free cash flow is basically net operating profit
• 24:16
  Speaker 1: after taxes, which is a rough measure of earnings. Right,
• 24:19
  Speaker 1: it's a little bit more formal, but rough measure of earnings.
• 24:21
  Speaker 1: Net operating profits after taxes, and the key to net
• 24:26
  Speaker 1: this in the acronym is no pad. The key to
• 24:28
  Speaker 1: notepad is that it's the unlevered cash earnings of a business.
• 24:32
  Speaker 1: So unlevered means there's no reckoning for financial leverage at
• 24:35
  Speaker 1: this point. And it's cash earnings, right, so you're taking
• 24:38
  Speaker 1: out all the cash counts and that's a beautiful number
• 24:40
  Speaker 1: to know. And then investment is all the investments of
• 24:42
  Speaker 1: the company needs to make, including working capital changes and
• 24:45
  Speaker 1: cap backs and so on so forth. So so free
• 24:47
  Speaker 1: cash flow sort of the bottom line number. And by
• 24:50
  Speaker 1: the way, even when we make adjustments to intangibles, what
• 24:53
  Speaker 1: we're doing is essentially making earnings higher, no PAD higher,
• 24:56
  Speaker 1: and we're making investments higher. Free cash flow sort of
• 24:58
  Speaker 1: the bottom line that does and change, and that's the
• 25:01
  Speaker 1: number we try to keep our eye on. So you
• 25:03
  Speaker 1: remember your high school basketball coach, I keep your eye
• 25:05
  Speaker 1: on the hips, right, because everything's gonna follow the hips.
• 25:07
  Speaker 1: That is the hips of finance, right, which is free
• 25:10
  Speaker 1: cash flow. That's the number you want to keep your
• 25:11
  Speaker 1: eye on. So Howard Marks is fond of discussing second
• 25:15
  Speaker 1: level thinking, and so what I'm hearing from you is
• 25:19
  Speaker 1: that just looking at earnings or pe multiples is first
• 25:23
  Speaker 1: level thinking and second level thinking is putting this into
• 25:27
  Speaker 1: the broader context of earnings relatives to free cash flow
• 25:31
  Speaker 1: relative to intangibles and growth, Is that like a wild
• 25:35
  Speaker 1: overstatement or no, not at all. I mean I think
• 25:38
  Speaker 1: that the answer is the way I might say this differently,
• 25:41
  Speaker 1: is it free cash flow is the ultimate thing that
• 25:43
  Speaker 1: we care about. All the other stuff you just mentioned
• 25:45
  Speaker 1: terms of earnings and multiples and so forth, those are
• 25:47
  Speaker 1: all proxies that try to get to the same things.
• 25:50
  Speaker 1: So they're short of shorthands, right, And by the way,
• 25:53
  Speaker 1: I mean you've had you've had the great Danny Knemon
• 25:55
  Speaker 1: with you. Right. What's good about shorthands? What's good about
• 25:58
  Speaker 1: heuristics as they save your time? Right, So that's why
• 26:01
  Speaker 1: they're useful, and that's why we use them. What's limiting
• 26:04
  Speaker 1: about heuristics or shorthand as they have biases? Right, And
• 26:08
  Speaker 1: so the key is not to the key is not
• 26:10
  Speaker 1: to never use them, the keys to understand where their
• 26:13
  Speaker 1: limitations lie. And I think that's where people get a
• 26:16
  Speaker 1: little bit can be a little bit lazy around the
• 26:18
  Speaker 1: edges and just sort of say like it's this thing
• 26:20
  Speaker 1: has always traded at twenty times this, and so it
• 26:22
  Speaker 1: should be twenty times that's not really you want to
• 26:25
  Speaker 1: go back to the core, the core ideas. So so
• 26:28
  Speaker 1: here's the pushback that I think we would get from
• 26:32
  Speaker 1: a Robin Hood trader today who is looking at their
• 26:37
  Speaker 1: portfolio over the past couple of years. They would say
• 26:39
  Speaker 1: something like, hey, this sophistic hidden analysis is interesting, but
• 26:44
  Speaker 1: I haven't been using second level thinking. I've been picking
• 26:48
  Speaker 1: the fastest horse the past couple of years without looking
• 26:51
  Speaker 1: at the odds, without looking at anything else, and that's
• 26:54
  Speaker 1: been working out. And I joke about dose coins and
• 26:57
  Speaker 1: things like that, but if you bought the fair this back,
• 27:00
  Speaker 1: the fastest tech ev company, the fastest uh crypto coin,
• 27:07
  Speaker 1: it didn't matter. Momentum seems to be driving those fast
• 27:11
  Speaker 1: horses the highest. How do you respond to that sort
• 27:14
  Speaker 1: of of pushback, Well, they're there's sort of two levels
• 27:17
  Speaker 1: of comments. One is, UM, I think it's important. I'm
• 27:20
  Speaker 1: gonna sound like an old, an old fogi here, but
• 27:22
  Speaker 1: I think it's important to make a distinction between speculating
• 27:25
  Speaker 1: and investing. And um, by the way, and this is
• 27:28
  Speaker 1: without any sort of moral judgment. So this is just
• 27:31
  Speaker 1: you know, it's trying to make this demarcation without judgment,
• 27:33
  Speaker 1: right A speculator or someone who buys something in the
• 27:36
  Speaker 1: hope that it goes up. Uh an investor someone who
• 27:39
  Speaker 1: buys a partial stake in a business. Right, it's a
• 27:43
  Speaker 1: very different mindset. And so if the markets shut shut
• 27:45
  Speaker 1: down for three months, three years or whatever, you wouldn't
• 27:48
  Speaker 1: care because your own part of a business. Right. So
• 27:50
  Speaker 1: this is almost again the Barry Berry is the investor
• 27:53
  Speaker 1: and versus Barry as a proprietor of a business. Right
• 27:55
  Speaker 1: you think about the value of the business. It's a
• 27:57
  Speaker 1: very different as you know, it's a very different mindset. Now,
• 28:00
  Speaker 1: when I peer out of the world today, I guess
• 28:03
  Speaker 1: I would actually think that I sort of think of
• 28:04
  Speaker 1: the world in sort of three different buckets. The first
• 28:06
  Speaker 1: bucket is sort of the normal bucket, where I think that,
• 28:09
  Speaker 1: notwithstanding we have some obviously a little bit of zany stuff,
• 28:12
  Speaker 1: most of the stuff out there is pretty pretty solid, right,
• 28:14
  Speaker 1: like pretty normal. And then the second bucket might be
• 28:18
  Speaker 1: you know, where I put things like the meme stocks
• 28:20
  Speaker 1: and so forth. These are be sort of the momentum.
• 28:23
  Speaker 1: And you know, in our language we call these sort
• 28:25
  Speaker 1: of diversity breakdowns. People correlate their behaviors in certain ways
• 28:30
  Speaker 1: and by the way, there's there's some language in the
• 28:32
  Speaker 1: book that helps talk about these things like reflexivity and
• 28:35
  Speaker 1: so forth. You know, so this would be the game
• 28:36
  Speaker 1: stops of the world in a MCS and so forth.
• 28:39
  Speaker 1: And by the way, many of these companies have actually
• 28:41
  Speaker 1: done very sensible things, which is they've they've sold, they've
• 28:44
  Speaker 1: sold raised capital, which by the way, increases the intrinsic
• 28:47
  Speaker 1: value of the per share owners for ongoing holders. And
• 28:51
  Speaker 1: then the third area is um cryptos decentralized finance. Part
• 28:57
  Speaker 1: of what I think is going on with the electric
• 28:59
  Speaker 1: electric vehicle market and so forth, and there's a very there.
• 29:02
  Speaker 1: I think what we're seeing is a very very old
• 29:05
  Speaker 1: and very well known pattern, which is, as new industries
• 29:10
  Speaker 1: develop the very common patterns, you see a huge upswing
• 29:14
  Speaker 1: in the number of participants and really experiments. So it's
• 29:18
  Speaker 1: lots of new entrants, lots of money flows in, lots
• 29:21
  Speaker 1: of people trying out weird and wacky stuff. By the way,
• 29:25
  Speaker 1: it wasn't that long ago, Barry, you remember this and
• 29:27
  Speaker 1: the dot com the same kind of thing, right, and
• 29:30
  Speaker 1: you know, people go this is all crazy and wasteful, right, Okay.
• 29:32
  Speaker 1: What happens is then eventually the market sorts this out
• 29:36
  Speaker 1: almost think of it as a Darwinian process, and then
• 29:39
  Speaker 1: you have the come down the back end. So there's
• 29:42
  Speaker 1: a lot of exit through companies going bankrupt or consolidation
• 29:45
  Speaker 1: and so so for the market determines what is legitimate
• 29:48
  Speaker 1: what is not, and lots of things go to zero.
• 29:50
  Speaker 1: But at the end of it, what what distills out
• 29:53
  Speaker 1: is something new and something important. So until and this
• 29:57
  Speaker 1: is sort of standard setting as well. So I think
• 29:59
  Speaker 1: that a good example. What's going on crypto. I mean
• 30:02
  Speaker 1: to me, that whole complex something that's very real. It's
• 30:06
  Speaker 1: gonna be It's gonna be with us. Um, much of
• 30:09
  Speaker 1: what's going on out there is not going to survive,
• 30:12
  Speaker 1: but there will be things that survive and will be
• 30:14
  Speaker 1: making important contributions to our economy. You're about to say something, well,
• 30:18
  Speaker 1: I was gonna I just wanted to put into context
• 30:21
  Speaker 1: because you biased the audience like pulling yourself an old
• 30:25
  Speaker 1: fog and referencing the dot coms. But if you look
• 30:29
  Speaker 1: at the history of bubbles, and I don't mean that
• 30:32
  Speaker 1: in a negative way. In fact, um Dan Gross had
• 30:35
  Speaker 1: a great book pop Why Bubbles Are Great for the economy.
• 30:38
  Speaker 1: You can look at telegraphs and railroads and automobiles and
• 30:42
  Speaker 1: televisions and computers and fiber optic can go through every
• 30:46
  Speaker 1: one of these technological innovations and they all follow that
• 30:49
  Speaker 1: exact path. There's this Cambrian explosion of experimentation. Lots of companies,
• 30:54
  Speaker 1: most of which don't survive, but the ones that come
• 30:58
  Speaker 1: out of it are our game changes really move the needle, right,
• 31:02
  Speaker 1: and we and the and the point being we don't
• 31:04
  Speaker 1: know a priori which ones are going to succeed or fail, right,
• 31:08
  Speaker 1: it gets sorted out. It's a sort of a big,
• 31:10
  Speaker 1: messy sorting out process. So so I think that's a
• 31:14
  Speaker 1: little bit of that's a big part of what's going on.
• 31:16
  Speaker 1: So things like I mean, electric vehicles, this is this
• 31:19
  Speaker 1: is like the canonical example of how this works, right,
• 31:22
  Speaker 1: And you know, the main academic on this, I know,
• 31:24
  Speaker 1: Dance book is actually really good book and an interesting one,
• 31:27
  Speaker 1: but you know, sort of the canonical the main the
• 31:29
  Speaker 1: main academic on this a guy named Stephen Clepper who
• 31:32
  Speaker 1: was a professor at Carnegie Mellon. And Clepper has wrote
• 31:35
  Speaker 1: very seriously about this and documented, as you point out,
• 31:37
  Speaker 1: all these these basics. So it's the flow of of talent,
• 31:41
  Speaker 1: it's the flow of money. It's the flow of entrepreneurs
• 31:45
  Speaker 1: to try to solve problems with some new tools at
• 31:48
  Speaker 1: their disposal, not knowing in advance what's going to work.
• 31:52
  Speaker 1: By the way, I mean this is now will nerd
• 31:54
  Speaker 1: out for just one second. I the first time I
• 31:57
  Speaker 1: ever wrote about this, it was in actually the context
• 31:59
  Speaker 1: of ners old development of children. And it turns out
• 32:02
  Speaker 1: that like the number of neurons in your brain actually
• 32:04
  Speaker 1: don't change that much through your life. What changes radically
• 32:07
  Speaker 1: is a number of synaptic connections between their the neurons.
• 32:10
  Speaker 1: And so from the time you're borns some time you're
• 32:12
  Speaker 1: about two or three years old, there's this huge upswing
• 32:14
  Speaker 1: and synaptic connections. So a three year old, if you've
• 32:17
  Speaker 1: ever met them, you know they're not super efficient machines,
• 32:20
  Speaker 1: but they're they're really open to the world, so learning
• 32:23
  Speaker 1: language is a lot. They're very curious about the world
• 32:25
  Speaker 1: and so and so forth. But they're inefficient. And so
• 32:27
  Speaker 1: what happens then is this it's called the heavy and process.
• 32:29
  Speaker 1: You use it or lose it. If the connection works,
• 32:32
  Speaker 1: you use it, and if it doesn't, it gets pruned
• 32:34
  Speaker 1: away and you have this massive reduction number of synaptic connections.
• 32:38
  Speaker 1: So scientists were interested in this there, you know, so
• 32:40
  Speaker 1: they documented this whole process. They're like, well, this is
• 32:42
  Speaker 1: kind of weird though, right, because the brain is a
• 32:44
  Speaker 1: very costly mechanism. You know, it's twenty of your energy
• 32:47
  Speaker 1: usage and this big thing on top of your head,
• 32:50
  Speaker 1: and you're vulnerable and so and so forth. And it
• 32:52
  Speaker 1: turns out that they sort of simulated this, and it
• 32:54
  Speaker 1: turns out this idea of trying things out and then
• 32:57
  Speaker 1: winnowing is one of the best ways to learn about
• 33:00
  Speaker 1: an environment, Isn't that cool? Right? So in a sense,
• 33:03
  Speaker 1: what we're doing is these are these these Cambrian explosions.
• 33:07
  Speaker 1: You described our methods financial and technological and entrepreneurial methods
• 33:12
  Speaker 1: to learn about the world and figure out what works. So,
• 33:15
  Speaker 1: so two comments on your nerd ing out, which I'm
• 33:17
  Speaker 1: totally loving. First, if you haven't seen American Utopia David
• 33:22
  Speaker 1: Burns play, it actually starts out with that exact discussion
• 33:26
  Speaker 1: of the the childhood, the infant brain making all these
• 33:31
  Speaker 1: synaptic connections and then just letting a trophy that which
• 33:34
  Speaker 1: doesn't work. And so what you're left with is a
• 33:37
  Speaker 1: very efficient set of things that the brain knows actually
• 33:41
  Speaker 1: are successful connections. But second, there's a fascinating book which
• 33:45
  Speaker 1: you and I may have spoken about previously, called The
• 33:49
  Speaker 1: Last Ape Standing, and it talks about how Homo sapiens
• 33:54
  Speaker 1: came very close to not surviving the Last Ice Age
• 33:58
  Speaker 1: because of how energy intensive the brain is and what
• 34:04
  Speaker 1: works really well in most environments doesn't work in a
• 34:09
  Speaker 1: in a resource poor environment, and the Ice Age turned
• 34:13
  Speaker 1: out to be a very research poor so that the
• 34:15
  Speaker 1: book kind of says, hey, we were not We were
• 34:18
  Speaker 1: down to about ten thousand Homo sapiens a couple more
• 34:22
  Speaker 1: years of bad climate, and you know this might be uh,
• 34:28
  Speaker 1: this might be in neanderthal world, not not a human world,
• 34:32
  Speaker 1: which is kind of kind of interesting. Um, so we
• 34:34
  Speaker 1: could we could walk out about a bunch of other stuff.
• 34:37
  Speaker 1: But I want to bring it back to to um
• 34:40
  Speaker 1: earnings and value. One of the things in the book
• 34:43
  Speaker 1: you talk about is investors believe price earnings multiple determined value.
• 34:49
  Speaker 1: But you argue that sort of backwards price earning multiples
• 34:52
  Speaker 1: are a function of value. Am I Am I getting
• 34:55
  Speaker 1: that right? Yeah? I mean you are if you think
• 34:57
  Speaker 1: about it. I mean the formulation is the um E
• 35:01
  Speaker 1: times PE equals p right, right, And so what you're
• 35:06
  Speaker 1: saying is, in order to forecast price, you need to
• 35:09
  Speaker 1: know the price of which is the numerator of the
• 35:12
  Speaker 1: pe right. So in a sense there's a bit of
• 35:13
  Speaker 1: a circular argument. So um, I mean, I don't want
• 35:16
  Speaker 1: to dwell too much on that. We've beaten up a
• 35:18
  Speaker 1: little enough on multiples. But the point being again, multiples
• 35:22
  Speaker 1: are are not valuation their shorthand for the valuation process
• 35:28
  Speaker 1: and with that shorthand or all the good things about
• 35:31
  Speaker 1: saving time and with that shorthand or all the bad
• 35:34
  Speaker 1: things about limitations and biases and blind spots. And so
• 35:38
  Speaker 1: if you do not, if you are not aware of
• 35:40
  Speaker 1: those limitations and blind spots, you're going to be I
• 35:43
  Speaker 1: think ill served by using simplistic measures. Quite interesting, Let's
• 35:48
  Speaker 1: talk a little bit about modeling, and you use a
• 35:51
  Speaker 1: number of examples in the book. Companies like Shopify and
• 35:55
  Speaker 1: Dominoes couldn't be more different, but they each present a
• 36:00
  Speaker 1: challenge to traditional analysts ability to understand the business and
• 36:05
  Speaker 1: forecast using old approaches. Both companies have been incredible performers.
• 36:11
  Speaker 1: People don't realize Domino's is one of the best performers
• 36:15
  Speaker 1: of the past twenty years, if not the best, it
• 36:18
  Speaker 1: depends on where everything closes by the time people hear this.
• 36:21
  Speaker 1: But right, Domino's top five, maybe even highest performer in
• 36:25
  Speaker 1: the past twenty years, is that right? Actually don't know that,
• 36:27
  Speaker 1: but yeah, that sounds right. It's a great it's an
• 36:29
  Speaker 1: amazing business. So so let's talk about how do you
• 36:32
  Speaker 1: model these in a way that gives you a better
• 36:35
  Speaker 1: insight into their future prospects? And what's the difference between
• 36:40
  Speaker 1: expectations investing and the traditional way analysts have been modeling these? Right,
• 36:45
  Speaker 1: so maybe we should take those will take those in
• 36:47
  Speaker 1: turn because they're slightly different flavors of what we're trying
• 36:49
  Speaker 1: to do. So Domino's Pizza was the case study. So
• 36:52
  Speaker 1: the key is that when we go through the expectations
• 36:54
  Speaker 1: investing process, understanding price and pliant expectations step one. Step
• 36:58
  Speaker 1: two is doing strategic and finance analysis. Step three is
• 37:01
  Speaker 1: making buying cell decisions. It's really nice to have a
• 37:04
  Speaker 1: case study to make it concrete. Now. Um, the case
• 37:08
  Speaker 1: study for the original book was Gateway two thousands, which
• 37:14
  Speaker 1: lasted for like three years after the boxes that were directed.
• 37:20
  Speaker 1: Seemed like a good idea at the time. It was
• 37:23
  Speaker 1: called so anyway, um, that's execution risk gateway and Dell
• 37:29
  Speaker 1: had similar models. Dell just executed, they did, they did,
• 37:32
  Speaker 1: and so so the idea, so the truth of the
• 37:35
  Speaker 1: matter is very like, this is how the smoke filled rooms,
• 37:38
  Speaker 1: how decisions get made. We're like, let's find a business
• 37:41
  Speaker 1: that's pretty straightforward to understand that we hope will be
• 37:44
  Speaker 1: around for a while, right, and if they leave it'll
• 37:47
  Speaker 1: be for reasons like they get bought out or so
• 37:49
  Speaker 1: pizza pretty understanding. So so the nature of the business
• 37:53
  Speaker 1: is pretty understandable, and it is a franchise business. It's
• 37:56
  Speaker 1: a it is a very beautiful business, and it's a
• 37:58
  Speaker 1: nice business to explaining. Also strategically, because they made they
• 38:04
  Speaker 1: have another they made a number of strategic decisions along
• 38:07
  Speaker 1: the way that allow us to explain why their their
• 38:09
  Speaker 1: business has been good in their strategic behaviors. And and
• 38:12
  Speaker 1: by the way, strategy often boils down to things like
• 38:15
  Speaker 1: it boils down to trade offs. And one of the
• 38:17
  Speaker 1: big tradeoffs that Domino's made early on which they were
• 38:21
  Speaker 1: took to they've been taken a task from from time
• 38:23
  Speaker 1: to time is that you don't eat there, right, you
• 38:24
  Speaker 1: don't go to Domino's two. I mean, there's there's some
• 38:28
  Speaker 1: there's some minor exceptions to that, but that's for the
• 38:30
  Speaker 1: most part true. And so what are the upsides and
• 38:33
  Speaker 1: downsides to that basic thing? So Domino's was, and and
• 38:37
  Speaker 1: again they are. They are a very uh intangible intensive
• 38:41
  Speaker 1: business in the sense that the business we're looking at
• 38:45
  Speaker 1: is the owns the essentially is the franchise or right,
• 38:48
  Speaker 1: so they own all these things and their their primary
• 38:50
  Speaker 1: function is basically to get ingredients and boxes to the
• 38:54
  Speaker 1: different franchisees and then to advertise for everybody. So essentially
• 38:57
  Speaker 1: they're an advertising machine and that's what they do. Um
• 39:02
  Speaker 1: it sounds like a lot of brands, marketing special not
• 39:06
  Speaker 1: specialty know how, a lot of intangibles, and a lot
• 39:09
  Speaker 1: of technology. So the the other thing is they're very
• 39:11
  Speaker 1: good at technology and have always been very good at technology.
• 39:13
  Speaker 1: So for instance, if I can help my franchise the
• 39:17
  Speaker 1: understand their labor demands, their product demands, if I can
• 39:21
  Speaker 1: make things uniform, in fact, they do a lot of
• 39:23
  Speaker 1: stuff that everything becomes very uniform in the kitchen. That
• 39:27
  Speaker 1: allows for them to deliver efficiently, to work the work
• 39:30
  Speaker 1: the kitchen, fit, to hire people efficiently, all those kinds
• 39:33
  Speaker 1: of things, and those are those are really difficult advantages
• 39:36
  Speaker 1: to to take away. And then they've been digital early,
• 39:39
  Speaker 1: so what you know, ordering online, so and so forth.
• 39:42
  Speaker 1: The second example is Shopify, and that's a little bit
• 39:45
  Speaker 1: of a different thing. So we have a chapter dedicated
• 39:48
  Speaker 1: to US chapter eight, and it was called beyond discounted
• 39:51
  Speaker 1: cash Flow. And so the the idea is that sometimes
• 39:54
  Speaker 1: you you know, you look at the businesses you can
• 39:56
  Speaker 1: touch and feel, and you run the numbers on it,
• 39:58
  Speaker 1: and it just have a hard time coming up with
• 40:01
  Speaker 1: anything close to the current stock price. And you might
• 40:03
  Speaker 1: immediately say, okay, well this is this doesn't make any sense.
• 40:06
  Speaker 1: What we what we suggest is that for certain types
• 40:09
  Speaker 1: of businesses they may be candidates for having some real
• 40:13
  Speaker 1: option value. So what is a real option When we
• 40:16
  Speaker 1: know about financial options, right, these are the right but
• 40:18
  Speaker 1: not the obligations. Typically, for example, a call option is
• 40:21
  Speaker 1: to buy a particular stock at a particular price at
• 40:24
  Speaker 1: a particular time. A real option is analogously for a
• 40:28
  Speaker 1: real investment in a business. Right, So this is for companies.
• 40:31
  Speaker 1: And so what we argue is at certain types of
• 40:33
  Speaker 1: businesses and the conditions are things like you wanted to
• 40:35
  Speaker 1: be an uncertain business, right, because where there's a lot
• 40:38
  Speaker 1: of certainty, there's not a lot of option value. Rights
• 40:40
  Speaker 1: of volatility is good for options. You want to management
• 40:43
  Speaker 1: team that's thoughtful, so they need to know how to
• 40:45
  Speaker 1: identify and cultivate and ultimately execute on those options. Market
• 40:50
  Speaker 1: leaders tend to be good because often when there are opportunities,
• 40:53
  Speaker 1: the market leader gets the first call. And then finally,
• 40:56
  Speaker 1: you need access to capital. When you say to we
• 40:58
  Speaker 1: have a great option, we want to X your size it,
• 41:00
  Speaker 1: you need to be able to finance it, right, And
• 41:03
  Speaker 1: so when those characteristics, those sort of boxes get checked,
• 41:06
  Speaker 1: you may have a business with some real options value.
• 41:09
  Speaker 1: Now in that case, our our our study from twenty
• 41:13
  Speaker 1: years ago was Amazon dot Com and that was probably
• 41:15
  Speaker 1: just dumb luck that we picked Amazon, but that was
• 41:18
  Speaker 1: that turned out to be sort of one of the
• 41:20
  Speaker 1: great examples of a real options company. And just think
• 41:22
  Speaker 1: about a WS wasn't even a twinkle on anybody's eye
• 41:26
  Speaker 1: in two thousand and one when we wrote that version
• 41:28
  Speaker 1: of it, but but we did identify it as a
• 41:31
  Speaker 1: company that had a lot of uncertainty and what was
• 41:34
  Speaker 1: going on on an executive who seemed to be pretty
• 41:36
  Speaker 1: astute at figuring these things out, and along the way
• 41:39
  Speaker 1: he I mean he made many many mistakes, Jeff Bezos did,
• 41:42
  Speaker 1: but along the way he actually made a lot of
• 41:46
  Speaker 1: really interesting, good capital allocation decisions. So so that just
• 41:49
  Speaker 1: shows like for all the mistakes that he made and
• 41:52
  Speaker 1: many even great executives make that they they are able
• 41:56
  Speaker 1: to allocate capital effectively. And Bezos talks about, hey, we're
• 42:00
  Speaker 1: not making enough mistakes. If there aren't enough fire phones
• 42:03
  Speaker 1: that are disasters, we're not trying enough new things. You know,
• 42:07
  Speaker 1: Amazon Prime, next day delivery, Amazon Music and video and
• 42:13
  Speaker 1: web services were all because they were throwing stuff up
• 42:16
  Speaker 1: against the wall to see what happens. If you're not
• 42:19
  Speaker 1: taking a risk, you're not getting the upside. That's exactly right.
• 42:22
  Speaker 1: And so so the question would be something like, um,
• 42:27
  Speaker 1: if if you think that as a potential for a business,
• 42:29
  Speaker 1: and it's obviously not in the touch and field today
• 42:32
  Speaker 1: with things you can see today, should you be willing
• 42:34
  Speaker 1: to pay for that? And how should you be willing
• 42:36
  Speaker 1: to pay for that? So we have a little section
• 42:38
  Speaker 1: on real options, and we talked about how to value
• 42:40
  Speaker 1: those and some more formal techniques. But but that is
• 42:44
  Speaker 1: leaving aside all the numbers and all that the keys.
• 42:47
  Speaker 1: It's a mindset, right and and so there may be
• 42:50
  Speaker 1: you know, are especially although if you can get this
• 42:51
  Speaker 1: optionality for free, that's fantastic, but even if you're willing to,
• 42:56
  Speaker 1: if you need to pay a little bit for it.
• 42:57
  Speaker 1: By the way, there are other people like you know,
• 42:58
  Speaker 1: the Bary dealers of the world. He's just another guy.
• 43:00
  Speaker 1: I just think of Barry Diller, and I think that
• 43:02
  Speaker 1: guy understands options as well as anybody out there, right
• 43:05
  Speaker 1: and for the businesses, so there there's certain executives that
• 43:08
  Speaker 1: tend to do it, really because he's managed to assemble
• 43:11
  Speaker 1: a conglomerate of very disparate businesses that all seem to
• 43:15
  Speaker 1: work very well in his portfolio. For lack of a
• 43:19
  Speaker 1: better better word. Um, but he's not running a mutual fund.
• 43:22
  Speaker 1: He's running a real operating business. So that's how you
• 43:26
  Speaker 1: would define optionality. Real optionality is identifying those opportunities and
• 43:31
  Speaker 1: then taking advantage of it. I think that's right. And
• 43:34
  Speaker 1: he's been doing this for a long time. By the way,
• 43:36
  Speaker 1: this is not like a recent thing. This for a
• 43:38
  Speaker 1: long time. So by the way, I previously had one
• 43:41
  Speaker 1: of your colleagues on as a guest. Dennis Lynch was
• 43:44
  Speaker 1: quite fascinating. He's really an interesting individual. Dennis is awesome. Yeah,
• 43:49
  Speaker 1: not just is not only a great investor, but a
• 43:52
  Speaker 1: great a great guy. And this is these are things
• 43:54
  Speaker 1: that tend to get underestimated, by the way, is that
• 43:57
  Speaker 1: organizational cultures are really important. And you know, he's just
• 44:01
  Speaker 1: created an environment that I think is is about a
• 44:04
  Speaker 1: good environment for an investment organization as possible, and that's
• 44:07
  Speaker 1: very challenging to do. People don't realize how hard, especially
• 44:10
  Speaker 1: during COVID and everybody remote, maintaining that is really difficult.
• 44:14
  Speaker 1: I agree, and I think part of it is that,
• 44:17
  Speaker 1: I mean, there are two things that I particularly admire.
• 44:19
  Speaker 1: One is there's a clear drive towards learning, being a
• 44:23
  Speaker 1: learning organization, so there's a premium on people thinking and
• 44:26
  Speaker 1: learning and so forth. And second is I think he
• 44:29
  Speaker 1: thinks a lot about trying to put people in a
• 44:31
  Speaker 1: position to be as effective as they can be, so
• 44:34
  Speaker 1: putting people in a position to do what they do
• 44:36
  Speaker 1: well and what they're passionate about. And yeah, great, great guy,
• 44:40
  Speaker 1: and I loved I mean, I love that episode, by
• 44:42
  Speaker 1: the way, and I think that he's he's really and
• 44:44
  Speaker 1: he doesn't and he doesn't do a lot of those things.
• 44:46
  Speaker 1: So it's great for you. That was No, that was
• 44:48
  Speaker 1: a lot of That was a lot of fun. Um.
• 44:50
  Speaker 1: So let's talk a little bit about market efficiency. Uh.
• 44:54
  Speaker 1: One of the questions that when we were kicking around
• 44:57
  Speaker 1: some ideas for this is have the markets got more
• 45:00
  Speaker 1: efficient over the last twenty years, given given the speed
• 45:04
  Speaker 1: information moves around, given the integration of technology and unofficial intelligence,
• 45:10
  Speaker 1: is the market the same market as the two thousand
• 45:14
  Speaker 1: and one market? Yeah? I think the answer those questions
• 45:16
  Speaker 1: are always know that they're not the same markets, and
• 45:19
  Speaker 1: they're almost always grinding toward more efficiency. Right. So, and
• 45:23
  Speaker 1: I think that if you did one versus one and
• 45:27
  Speaker 1: go back over time, right and for all the reasons
• 45:29
  Speaker 1: you decided that information is is nearly cost costless to
• 45:34
  Speaker 1: acquire and so forth. Now, um, the one thing else
• 45:38
  Speaker 1: to say that And and I, by the way, I
• 45:41
  Speaker 1: am very enthusiastic about systematic strategies and quantitatives tools. I
• 45:46
  Speaker 1: think these are all things that even as discretionary investors,
• 45:49
  Speaker 1: we need to integrate these things in a very thoughtful way.
• 45:52
  Speaker 1: All that said that, in active management, the notion of
• 45:56
  Speaker 1: judgment is not going to go away anytime soon, and
• 45:59
  Speaker 1: so and and judgment as distinct from like I'm just
• 46:03
  Speaker 1: forecasting or you know that kind of stuff. But judgments
• 46:05
  Speaker 1: are not going to go away, and so we need that.
• 46:08
  Speaker 1: So when you think about in the very short term,
• 46:11
  Speaker 1: so short term trading, were systematic strategies are just gonna
• 46:14
  Speaker 1: be They're just so powerful. You know, if tomorrow is
• 46:17
  Speaker 1: gonna be a lot like today, or day after tomorrow
• 46:19
  Speaker 1: a lot like today, systematic things are gonna are going
• 46:21
  Speaker 1: to be much better than humans and those kinds of environments.
• 46:25
  Speaker 1: But again, if you look out five or ten or
• 46:26
  Speaker 1: fifteen years, and we talked before about these patterns of
• 46:29
  Speaker 1: how industries evolve and so forth, machines have a very
• 46:32
  Speaker 1: difficult time understanding those kinds of things, and humans can
• 46:35
  Speaker 1: be I think a little bit more thoughtful about understanding
• 46:39
  Speaker 1: who might win, who might lose for what reasons, things
• 46:42
  Speaker 1: like measuring culture and so on and so forth. So yeah,
• 46:45
  Speaker 1: I mean, it's always it's always a tough game, and uh,
• 46:48
  Speaker 1: I just don't see it's gonna be getting a ton
• 46:51
  Speaker 1: ton easier over time. So so the markets becoming more efficient,
• 46:56
  Speaker 1: Let me, let me ask that slightly differently? Are are
• 46:59
  Speaker 1: we quicker today to discount the future? So and and
• 47:04
  Speaker 1: we briefly talked about, uh, the electric vehicle makers. If
• 47:08
  Speaker 1: we're looking at Lucid and Tesla and Rivian in those
• 47:11
  Speaker 1: companies footnote A hundred years ago, there were ninety different
• 47:16
  Speaker 1: automobile companies before we were left with five and then
• 47:20
  Speaker 1: three and now in the US and now um, here
• 47:23
  Speaker 1: we are with everybody rolling out e vs and lots
• 47:26
  Speaker 1: of new EV companies coming out. Are we better able
• 47:32
  Speaker 1: to look at this group and say, oh, yeah, eventually
• 47:35
  Speaker 1: everything's gonna be e V and therefore these companies have value?
• 47:39
  Speaker 1: Or are these closer to the meme stocks? And and
• 47:41
  Speaker 1: I'm not asking for an opinion about any specific company,
• 47:45
  Speaker 1: I mean, how are investors generalizing with any of these sectors?
• 47:51
  Speaker 1: But we can use evs as an example. I mean,
• 47:54
  Speaker 1: it's a great question baring and a few things come
• 47:56
  Speaker 1: to mind. Um, the first thing I should mention, there's
• 47:58
  Speaker 1: a fairly recent academic paper. This is within the last
• 48:01
  Speaker 1: few months, and we can maybe posted on the show
• 48:04
  Speaker 1: notes or something to this effect. And it was its
• 48:06
  Speaker 1: studied about ten thousand I p o s since nine
• 48:12
  Speaker 1: and and then it actually went and tracked the future
• 48:15
  Speaker 1: earnings and discounted them back to a present value and
• 48:17
  Speaker 1: said how close was the I p O price to
• 48:20
  Speaker 1: the actual performance of the business over time? And it
• 48:24
  Speaker 1: turns out, I mean probably not shockingly. Is it on average?
• 48:28
  Speaker 1: It was about right? But there is massive variants and
• 48:33
  Speaker 1: there is massive skew. Right. So the answer is the
• 48:36
  Speaker 1: market tends to get this broadly speaking, but for any
• 48:39
  Speaker 1: particular company, uh, not particularly well. So that's my first comment, say,
• 48:44
  Speaker 1: I will enter all this into with some some degree
• 48:46
  Speaker 1: of humility. The second thing is there's a concept and
• 48:49
  Speaker 1: we talked about in this the book as well, but
• 48:51
  Speaker 1: it's a very well known concept of reflexivity, right, And
• 48:54
  Speaker 1: so we tend to think about fundamentals and price action
• 48:59
  Speaker 1: as two separate things. Right, So people always draw that,
• 49:01
  Speaker 1: you know, the prices that thing that's squiggling all over
• 49:03
  Speaker 1: the place, and fundamentals is things sort applauds along, you know,
• 49:07
  Speaker 1: and and so prices sort of chasing around. Um. What
• 49:10
  Speaker 1: George Soros and many others have talked about in the
• 49:12
  Speaker 1: concept of reflectivity is these two things feed back to
• 49:15
  Speaker 1: one another. So the very fact that when price is
• 49:17
  Speaker 1: up and a company can sell equity that allows it
• 49:20
  Speaker 1: resources to pursue fundamentals in a way that it may
• 49:23
  Speaker 1: not have been able to otherwise. Right, and so on
• 49:25
  Speaker 1: and so forth. Right, and by the way, the positive
• 49:27
  Speaker 1: feedback works on the way up, and it also couldn't
• 49:29
  Speaker 1: work on the way down, just to be clear. So
• 49:31
  Speaker 1: I think even in electric vehicles we've seen a big
• 49:34
  Speaker 1: dose of this reflexivity. And then the other thing that
• 49:38
  Speaker 1: makes it this all very complicated is what's going on
• 49:40
  Speaker 1: with interest rates and discount rates, right, and just I'll
• 49:44
  Speaker 1: just spend one moment to explain this, because it's actually
• 49:47
  Speaker 1: quite interesting if you go back and look at the
• 49:49
  Speaker 1: history of interest rates, so on the X axis you
• 49:52
  Speaker 1: would draw, you know, the history of real interest rates,
• 49:55
  Speaker 1: so adjusted for inflation. And then on the y axis,
• 49:58
  Speaker 1: the price earning is multip so we can use like
• 50:00
  Speaker 1: a Chiller cyclically adjusted price earnings multiple as an example.
• 50:04
  Speaker 1: If you plot what PE multiples do, it's actually an
• 50:07
  Speaker 1: inverted you. So saying this differently, high interest rates are
• 50:11
  Speaker 1: associated with low multiples. That's that makes sense. Kind of
• 50:15
  Speaker 1: medium ones are associated with higher multiples. Yeah, that seems okay,
• 50:19
  Speaker 1: but you would expect this to be a continued linear relationship.
• 50:22
  Speaker 1: So the low interest rates effective really high multiples, and
• 50:25
  Speaker 1: in fact that's how it happened. Occurs back down and
• 50:28
  Speaker 1: low interest rates are again effectively low uh low price
• 50:33
  Speaker 1: earnings multiples. So what's going on here? And the answer
• 50:36
  Speaker 1: is usually historically low interest rates have been associated with
• 50:40
  Speaker 1: sluggish growth because the fet is usually cutting rates in
• 50:45
  Speaker 1: response to a succession. It's it's when you look at
• 50:48
  Speaker 1: the causal relationship, how you end up at low rates. Well,
• 50:52
  Speaker 1: in this case it's following the financial crisis or a pandemic,
• 50:55
  Speaker 1: but historically most cases are because the economy is in
• 50:59
  Speaker 1: the test sluggish, and go back to the late nineteen
• 51:01
  Speaker 1: thirties and early nineteen forties was another episode of hilary
• 51:04
  Speaker 1: low very low discarnage. So so the argument here is
• 51:07
  Speaker 1: if you have companies that can grow strongly through this
• 51:10
  Speaker 1: low interest rate or low discount rate environment, they actually
• 51:14
  Speaker 1: get the double positives, right. One is the growth actually
• 51:17
  Speaker 1: they do put up the numbers, and second is they
• 51:19
  Speaker 1: get the benefit of a low discount rate. So so
• 51:22
  Speaker 1: it's a combination. You sort of throw those things into
• 51:24
  Speaker 1: the mix and you get sort of these these sort
• 51:26
  Speaker 1: of somewhat weird outcum but but again, um, early whenever
• 51:30
  Speaker 1: you're in early days, as we talked about before, for
• 51:32
  Speaker 1: electrical vehicles or anything else, when you're in early days,
• 51:34
  Speaker 1: you're gonna there's there's there's a lot of jocking around
• 51:37
  Speaker 1: for a position, and it's often not crystal clear who
• 51:41
  Speaker 1: the ultimate winners or losers will be. So so let's
• 51:43
  Speaker 1: talk a little bit about share buy backs. You have
• 51:45
  Speaker 1: a whole chapter on that. There is some controversy about
• 51:50
  Speaker 1: share buy backs. Some people like them, some people think
• 51:54
  Speaker 1: it's a waste of money. Um, I'm gonna disclose my take.
• 51:58
  Speaker 1: I think as long as they were showing share buy backs,
• 52:01
  Speaker 1: it creates an advantage for the most of the companies
• 52:04
  Speaker 1: doing the share buy backs, first of the companies that can't.
• 52:07
  Speaker 1: Whether that's a cause or effect is arguable. Hey, if
• 52:11
  Speaker 1: you can't afford to do the share buy backs, you're
• 52:13
  Speaker 1: probably doing something else wrong. But that said, tell us
• 52:17
  Speaker 1: a little bit about share buy backs, what's the significance
• 52:20
  Speaker 1: of them, and what does it mean for performance? But
• 52:23
  Speaker 1: by the way, I just can't get over this controversial
• 52:27
  Speaker 1: for some reason. I don't I just don't understand why
• 52:29
  Speaker 1: people seem so flummix by this issue because It seems
• 52:32
  Speaker 1: pretty straightforward to me. Because of the anecdotes. There are terrible,
• 52:35
  Speaker 1: terrible anecdotes. General Electric bought a ton of of stock
• 52:40
  Speaker 1: back on its way towards this, and I could give
• 52:42
  Speaker 1: you a dozen other memorable examples, but that's a little
• 52:47
  Speaker 1: bit of availability bias. You know, we we that's what
• 52:51
  Speaker 1: we've seen, and so people always tried out the worst anecdote.
• 52:55
  Speaker 1: I think that my favorite anecdote is Dell spent more
• 53:00
  Speaker 1: money when it was a freestanding public company on stock
• 53:03
  Speaker 1: buy backs. Then they earned in profits their entire existence
• 53:07
  Speaker 1: up until they were take in private, you know, a
• 53:10
  Speaker 1: decade ago. Well, now now we're going back to the
• 53:13
  Speaker 1: intangible argument and there versus their cash lows. By the way,
• 53:16
  Speaker 1: can I tell I'll just tell a little maybe this
• 53:17
  Speaker 1: a little bit out of school, but it's okay, I'll
• 53:19
  Speaker 1: tell this a little lot of school story. So, um,
• 53:22
  Speaker 1: in two thousand and ten, I was invited to give
• 53:26
  Speaker 1: a talk to the senior executive team at General Electric,
• 53:32
  Speaker 1: and uh, this is right on the heels of the
• 53:35
  Speaker 1: financial crisis, right, so this is a near death experience, right,
• 53:38
  Speaker 1: especially for GEF the financial services division and so and
• 53:41
  Speaker 1: so forth. Right, So, this is not a good you know,
• 53:43
  Speaker 1: it's a very challenging time. And um, I don't wear
• 53:48
  Speaker 1: the stock was at the time is all pre split stuff,
• 53:50
  Speaker 1: but it was probably in the low teen something like that, right,
• 53:53
  Speaker 1: And um so I'm getting a cup of coffee before
• 53:56
  Speaker 1: my presentation, and I bumped into the chief financial officer
• 54:00
  Speaker 1: and he says, Man, the worst thing and idea that
• 54:04
  Speaker 1: we did is we bought backstock in the thirties. And
• 54:07
  Speaker 1: I looked at him directly and nice, like, dude, You've
• 54:10
  Speaker 1: done a lot worse stuff than that, right, And so
• 54:13
  Speaker 1: you might say, Okay, it's not the accounting and all
• 54:17
  Speaker 1: the everything energy capital. It was the share of what
• 54:20
  Speaker 1: is even all that now? And I just said, leaving
• 54:22
  Speaker 1: aside all that stuff, Actually, I thought my my thought
• 54:25
  Speaker 1: was going on the back of my head was much
• 54:27
  Speaker 1: more about broader capital allocation and M and A activity
• 54:30
  Speaker 1: M and A like what they bought and what they
• 54:32
  Speaker 1: sold versus the buybacks and what they didn't buy, the
• 54:34
  Speaker 1: opportunities they chose to pass on. So let me let
• 54:37
  Speaker 1: me okay, if I'm allowed to nerd out just a bit.
• 54:40
  Speaker 1: First of all, there there is some there should be
• 54:42
  Speaker 1: some people should have some psychological equivalence between dividends and
• 54:46
  Speaker 1: buy backs and and and execution. They're different and distinct,
• 54:49
  Speaker 1: and if done properly, buy backs can be slightly beneficial
• 54:53
  Speaker 1: relative to dividends. But let's just say that these are
• 54:55
  Speaker 1: a mechanism return capital the shareholders, albeit only those people
• 54:59
  Speaker 1: who are sellers are willing to take it. So here's
• 55:01
  Speaker 1: here's my nerd my nerd out moment, which is I
• 55:04
  Speaker 1: called the value conservation concept, and this is really the
• 55:06
  Speaker 1: key point. So let's say you have a company that's
• 55:09
  Speaker 1: worth a thousand I'm just making this up, and you
• 55:11
  Speaker 1: have you know, X number of shares outstanding, and they
• 55:14
  Speaker 1: decide they're going to return two hundred dollars to shareholders,
• 55:17
  Speaker 1: right of the thousand, two hundreds going to go to
• 55:19
  Speaker 1: shahoulders um. By the way, they could it could be
• 55:22
  Speaker 1: a dividend, it could be a buy back, it could
• 55:23
  Speaker 1: be anything. It could be they could burn the cash
• 55:25
  Speaker 1: in the parking lot. Right. So the point is that
• 55:27
  Speaker 1: the value of the firm after this is executed will
• 55:30
  Speaker 1: go from a thousand to eight hundred period. Right. Again,
• 55:33
  Speaker 1: it doesn't matter what they did with the doing, it's
• 55:34
  Speaker 1: gonna go from a thousand to eight hundreds. Okay, so
• 55:36
  Speaker 1: now let's walk through three scenarios. One scenario is the
• 55:39
  Speaker 1: stock is over valued. Right, Let's pretend that was the
• 55:43
  Speaker 1: g E situation. The stock is overvalued, so they buy
• 55:46
  Speaker 1: back over valued stock. Well, the value the firm we
• 55:50
  Speaker 1: just established goes from a thousand to eight hundred. That
• 55:53
  Speaker 1: doesn't change. What does change is the relative positioning of
• 55:58
  Speaker 1: the selling shoulders versus going shoulders. In this case, the
• 56:01
  Speaker 1: selling shoulders are getting in quotes more than they should
• 56:04
  Speaker 1: so they're benefiting and the ongoing shoulders are suffering. Right,
• 56:08
  Speaker 1: so they're getting their per share value just went down, right,
• 56:11
  Speaker 1: And we can demonstrate, and we actually do in the book.
• 56:13
  Speaker 1: We can demonstrate that mathematicad scenario too is a buy
• 56:16
  Speaker 1: back undervalued stock. Right, So what's happened now is the
• 56:19
  Speaker 1: sellers are getting less than what they're supposed to be getting,
• 56:22
  Speaker 1: so they're in a sense getting ripped off. And what's
• 56:24
  Speaker 1: left is the per share value goes up, the interns
• 56:27
  Speaker 1: of guide goes up for the ongoing shareholders. Right, So
• 56:31
  Speaker 1: one of the points always make the money managers I
• 56:33
  Speaker 1: as I said, well, I presume you own stocks because
• 56:35
  Speaker 1: you believe that they're undervalued. Is that a fair assessment.
• 56:40
  Speaker 1: If the answer to that is yes, then you always
• 56:43
  Speaker 1: want companies to buy back stock because the presumption is
• 56:46
  Speaker 1: somebody is selling for too low a price and your
• 56:48
  Speaker 1: per share value is going to go up. Now, Diven,
• 56:51
  Speaker 1: end of course, just goes to everybody and leaving a
• 56:52
  Speaker 1: side tax effects, everyone gets treated completely equally. So now
• 56:57
  Speaker 1: what we talked about in the book is this thing
• 56:59
  Speaker 1: called the Golden rule buy backs, which basically says you
• 57:01
  Speaker 1: should buy back of stock only one is below fair
• 57:03
  Speaker 1: value and basically all other operational initiatives have been met. Right.
• 57:08
  Speaker 1: And again, Barry, I'll just let you put on your
• 57:10
  Speaker 1: sort of owner of a business hat as well. You
• 57:13
  Speaker 1: probably think to yourself, all right, we've got financials. What
• 57:16
  Speaker 1: I want to do is invest in all the ways
• 57:17
  Speaker 1: in the business that I think would add value to
• 57:20
  Speaker 1: our organization. And then there's something left after left over
• 57:23
  Speaker 1: after all that, then we'll think about what to do
• 57:25
  Speaker 1: with that money. Right, But your first inclination is let's
• 57:28
  Speaker 1: invest back into ways to build value for our our
• 57:32
  Speaker 1: long term value for our franchise. Right, So so to me,
• 57:35
  Speaker 1: uh okay, And then the last thing I'll say about
• 57:38
  Speaker 1: buy backs versus dividends, which is really interesting and I
• 57:40
  Speaker 1: think this is a very real thing, which is it's
• 57:43
  Speaker 1: a completely different psychological thing for executives. So when they
• 57:47
  Speaker 1: pay a dividend, they deem that to be a quasi contract,
• 57:51
  Speaker 1: and they are loath to cut dividends. They want to
• 57:54
  Speaker 1: raise the dividend, and the dividend is the sacred thing
• 57:57
  Speaker 1: that we want to preserve at all costs. As a consequence,
• 58:00
  Speaker 1: by the way, if you look at a long term
• 58:02
  Speaker 1: series of dividends versus other capital allocation things like M
• 58:05
  Speaker 1: and A or CAPEX, where dividends are really stable series,
• 58:09
  Speaker 1: I mean they do go down in recessions and so forth,
• 58:11
  Speaker 1: but it's a super smooth series, right, because companies are
• 58:14
  Speaker 1: really reticent to to cut them in there, and they're
• 58:17
  Speaker 1: pretty conservative about growing them. By contrast, buy backs are
• 58:21
  Speaker 1: deemed to be sort of this residual. Right. Yeah, we
• 58:23
  Speaker 1: paid all our bills, we made all the investments. We like,
• 58:26
  Speaker 1: we got some money sitting around. What do we do
• 58:28
  Speaker 1: with it. Let's buy back stock, right, and so the
• 58:31
  Speaker 1: the the volatility of buy backs from one year to
• 58:35
  Speaker 1: the next. So, so we went through COVID. What was
• 58:38
  Speaker 1: the first thing that got cut. It wasn't dividends. I mean,
• 58:40
  Speaker 1: dividends went down, but it was it was buy backs
• 58:43
  Speaker 1: went from a lot to very little in a very
• 58:45
  Speaker 1: short period time. Someone did research showing that something like
• 58:50
  Speaker 1: announced by backs are executed, a big swath never get
• 58:54
  Speaker 1: completed because the world intervenes and sometimes you can't do
• 58:59
  Speaker 1: what you said you were gonna do. Now that one
• 59:01
  Speaker 1: we I checked that because that was true. That was
• 59:03
  Speaker 1: that was true back in the nine nineties. That is
• 59:05
  Speaker 1: not really in the United States. In the United States,
• 59:08
  Speaker 1: most pro programs get executed. But that was that was
• 59:11
  Speaker 1: a true thing, and it's more true internationally than it
• 59:14
  Speaker 1: is in the United States. Yeah. So so to me
• 59:17
  Speaker 1: and bo Way, this is a whole another thing going
• 59:19
  Speaker 1: back to how to think about markets. I mean, I
• 59:20
  Speaker 1: actually think one of the very simple and many quantitative
• 59:23
  Speaker 1: guys do this, but one of the very simplistic ways
• 59:24
  Speaker 1: to think about markets is simply take take the SMPI,
• 59:28
  Speaker 1: for instance, take the dividend yield plus the buy back
• 59:31
  Speaker 1: yield and quotation marks, and then um and then that
• 59:35
  Speaker 1: that yield ends up being your return. Now, the last
• 59:37
  Speaker 1: thing I'll say before I don't want to there's an
• 59:39
  Speaker 1: e T f for that sharehold of value. That's a
• 59:42
  Speaker 1: that's a good one. So the last thing lest I
• 59:44
  Speaker 1: come across is totally like favorable by buy backs. Let
• 59:47
  Speaker 1: me just say, and you alluded to Dell. I mean,
• 59:49
  Speaker 1: there are companies of buy back stock for the wrong reasons, right,
• 59:53
  Speaker 1: and so the wrong reason would be something like to
• 59:56
  Speaker 1: increase earnings per share or two offset to ocean from
• 1:00:00
  Speaker 1: stock based compensation programs, and so and so from those
• 1:00:03
  Speaker 1: net aren't necessarily bad, but those are not the proper motivation.
• 1:00:06
  Speaker 1: The last one, it seems that because of the way
• 1:00:09
  Speaker 1: we treat stock options as a sort of non cost
• 1:00:13
  Speaker 1: and it takes real capital buy back shares to make
• 1:00:17
  Speaker 1: up for that, it kind of can mislead investors or
• 1:00:21
  Speaker 1: it looks like you're hiding this dilutive thing you're doing
• 1:00:24
  Speaker 1: in a way that isn't always transparent. And some companies
• 1:00:27
  Speaker 1: have been more egregious than all, and I agree with that.
• 1:00:30
  Speaker 1: So I would just say that the stock based compensation discussion,
• 1:00:34
  Speaker 1: and by the way, some SPC programs are great and
• 1:00:37
  Speaker 1: others are not as good and so forth, so there's
• 1:00:39
  Speaker 1: no one size fits all. But that's a separate discussion
• 1:00:43
  Speaker 1: from the buy back discussion. So I would just say
• 1:00:45
  Speaker 1: that those two things should not be intermingled with to
• 1:00:47
  Speaker 1: one another. And I think your observation is exactly correct.
• 1:00:50
  Speaker 1: They're are sometimes brought together in a way that may
• 1:00:52
  Speaker 1: not be productive. H But but you were gonna say
• 1:00:56
  Speaker 1: one more thing about stock buy backs, which generally is
• 1:00:59
  Speaker 1: you think it's a net positive for for shareholder price. Well,
• 1:01:03
  Speaker 1: I think that that's uh, that's an empirical question which
• 1:01:06
  Speaker 1: has been answered for decades. So the answer is that
• 1:01:08
  Speaker 1: is yes. And and by the way, people have this
• 1:01:11
  Speaker 1: perception companies pie back stock when they're high and they
• 1:01:13
  Speaker 1: don't buy it when it's low. That's actually not true.
• 1:01:15
  Speaker 1: I mean, because I remember in oh eight No. Nine,
• 1:01:19
  Speaker 1: nobody was announcing stock by backs, but I do have
• 1:01:22
  Speaker 1: a vivid recollection of everybody was buying backs. Yeah, but
• 1:01:27
  Speaker 1: if you do the numbers, the aggriant numbers are actually
• 1:01:29
  Speaker 1: pretty good. And by the way, it's this is now
• 1:01:31
  Speaker 1: not another a very big macro comment, which is companies
• 1:01:35
  Speaker 1: are pretty good at selling stock when it's high and
• 1:01:38
  Speaker 1: buying it when it's bad when it's cheap. Posatively, I mean, empirically,
• 1:01:42
  Speaker 1: we know that for a fact. That's so they're pretty good.
• 1:01:44
  Speaker 1: So when they're retiring act, Yes, that's that's an interesting
• 1:01:46
  Speaker 1: And by the way, that the reason I bring that
• 1:01:49
  Speaker 1: up and why that's important is that when we talk
• 1:01:51
  Speaker 1: about alpha, for example, alpha is a measure of excess returns,
• 1:01:55
  Speaker 1: and of course it nets to zero by definition within
• 1:01:57
  Speaker 1: a closed group of the problems. Markets are not clos
• 1:02:00
  Speaker 1: post right, They're actually open, and they're open that there
• 1:02:02
  Speaker 1: are other entities interacting, and the biggest other entity interacting
• 1:02:06
  Speaker 1: is actually corporation. So if companies are selling expensive and
• 1:02:09
  Speaker 1: buying cheap, that means there's companies are gathering somebody alpha.
• 1:02:13
  Speaker 1: So it's funny you say that, because I'm trying to
• 1:02:15
  Speaker 1: remember which quant said it, and I don't want to
• 1:02:17
  Speaker 1: put words into Cliff Fastness his mouth. Somebody had written
• 1:02:21
  Speaker 1: stock buy backs are legal insider trade, and you know
• 1:02:24
  Speaker 1: how well the company is going to do. So if
• 1:02:27
  Speaker 1: you're selling stock, it's you're less confident. And if you're
• 1:02:31
  Speaker 1: a buyer, as a corporate entity, you should be doing
• 1:02:35
  Speaker 1: so because you think the company's future prospects are bright
• 1:02:38
  Speaker 1: and you know exactly why. Yeah. And by the way,
• 1:02:40
  Speaker 1: the on thing I'll just mentioned is it just to
• 1:02:42
  Speaker 1: be clear that buy backs were, I mean they're there.
• 1:02:44
  Speaker 1: There are histories like Telen's very famous for having brought
• 1:02:47
  Speaker 1: back stock in the nineteen seventies and so forth. But
• 1:02:49
  Speaker 1: buy backs were the wild West in the nineteen seventies, right,
• 1:02:52
  Speaker 1: because you could be you could be charged with stock
• 1:02:55
  Speaker 1: price manipulation. So the s the SEC put in a
• 1:02:58
  Speaker 1: safe harbor provision in nine teen eight two, so there's
• 1:03:02
  Speaker 1: no real discussion. And by the way, people don't know
• 1:03:04
  Speaker 1: right at the start of the best ball market, right
• 1:03:07
  Speaker 1: is a really important day because you if you're thinking
• 1:03:09
  Speaker 1: about returning capital to shareholders and you're thinking about the
• 1:03:12
  Speaker 1: complete dividend plus buy back picks nothing before. There's no
• 1:03:16
  Speaker 1: comparability before and after eight two. So the safe harbord
• 1:03:19
  Speaker 1: is important. So so even if companies have a symmetric information,
• 1:03:22
  Speaker 1: the safe harbor assures that if they execute their trades
• 1:03:26
  Speaker 1: in a certain way with particular volumes and stakes and
• 1:03:28
  Speaker 1: all that, hence the legal insider hence they're good to go.
• 1:03:31
  Speaker 1: They listen. Who better to know a company's own prospect
• 1:03:34
  Speaker 1: than the management of the company. And that's probably a
• 1:03:38
  Speaker 1: reason why quantz like buy backs and a lot of
• 1:03:42
  Speaker 1: people track insider buying and corporate buy backs, because theoretically
• 1:03:48
  Speaker 1: there should be a pretty solid signal in there. Absolutely,
• 1:03:52
  Speaker 1: So we talked about Shopify, we talked about Domino's I
• 1:03:56
  Speaker 1: want to bring corporate management back to something you out
• 1:04:00
  Speaker 1: and in a previous book, the paradox of skill, which
• 1:04:04
  Speaker 1: states the higher level the level of competition, the more
• 1:04:08
  Speaker 1: luck improves events. Now we know how that works in sports.
• 1:04:13
  Speaker 1: How does that work in investing? How does that work
• 1:04:16
  Speaker 1: in business? Well, I mean I think it works across
• 1:04:19
  Speaker 1: all these domains and just too And I'll just restate
• 1:04:22
  Speaker 1: what you just said. The paradox of skill. Seys and
• 1:04:23
  Speaker 1: activities were both skill and luck and tribute to outcomes
• 1:04:27
  Speaker 1: most things. As skill improves, luck becomes a more important
• 1:04:32
  Speaker 1: determinant of the outcome. So that doesn't seem to make
• 1:04:34
  Speaker 1: any sense. And so the key is to think about
• 1:04:36
  Speaker 1: skill in two different dimensions. The first dimensions absolute skill.
• 1:04:41
  Speaker 1: And I think we'd all agree, and that was really
• 1:04:43
  Speaker 1: our comment about market efficiency. We look around the world,
• 1:04:45
  Speaker 1: I mean, just look at the technology at our fingertips,
• 1:04:47
  Speaker 1: that best practices of training for athletes and so over.
• 1:04:50
  Speaker 1: I mean, I think we'd all agree without a doubt
• 1:04:53
  Speaker 1: that it's as good as it's ever been in terms
• 1:04:55
  Speaker 1: of how we are absolute levels of skill. And we
• 1:04:59
  Speaker 1: can document that when we measure things versus a clock,
• 1:05:02
  Speaker 1: so for example of running and so and so forth.
• 1:05:05
  Speaker 1: But the second dimension is really the key one for
• 1:05:07
  Speaker 1: the paradox of skill, which is a relative skill, and
• 1:05:11
  Speaker 1: the paradise the key to the whole paradox, as it
• 1:05:13
  Speaker 1: says something like when what has happened over time is
• 1:05:16
  Speaker 1: the difference between the very best and the average shrinks
• 1:05:19
  Speaker 1: over time, so everyone becomes a little bit closer to
• 1:05:22
  Speaker 1: one another. Standard deviation of performance shrinks over time, and
• 1:05:25
  Speaker 1: so um, you know, you know, because there you're a
• 1:05:28
  Speaker 1: car guy, right, so you might you might appreciate this,
• 1:05:30
  Speaker 1: but you know my understanding because I read one or
• 1:05:33
  Speaker 1: two papers about this. But you know, the differential in
• 1:05:36
  Speaker 1: the quality of car finishes in the nineteen sixties and seventies,
• 1:05:40
  Speaker 1: I guess, was very high. So you know, you bought
• 1:05:42
  Speaker 1: a Mercedes Benz it really was a better, right bank
• 1:05:48
  Speaker 1: versus you bought some other cheaper right exactly. And so
• 1:05:53
  Speaker 1: now it turns out that you can buy pretty much
• 1:05:55
  Speaker 1: any car. They may not they may not be bank vaults,
• 1:05:57
  Speaker 1: but they're all pretty well put together. And they're finishes
• 1:06:00
  Speaker 1: are all pretty good, and so on and so forth.
• 1:06:02
  Speaker 1: So there's a good example of how you might envision
• 1:06:05
  Speaker 1: how that's changed over time. So I think, yeah, in
• 1:06:07
  Speaker 1: terms of you just when if you want applied to
• 1:06:10
  Speaker 1: businesses best practices and businesses tend to be embraced until autuma.
• 1:06:14
  Speaker 1: Manufacturing might be one example that managerial best practices tend
• 1:06:18
  Speaker 1: to find their ways and to keep people's minds training
• 1:06:21
  Speaker 1: through school, business schools and so on and so forth.
• 1:06:24
  Speaker 1: So yeah, I think broad broadly speaking, this is a
• 1:06:27
  Speaker 1: universal concert. So let me have you addressed two examples
• 1:06:31
  Speaker 1: of this that I think are instructive. One is allocators
• 1:06:35
  Speaker 1: of capital. If you're in the investment management business, there
• 1:06:40
  Speaker 1: really shouldn't be giant outliers and performance over long periods
• 1:06:45
  Speaker 1: of time. There might be over a couple of quarters
• 1:06:47
  Speaker 1: or even a year, but for the most part, and
• 1:06:50
  Speaker 1: we've seen some of this over the past couple of years,
• 1:06:52
  Speaker 1: a few funds have exploded, done really well, some some
• 1:06:55
  Speaker 1: hedge funds that have been all in on crypto, some
• 1:06:58
  Speaker 1: people that were way early to the work at home
• 1:07:01
  Speaker 1: work from homestocks or Tesla or what have you. Is
• 1:07:06
  Speaker 1: the expectation when you see like somebody leading the pack
• 1:07:10
  Speaker 1: by an extraordinary amount that eventually that just mean reverts
• 1:07:14
  Speaker 1: and and there's a degree of lucky timing. I'm not
• 1:07:17
  Speaker 1: even saying luck, but just lucky timing versus skill. How
• 1:07:22
  Speaker 1: do we look at outliers and market performance? Yeah, I
• 1:07:25
  Speaker 1: mean part of the the the answer if you're if
• 1:07:27
  Speaker 1: you're trying to avoid getting uh consumed by the paradox
• 1:07:31
  Speaker 1: of skill in other words, where is the answer is
• 1:07:33
  Speaker 1: to look for easy games? Right, So you're if you
• 1:07:36
  Speaker 1: think you're a skillful person, you don't want to compete
• 1:07:39
  Speaker 1: with other super skillful people. You want to find games
• 1:07:43
  Speaker 1: where your skill tends to be the highest. Right, so
• 1:07:47
  Speaker 1: you know you're Annie Duke. Instead of playing with a
• 1:07:49
  Speaker 1: high stakes table, maybe you play at the next leg
• 1:07:52
  Speaker 1: stakes down where your profit per hours higher because your
• 1:07:57
  Speaker 1: skill differentials higher. So you may be making less money,
• 1:07:59
  Speaker 1: but you're higher skill differential. And so that might be
• 1:08:02
  Speaker 1: that this is the interesting uh sort of almost come
• 1:08:05
  Speaker 1: back to that idea that when there are new markets
• 1:08:08
  Speaker 1: that open up, it can be the case that lots
• 1:08:11
  Speaker 1: of people are sitting at the table. Right. If you
• 1:08:13
  Speaker 1: wanted to continue with this poker analogy, lots of different
• 1:08:16
  Speaker 1: people with varied skills are sitting at the tables, some
• 1:08:19
  Speaker 1: of who know what's going on in others who don't,
• 1:08:21
  Speaker 1: and that those those those can be actually easy games,
• 1:08:24
  Speaker 1: and that's an opportunity set that you're not gonna get
• 1:08:26
  Speaker 1: if you're only buying sp FI fund, that's right. And
• 1:08:28
  Speaker 1: then that those those eventually get tightened up, right, so
• 1:08:31
  Speaker 1: the people that are not the losers end up losing
• 1:08:34
  Speaker 1: money and then they leave the table for for whatever reason,
• 1:08:36
  Speaker 1: and then those seats get filled by more skillful players
• 1:08:39
  Speaker 1: and so on and so forth. So eventually that gets
• 1:08:41
  Speaker 1: sorted out. But you there's there's a long history of markets,
• 1:08:45
  Speaker 1: even as we've evolved toward more efficient broadly speaking, where
• 1:08:49
  Speaker 1: they're these easy games have popped up, and you know,
• 1:08:52
  Speaker 1: even like I was talking to Buddy Mine, who was
• 1:08:54
  Speaker 1: an early options trader, and he's like, you know, they
• 1:08:57
  Speaker 1: was like, it's like the eight is like the eighties, Yeah,
• 1:09:00
  Speaker 1: the nineteen eighties, And he's like, oh, they introduced options
• 1:09:03
  Speaker 1: on certain commodities, right, and they hadn't traded them before
• 1:09:06
  Speaker 1: in this particular exchange. He's like going, and he's like,
• 1:09:09
  Speaker 1: so people start putting up you know, bids and offers
• 1:09:11
  Speaker 1: for things, and he's like, you start figuring out he
• 1:09:13
  Speaker 1: could put he could put on like these costless spreads
• 1:09:15
  Speaker 1: at a guaranteed profit, and he's like, this doesn't make
• 1:09:19
  Speaker 1: any sense. It's not gonna last very long. But like
• 1:09:22
  Speaker 1: my HP twelve C works. And I remember, I'm just
• 1:09:24
  Speaker 1: take advantage of it while I while I get it right.
• 1:09:26
  Speaker 1: So part of the answer, I think that the response,
• 1:09:29
  Speaker 1: the careful response, would be something like, don't don't say
• 1:09:31
  Speaker 1: like these people are automatically just lucky people. The question
• 1:09:35
  Speaker 1: is are they playing in an easy game where they
• 1:09:38
  Speaker 1: bring something to the table that others don't have. They've
• 1:09:40
  Speaker 1: identified the opportunity and I'm taking advantage of it. Now.
• 1:09:43
  Speaker 1: The problem with the problem with easy games, generally speaking,
• 1:09:46
  Speaker 1: is that the last well, ay, they don't last, but
• 1:09:49
  Speaker 1: be if they do last, they tend not to be
• 1:09:51
  Speaker 1: super scalable. So in other words, it's often you can't
• 1:09:54
  Speaker 1: make billions and billions and billions of dollars in an
• 1:09:56
  Speaker 1: easy game because people you know figure it out, so
• 1:09:59
  Speaker 1: they usually tend to be smaller and nicheer and so forth.
• 1:10:02
  Speaker 1: I mean, I remember I was talking to a quant
• 1:10:03
  Speaker 1: firm based in London, and they said that there they
• 1:10:06
  Speaker 1: had some little strategy that was dealing with Chinese retail investors,
• 1:10:12
  Speaker 1: and they said, this thing is like a little money machine,
• 1:10:14
  Speaker 1: like every day we money on this thing, he goes,
• 1:10:17
  Speaker 1: but little it just can't. We just can't do it
• 1:10:20
  Speaker 1: in bigger size. But it's such a nice little thing.
• 1:10:22
  Speaker 1: We just let it keep going, buddy like. But but
• 1:10:25
  Speaker 1: it's it's just like, you know, steady, steady drum beat
• 1:10:28
  Speaker 1: of process. So we see that all the time when
• 1:10:32
  Speaker 1: a firm returns capital to their limited partners and say
• 1:10:36
  Speaker 1: they say, hey, we have enough money to mind this inefficiency,
• 1:10:40
  Speaker 1: but it's not big enough to share with other people.
• 1:10:44
  Speaker 1: And the exceptions when people try and push the envelope
• 1:10:48
  Speaker 1: is you get a long term capital management situation where
• 1:10:51
  Speaker 1: they leveraged up these inefficiencies and eventually the chickens come
• 1:10:55
  Speaker 1: home to roost. So let's put aside the investment side
• 1:11:00
  Speaker 1: of luck versus skill and talk about how does this
• 1:11:04
  Speaker 1: manifest in business. You you have you have lots of
• 1:11:08
  Speaker 1: professional consultant companies mackenzie and go down the list. You
• 1:11:12
  Speaker 1: have all these great business schools turning out these nbas
• 1:11:17
  Speaker 1: and these j ds that are super smart, super insightful.
• 1:11:21
  Speaker 1: They're they're steeped in all the wisdom of the business
• 1:11:25
  Speaker 1: cases that have happened into that environment. Do we really
• 1:11:29
  Speaker 1: see luck playing a role in what companies end up
• 1:11:32
  Speaker 1: being successful? Maybe for a few quarters or years? Um
• 1:11:36
  Speaker 1: does that happen? Oh? Yeah, I mean I think for sure.
• 1:11:40
  Speaker 1: It's actually funny because I are participated in an academic
• 1:11:43
  Speaker 1: seminar where like like a non academic but academic seminar,
• 1:11:47
  Speaker 1: and it was literally about this exact topic, which is
• 1:11:49
  Speaker 1: how much what is the roles skill and luck in
• 1:11:52
  Speaker 1: UM corporate strategy setting? And and interestingly there is an
• 1:11:56
  Speaker 1: academic that took this luck side and academic took the
• 1:11:58
  Speaker 1: skill side. And you know, answer, of course is somewhere
• 1:12:01
  Speaker 1: in between those two. I think your question you're asking
• 1:12:03
  Speaker 1: is a slightly more subtle one, which is has it
• 1:12:05
  Speaker 1: changed over time? And I think that the answer is um.
• 1:12:08
  Speaker 1: That again as right, that's the basic principle is there's
• 1:12:13
  Speaker 1: more uniformity in the skill levels it becomes. Now. Look,
• 1:12:16
  Speaker 1: the answer is for many famous business breakthroughs, and clearly
• 1:12:22
  Speaker 1: this is very true for example, drug development, that almost
• 1:12:25
  Speaker 1: seems like it's I mean those are I mean, I
• 1:12:27
  Speaker 1: don't call them luck, but we'd say that there's a
• 1:12:29
  Speaker 1: high degree of randomness and it's not exactly And so
• 1:12:33
  Speaker 1: you know, you think about although, to be fair, some
• 1:12:36
  Speaker 1: of the new technologies the I forgot what it's called
• 1:12:40
  Speaker 1: the nose on a chip that allows the testing of
• 1:12:44
  Speaker 1: these jillion variations using semiconductors and software rather than RNA.
• 1:12:49
  Speaker 1: What about RNA was an amazing You think about that's
• 1:12:52
  Speaker 1: a decade plus in the making. Two people think it's
• 1:12:55
  Speaker 1: a recent discovery. It's almost twenty years. That's amazing, Like
• 1:12:59
  Speaker 1: you said, twenty years of and d sort of ready
• 1:13:01
  Speaker 1: like all dressed up with no place to go just yet.
• 1:13:04
  Speaker 1: And then when it became time to go, it went.
• 1:13:06
  Speaker 1: And by the way, that thing, I mean, my understanding
• 1:13:08
  Speaker 1: is that these guys had that thing ready to go
• 1:13:10
  Speaker 1: probably a couple of years ago, March of April four,
• 1:13:14
  Speaker 1: specifically March of April and other words, it was ready
• 1:13:19
  Speaker 1: to go, like almost right away, which is astounding. It's
• 1:13:22
  Speaker 1: you know, there's one o the thing I'll just add
• 1:13:23
  Speaker 1: Barry that you know, and we wrote a piece. It
• 1:13:25
  Speaker 1: was in a slightly different context, but the piece was
• 1:13:28
  Speaker 1: called Turn and Face the Strange, and it was about
• 1:13:30
  Speaker 1: why organizations are slow to change. By the way, the
• 1:13:34
  Speaker 1: inspiration for that piece was actually a presentation that Dick
• 1:13:37
  Speaker 1: Taylor gave at the m I. T. Sloan Sports Analytics Conference.
• 1:13:41
  Speaker 1: So this is going to seem a little bit weird
• 1:13:42
  Speaker 1: that a behavioral economist talking into sports conference. But Dick's
• 1:13:46
  Speaker 1: point was something like this, which is, there are certain
• 1:13:49
  Speaker 1: things that we know work analytically is sports, You know,
• 1:13:52
  Speaker 1: the three point shot, going forward on fourth down, stuff
• 1:13:56
  Speaker 1: like that, and uh, it seemed to have taken forever
• 1:14:00
  Speaker 1: ever for teams to actually embrace. And the question is
• 1:14:04
  Speaker 1: why don't teams do it much faster? So this is
• 1:14:08
  Speaker 1: an interesting one where they're there, you know, we know
• 1:14:11
  Speaker 1: that it works in quotes, we know and um, and
• 1:14:15
  Speaker 1: yet the answer is it's not part of the conventional wisdom,
• 1:14:18
  Speaker 1: and it's not part of the coaching guild. It's not
• 1:14:20
  Speaker 1: what you learn as a player when you've grown up.
• 1:14:22
  Speaker 1: And so it takes almost a generation or two for
• 1:14:25
  Speaker 1: these things to get woven. And now, now if you
• 1:14:27
  Speaker 1: watch the NFL going forward on fourth down for the
• 1:14:29
  Speaker 1: most part, and it's not it's for the most part,
• 1:14:32
  Speaker 1: but it's happening much much more frequently so people have
• 1:14:35
  Speaker 1: gotten the memo on these things, especially the younger coaches
• 1:14:37
  Speaker 1: and so forth. The interesting story UM about Taylor is
• 1:14:43
  Speaker 1: when Michael Lewis's money Ball came out, Taylor sends Lewis
• 1:14:47
  Speaker 1: an email or letter saying, Hey, you're talking about Knomen
• 1:14:51
  Speaker 1: and Diversky's work. This is all behavioral finance, which is
• 1:14:54
  Speaker 1: what eventually led to Lewis's book ten years later. Uh.
• 1:14:59
  Speaker 1: The undoing part objects because he didn't realize he had
• 1:15:02
  Speaker 1: really written a work, a book about their work. Kind
• 1:15:06
  Speaker 1: of fascinating. And even with money Ball, it still took
• 1:15:11
  Speaker 1: a decade or two UM for teams like the Boston
• 1:15:16
  Speaker 1: Red Sox to start using things that Lewis had written
• 1:15:20
  Speaker 1: about years and years before and ultimately led the Red
• 1:15:23
  Speaker 1: Sox to a championship. You know, it's interesting. My understanding
• 1:15:27
  Speaker 1: is that UM, Danny and Thinking and writing Thinking Fast
• 1:15:30
  Speaker 1: and Slow, which came out about a decade ago, talked
• 1:15:33
  Speaker 1: to a number of other writers to potentially collaborate with
• 1:15:38
  Speaker 1: him on that. One was Jason's Why, and I think
• 1:15:41
  Speaker 1: Jason's edited about three quoters of Jason I spent thinking
• 1:15:44
  Speaker 1: that thinks about a long time with him on it.
• 1:15:46
  Speaker 1: But the other one was Michael Lewis. Interestingly, so I
• 1:15:49
  Speaker 1: think he actually spent a fair bit of time with
• 1:15:52
  Speaker 1: Michael back when he was thinking about this, and I
• 1:15:55
  Speaker 1: think he obviously went to ultimately and by the way,
• 1:15:57
  Speaker 1: Danny is a beautiful writer, so I recounted writer to
• 1:16:00
  Speaker 1: and ended up doing it on his own. But that's
• 1:16:01
  Speaker 1: an interesting but I think, like you said, between the
• 1:16:05
  Speaker 1: failure thing and spending time with Conum and himself, I
• 1:16:08
  Speaker 1: think that that sort of made it clear to Michael Lewis,
• 1:16:11
  Speaker 1: who's just, by the way, insanely I love that podcast
• 1:16:15
  Speaker 1: you did with him too. He's just an insanely talented guy.
• 1:16:18
  Speaker 1: And anyway, yeah, he's he's been a regular. Some of
• 1:16:22
  Speaker 1: the stuff he's written about finance is just so unique
• 1:16:27
  Speaker 1: and comes from such a special angle. There's there's nobody
• 1:16:32
  Speaker 1: else who has his ability to identify the consensus, find
• 1:16:38
  Speaker 1: the band of misfits that are challenging the consensus and
• 1:16:42
  Speaker 1: are ultimately proven right. And it's just such a great story.
• 1:16:46
  Speaker 1: It works so well whether you're talking about baseball or
• 1:16:49
  Speaker 1: finance or um high high freakingcy trading, or like I
• 1:16:54
  Speaker 1: love that in premonition, it's the Bush white House's strike
• 1:17:00
  Speaker 1: team that essentially creates all of the uh COVID response
• 1:17:05
  Speaker 1: that was ready to go, and we really this really
• 1:17:09
  Speaker 1: didn't need to be three quarters of a million deaths.
• 1:17:12
  Speaker 1: It's quite fascinating. Well, we are way off topic, and
• 1:17:16
  Speaker 1: I've allowed you to allow me to, um disrupt myself.
• 1:17:21
  Speaker 1: So why don't I jump since we're since we're already
• 1:17:24
  Speaker 1: talking about all sorts of other things, why don't I
• 1:17:27
  Speaker 1: jump to our favorite podcast questions? Um, and since we're
• 1:17:31
  Speaker 1: talking about COVID, what have you been doing to keep
• 1:17:35
  Speaker 1: yourself entertained during lockdown? Tell us what Netflix or Amazon
• 1:17:39
  Speaker 1: Prime shows or podcasts you've been been staying busy with
• 1:17:44
  Speaker 1: besides masters and business besides Yeah, um so so Bury
• 1:17:49
  Speaker 1: My My, My confession is what you probably know is
• 1:17:52
  Speaker 1: I don't watch a lot of tea and so I
• 1:17:55
  Speaker 1: don't have any good answers on that. Um I do.
• 1:17:57
  Speaker 1: I do enjoy podcasts, and you know, I probably the
• 1:18:00
  Speaker 1: one I listened to the most frequently is um is
• 1:18:03
  Speaker 1: Patrick O'Shaughnessy's invest like the best, and I think he's
• 1:18:05
  Speaker 1: done it really nice. But I'm also a big fan
• 1:18:08
  Speaker 1: of like Tyler Tyler Cowen's conversations with tyler Um, Russ Reynolds,
• 1:18:13
  Speaker 1: Russ Roberts, part of me. Rus Roberts. By the way,
• 1:18:14
  Speaker 1: Russ Roberts has been doing these sorts of interviews before
• 1:18:18
  Speaker 1: any of us started. He's been doing it for like
• 1:18:20
  Speaker 1: twenty years. So I'm fans of all those guys, but
• 1:18:22
  Speaker 1: I usually go. I usually go if there's someone who
• 1:18:25
  Speaker 1: pops up who I find to be an interesting guest.
• 1:18:27
  Speaker 1: That's usually what motivates me to do that. So that's
• 1:18:30
  Speaker 1: mostly what I do. And then I do. I have
• 1:18:32
  Speaker 1: to say that I it's been an odd thing. I'm
• 1:18:35
  Speaker 1: a I'm a fairly big sports fan, so I do
• 1:18:37
  Speaker 1: enjoy watching sports. So I have to say that one
• 1:18:40
  Speaker 1: for example, even the NFL, I've enjoyed it probably more
• 1:18:43
  Speaker 1: this year than I have in a very long time,
• 1:18:45
  Speaker 1: just for whatever reasons, you know, because there, I mean,
• 1:18:49
  Speaker 1: they play at the games, but it was a very
• 1:18:50
  Speaker 1: different environment. Just feels like it's a little bit back
• 1:18:52
  Speaker 1: to normal, and I've really enjoyed that. So let's talk
• 1:18:55
  Speaker 1: a little bit about your mentors who helped shape your career. Well,
• 1:19:00
  Speaker 1: there are a number of them that come to mind.
• 1:19:02
  Speaker 1: Many many of them are great. H Well, I'll rap
• 1:19:04
  Speaker 1: report we've already talked about, and that I mean he
• 1:19:06
  Speaker 1: would be sort of first and foremost, UM, and not
• 1:19:10
  Speaker 1: just as someone who was a mentor and a teacher
• 1:19:13
  Speaker 1: to me, but also a collaborator. And you know, so
• 1:19:16
  Speaker 1: that that's the whole package. Bill Miller has to be
• 1:19:20
  Speaker 1: up there. You know, Bill, Bill introduced me, for example,
• 1:19:23
  Speaker 1: to the Santa Fe Institute. And I don't know if
• 1:19:25
  Speaker 1: you saw this, but Bill Um recently made very large
• 1:19:30
  Speaker 1: a million dollars, which is a transformational gift to that
• 1:19:33
  Speaker 1: place because it's a relatively small place. And uh so
• 1:19:36
  Speaker 1: that will ensure that sort of complexity science is on
• 1:19:39
  Speaker 1: the scene for for for a long time to come,
• 1:19:42
  Speaker 1: which was really extraordinary. But you know it's not just Um.
• 1:19:45
  Speaker 1: I mean, I think Bill is another one of these guys.
• 1:19:47
  Speaker 1: It has uh an insatiable intellectual curiosity, has a good
• 1:19:52
  Speaker 1: has good taste for ideas UM and just a very
• 1:19:56
  Speaker 1: thoughtful guy. Um. The two other come to mind, you know,
• 1:19:59
  Speaker 1: it's gonna sun a little it on. One is a
• 1:20:00
  Speaker 1: guy named Brady Dougan, who is was a former CEO
• 1:20:03
  Speaker 1: of Credit sweetz Um now has his own firm. But Brady,
• 1:20:06
  Speaker 1: when I was growing up in at equities in the
• 1:20:09
  Speaker 1: Credit Sweeze back in the day. It was always a
• 1:20:11
  Speaker 1: big supporter. And when I went back to Credit Switez
• 1:20:13
  Speaker 1: in two thousand and thirteen, it was because he was
• 1:20:15
  Speaker 1: there and he offered me a really exciting opportunity to
• 1:20:18
  Speaker 1: do that. And probably the last guy I've mentioned is
• 1:20:21
  Speaker 1: Dennis Lynch. You know, I think Dennis. You know, it's
• 1:20:24
  Speaker 1: interesting as I was thinking about what to do next
• 1:20:26
  Speaker 1: and just sat down with Dennis, and you know, he
• 1:20:28
  Speaker 1: had been early reader of a lot of stuff we've done,
• 1:20:31
  Speaker 1: and again creates an incredible environment for work. Every day
• 1:20:35
  Speaker 1: is super exciting for me to get going. I can't
• 1:20:38
  Speaker 1: wait to get going every single day. And as usual,
• 1:20:40
  Speaker 1: I have a longer list of things to do than
• 1:20:43
  Speaker 1: the things I can get done. It's just it's like
• 1:20:45
  Speaker 1: one of these really fun sensations. So those are people
• 1:20:47
  Speaker 1: I would mention that's fantastic. So I know you read
• 1:20:50
  Speaker 1: a lot, So let's talk about what you're reading now
• 1:20:54
  Speaker 1: and what some of your favorite books are. Oh Man alive,
• 1:20:57
  Speaker 1: So I should be more prepared for this one. Uh
• 1:20:59
  Speaker 1: and p Us. I normally shoot these questions over to people,
• 1:21:03
  Speaker 1: but you've you've been through this fourth appearance, so I
• 1:21:08
  Speaker 1: figured out, let me, let me just wing it. I
• 1:21:11
  Speaker 1: know that's bad. So well, what I'm reading right now
• 1:21:14
  Speaker 1: is actually two books simultaneously. Richard Rhodes has a new
• 1:21:18
  Speaker 1: biography of E. O. Wilson, the very famous biologist and
• 1:21:23
  Speaker 1: and you know Richard Rose a very famous, talented biographer.
• 1:21:26
  Speaker 1: And it's just a beautiful book. And I'm familiar with
• 1:21:29
  Speaker 1: el Wilson. By the way. El Wilson wrote a book
• 1:21:32
  Speaker 1: called Consilience, which is you mentioned you keep saying consilient
• 1:21:37
  Speaker 1: head of Concilient Research. And I assume every time everybody
• 1:21:40
  Speaker 1: hears that, they go, I don't know what the heck
• 1:21:41
  Speaker 1: he's talking about. So that's where let's connect that. We'll
• 1:21:45
  Speaker 1: close that and we'll close that loop right there. And
• 1:21:48
  Speaker 1: so I really enjoy that book. Um. I'm also reading
• 1:21:52
  Speaker 1: a book now by Page Harden called The Genetic Lottery,
• 1:21:55
  Speaker 1: So this is really about genetics and uh what we've
• 1:21:59
  Speaker 1: learned about and edics, inequality. A couple of books I
• 1:22:03
  Speaker 1: really enjoyed this year. Stephen Pinker's book on Rationality has
• 1:22:06
  Speaker 1: been wonderful. I don't know if you read that or
• 1:22:08
  Speaker 1: know it, but I was familiar with many of the
• 1:22:11
  Speaker 1: ideas in there. So it wasn't like it was brand
• 1:22:13
  Speaker 1: new stuff. But he presents ideas in a very clear
• 1:22:17
  Speaker 1: and compelling way and ways actually would help me even
• 1:22:19
  Speaker 1: pedagogically as a teacher to explain it to other people.
• 1:22:23
  Speaker 1: And probably I would say my favorite book this year
• 1:22:25
  Speaker 1: was a book by Fred Lodge of all On. It's
• 1:22:30
  Speaker 1: a biography of JFK. So. He's embarked on a two
• 1:22:33
  Speaker 1: part series on JFK. So this is the first one
• 1:22:37
  Speaker 1: from the time he was born in v to when
• 1:22:40
  Speaker 1: he wins the Senate in the nineteen fifties, and then
• 1:22:42
  Speaker 1: the second piece will be obviously sort of packed in
• 1:22:45
  Speaker 1: the last roughly eight or ten years of his life.
• 1:22:48
  Speaker 1: But uh, I you know, and I obviously knew the
• 1:22:51
  Speaker 1: basic profile of Kennedy, but it was I learned just
• 1:22:54
  Speaker 1: a ton about him. I learned a ton about his family,
• 1:22:57
  Speaker 1: which I found to be and it's just beautifully written.
• 1:22:59
  Speaker 1: So I let you learned a lot about world history
• 1:23:01
  Speaker 1: along the way, and so and so forth. So those
• 1:23:02
  Speaker 1: are someone's el mentioned. So those last two scientists EO.
• 1:23:05
  Speaker 1: Wilson A Life and Nature and then JFK. Coming of
• 1:23:09
  Speaker 1: Age in the American Century. Um, those are the two
• 1:23:12
  Speaker 1: books you just you just mentioned. So our final two questions,
• 1:23:16
  Speaker 1: what sort of advice would you give to a recent
• 1:23:19
  Speaker 1: college grad who was interested in a career in either
• 1:23:23
  Speaker 1: investment management or a financial research Well, by the way,
• 1:23:27
  Speaker 1: in many ways, it's a very exciting time. And when
• 1:23:29
  Speaker 1: we talked about these intangibles and you know, from a
• 1:23:32
  Speaker 1: point from the point of view understanding how those work
• 1:23:35
  Speaker 1: and so forth, it it would be pretty exciting. But
• 1:23:37
  Speaker 1: you know, the key for me is always too there.
• 1:23:39
  Speaker 1: There's sort of two things and they're probably a little
• 1:23:42
  Speaker 1: bit hokey, but the first thing is you really have
• 1:23:45
  Speaker 1: to set out to try to learn as much as
• 1:23:47
  Speaker 1: you can, and so a lot of that is reading
• 1:23:49
  Speaker 1: and studying on your own. You know, whenever my kids
• 1:23:53
  Speaker 1: graduated from college and I sort of give him a
• 1:23:55
  Speaker 1: hug and say congratulations and then say recognized. Tomorrow morning
• 1:23:58
  Speaker 1: you wake up and your education begins, right, So it's
• 1:24:01
  Speaker 1: it's an ongoing process. Um. And then the second thing
• 1:24:03
  Speaker 1: is it's it's tricky to do when you're young, but
• 1:24:06
  Speaker 1: the key is as soon as you can is defined
• 1:24:08
  Speaker 1: an organization where you feel comfortable and can contribute, and
• 1:24:11
  Speaker 1: just the culture of the organization where you work is
• 1:24:14
  Speaker 1: such a big deal. I guess the thing that maybe
• 1:24:17
  Speaker 1: is what people are asking for more overtly is it
• 1:24:20
  Speaker 1: would go back to this thing on easy games. So
• 1:24:21
  Speaker 1: if you're st of saying, like where where are things exciting?
• 1:24:24
  Speaker 1: The answer is to try not to do what everybody
• 1:24:26
  Speaker 1: else is doing. Are their pockets or areas where you
• 1:24:29
  Speaker 1: can do something it's a little bit different, a little
• 1:24:31
  Speaker 1: bit maybe more niche for now, or something that might
• 1:24:34
  Speaker 1: grow or evolve quite quite interesting. And our final question,
• 1:24:39
  Speaker 1: what do you know about the world of investing management
• 1:24:42
  Speaker 1: today that you wish you knew thirty or so years
• 1:24:45
  Speaker 1: ago when you were first getting started. Yeah, I mean
• 1:24:47
  Speaker 1: I think that the I mean I don't think that
• 1:24:49
  Speaker 1: I didn't know this, but I think I underappreciate it,
• 1:24:52
  Speaker 1: which is just the central importance of people for all
• 1:24:54
  Speaker 1: this stuff. And you know, one of the pieces that's
• 1:24:58
  Speaker 1: in one of our cues, so something we're or write
• 1:25:00
  Speaker 1: on I've very fully outlined in this report is a
• 1:25:03
  Speaker 1: report about feedback. So one of the really difficult things
• 1:25:07
  Speaker 1: in our world is to get feedback, especially in investing.
• 1:25:09
  Speaker 1: So if you're buying selling stocks, ultimately it's about the
• 1:25:13
  Speaker 1: stocks performing well. But you know, there's there's very little
• 1:25:16
  Speaker 1: quality intermediate feedback. But I start the piece off by
• 1:25:21
  Speaker 1: talking about riffing off of work by Phil Tetlock at
• 1:25:24
  Speaker 1: the University of Pennsylvania on the super forecasters, and what
• 1:25:27
  Speaker 1: they were able to sort of figure out is that
• 1:25:29
  Speaker 1: these super forecasters have certain profiles and those profiles tend
• 1:25:33
  Speaker 1: to be a key part of what makes them effective
• 1:25:36
  Speaker 1: at what they do. And there are lots of aspects
• 1:25:38
  Speaker 1: of it, but one only one that I'll mention it's
• 1:25:40
  Speaker 1: really important, which is this idea of being actively open minded.
• 1:25:43
  Speaker 1: Active open mindedness is the key, right, and that means
• 1:25:46
  Speaker 1: that you're not not only willing to pursue contemplate points
• 1:25:50
  Speaker 1: of view that are different than yours, but you're actually
• 1:25:52
  Speaker 1: willing to seek them out. And I'll just say that,
• 1:25:55
  Speaker 1: you know, we all like to think that we do this.
• 1:25:57
  Speaker 1: The answer is no, not really right, Because once you've
• 1:26:01
  Speaker 1: made up your mind about something, the past least path
• 1:26:03
  Speaker 1: least resistance is just like look for stuff that confirms
• 1:26:06
  Speaker 1: it and just keep on moving, right, because if you're
• 1:26:08
  Speaker 1: confronted if you have to change your mind or two things,
• 1:26:10
  Speaker 1: when you have to change your mind, which itself is
• 1:26:12
  Speaker 1: a pain, and then you may have to change what
• 1:26:13
  Speaker 1: you do right, which is actually another pain right, so
• 1:26:16
  Speaker 1: most of us would rather not be bothered with that.
• 1:26:19
  Speaker 1: So so that would be the one thing I just say,
• 1:26:20
  Speaker 1: investment management is is it's this drum beat, but it's
• 1:26:24
  Speaker 1: the people and the culture is becoming really the secret
• 1:26:27
  Speaker 1: sauce to long term success. Really good answer. It's funny
• 1:26:30
  Speaker 1: we we started talking about we started talking out about
• 1:26:35
  Speaker 1: inflation and never got back to it. When I have
• 1:26:39
  Speaker 1: my um, I have my expectations in my viewpoint, and
• 1:26:44
  Speaker 1: whenever I want to share a chart that supports that
• 1:26:48
  Speaker 1: view part I that viewpoint, I always try to describe
• 1:26:53
  Speaker 1: it on Twitter as today in confirmed firming my priors here,
• 1:26:58
  Speaker 1: something that agrees with something already said. So at least
• 1:27:01
  Speaker 1: there's a tiny hint of recognition that hey, you're not thinking,
• 1:27:06
  Speaker 1: you're just you're just finding something that agrees with you
• 1:27:09
  Speaker 1: and sharing it, which we all do. But at least
• 1:27:12
  Speaker 1: if you admit it, you're you're part of the way
• 1:27:14
  Speaker 1: to us. I would say, Barry, I don't know exactly
• 1:27:16
  Speaker 1: when we met, but I remember one It was an
• 1:27:19
  Speaker 1: early instance where I wrote something and then you wrote
• 1:27:22
  Speaker 1: me back and you said, hey, man, you wrote this
• 1:27:24
  Speaker 1: thing and it's not right, and you know you you
• 1:27:27
  Speaker 1: got this basically thinking wrong. I think it was like
• 1:27:29
  Speaker 1: weapons of mass destruction, you know, prediction market or something
• 1:27:33
  Speaker 1: that there was something like a weapons and I wrote
• 1:27:35
  Speaker 1: something about weapons of mass destruction and and you know
• 1:27:38
  Speaker 1: Iraq or something. You go that this is not right.
• 1:27:40
  Speaker 1: And I thought to myself, like, you know, first of all,
• 1:27:43
  Speaker 1: so of course it's someone's telling you're not right, But
• 1:27:46
  Speaker 1: but the way you did it was really interesting, and
• 1:27:47
  Speaker 1: I thought, really constructive. So it was not like, dude,
• 1:27:50
  Speaker 1: you're an idiot. It was It was not like that day.
• 1:27:54
  Speaker 1: Maybe maybe maybe at least that's not the way you
• 1:27:56
  Speaker 1: came across. You came across saying like, hey, I think
• 1:27:58
  Speaker 1: you got this thing wrong. Are some other stuff that
• 1:28:01
  Speaker 1: you may want to consider when you think about this
• 1:28:03
  Speaker 1: topic going forward. And I was like, you know what,
• 1:28:05
  Speaker 1: I'm down with that that that's good. Like right, it
• 1:28:08
  Speaker 1: was shot. Maybe it was shockingly diplomatic, but that's the
• 1:28:10
  Speaker 1: way to do it. So it wasn't about you took
• 1:28:13
  Speaker 1: it immediately away from being about me and immediately about
• 1:28:16
  Speaker 1: there might be other ways to Did it change your minds?
• 1:28:18
  Speaker 1: Did it affect you? It did change. I think it
• 1:28:20
  Speaker 1: did change my mind because I think and I think
• 1:28:22
  Speaker 1: you end up being sort of the front end of
• 1:28:24
  Speaker 1: what ended up being the correct interpretation what was going on,
• 1:28:28
  Speaker 1: and well that I do all the time. It's a
• 1:28:30
  Speaker 1: lonely place, but I will tell you the challenge is
• 1:28:36
  Speaker 1: when you're right about that sort of front end stuff,
• 1:28:40
  Speaker 1: you're not always right. We thought you're gonna be wrong frequently.
• 1:28:43
  Speaker 1: You have to be ready to say and that's why
• 1:28:46
  Speaker 1: every year I put out, hey, this is what I
• 1:28:48
  Speaker 1: got wrong here in my mea culpus, because if you
• 1:28:51
  Speaker 1: don't do that, you have no right to say to
• 1:28:53
  Speaker 1: a Michael Mobson, hey dude, I think you're not right
• 1:28:57
  Speaker 1: about this. Take a look at a look at that anyway.
• 1:29:00
  Speaker 1: I appreciate that because you actually did it in a
• 1:29:02
  Speaker 1: way that was tactful and respectful, and that was I
• 1:29:07
  Speaker 1: think just take credit for I'll definitely, uh, I definitely will. Hey, Mike,
• 1:29:17
  Speaker 1: this has been just fantastic. Thank you so much for
• 1:29:21
  Speaker 1: being so generous with your time. We have been speaking
• 1:29:24
  Speaker 1: with Michael Mobison. He is the head of Concilient Research
• 1:29:29
  Speaker 1: at Counterpoint Global at Morgan Stanley's investment management group. If
• 1:29:35
  Speaker 1: you enjoy this conversation, Well, be sure and check out
• 1:29:38
  Speaker 1: any of the previous three hundred and nine two ones
• 1:29:41
  Speaker 1: we've done prior. I promised by the time we get
• 1:29:44
  Speaker 1: to four hundred, will we'll start getting these right. We
• 1:29:46
  Speaker 1: love your comments, feedback and suggestions right to us at
• 1:29:51
  Speaker 1: m IB podcast at Bloomberg dot net. You can follow
• 1:29:54
  Speaker 1: me on Twitter at rid Halts. Sign up for a
• 1:29:56
  Speaker 1: daily reading list at rialts dot com. I would be
• 1:30:00
  Speaker 1: miss if I did not thank the crack staff that
• 1:30:01
  Speaker 1: helps us put these together each week. Paris World is
• 1:30:05
  Speaker 1: my producer, Michael Batnick is my head of research. Atika
• 1:30:09
  Speaker 1: val Bron is our project manager. I'm Barry Rihults. You've
• 1:30:13
  Speaker 1: been listening to my student business on Bloomberg Radio.