1 00:00:01,960 --> 00:00:06,040 Speaker 1: This is Masters in Business with Very Red Holds on 2 00:00:06,200 --> 00:00:09,760 Speaker 1: Bloomberg Radio. This weekend. On the podcast, I have an 3 00:00:09,760 --> 00:00:14,560 Speaker 1: extra special guest, returning after a too long of a wait, 4 00:00:15,280 --> 00:00:20,160 Speaker 1: Professor Aswat Damadoran. What can I say about his breath 5 00:00:20,239 --> 00:00:24,680 Speaker 1: and depth of expertise? Start with valuation, What is a 6 00:00:24,720 --> 00:00:29,000 Speaker 1: company worth and why? Move towards what are the things 7 00:00:29,040 --> 00:00:34,400 Speaker 1: that drive valuations? And then expand out to what happens 8 00:00:34,440 --> 00:00:39,239 Speaker 1: to valuations over the life cycle of a company and 9 00:00:39,479 --> 00:00:44,080 Speaker 1: why those life cycles are getting increasingly shorter over the 10 00:00:44,120 --> 00:00:48,320 Speaker 1: past few decades. And then meld in a little psychology 11 00:00:48,360 --> 00:00:52,279 Speaker 1: and behavioral finance, and you have what is truly a 12 00:00:52,320 --> 00:00:55,760 Speaker 1: master class by one of the great professors in the 13 00:00:55,800 --> 00:00:59,920 Speaker 1: world of finance. I found our conversation to be absolutely fascinating. 14 00:01:00,520 --> 00:01:05,360 Speaker 1: I know you will also with no further ado, Nyu Sterns, 15 00:01:05,360 --> 00:01:09,720 Speaker 1: Professor Aswath Demotorant, I'm glad to be back. So let's 16 00:01:09,720 --> 00:01:12,880 Speaker 1: start out with a little bit on the work you do. 17 00:01:12,959 --> 00:01:17,399 Speaker 1: You're known as the Dean evaluation. What led you into 18 00:01:17,480 --> 00:01:20,880 Speaker 1: that field of study in the world of investing? Can 19 00:01:20,880 --> 00:01:22,800 Speaker 1: I tell you a a little story? But why I'm called 20 00:01:22,800 --> 00:01:26,640 Speaker 1: the Dean Evaluation. I was in CNBC about a decade ago, 21 00:01:26,880 --> 00:01:29,800 Speaker 1: and the host had trouble with my last name, and 22 00:01:29,800 --> 00:01:32,320 Speaker 1: he kept trying and trying. It's so easy. It runs 23 00:01:32,360 --> 00:01:34,679 Speaker 1: with the motor too many wiles, so you don't know 24 00:01:34,720 --> 00:01:37,880 Speaker 1: which one to emphasize and which one not to. So finally, 25 00:01:37,920 --> 00:01:40,119 Speaker 1: after about his fifth try, he said, I give up. 26 00:01:40,200 --> 00:01:42,800 Speaker 1: I'm going to call you Dean, and I said why, 27 00:01:42,840 --> 00:01:45,959 Speaker 1: He said Dan evaluation. It's easier to say so there 28 00:01:46,000 --> 00:01:48,680 Speaker 1: has nothing to do with expertise and everything to do 29 00:01:48,760 --> 00:01:52,800 Speaker 1: with having an unpronounceable last name. So just for the record, 30 00:01:52,920 --> 00:01:57,320 Speaker 1: it's not Damadoran. It's Demotoran exactly, because I don't think 31 00:01:57,360 --> 00:02:00,040 Speaker 1: that's that hard. It only took me nine times and 32 00:02:00,240 --> 00:02:03,320 Speaker 1: I got it right. So let's start with the question 33 00:02:03,880 --> 00:02:07,880 Speaker 1: what lured you to focus on valuation. I am interested 34 00:02:07,920 --> 00:02:10,760 Speaker 1: in numbers. I'm naturally a numbers person, but I've also 35 00:02:10,880 --> 00:02:14,600 Speaker 1: been interested in storytelling. To me, storytelling is much more. 36 00:02:14,639 --> 00:02:16,720 Speaker 1: I mean, if you think about the history of humanity, 37 00:02:17,360 --> 00:02:20,240 Speaker 1: for thousands of years, the way we passed down information 38 00:02:20,560 --> 00:02:22,880 Speaker 1: was with stories, not with numbers. It's only in the 39 00:02:22,960 --> 00:02:25,959 Speaker 1: last century that numbers have come to the forefront. Is 40 00:02:26,320 --> 00:02:30,840 Speaker 1: that correct. It's just the last century. That's fascinating. In fact, 41 00:02:30,880 --> 00:02:34,120 Speaker 1: I think the first numbers were collected by the insurance 42 00:02:34,160 --> 00:02:37,400 Speaker 1: people in the seventeen hundreds, but it was very proprietary 43 00:02:37,400 --> 00:02:40,400 Speaker 1: only they had access. It's the last an Excel really 44 00:02:40,560 --> 00:02:45,880 Speaker 1: has allowed for this acceleration of number crunching. So to me, 45 00:02:46,080 --> 00:02:49,679 Speaker 1: the you know what attracts me to valuation, it's it's 46 00:02:49,760 --> 00:02:52,799 Speaker 1: it's at bridge between stories and numbers. You tell stories 47 00:02:52,840 --> 00:02:56,360 Speaker 1: about companies that you convert into numbers, and those numbers 48 00:02:56,400 --> 00:02:59,720 Speaker 1: eventually become valuations, and I find it attractive. I don't 49 00:02:59,720 --> 00:03:02,560 Speaker 1: want to be a number. I'm not a natural accountant 50 00:03:02,639 --> 00:03:05,080 Speaker 1: or an actuary. I'm not a natural strategy who can 51 00:03:05,080 --> 00:03:08,919 Speaker 1: tell the stories. I like to connect stories numbers, and 52 00:03:09,040 --> 00:03:11,560 Speaker 1: valuation is the place to go to do that. So 53 00:03:11,680 --> 00:03:16,239 Speaker 1: as it's safe to say, narratives drive value, narratives drive 54 00:03:16,320 --> 00:03:20,360 Speaker 1: value absolutely Now, Sometimes narratives drive value to towns and 55 00:03:20,400 --> 00:03:23,640 Speaker 1: cities they really shouldn't go. Sometimes narratives can become fairytales, 56 00:03:23,680 --> 00:03:26,799 Speaker 1: and that's why you need numbers to keep your discipline. 57 00:03:27,040 --> 00:03:29,440 Speaker 1: In fact, when I start my valuation class, I have 58 00:03:29,480 --> 00:03:31,960 Speaker 1: three hundred and fifty nbas who take my class, and 59 00:03:32,080 --> 00:03:35,680 Speaker 1: it's an amphitheater. I start with the question how many 60 00:03:35,680 --> 00:03:37,720 Speaker 1: of you are more naturally number crunches, and about two 61 00:03:37,800 --> 00:03:43,720 Speaker 1: hundred put up their hands. X bankers are recovering accountants, auditors, actuary, scientists, mathematicians, 62 00:03:44,320 --> 00:03:47,400 Speaker 1: and the other one fifty and natural storytellers, liberal arts majors. 63 00:03:47,440 --> 00:03:51,400 Speaker 1: Because MBA programs have become incredibly diverse. And I tell 64 00:03:51,440 --> 00:03:53,600 Speaker 1: them what my endgame for the classes. I said, by 65 00:03:53,600 --> 00:03:55,320 Speaker 1: the end of this class, and I turned to my 66 00:03:55,400 --> 00:03:59,120 Speaker 1: number crunches. I said, look, I hope you have enough 67 00:03:59,600 --> 00:04:01,960 Speaker 1: belief in your own imagination that you're willing to let 68 00:04:02,000 --> 00:04:05,320 Speaker 1: go because they've spent a lifetime being told that being 69 00:04:05,480 --> 00:04:09,920 Speaker 1: subjective is a weakness. Making judgments about something is a weakness. 70 00:04:10,480 --> 00:04:12,280 Speaker 1: And then I turn to my storytelling. So by the 71 00:04:12,360 --> 00:04:15,400 Speaker 1: end of this class, I hope you have enough confidence 72 00:04:15,400 --> 00:04:18,640 Speaker 1: with numbers that you become a discipline storyteller. To me, 73 00:04:18,760 --> 00:04:21,520 Speaker 1: what makes for good valuation is you're either a discipline 74 00:04:21,560 --> 00:04:25,760 Speaker 1: storyteller or an imaginative number cruncher. And I think that 75 00:04:25,960 --> 00:04:30,839 Speaker 1: combination is getting increasingly hard to find because we're very 76 00:04:30,839 --> 00:04:33,440 Speaker 1: early in life. I see this with my wife teaches 77 00:04:33,520 --> 00:04:37,200 Speaker 1: fifth grade. Already, people are being slaughtered natural number cruncher. 78 00:04:37,200 --> 00:04:40,280 Speaker 1: They're going to take number crunching classes, go for a 79 00:04:40,360 --> 00:04:44,000 Speaker 1: number crunching degree, have a number crunching job. You know, 80 00:04:44,240 --> 00:04:47,880 Speaker 1: there are no renaissance people left on Wall Street and 81 00:04:47,960 --> 00:04:50,800 Speaker 1: investing people who can talk about drama and talk about 82 00:04:50,920 --> 00:04:54,279 Speaker 1: numbers at the same time, and I think that's a loss. 83 00:04:54,000 --> 00:04:57,320 Speaker 1: There are a handful, but they certainly are few and 84 00:04:57,400 --> 00:05:02,120 Speaker 1: far between, to say the very least. So you discuss 85 00:05:02,160 --> 00:05:06,000 Speaker 1: on how all this adds up to a puzzle of 86 00:05:06,040 --> 00:05:10,279 Speaker 1: corporate finance that you enjoy untangling. What are some of 87 00:05:10,279 --> 00:05:13,239 Speaker 1: the recent puzzles that you've been trying to tease apart. 88 00:05:13,640 --> 00:05:17,279 Speaker 1: Let's take a basic one. Let's take buybacks. It's a story, 89 00:05:17,320 --> 00:05:21,520 Speaker 1: it's a political hot spot, and everybody's talking about it. 90 00:05:22,120 --> 00:05:24,960 Speaker 1: And I've always wondered, why has there been a shift 91 00:05:25,040 --> 00:05:28,320 Speaker 1: away from dividends to buy backs over the last four decades. 92 00:05:28,640 --> 00:05:32,080 Speaker 1: It's incredibly noticeable. I'm going to write down my answer 93 00:05:32,080 --> 00:05:34,280 Speaker 1: and you tell me. I'm curious as to what your 94 00:05:34,320 --> 00:05:36,760 Speaker 1: answer is. Forty years ago, ninety five percent of the 95 00:05:36,760 --> 00:05:38,960 Speaker 1: cash return by companies took the form of dividends. In 96 00:05:39,000 --> 00:05:41,440 Speaker 1: nineteen eighty one, when I started, dividends were a way 97 00:05:41,480 --> 00:05:44,800 Speaker 1: to go for return cash. Last year, sixty seven percent 98 00:05:44,800 --> 00:05:48,560 Speaker 1: of all cash return by companies took the form of buybacks. 99 00:05:48,600 --> 00:05:50,600 Speaker 1: Two out of three dollars two out of three dollars. 100 00:05:50,640 --> 00:05:53,160 Speaker 1: Collectively a trillion dollars was returning to the form of 101 00:05:53,160 --> 00:05:57,000 Speaker 1: buybacks five hundred and fifty billion dollars in dividends. Clearly, 102 00:05:57,200 --> 00:06:00,520 Speaker 1: this is a trendline. It's not just the US. Across 103 00:06:00,600 --> 00:06:03,440 Speaker 1: the world, you're starting starting to see this phenomenon. So 104 00:06:03,480 --> 00:06:06,279 Speaker 1: that's really interesting because what I wrote down was tax 105 00:06:06,320 --> 00:06:09,920 Speaker 1: efficiency is one of the drivers, and then we could 106 00:06:09,960 --> 00:06:14,080 Speaker 1: talk about stock option plans and what is and isn't 107 00:06:15,040 --> 00:06:19,440 Speaker 1: above the lines adopted. So there's that what's your conclude fact. 108 00:06:19,440 --> 00:06:21,240 Speaker 1: I throw this out to my class and the first 109 00:06:21,240 --> 00:06:23,640 Speaker 1: thing they come up with is in more tax efficient 110 00:06:23,920 --> 00:06:26,760 Speaker 1: to do buybacks then dividends, And in a sense it is, 111 00:06:27,320 --> 00:06:29,680 Speaker 1: but it's actually less tax efficient now than it was 112 00:06:29,680 --> 00:06:32,120 Speaker 1: in nineteen eighty one. When nineteen eighty one, when I started, 113 00:06:32,120 --> 00:06:34,960 Speaker 1: you got dividends, there were tax disordinary income at the 114 00:06:35,040 --> 00:06:38,600 Speaker 1: highest marginal tax rate that penty percent capital gains then 115 00:06:38,600 --> 00:06:41,560 Speaker 1: we're tax or twenty eight percent. So the question is 116 00:06:41,560 --> 00:06:45,080 Speaker 1: if tax efficiency is the issue why were in buybacks 117 00:06:45,120 --> 00:06:48,839 Speaker 1: the dominant way of returning cash pre nineteen eighty one, 118 00:06:49,520 --> 00:06:52,640 Speaker 1: and why have they actually increased as in fact, dividends 119 00:06:52,800 --> 00:06:55,000 Speaker 1: and buybacks and now tax it roughly the same rate 120 00:06:55,000 --> 00:06:58,160 Speaker 1: since two thousand and four. The tax rate and dividends 121 00:06:58,160 --> 00:07:00,839 Speaker 1: and capital gains is fifteen eighteen in twenty one percent. 122 00:07:00,839 --> 00:07:04,000 Speaker 1: They matched up right, So there's actually less tax efficient 123 00:07:04,080 --> 00:07:07,719 Speaker 1: now than it was thirty or forty years ago. Don't cash, 124 00:07:07,839 --> 00:07:11,400 Speaker 1: So that argument kind of The other argument I heard 125 00:07:11,480 --> 00:07:16,040 Speaker 1: was management compensation and the nineteen general stock options. But 126 00:07:16,120 --> 00:07:19,800 Speaker 1: if you get restricted stock, the incentives changed. With stock options. 127 00:07:19,800 --> 00:07:21,440 Speaker 1: There's an argument to be made that you want the 128 00:07:21,480 --> 00:07:24,000 Speaker 1: stock price to go up because your options are worth Course, 129 00:07:24,040 --> 00:07:27,320 Speaker 1: in the nineteen nineties, the argument was, it's buy backs 130 00:07:27,320 --> 00:07:32,760 Speaker 1: are happening because we're increasingly rewarded, rewarding management with stock options, 131 00:07:33,040 --> 00:07:35,000 Speaker 1: they have an incentive to do buy back so that 132 00:07:35,040 --> 00:07:37,040 Speaker 1: they can get the higher price in the options. So 133 00:07:37,080 --> 00:07:40,280 Speaker 1: I said, okay, that's testable. If that is true, buy 134 00:07:40,360 --> 00:07:44,280 Speaker 1: backs should be greater at companies where management stock options 135 00:07:44,280 --> 00:07:47,520 Speaker 1: that are a higher percentage of compensation, and less set 136 00:07:47,560 --> 00:07:52,120 Speaker 1: companies where management options are not issue. And I tested 137 00:07:52,160 --> 00:07:54,600 Speaker 1: that in the nineteen nineties. In fact, that argument didn't 138 00:07:54,640 --> 00:07:57,680 Speaker 1: work hard because, you know, because the companies were doing 139 00:07:57,720 --> 00:08:00,640 Speaker 1: buybacks in the nineteen nineties were not the big companies. 140 00:08:00,840 --> 00:08:04,080 Speaker 1: There were older, you know, companies that were over the 141 00:08:04,160 --> 00:08:06,840 Speaker 1: hill in terms of their business models. And as you 142 00:08:07,040 --> 00:08:10,240 Speaker 1: well known, two thousand and seven, accountants fixed what I 143 00:08:10,280 --> 00:08:12,880 Speaker 1: thought was a horrendous mistake or the part which was 144 00:08:12,920 --> 00:08:17,040 Speaker 1: treating options as free money and essentially expensing it. And 145 00:08:17,200 --> 00:08:19,520 Speaker 1: over the last fifteen years, and maybe people are not 146 00:08:19,600 --> 00:08:23,239 Speaker 1: aware of it, companies have increasingly shifted away from options 147 00:08:23,240 --> 00:08:26,320 Speaker 1: to restricted stock last year. In other words, you get 148 00:08:26,480 --> 00:08:29,240 Speaker 1: a block of stock that you can sell, there's a 149 00:08:29,280 --> 00:08:31,880 Speaker 1: big tax hit for that. Right. It's kind of complicated 150 00:08:31,920 --> 00:08:34,320 Speaker 1: how you have to deal with it because you're not 151 00:08:34,600 --> 00:08:37,560 Speaker 1: selling anything to pay for it. But it shows up 152 00:08:37,559 --> 00:08:40,120 Speaker 1: as companies. It's a different kind of taxes with the options. 153 00:08:40,120 --> 00:08:43,360 Speaker 1: That tax had came when you exercised your option. I 154 00:08:43,480 --> 00:08:46,240 Speaker 1: remember markus Zuckerberg when they went public had to pay 155 00:08:46,280 --> 00:08:48,200 Speaker 1: what a half a billion dollars to the state of 156 00:08:48,240 --> 00:08:52,600 Speaker 1: California for options being exercised. Now, but restricted stock have 157 00:08:52,679 --> 00:08:55,040 Speaker 1: a different set of characteristics, and there you don't have 158 00:08:55,040 --> 00:08:57,600 Speaker 1: the incentive anymore to play with the prices because you're 159 00:08:57,600 --> 00:08:59,920 Speaker 1: going to get the shares anyway, and you're going to 160 00:09:00,040 --> 00:09:01,920 Speaker 1: get the dividends. While you get the shares. If you 161 00:09:02,000 --> 00:09:04,600 Speaker 1: paid our dividends, you still, even on restricted chairs, get 162 00:09:04,600 --> 00:09:08,559 Speaker 1: those dividends. So over the last fifteen years, companies that 163 00:09:08,800 --> 00:09:12,240 Speaker 1: used to give options have increasingly shifted away from restricted 164 00:09:12,240 --> 00:09:14,520 Speaker 1: stock and over options to the reason for buy backs. 165 00:09:14,520 --> 00:09:17,000 Speaker 1: You should have seen a drop off in buybacks, and 166 00:09:17,080 --> 00:09:21,440 Speaker 1: we haven't. So I stepped back and said, what's strong 167 00:09:21,520 --> 00:09:24,840 Speaker 1: with dividends? And let's face the dividends really never made 168 00:09:25,000 --> 00:09:27,720 Speaker 1: sense as a way of returning cash to equity investors. 169 00:09:27,720 --> 00:09:30,040 Speaker 1: Why if you're a long term investor, you want to 170 00:09:30,040 --> 00:09:31,960 Speaker 1: see the jobs. If you think about equity as a 171 00:09:32,000 --> 00:09:33,880 Speaker 1: residual claim, which is the way I think about it, 172 00:09:33,960 --> 00:09:37,120 Speaker 1: you get whatever's left over, then that residual claim should 173 00:09:37,200 --> 00:09:41,320 Speaker 1: change your tier. Whereas dividends historically have been sticky, They're 174 00:09:41,320 --> 00:09:44,840 Speaker 1: like coupons on bonds. And the only reason I can 175 00:09:44,880 --> 00:09:48,360 Speaker 1: think for why dividends became the key way of returning 176 00:09:48,400 --> 00:09:51,120 Speaker 1: cash is I went back to the history of markets. 177 00:09:51,280 --> 00:09:55,960 Speaker 1: Bond markets preceded stock markets, so when stock markets are 178 00:09:56,000 --> 00:09:59,360 Speaker 1: first opened to attract investors to buy stocks. They had 179 00:09:59,400 --> 00:10:02,640 Speaker 1: to be discus isised as bonds, so meaning he had 180 00:10:02,679 --> 00:10:05,680 Speaker 1: a coupon. It was fairly reliable and if you had 181 00:10:05,720 --> 00:10:08,400 Speaker 1: a little upside on the equity, you can go look 182 00:10:08,400 --> 00:10:11,600 Speaker 1: at the original railroad stocks. You put a dividend in 183 00:10:11,800 --> 00:10:14,360 Speaker 1: to get investors who are buying bonds. This is just 184 00:10:14,480 --> 00:10:18,320 Speaker 1: like a bond with price appreciation. And this is in 185 00:10:18,360 --> 00:10:21,000 Speaker 1: a one reason I'm a little skeptical about people who 186 00:10:21,040 --> 00:10:23,439 Speaker 1: claim that they do their investing based on Ben Graham 187 00:10:23,520 --> 00:10:26,520 Speaker 1: Security analysis. It's a great book, but it reflects the time. 188 00:10:26,520 --> 00:10:28,880 Speaker 1: It was a little dated, it was nineteen thirty four, 189 00:10:28,880 --> 00:10:31,320 Speaker 1: and it reflects the risk a version of somebody coming 190 00:10:31,320 --> 00:10:34,720 Speaker 1: off the Great Depression and things of stocks as bonds 191 00:10:34,720 --> 00:10:38,160 Speaker 1: with price appreciation. That's that's a Graham approach investing. Buy 192 00:10:38,200 --> 00:10:41,760 Speaker 1: a bond with price appreciation. So let's combine two things 193 00:10:41,800 --> 00:10:46,040 Speaker 1: that you've said. One is your love of narrative as 194 00:10:46,040 --> 00:10:49,959 Speaker 1: a way of explaining numbers, and the second is I'm 195 00:10:50,000 --> 00:10:53,240 Speaker 1: going to you mentioned railroads. I want to just reference 196 00:10:53,440 --> 00:10:57,640 Speaker 1: what we see in terms of pushback to buy backs 197 00:10:57,720 --> 00:11:02,240 Speaker 1: and from the nineties anecdotally, and I know the plural 198 00:11:02,280 --> 00:11:05,800 Speaker 1: of anecdote is not data, but anecdotally. We always used 199 00:11:05,840 --> 00:11:10,040 Speaker 1: to see the worst time stock buy backs. Heading into 200 00:11:10,240 --> 00:11:13,720 Speaker 1: two thousand, it seemed like the buybacks got bigger and bigger. 201 00:11:14,559 --> 00:11:18,320 Speaker 1: Management tends to be terrible timers, so I used to 202 00:11:18,360 --> 00:11:21,000 Speaker 1: hear that all the time. Then you have the railroad 203 00:11:21,080 --> 00:11:24,680 Speaker 1: crash and a big stock buy back instead of a 204 00:11:24,760 --> 00:11:30,360 Speaker 1: safety upgrade. And so these stories seemed compelling, even though 205 00:11:30,520 --> 00:11:33,600 Speaker 1: they don't reflect the totality of all the buybacks. And 206 00:11:33,640 --> 00:11:37,520 Speaker 1: I'm glad you brought brought up Norfolk Southern because my 207 00:11:37,720 --> 00:11:40,800 Speaker 1: most recent post and buy back starts with two stories. 208 00:11:40,840 --> 00:11:44,280 Speaker 1: One is the Norfolk Southern story and how that initiated 209 00:11:44,320 --> 00:11:47,120 Speaker 1: again this discussion of our buy backs happening at the 210 00:11:47,160 --> 00:11:50,439 Speaker 1: expense of things that of reinvestment, things you need to 211 00:11:50,480 --> 00:11:52,360 Speaker 1: put back. And the second was, of course the Warren 212 00:11:52,400 --> 00:11:55,840 Speaker 1: Buffett story that came out the same week where he 213 00:11:56,000 --> 00:11:58,680 Speaker 1: called you know, essentially called people of post buybacks. You 214 00:11:58,720 --> 00:12:02,600 Speaker 1: know economically it's I mean, strong words for a buffet. 215 00:12:02,960 --> 00:12:07,480 Speaker 1: And again some histories until two thousand and nine or ten, 216 00:12:07,600 --> 00:12:11,640 Speaker 1: Warren Buffett actually spoke out against buybacks. He was a 217 00:12:11,640 --> 00:12:14,319 Speaker 1: big dividend person, and then in two thousand and twelve. 218 00:12:14,360 --> 00:12:18,559 Speaker 1: I think Berkshire Hathaway initiated its buybacks with a cap, 219 00:12:18,600 --> 00:12:21,160 Speaker 1: which is, you know that they would do buybacks as 220 00:12:21,200 --> 00:12:23,800 Speaker 1: long as the price was less than intrinsic value. Now, 221 00:12:23,880 --> 00:12:28,360 Speaker 1: is that a function of Berkshire Hathaway having so much 222 00:12:28,480 --> 00:12:32,840 Speaker 1: cash and not a lot of reasonably priced acquisition targets. 223 00:12:32,840 --> 00:12:35,720 Speaker 1: And I think here's where I think the real reason 224 00:12:35,840 --> 00:12:40,160 Speaker 1: for the buybacks comes in dividends, because they're sticky requires 225 00:12:40,200 --> 00:12:43,640 Speaker 1: some degree of confidence about future learnings. Now, when I 226 00:12:43,679 --> 00:12:45,760 Speaker 1: started in nineteen eighty one, I actually made a list 227 00:12:45,800 --> 00:12:49,040 Speaker 1: of two hundred US companies with reliable and predictable learnings. 228 00:12:49,080 --> 00:12:50,840 Speaker 1: It was easy to do. You had not you know, 229 00:12:50,880 --> 00:12:55,040 Speaker 1: these big company telephone companies, consumer product companies, I come 230 00:12:55,080 --> 00:12:57,880 Speaker 1: to call them widows and orphans, exactly a big brand 231 00:12:57,960 --> 00:13:00,560 Speaker 1: name companies. And I made a list. It was easy 232 00:13:00,600 --> 00:13:02,200 Speaker 1: to do. Today, if you ask me to make a 233 00:13:02,200 --> 00:13:06,280 Speaker 1: list of twenty companies with reliable and predictable earnings, I 234 00:13:06,480 --> 00:13:12,320 Speaker 1: have difficulty twenty. You can't get twenty because everybody's business 235 00:13:12,400 --> 00:13:16,599 Speaker 1: is under disruption. Everything is changing. I mean, welcome to globalization. 236 00:13:16,679 --> 00:13:19,120 Speaker 1: There's a dark side to globalization, and one of the 237 00:13:19,200 --> 00:13:23,000 Speaker 1: dark sides of globalization is business has become more unpredictable, 238 00:13:23,080 --> 00:13:26,480 Speaker 1: Learnings have become less predictable, and if earning has become 239 00:13:26,559 --> 00:13:29,760 Speaker 1: less predictable, what company in its right mind wants to 240 00:13:29,840 --> 00:13:33,360 Speaker 1: increase dividends by twenty percent and then phase the problem 241 00:13:33,400 --> 00:13:36,040 Speaker 1: two years later of saying we've been disrupted, we have 242 00:13:36,080 --> 00:13:39,120 Speaker 1: to go back and cut dividends. I think of buybacks 243 00:13:39,120 --> 00:13:41,760 Speaker 1: as flexible dividends. That's the way I think about it, 244 00:13:41,800 --> 00:13:43,640 Speaker 1: and that's a good thing. In the first quarter of 245 00:13:43,679 --> 00:13:47,800 Speaker 1: twenty twenty, when COVID shut the global economy down, everybody 246 00:13:48,000 --> 00:13:50,120 Speaker 1: felt that the right thing for companies to do is 247 00:13:50,200 --> 00:13:54,719 Speaker 1: hold back cash, right But company, because you got to 248 00:13:54,760 --> 00:13:57,800 Speaker 1: wait this out, and if you look at buybacks, that's 249 00:13:57,800 --> 00:14:00,920 Speaker 1: exactly what happened. Companies announced that they were cutting back 250 00:14:00,960 --> 00:14:03,199 Speaker 1: on buybacks, and buybacks that already anounced we're going to 251 00:14:03,200 --> 00:14:06,960 Speaker 1: be suspended. Buybacks dropped by fifty percent in that quarter, 252 00:14:07,320 --> 00:14:09,560 Speaker 1: which ironically would have been a great time to buy 253 00:14:09,559 --> 00:14:12,080 Speaker 1: some stock. Exactly. We'll come back to the timing issue. 254 00:14:12,240 --> 00:14:16,160 Speaker 1: But dividends continued as if nothing was happening, because, oh really, 255 00:14:16,320 --> 00:14:20,040 Speaker 1: companies were terrified. And this is the problem is companies 256 00:14:20,080 --> 00:14:22,840 Speaker 1: are so attuned to this notion of you can't cut 257 00:14:22,880 --> 00:14:25,480 Speaker 1: dividends that when a company actually cuts dividends, it's usually 258 00:14:25,520 --> 00:14:29,560 Speaker 1: because it's disaster on the horizon. So you're actually stuck 259 00:14:29,560 --> 00:14:32,000 Speaker 1: with a dividen. You're a hotel company, you're paying a dividend. 260 00:14:32,000 --> 00:14:34,720 Speaker 1: You're continuing to pay a dividend because you don't want 261 00:14:34,720 --> 00:14:37,280 Speaker 1: to send the wrong signal. My reaction is, are you 262 00:14:37,320 --> 00:14:41,200 Speaker 1: in denial because everybody around you knows that you can't 263 00:14:41,240 --> 00:14:44,600 Speaker 1: run your business. But that's the problem with dividends is 264 00:14:44,640 --> 00:14:49,160 Speaker 1: the way we've created dividend policies, and let's face it, 265 00:14:49,240 --> 00:14:53,600 Speaker 1: value investors have fed into into this addiction by saying, 266 00:14:53,880 --> 00:14:57,000 Speaker 1: I buy the stock because it never cuts dividends. That's 267 00:14:57,000 --> 00:15:00,920 Speaker 1: really interesting. I have a vivid recollection when I was 268 00:15:01,240 --> 00:15:05,480 Speaker 1: new to investing in the mid nineties of finding these 269 00:15:05,760 --> 00:15:11,160 Speaker 1: giant yielding companies eight nine, ten percent, not realizing until 270 00:15:11,240 --> 00:15:14,400 Speaker 1: someone pulled me aside and said, here's what's going on. Hey, 271 00:15:14,400 --> 00:15:18,080 Speaker 1: these were two percent dividend companies until they got shelacked. 272 00:15:18,480 --> 00:15:21,200 Speaker 1: And even though they're circling the drain, they're still afraid 273 00:15:21,200 --> 00:15:23,320 Speaker 1: to cut the dividend. And that's why it looks like 274 00:15:23,360 --> 00:15:26,560 Speaker 1: it's a nine percent yield that dividends eventually going away. 275 00:15:27,080 --> 00:15:30,360 Speaker 1: We can't still see that anymore. That's got to be history. 276 00:15:30,480 --> 00:15:32,640 Speaker 1: Right last year, they were at least a couple of 277 00:15:32,760 --> 00:15:35,480 Speaker 1: hundred companies with dividendials greater than eight percent, And the 278 00:15:35,520 --> 00:15:37,360 Speaker 1: way I think of them is, these are companies that 279 00:15:37,400 --> 00:15:39,720 Speaker 1: are teetering on the edge of the cliff. And if 280 00:15:39,760 --> 00:15:43,960 Speaker 1: you're a lazy value investor buying high yields, you're going 281 00:15:44,000 --> 00:15:46,120 Speaker 1: to be buying a lot of banks right now. A 282 00:15:46,120 --> 00:15:49,080 Speaker 1: lot of regional banks right now have dividendials of six, seven, 283 00:15:49,160 --> 00:15:52,200 Speaker 1: eight percent. But if you load up your portfolio with those, 284 00:15:52,360 --> 00:15:55,400 Speaker 1: guard only knows what a year or two from now 285 00:15:55,440 --> 00:15:58,160 Speaker 1: you're going to be looking at. Because these companies are 286 00:15:58,160 --> 00:16:00,600 Speaker 1: going to be forced to cut their dividends. Right This 287 00:16:00,760 --> 00:16:03,160 Speaker 1: is not even a question of it's it's not a choice. 288 00:16:03,200 --> 00:16:05,480 Speaker 1: They're going to be forced to cut their dividends. You're 289 00:16:05,480 --> 00:16:08,520 Speaker 1: just buying them just ahead of the precipice. And it's 290 00:16:08,560 --> 00:16:10,880 Speaker 1: not a great way to invest as a reason. But 291 00:16:11,040 --> 00:16:13,320 Speaker 1: to me, that is what I think about as a puzzle. 292 00:16:13,360 --> 00:16:16,040 Speaker 1: When I look at a company doing something and I say, 293 00:16:16,400 --> 00:16:19,360 Speaker 1: why is that happening. I want to generalize the discussion 294 00:16:19,400 --> 00:16:22,920 Speaker 1: because it's easy to get trapped in an anecdotal story 295 00:16:23,280 --> 00:16:27,080 Speaker 1: and draw conclusions that don't apply to the population. And right, 296 00:16:27,160 --> 00:16:31,400 Speaker 1: you probably saw the story about Musk lowering the Twitter value, 297 00:16:31,480 --> 00:16:36,120 Speaker 1: right twenty billion dollars for the stuff, And that's an 298 00:16:36,120 --> 00:16:40,000 Speaker 1: interesting question when first, is this a gaming of the 299 00:16:40,200 --> 00:16:44,200 Speaker 1: system and you're setting yourself up for the great recovery story? 300 00:16:44,360 --> 00:16:46,040 Speaker 1: Does he get it right now? Does he get it 301 00:16:46,120 --> 00:16:48,960 Speaker 1: right down? So there's the taxes that I am puzzled, 302 00:16:49,040 --> 00:16:52,640 Speaker 1: but I'm curious. I want to find out, and I'm 303 00:16:52,680 --> 00:16:54,960 Speaker 1: digging as much as I can, because we do know 304 00:16:55,000 --> 00:16:58,800 Speaker 1: that Federal took a fifty six percent right down on 305 00:16:58,840 --> 00:17:04,080 Speaker 1: their investment in Twitter finance appurchase. They have finance, so 306 00:17:04,080 --> 00:17:06,080 Speaker 1: they invest in the equity. They took a fifty seven 307 00:17:06,119 --> 00:17:09,439 Speaker 1: percent right down, which which is suspiciously closed to the 308 00:17:09,560 --> 00:17:13,080 Speaker 1: knockdown you're seeing from forty four to twenty vallion. So 309 00:17:13,840 --> 00:17:18,080 Speaker 1: I always wonder about these accounting firms that reappraise price. 310 00:17:18,119 --> 00:17:20,680 Speaker 1: They don't ap reappraise value. They repraise price what they're 311 00:17:20,720 --> 00:17:24,560 Speaker 1: based it on. Probably then again, they don't reappraise value, 312 00:17:24,600 --> 00:17:29,159 Speaker 1: they reappraise price and I suspect you think they should 313 00:17:29,200 --> 00:17:32,080 Speaker 1: be reappraising value. I don't think they have the tools 314 00:17:32,080 --> 00:17:34,720 Speaker 1: to be quite honest, I'd rather have an honest pricing 315 00:17:35,000 --> 00:17:40,640 Speaker 1: than a kabuki dance valuation, because you know, it goes 316 00:17:40,680 --> 00:17:43,280 Speaker 1: back to this issue of fair value accounting. Fair value 317 00:17:43,280 --> 00:17:46,000 Speaker 1: accounting is not about value, about pricing. In fact, if 318 00:17:46,000 --> 00:17:49,120 Speaker 1: you look at Fast one fifty seven, which lays out 319 00:17:49,160 --> 00:17:51,800 Speaker 1: the principles of fair value accounting, you're supposed to come 320 00:17:51,840 --> 00:17:54,720 Speaker 1: up with the number that you can get if you 321 00:17:54,920 --> 00:17:58,000 Speaker 1: sold in the market to a willing to a participant 322 00:17:58,080 --> 00:18:01,719 Speaker 1: on an arms length transaction. That's a price mission market 323 00:18:01,760 --> 00:18:04,840 Speaker 1: price market hardest are so in a sense, that's what 324 00:18:04,960 --> 00:18:07,840 Speaker 1: these accountants are doing. And presumably they mark down the 325 00:18:07,920 --> 00:18:11,919 Speaker 1: pricing based on revenues dropping by fifty seven percent. It's 326 00:18:11,960 --> 00:18:15,160 Speaker 1: as simplistic as that. Do we really think Twitter could 327 00:18:15,160 --> 00:18:18,280 Speaker 1: be sold today for twenty billion dollars? I think it 328 00:18:18,359 --> 00:18:21,320 Speaker 1: could be so to somebody with deep pockets, because, let's 329 00:18:21,320 --> 00:18:24,080 Speaker 1: face it, you know you've just got three fifty million users, 330 00:18:24,160 --> 00:18:27,760 Speaker 1: and you know, I've never seen a social media platform 331 00:18:27,800 --> 00:18:30,399 Speaker 1: becomes so much a part of our lives with a 332 00:18:30,480 --> 00:18:34,000 Speaker 1: pricing and a business model that doesn't seem to work right. 333 00:18:34,240 --> 00:18:36,720 Speaker 1: This has been the problem right from the beginning, and 334 00:18:36,800 --> 00:18:38,919 Speaker 1: I think part of the reason is the nature of 335 00:18:38,960 --> 00:18:42,800 Speaker 1: the platform doesn't lend itself easily to the way you 336 00:18:42,840 --> 00:18:45,280 Speaker 1: make money. It's not good for a subscription model, as 337 00:18:45,359 --> 00:18:47,880 Speaker 1: Eaton is finding out right. The three percent the people 338 00:18:47,920 --> 00:18:51,119 Speaker 1: who send out ninety percent the tweets are might. You 339 00:18:51,200 --> 00:18:53,200 Speaker 1: might get them, but you can't make enough money on 340 00:18:53,280 --> 00:18:55,720 Speaker 1: the three percent to cover the business. It's not a 341 00:18:55,800 --> 00:19:00,160 Speaker 1: great advertising model, partly because what makes it attractive. It's 342 00:19:00,200 --> 00:19:04,040 Speaker 1: just limits and characters also limits you in terms of advertising. 343 00:19:04,080 --> 00:19:06,480 Speaker 1: People are hitting and running. They don't sit and read, 344 00:19:06,800 --> 00:19:09,080 Speaker 1: whereas in Facebook I can get to you while they 345 00:19:09,119 --> 00:19:11,920 Speaker 1: are spending an hour talking to your friends. Right, So 346 00:19:12,200 --> 00:19:16,840 Speaker 1: it's different. It's a difficult social media platform to monetize. 347 00:19:16,960 --> 00:19:20,280 Speaker 1: Jack Dorsey found it out, you know, and his subsequent 348 00:19:20,359 --> 00:19:23,439 Speaker 1: people they're found it out. I am not suhere it 349 00:19:23,480 --> 00:19:26,879 Speaker 1: can ever be monetized successfully. I would not buy it 350 00:19:26,920 --> 00:19:30,240 Speaker 1: as a business right what Elon should do. And by 351 00:19:30,280 --> 00:19:33,080 Speaker 1: the way, I'm very good at giving advice to billionaires 352 00:19:33,119 --> 00:19:36,160 Speaker 1: whether they want it or not. It should be like 353 00:19:36,200 --> 00:19:39,680 Speaker 1: a Craigslist or a Wikipedia. Put it into a foundation 354 00:19:40,160 --> 00:19:42,399 Speaker 1: for the public good, and if you really want it 355 00:19:42,440 --> 00:19:45,880 Speaker 1: to be a public square, don't monetize it. Just sell 356 00:19:46,000 --> 00:19:48,640 Speaker 1: enough advertising so it's a break even, and maybe it'll 357 00:19:48,640 --> 00:19:51,240 Speaker 1: be a twenty billion dollar rite off on its next 358 00:19:51,880 --> 00:19:53,600 Speaker 1: or forty four billion dollars. I think he could use 359 00:19:53,600 --> 00:19:56,280 Speaker 1: the tax he can write off only the equity portion 360 00:19:56,320 --> 00:19:58,639 Speaker 1: of forty four billion. Then write offs are going to 361 00:19:58,680 --> 00:20:01,000 Speaker 1: be the banks writing it off. So that's I think 362 00:20:01,040 --> 00:20:05,160 Speaker 1: the reality of this is. I think that is absolutely true. 363 00:20:05,280 --> 00:20:08,160 Speaker 1: I think Twitter plays a role in our lives, which 364 00:20:08,480 --> 00:20:11,160 Speaker 1: for many people, I think they we get our news 365 00:20:11,160 --> 00:20:14,240 Speaker 1: on Twitter first, right, it's the new tape, absolutely where 366 00:20:14,320 --> 00:20:17,920 Speaker 1: news breaks. I've heard that, you know, the quarterback for 367 00:20:18,720 --> 00:20:21,399 Speaker 1: Baltimore wants leave. The first place he read it is 368 00:20:21,400 --> 00:20:24,119 Speaker 1: he posts on Twitter that I'm looking for Lamar Jacks 369 00:20:24,160 --> 00:20:27,280 Speaker 1: and now I'm looking for another place to be. So 370 00:20:27,440 --> 00:20:31,679 Speaker 1: I think it's become this breaking newsplace, joyless track Twitter 371 00:20:31,720 --> 00:20:34,200 Speaker 1: because they get their news stories off very much. So 372 00:20:34,560 --> 00:20:36,400 Speaker 1: I'm in the middle. I had a flight back from 373 00:20:36,440 --> 00:20:40,200 Speaker 1: California and I'm catching up in season three of Drive 374 00:20:40,280 --> 00:20:44,000 Speaker 1: to Survive the f one and one of the drivers 375 00:20:44,240 --> 00:20:47,560 Speaker 1: is leaving to take a gig with another of the 376 00:20:47,720 --> 00:20:51,200 Speaker 1: f one teams and he makes that announcement on Twitter. 377 00:20:51,280 --> 00:20:54,359 Speaker 1: It's it's where people go. It very much could be 378 00:20:54,440 --> 00:20:57,280 Speaker 1: the public square, and I think that's where it might 379 00:20:57,480 --> 00:20:59,399 Speaker 1: end up, but it might need somebody to take a 380 00:20:59,400 --> 00:21:02,200 Speaker 1: big rite before it ends up here. I mean, I've 381 00:21:02,240 --> 00:21:05,560 Speaker 1: given up on trying to figure out Elon's motives in 382 00:21:05,680 --> 00:21:08,560 Speaker 1: doing something. But I think in a sense there is 383 00:21:08,600 --> 00:21:13,720 Speaker 1: a portion of honesty in which is he wanted a 384 00:21:13,760 --> 00:21:16,200 Speaker 1: public forum. He wants it in his stims. That's a problem. 385 00:21:16,480 --> 00:21:18,440 Speaker 1: He wants it in his stims and the way. But 386 00:21:19,240 --> 00:21:21,800 Speaker 1: I think that there is an argument to be made 387 00:21:21,840 --> 00:21:25,080 Speaker 1: that Twitter as it was developing would never make it 388 00:21:25,119 --> 00:21:28,439 Speaker 1: as a successful business, that maybe there's a pathway for 389 00:21:28,480 --> 00:21:30,879 Speaker 1: it to become a part of our lives more like 390 00:21:30,880 --> 00:21:34,240 Speaker 1: one of those regulated utilities, which you know we would 391 00:21:34,440 --> 00:21:36,760 Speaker 1: we are so dependent on. But it's then not going 392 00:21:36,800 --> 00:21:39,840 Speaker 1: to have the growth and the monetization potential that people 393 00:21:39,960 --> 00:21:42,240 Speaker 1: might have seen it originally. So I have a pet 394 00:21:42,280 --> 00:21:44,720 Speaker 1: theory of value Alon, We'll come to it later. What 395 00:21:44,760 --> 00:21:48,000 Speaker 1: I want it's a really circle back to is you 396 00:21:48,320 --> 00:21:52,320 Speaker 1: were describing the difference between price and valuation and it 397 00:21:52,520 --> 00:21:56,320 Speaker 1: kind of raised an idea in my mind? How far 398 00:21:56,560 --> 00:22:01,800 Speaker 1: behind the academic research? The most current academic research do 399 00:22:01,880 --> 00:22:06,760 Speaker 1: you find Wall Street, Finance, the investment community. Because my 400 00:22:06,840 --> 00:22:11,840 Speaker 1: favorite examples modern port folio theory, capital asset pricing model, 401 00:22:11,920 --> 00:22:14,919 Speaker 1: the Farmer French factor model. It seemed like the market 402 00:22:15,080 --> 00:22:18,560 Speaker 1: took a decade or longer to catch up. Is that 403 00:22:19,160 --> 00:22:22,399 Speaker 1: gap still there? Especially when it comes to how do 404 00:22:22,440 --> 00:22:27,040 Speaker 1: we properly value this company? It's interesting the models catch 405 00:22:27,119 --> 00:22:29,879 Speaker 1: up faster than the underlying logic. There are a lot 406 00:22:29,920 --> 00:22:32,600 Speaker 1: of people who use betas now right, but they don't 407 00:22:32,720 --> 00:22:37,240 Speaker 1: understand the core assumption you need to get to betas 408 00:22:37,280 --> 00:22:39,639 Speaker 1: being a measure of risk, which is you got to 409 00:22:39,640 --> 00:22:43,320 Speaker 1: assume that investors have a diversified view of risk, that 410 00:22:43,400 --> 00:22:45,240 Speaker 1: when they think about the risk and a company, they 411 00:22:45,240 --> 00:22:47,479 Speaker 1: don't think of the risk of the company standing alone, 412 00:22:47,720 --> 00:22:50,080 Speaker 1: but the risk it adds to a portfolio. That is 413 00:22:50,119 --> 00:22:53,359 Speaker 1: the core idea band all of modern portfolio the sharp ratio, 414 00:22:53,640 --> 00:22:56,560 Speaker 1: all the work bill shows. And the reason I make 415 00:22:56,600 --> 00:22:58,960 Speaker 1: that claim is I see people who own three stocks 416 00:22:59,000 --> 00:23:00,919 Speaker 1: who might use beta, and I said, look, are you 417 00:23:00,960 --> 00:23:03,480 Speaker 1: sure you want to use beta to measure risks? Because 418 00:23:03,480 --> 00:23:06,560 Speaker 1: you're violating the core assumption and they're not even sure 419 00:23:06,640 --> 00:23:10,080 Speaker 1: what I'm talking about, and that I think is to me. 420 00:23:10,520 --> 00:23:13,240 Speaker 1: The models make it, in fact too much more quickly 421 00:23:13,240 --> 00:23:15,680 Speaker 1: than they should, because I want the intuition to get 422 00:23:15,680 --> 00:23:19,160 Speaker 1: out there first, the logic to be debated first before 423 00:23:19,200 --> 00:23:22,080 Speaker 1: you adopt the models. Greed drives everything. So if somebody 424 00:23:22,119 --> 00:23:25,080 Speaker 1: sees a factor model and they say a factor making money, 425 00:23:25,119 --> 00:23:27,679 Speaker 1: there's an etf. Let's get founded on the fact that 426 00:23:27,920 --> 00:23:30,879 Speaker 1: nobody stops and asks the question, why is that factor 427 00:23:31,040 --> 00:23:34,320 Speaker 1: giving me higher returns? What is the underlying logic? Small 428 00:23:34,359 --> 00:23:37,480 Speaker 1: cap right? For a long time people bought small cap stalks, 429 00:23:37,520 --> 00:23:38,879 Speaker 1: but these says, oh, it makes a return, and I 430 00:23:38,880 --> 00:23:40,800 Speaker 1: would stop and ask them, why do you think small 431 00:23:40,840 --> 00:23:44,399 Speaker 1: cap stalks earn a higher return? The original research, actually 432 00:23:44,440 --> 00:23:49,280 Speaker 1: the former French paper that's fine, argued that market capitalization 433 00:23:49,359 --> 00:23:51,760 Speaker 1: was standing in as a proxy for is that small 434 00:23:51,800 --> 00:23:55,119 Speaker 1: companies were riskier than larger companies. You weren't really making 435 00:23:55,240 --> 00:23:57,800 Speaker 1: higher returns. You just look like you were making higher 436 00:23:57,840 --> 00:24:00,320 Speaker 1: returns and beating the models, but in fact you were 437 00:24:00,320 --> 00:24:02,919 Speaker 1: exposed to risk. On a risk adjustice basis, it's the 438 00:24:02,960 --> 00:24:06,040 Speaker 1: same and that's exactly right, But you'd look good when 439 00:24:06,080 --> 00:24:09,520 Speaker 1: the alphas were calculated because people were using outmoded models 440 00:24:09,560 --> 00:24:12,080 Speaker 1: to measure risk, and you could beat those models, so 441 00:24:12,119 --> 00:24:15,440 Speaker 1: you could gain the system the great positive alphas, but 442 00:24:15,680 --> 00:24:18,359 Speaker 1: looking like you were beating when in fact you were 443 00:24:18,400 --> 00:24:21,399 Speaker 1: just buying small cap stalks. That was a farmer so 444 00:24:21,520 --> 00:24:24,000 Speaker 1: farmer Frenchs. We're not saying you should invest in small 445 00:24:24,040 --> 00:24:26,000 Speaker 1: cap stalks. They were saying, when you invest in small 446 00:24:26,000 --> 00:24:28,360 Speaker 1: cap stalks, it look like you're making money, but they're 447 00:24:28,440 --> 00:24:32,760 Speaker 1: underlying risk liquidity risk, information risk, right, but not as 448 00:24:32,760 --> 00:24:36,000 Speaker 1: covered on Wall Street. Lesson an ETF gets found in 449 00:24:36,000 --> 00:24:38,080 Speaker 1: the next year on small cap stalks, people forget all 450 00:24:38,119 --> 00:24:40,760 Speaker 1: about the risk story. It becomes an alpha story. Everything 451 00:24:40,800 --> 00:24:43,600 Speaker 1: in Wall Street becomes an alpha story. I mean this 452 00:24:43,720 --> 00:24:46,119 Speaker 1: is I mean we might get to ESG. This is 453 00:24:46,160 --> 00:24:49,959 Speaker 1: I think at the core of y ESG has floundered 454 00:24:50,680 --> 00:24:53,800 Speaker 1: is somewhere in the middle of the last decade, people 455 00:24:53,920 --> 00:24:56,959 Speaker 1: decided it would sell better if you sold it as 456 00:24:57,000 --> 00:24:59,879 Speaker 1: an alpha story. So they told people, if you invest 457 00:25:00,040 --> 00:25:02,320 Speaker 1: in good companies, you would make higher duds. I mean, 458 00:25:02,359 --> 00:25:04,520 Speaker 1: this is the hold that thought. Because we're going to 459 00:25:04,560 --> 00:25:07,760 Speaker 1: definitely come to ESG, let's stay with small cap for 460 00:25:07,760 --> 00:25:11,879 Speaker 1: a Second, the most recent academic research I read that 461 00:25:11,960 --> 00:25:16,000 Speaker 1: I thought was kind of compelling was sort of small 462 00:25:16,040 --> 00:25:19,879 Speaker 1: cap within the small cap story that so, first the 463 00:25:20,119 --> 00:25:23,280 Speaker 1: small cap factor kind of went away because it was 464 00:25:23,320 --> 00:25:29,280 Speaker 1: really risk it wasn't actual returns. And then the update was, well, 465 00:25:29,320 --> 00:25:31,760 Speaker 1: if you're looking at small cap, most of the returns 466 00:25:31,760 --> 00:25:34,919 Speaker 1: are driven by the microcap and so that it's not 467 00:25:35,000 --> 00:25:39,280 Speaker 1: the small cap. So is there microcap alpha or is 468 00:25:39,320 --> 00:25:42,359 Speaker 1: that also a risk adjustice. It's even stranger than they 469 00:25:42,520 --> 00:25:45,119 Speaker 1: and much of it is delivered in the first month 470 00:25:45,119 --> 00:25:48,080 Speaker 1: of the year, you know, ninecause of the January effect. 471 00:25:48,200 --> 00:25:51,600 Speaker 1: The January effect. So there's something weird going on here, right, 472 00:25:51,640 --> 00:25:53,720 Speaker 1: I mean, it's been going on for so people dump 473 00:25:53,760 --> 00:25:55,640 Speaker 1: a bunch of junk. They don't want to show their 474 00:25:55,640 --> 00:25:59,200 Speaker 1: books in December. Reasons that by before December thirty first 475 00:25:59,240 --> 00:26:02,840 Speaker 1: to get rid of the low profile stocks and your portfolios. 476 00:26:03,440 --> 00:26:06,560 Speaker 1: That so you essentially push the price down, and then 477 00:26:06,800 --> 00:26:11,159 Speaker 1: January comes around and you make you buy back those stocks. 478 00:26:11,200 --> 00:26:14,159 Speaker 1: The price goes up. Whatever the reason, it's some I 479 00:26:14,200 --> 00:26:17,400 Speaker 1: would not invest based on a small cab phenomenon precisely 480 00:26:17,440 --> 00:26:20,800 Speaker 1: because it's so weird. It doesn't happen over the course 481 00:26:20,840 --> 00:26:23,199 Speaker 1: of the year. It doesn't happen in a cross section. 482 00:26:23,560 --> 00:26:26,920 Speaker 1: It's a small subset of companies, but it hears where 483 00:26:27,080 --> 00:26:30,120 Speaker 1: it is. Staying with our notion of how badly academic 484 00:26:30,160 --> 00:26:34,200 Speaker 1: theory gets transitioned into practice. If you're if you ever 485 00:26:34,280 --> 00:26:36,840 Speaker 1: talk to people who praise small companies, the way they 486 00:26:36,960 --> 00:26:39,199 Speaker 1: praise to come up with a discount rate is they 487 00:26:39,280 --> 00:26:42,040 Speaker 1: use the traditional models risk cre rate, beta, risk premium. 488 00:26:42,040 --> 00:26:43,560 Speaker 1: They come up with the number, and then they will 489 00:26:43,600 --> 00:26:46,960 Speaker 1: add a small cap premium, a premium four percent more 490 00:26:47,000 --> 00:26:50,119 Speaker 1: to push up the discount rate for small companies. So 491 00:26:50,160 --> 00:26:52,040 Speaker 1: if you own a private business and you go to 492 00:26:52,200 --> 00:26:55,000 Speaker 1: Duff and Phelps or you go to Incidence of Value 493 00:26:55,000 --> 00:26:57,680 Speaker 1: my business, they'll come up with a twelve percent discountry, 494 00:26:57,680 --> 00:26:59,720 Speaker 1: and so we're going to add a six percent small 495 00:27:00,119 --> 00:27:02,600 Speaker 1: premium to it. He said, why because remember that eighteen 496 00:27:02,640 --> 00:27:05,879 Speaker 1: percent discountry means a lower value for your business. You're saying, 497 00:27:06,160 --> 00:27:07,800 Speaker 1: he said, why are you doing that? Because there's a 498 00:27:07,840 --> 00:27:11,800 Speaker 1: small cap premium. It's academically proven. They pull out papers say, 499 00:27:11,800 --> 00:27:14,280 Speaker 1: look there's a small cap premium. It's roughly six percent. 500 00:27:14,880 --> 00:27:19,080 Speaker 1: That's extraordinarily sloppy. You're dropping the value of every small 501 00:27:19,119 --> 00:27:23,800 Speaker 1: cap company because you think they're all hit with that 502 00:27:23,840 --> 00:27:26,639 Speaker 1: same bludget. There was actually a very interesting paper that 503 00:27:26,680 --> 00:27:29,920 Speaker 1: came out of a QR, and I think Eliza Peterson 504 00:27:30,040 --> 00:27:32,879 Speaker 1: is one of them, and he argued that it's not 505 00:27:33,080 --> 00:27:36,080 Speaker 1: small cap, it's not a small cap premium, it's a 506 00:27:36,119 --> 00:27:41,159 Speaker 1: small cap junk premium, which basically means that it's small 507 00:27:41,200 --> 00:27:43,840 Speaker 1: cap companies that are of high quality that are earning 508 00:27:43,880 --> 00:27:46,359 Speaker 1: much of the premium. So if you put your money 509 00:27:46,400 --> 00:27:49,760 Speaker 1: across a hundred small cap stocks and you're just investing 510 00:27:49,760 --> 00:27:52,000 Speaker 1: in all hundred of them, you might end up with 511 00:27:52,040 --> 00:27:54,200 Speaker 1: the port for it that does nothing. You need small 512 00:27:54,240 --> 00:27:57,560 Speaker 1: cap and quality, and at that point you're saying, what's 513 00:27:57,600 --> 00:27:59,840 Speaker 1: a small cap got to do with anything? I would 514 00:28:00,240 --> 00:28:02,320 Speaker 1: that if you did a quality effect across the board, 515 00:28:02,320 --> 00:28:04,480 Speaker 1: you're probably going to find a quality effect in large 516 00:28:04,520 --> 00:28:08,119 Speaker 1: gap stocks and MidCap stocks. So I think this is 517 00:28:08,160 --> 00:28:11,960 Speaker 1: one of those cases with the academic research weird off 518 00:28:12,000 --> 00:28:15,400 Speaker 1: in one direction, but the practitioners using the research found 519 00:28:15,440 --> 00:28:18,359 Speaker 1: ways of making money on it, and in the process 520 00:28:18,840 --> 00:28:21,400 Speaker 1: it's taken on a form that none of the academics 521 00:28:21,600 --> 00:28:25,200 Speaker 1: might have done the original research would even recognize. So 522 00:28:25,359 --> 00:28:28,720 Speaker 1: I think that it's not that research takes a long 523 00:28:28,800 --> 00:28:31,000 Speaker 1: time to go into practice. I could live with that. 524 00:28:31,119 --> 00:28:36,280 Speaker 1: It's the way it gets skewed, and it's worse than worse. 525 00:28:36,640 --> 00:28:38,720 Speaker 1: It's true. I think it actually ends up doing more 526 00:28:38,800 --> 00:28:41,840 Speaker 1: damage than good when it goes into practice. That's much 527 00:28:41,920 --> 00:28:45,440 Speaker 1: rather that practitioners never read academic research and try to 528 00:28:45,480 --> 00:28:48,640 Speaker 1: put into practice because in the process of putting into 529 00:28:48,640 --> 00:28:51,280 Speaker 1: practice they just ruin it. So let me give you 530 00:28:51,320 --> 00:28:55,560 Speaker 1: one that I hate, and it's now an ETF. Someone 531 00:28:55,600 --> 00:28:59,000 Speaker 1: did a study, some academic research did a study that 532 00:28:59,160 --> 00:29:03,240 Speaker 1: founds that if you only held stocks during market hours, 533 00:29:03,720 --> 00:29:07,760 Speaker 1: you underperformed holding stocks from when the market is closed. 534 00:29:07,800 --> 00:29:10,560 Speaker 1: And I thought it was the aside from the fact 535 00:29:10,560 --> 00:29:12,960 Speaker 1: that the market is only open six and a half 536 00:29:12,960 --> 00:29:16,480 Speaker 1: hours a day, hold that aside, all the gap ups, 537 00:29:16,520 --> 00:29:19,280 Speaker 1: all the news that breaks after. It just seemed like 538 00:29:19,440 --> 00:29:23,800 Speaker 1: such a silly concept. And now there's an ETF. I'm 539 00:29:23,840 --> 00:29:26,720 Speaker 1: curious what your thoughts are on. I think it's nonsense. Nonsense. 540 00:29:26,760 --> 00:29:31,200 Speaker 1: It's nonsense. I mean, I I my argument and I 541 00:29:31,200 --> 00:29:34,240 Speaker 1: look at me and as their value is, if everybody 542 00:29:34,280 --> 00:29:38,080 Speaker 1: can do it right, then I can almost it's going 543 00:29:38,120 --> 00:29:41,480 Speaker 1: to get it's going if it really exist, get arbitragey. 544 00:29:41,480 --> 00:29:44,400 Speaker 1: So to begin with, everybody knows what the what the 545 00:29:44,520 --> 00:29:47,640 Speaker 1: open hours to the market. This is no secret information. Right, 546 00:29:47,840 --> 00:29:51,400 Speaker 1: you're not finding anything particularly valuable. So what I mean 547 00:29:51,880 --> 00:29:54,880 Speaker 1: in investing you got to bring something to the table, right, 548 00:29:54,960 --> 00:29:57,720 Speaker 1: take something away. That's my view. You have to bring 549 00:29:57,880 --> 00:30:00,440 Speaker 1: something to the table. You have to bring some new 550 00:30:00,520 --> 00:30:03,120 Speaker 1: insight in order to take some alpha away. Or it 551 00:30:03,160 --> 00:30:06,920 Speaker 1: could be some unique characteristic. Pension funds pay no taxes, right, 552 00:30:07,080 --> 00:30:10,360 Speaker 1: that should give them an advances the subsets of the market. 553 00:30:10,560 --> 00:30:13,680 Speaker 1: Plus they're perpetual, so if they buy dividend paying stocks, 554 00:30:13,840 --> 00:30:16,400 Speaker 1: they should be able to on hire returns on a 555 00:30:16,480 --> 00:30:18,800 Speaker 1: post tack bax is because their taxes are zero, right 556 00:30:19,240 --> 00:30:22,040 Speaker 1: do they Well, they try to be clever. The problem 557 00:30:22,080 --> 00:30:26,080 Speaker 1: is momentum is such a strong force that everybody chases it. Right, 558 00:30:26,080 --> 00:30:27,960 Speaker 1: They're not going for the stocks they should go for 559 00:30:28,000 --> 00:30:31,560 Speaker 1: a given their niche properties. They go for stocks that 560 00:30:31,680 --> 00:30:36,200 Speaker 1: everybody else is buying, and therefore they perform as everybody else. 561 00:30:36,400 --> 00:30:39,000 Speaker 1: And in fact, let's you know, let's use Berkshire had 562 00:30:39,040 --> 00:30:42,280 Speaker 1: the way to illustrate how a niche can be exploited. Well, 563 00:30:42,800 --> 00:30:46,520 Speaker 1: to me, one of the reasons weren't. Buffett succeeded. He 564 00:30:46,560 --> 00:30:48,440 Speaker 1: has a lot of good qualities brought in and it's 565 00:30:48,480 --> 00:30:51,120 Speaker 1: one of the reasons he succeeded is the money he 566 00:30:51,200 --> 00:30:53,520 Speaker 1: was investing. I mean, if you think about the money 567 00:30:53,520 --> 00:30:57,000 Speaker 1: he was investing, he's been investing insurance company premiums that 568 00:30:57,040 --> 00:31:01,479 Speaker 1: are collected, right, low cost capital with the perpetual it 569 00:31:01,480 --> 00:31:05,080 Speaker 1: doesn't panic. Right, that's a huge plus. Right, So when 570 00:31:05,120 --> 00:31:08,720 Speaker 1: he bought Goldman Sachs in November of two thousand and 571 00:31:08,800 --> 00:31:11,280 Speaker 1: eight and Bank of American November in two thousand and eight, 572 00:31:11,680 --> 00:31:14,640 Speaker 1: I thought about a traditional portfolio manager doing the same 573 00:31:14,680 --> 00:31:17,880 Speaker 1: thing and trying to explain to their clients what they 574 00:31:17,960 --> 00:31:19,960 Speaker 1: just say. They would have gotten fired. They'd have gotten fired. 575 00:31:20,080 --> 00:31:21,320 Speaker 1: So what the heck are you doing in the middle 576 00:31:21,320 --> 00:31:24,080 Speaker 1: of a crisis. But right, but that's the time to buy. 577 00:31:24,880 --> 00:31:27,960 Speaker 1: You have capital that doesn't panic, it's driven by the 578 00:31:28,000 --> 00:31:31,720 Speaker 1: actuarial tables. You can go out and take positions in 579 00:31:31,760 --> 00:31:34,720 Speaker 1: these companies and say, I don't have to worry about 580 00:31:34,760 --> 00:31:37,960 Speaker 1: my clients asking me to have questions because my clients 581 00:31:37,960 --> 00:31:41,840 Speaker 1: are the actuarial tables. The question is if he can 582 00:31:41,880 --> 00:31:45,320 Speaker 1: do it with insurance company money Why can't all State 583 00:31:45,480 --> 00:31:48,760 Speaker 1: and State Farm and other insurance companies do the same thing. 584 00:31:49,080 --> 00:31:51,800 Speaker 1: What's your answer? Because the answer is an average portfolio 585 00:31:51,800 --> 00:31:55,160 Speaker 1: managers driven by emotion and mood, they can they talk 586 00:31:55,240 --> 00:31:58,800 Speaker 1: the value investing talk. So let me expand that it's 587 00:31:58,840 --> 00:32:02,760 Speaker 1: not your insurance company these Why can't foundations and endowments 588 00:32:02,840 --> 00:32:06,800 Speaker 1: and you know, go down the list of entities that 589 00:32:08,080 --> 00:32:12,200 Speaker 1: has capital that shouldn't panic and has a hundred year 590 00:32:12,960 --> 00:32:15,680 Speaker 1: investment horizons because they're run by people who are still 591 00:32:15,800 --> 00:32:18,560 Speaker 1: judged on a year to year basis. So as soon 592 00:32:18,640 --> 00:32:23,320 Speaker 1: as chat bots take over running portfolios, we should avoid 593 00:32:23,320 --> 00:32:24,920 Speaker 1: this panic or are they just going to pick up 594 00:32:24,960 --> 00:32:27,480 Speaker 1: the panic? Because chatbots are going to just reflect human being. 595 00:32:27,720 --> 00:32:30,360 Speaker 1: That's why I'm not so upbeat about chat bots are 596 00:32:30,400 --> 00:32:33,320 Speaker 1: doing the right thing. They're going to mimic human behavior 597 00:32:33,360 --> 00:32:36,120 Speaker 1: and guess what humans behave in some really bad ways, 598 00:32:36,240 --> 00:32:39,240 Speaker 1: especially during crises. So chat bots are going to just 599 00:32:39,400 --> 00:32:41,719 Speaker 1: magnify that process. So if you think this is going 600 00:32:41,760 --> 00:32:44,400 Speaker 1: to make us more rational, it's not. In fact, you 601 00:32:44,440 --> 00:32:47,640 Speaker 1: have to create a counter chat bot that says, tell 602 00:32:47,720 --> 00:32:49,400 Speaker 1: me what I should be doing, and then I'll do 603 00:32:49,440 --> 00:32:53,040 Speaker 1: the exact opposite. Inverse, chat body there you go. That's 604 00:32:53,040 --> 00:32:55,000 Speaker 1: a product that I would buy. I like it. Yeah, 605 00:32:55,560 --> 00:32:59,920 Speaker 1: quite fascinating. So let's talk a little bit about academy. 606 00:33:00,600 --> 00:33:05,160 Speaker 1: You're not the typical tenured professor. Aside from the fact 607 00:33:05,160 --> 00:33:07,800 Speaker 1: that you've won tons of award and been voted best 608 00:33:08,040 --> 00:33:12,240 Speaker 1: Professor at Stern over and over again. You're very open source. 609 00:33:12,320 --> 00:33:16,400 Speaker 1: You have a blog, you're very active on Twitter. Both 610 00:33:16,440 --> 00:33:19,600 Speaker 1: of these are a little unusual in academia. Tell us, 611 00:33:19,680 --> 00:33:22,960 Speaker 1: tell us why you approach the world that way. I'm 612 00:33:22,960 --> 00:33:25,280 Speaker 1: often asked what I do for a living, and as 613 00:33:25,360 --> 00:33:29,960 Speaker 1: I'm a teacher, that's that's my passion. It's not the valuation, 614 00:33:30,120 --> 00:33:32,360 Speaker 1: it's not corporate finance. I'm a teacher first and foremost. 615 00:33:32,440 --> 00:33:36,000 Speaker 1: I'd tell people if I wasn't teaching valuation and corporate finance, 616 00:33:36,040 --> 00:33:40,320 Speaker 1: I'd be teaching high school algebra. Teaching is my passion. 617 00:33:40,640 --> 00:33:43,520 Speaker 1: Corporate finance and valuation are the things that I use 618 00:33:43,840 --> 00:33:47,280 Speaker 1: to kind of exploit that passion. And that puts me 619 00:33:47,360 --> 00:33:53,520 Speaker 1: at odds with traditional academia because, unfortunately, I think education 620 00:33:54,040 --> 00:33:57,400 Speaker 1: universities have lost their core mission. To me, the core 621 00:33:57,440 --> 00:34:00,520 Speaker 1: mission of a university should be educating the students who 622 00:34:00,560 --> 00:34:03,320 Speaker 1: go through one would think, right, you think, But if 623 00:34:03,360 --> 00:34:06,680 Speaker 1: you're a research university, the mission is muddled. And the 624 00:34:06,680 --> 00:34:09,719 Speaker 1: mission is muddled because you then get you know, you 625 00:34:09,800 --> 00:34:15,279 Speaker 1: get measured on the reputation of your faculty with their 626 00:34:15,360 --> 00:34:18,399 Speaker 1: pure group and what kind of research they do. And 627 00:34:18,640 --> 00:34:22,759 Speaker 1: I tell people, if you think about the constituencies or 628 00:34:22,840 --> 00:34:26,040 Speaker 1: universities serves, you'd expect undergraduate students to be at the 629 00:34:26,080 --> 00:34:29,560 Speaker 1: top of the list, especially at university like NYU where 630 00:34:29,560 --> 00:34:33,680 Speaker 1: our money primarily comes from tuition. These are your customers, right, 631 00:34:34,120 --> 00:34:36,480 Speaker 1: But if you actually look at decisions made at a 632 00:34:36,600 --> 00:34:39,440 Speaker 1: university and you look at where undergraduate students fall on 633 00:34:39,520 --> 00:34:42,880 Speaker 1: that list, they're not even on that list. At the 634 00:34:42,920 --> 00:34:46,480 Speaker 1: top of the list are tenured faculty. I mean I 635 00:34:46,600 --> 00:34:51,279 Speaker 1: describe universities as lunatic asylums where the inmates run the asylum, right, 636 00:34:51,880 --> 00:34:55,200 Speaker 1: And because of that, universities do things where an outside 637 00:34:55,200 --> 00:34:57,799 Speaker 1: of looks at the universities. How the heck do you 638 00:34:57,800 --> 00:35:00,839 Speaker 1: guys get away with this? I'm going to give away 639 00:35:00,840 --> 00:35:04,680 Speaker 1: a secret. As a professor to research university, my teaching 640 00:35:04,719 --> 00:35:09,439 Speaker 1: load is three courses a year that translates into four 641 00:35:09,480 --> 00:35:12,359 Speaker 1: and a half hours a week for thirty weeks a year. 642 00:35:12,560 --> 00:35:15,359 Speaker 1: That's pretty light. That is like, that's it. And once 643 00:35:15,400 --> 00:35:18,480 Speaker 1: you're I know, you're supposed to keep the extra time 644 00:35:18,520 --> 00:35:22,359 Speaker 1: for research, but once you're tenured that there's no your 645 00:35:22,440 --> 00:35:27,080 Speaker 1: landed gentry, your landed gentry. And if you think about 646 00:35:27,200 --> 00:35:29,839 Speaker 1: how much it costs to pay a faculty member who 647 00:35:29,840 --> 00:35:31,640 Speaker 1: works four and a half hours a week, then you 648 00:35:31,680 --> 00:35:35,600 Speaker 1: can very quickly start to untangle why it costs a 649 00:35:35,680 --> 00:35:39,520 Speaker 1: student fifty thousand dollars a year to go through as tuition. 650 00:35:39,600 --> 00:35:42,879 Speaker 1: And so you're implying it costs ten times as much 651 00:35:42,920 --> 00:35:47,359 Speaker 1: as it should if people were legitimately, Yeah, if you're 652 00:35:47,400 --> 00:35:49,960 Speaker 1: just paying for an education, it should be it should 653 00:35:49,960 --> 00:35:53,279 Speaker 1: be one tenth of that. And I think that you know, 654 00:35:53,280 --> 00:35:56,759 Speaker 1: of course, university education is not just courses. That was 655 00:35:56,800 --> 00:35:59,960 Speaker 1: the mistake that Edex and Coursera made when they first 656 00:36:00,200 --> 00:36:03,840 Speaker 1: decided they're going to disrupt the education business by packaging 657 00:36:03,880 --> 00:36:06,960 Speaker 1: these mooks. Remember the big online course that we're supposed 658 00:36:06,960 --> 00:36:10,560 Speaker 1: to change education. It never quite caught on because an 659 00:36:10,680 --> 00:36:14,600 Speaker 1: education is a collection of things. It's the courses you take, 660 00:36:14,719 --> 00:36:18,600 Speaker 1: it's the network you create, it's the entertainment value. Let's 661 00:36:18,600 --> 00:36:21,600 Speaker 1: say you go to notre Dame that Sunday football is 662 00:36:21,600 --> 00:36:24,239 Speaker 1: a big part of your life. And most of all, 663 00:36:24,480 --> 00:36:27,600 Speaker 1: it's parents sending their kids off to a place where 664 00:36:27,600 --> 00:36:30,920 Speaker 1: they can do stupid things for four years and not 665 00:36:30,960 --> 00:36:33,400 Speaker 1: get into too much trouble. I mean, let's face it, 666 00:36:33,640 --> 00:36:36,919 Speaker 1: if you, especially if you have a child the age 667 00:36:36,960 --> 00:36:38,880 Speaker 1: of eighteen to twenty two, you know they're going to 668 00:36:38,960 --> 00:36:42,840 Speaker 1: do stupid things. This speaks stupidity purpose of and you 669 00:36:42,960 --> 00:36:45,640 Speaker 1: send them off to a nice college campus. They can 670 00:36:45,680 --> 00:36:50,000 Speaker 1: do stupid things on campus, and the college kind of 671 00:36:50,040 --> 00:36:53,880 Speaker 1: covers up for that stupidity. So I think, in a sense, 672 00:36:53,920 --> 00:36:56,480 Speaker 1: you're buying a package. It's like the old cable model. 673 00:36:56,600 --> 00:36:59,200 Speaker 1: You bought this package, it's going to cost you fifty 674 00:36:59,280 --> 00:37:02,759 Speaker 1: thousand a year, and because you couldn't untangle the different pieces, 675 00:37:03,400 --> 00:37:06,120 Speaker 1: you paid because you had no choice. I do a 676 00:37:06,160 --> 00:37:10,200 Speaker 1: session called Barbarians at the Gate for universities, I say, loo, 677 00:37:11,120 --> 00:37:14,160 Speaker 1: just as the cable companies ended up with this unbundling 678 00:37:14,280 --> 00:37:16,160 Speaker 1: of the product where people said, you know what, I 679 00:37:16,200 --> 00:37:21,280 Speaker 1: can just get the channels I want by paying directly 680 00:37:21,360 --> 00:37:23,800 Speaker 1: for them, and that kind of untangled the cable business, 681 00:37:24,239 --> 00:37:28,239 Speaker 1: untangling is coming to the education business. People are going 682 00:37:28,280 --> 00:37:31,400 Speaker 1: to be able to buy the network. LinkedIn is in 683 00:37:31,440 --> 00:37:34,280 Speaker 1: fact a very good substitute for going to a college 684 00:37:34,520 --> 00:37:37,279 Speaker 1: and spending four years hanging out with people who might 685 00:37:37,320 --> 00:37:38,919 Speaker 1: never get back to you when you try to reach 686 00:37:38,960 --> 00:37:42,200 Speaker 1: out to them. So essentially, what technology is doing is 687 00:37:42,200 --> 00:37:47,040 Speaker 1: it's unbundling the university model, and over time it's going 688 00:37:47,080 --> 00:37:49,320 Speaker 1: to eat away at the university model. In the university 689 00:37:49,360 --> 00:37:55,000 Speaker 1: is actually contributing to their own disruption. Georgia Tech, for instance, 690 00:37:55,040 --> 00:37:57,520 Speaker 1: allows you to take courses for a fee. It does 691 00:37:57,560 --> 00:38:00,040 Speaker 1: a very good job, and it's a good rev and 692 00:38:00,160 --> 00:38:02,440 Speaker 1: you generate it, but you're already digging a whole for 693 00:38:02,560 --> 00:38:05,600 Speaker 1: your own demise as a university because once you start 694 00:38:05,719 --> 00:38:09,600 Speaker 1: unbundling courses and offering them, people can start pricing them up. 695 00:38:10,480 --> 00:38:12,880 Speaker 1: I'm paying for five courses in an MBA, I'm paying 696 00:38:13,320 --> 00:38:16,520 Speaker 1: fifty thousand dollars, but you're offering the same five courses 697 00:38:16,560 --> 00:38:19,759 Speaker 1: online for two thousand dollars a piece. Five times two 698 00:38:19,760 --> 00:38:23,120 Speaker 1: thousand is our ten thousand, So what's the extra forty 699 00:38:23,200 --> 00:38:28,279 Speaker 1: thousand four? Unbundling basically then makes it transparent that you're 700 00:38:28,360 --> 00:38:32,200 Speaker 1: charging this hefty premium. The only thing universities have going 701 00:38:32,239 --> 00:38:35,520 Speaker 1: for them. That's going to make disruptions slow is parents. 702 00:38:35,960 --> 00:38:37,880 Speaker 1: I mean, if you're eighteen year old came to you 703 00:38:37,920 --> 00:38:42,560 Speaker 1: and said, look dad, our mom, I've looked you know 704 00:38:42,880 --> 00:38:45,879 Speaker 1: I can take I can educate myself by taking all 705 00:38:45,880 --> 00:38:49,600 Speaker 1: these courses online. Most parents are probably still going to 706 00:38:49,640 --> 00:38:53,279 Speaker 1: say that's not education. You've got to because we've been 707 00:38:53,560 --> 00:38:55,920 Speaker 1: that's the only point of cow. Yeah, we've been trained, 708 00:38:55,960 --> 00:38:58,239 Speaker 1: and it takes four years. You go to university. There's 709 00:38:58,239 --> 00:39:01,040 Speaker 1: a degree that comes with this, and there's a screening 710 00:39:01,120 --> 00:39:03,840 Speaker 1: process that goes with it. So I think the reason 711 00:39:03,960 --> 00:39:07,839 Speaker 1: disruption has been so slow to come to education is 712 00:39:07,920 --> 00:39:11,919 Speaker 1: because the people who make the decisions and education, which 713 00:39:11,960 --> 00:39:15,680 Speaker 1: still are the parents, not the kids, have been have 714 00:39:15,800 --> 00:39:18,440 Speaker 1: been trained to believe that you have to go to university, 715 00:39:18,520 --> 00:39:20,719 Speaker 1: go for four years to get a degree. But that's 716 00:39:20,719 --> 00:39:23,520 Speaker 1: going to change. So let me throw a quote of 717 00:39:23,600 --> 00:39:28,120 Speaker 1: yours back at you and get some feedback. And I'm 718 00:39:28,239 --> 00:39:31,320 Speaker 1: very amused by this quote. This will get me shunned 719 00:39:31,360 --> 00:39:34,400 Speaker 1: in the academic world, but who cares. I don't do 720 00:39:34,520 --> 00:39:37,480 Speaker 1: academic research or right to be published anymore. Life is 721 00:39:37,520 --> 00:39:40,840 Speaker 1: too short to be spent writing for an echo chamber 722 00:39:41,120 --> 00:39:44,960 Speaker 1: and rewriting to meet the often arbitrary demands of a reviewer. 723 00:39:45,320 --> 00:39:48,719 Speaker 1: I write only on topics that a interest me and 724 00:39:48,960 --> 00:39:54,719 Speaker 1: be maybe useful to practitioners explain, like, aren't you basically 725 00:39:54,760 --> 00:39:58,440 Speaker 1: thumbing your nose at the entire publisher parish world of 726 00:39:58,520 --> 00:40:01,960 Speaker 1: academia now that you're a tenured professor. Yeah. I think 727 00:40:02,000 --> 00:40:05,960 Speaker 1: there's a degree of hypocrisy that, right, because I did 728 00:40:06,000 --> 00:40:08,759 Speaker 1: get tenure and it was based upon papers that I 729 00:40:08,800 --> 00:40:11,560 Speaker 1: don't even remember what I wrote them on, right, I 730 00:40:11,560 --> 00:40:14,040 Speaker 1: mean that tells you a little bit about what academic 731 00:40:14,120 --> 00:40:17,759 Speaker 1: research is about. It's as a discipline ages, and this 732 00:40:17,880 --> 00:40:20,359 Speaker 1: is I think key. You have to start to ask 733 00:40:20,440 --> 00:40:23,320 Speaker 1: smaller and smaller questions to be able to get published 734 00:40:23,400 --> 00:40:25,759 Speaker 1: and take and I'll take the example of physics one 735 00:40:25,840 --> 00:40:29,200 Speaker 1: hundred years ago or more, Einstein and Moore asking the 736 00:40:29,280 --> 00:40:33,040 Speaker 1: big questions how does the universe get created? What drives 737 00:40:33,080 --> 00:40:35,759 Speaker 1: it today? If you look at a physics journal, they're 738 00:40:35,800 --> 00:40:38,440 Speaker 1: asking questions you don't even understand the title of the 739 00:40:38,520 --> 00:40:41,400 Speaker 1: paper because it's such a small question. There are seven 740 00:40:41,520 --> 00:40:43,680 Speaker 1: co authors. That's the other thing that seems to happen 741 00:40:43,719 --> 00:40:47,240 Speaker 1: as discipline's age is you use this power of numbers, 742 00:40:47,320 --> 00:40:50,440 Speaker 1: one of who might have connections to a reviewer, so 743 00:40:50,600 --> 00:40:53,759 Speaker 1: you add them on and they're asking questions that, to 744 00:40:53,800 --> 00:40:57,920 Speaker 1: be quite honest, nobody cares about, including physicists, because the 745 00:40:58,040 --> 00:41:02,000 Speaker 1: question is so narrowly phrased that you say, who really cares? Well, 746 00:41:02,040 --> 00:41:04,799 Speaker 1: now that we know how the universe was created, don't 747 00:41:04,840 --> 00:41:07,080 Speaker 1: We can't spend any more time on that, zach Or. 748 00:41:07,680 --> 00:41:10,319 Speaker 1: But even if you have questions, because we really still 749 00:41:10,360 --> 00:41:12,439 Speaker 1: don't know how the universe was created. The only problem 750 00:41:12,480 --> 00:41:14,800 Speaker 1: is if you've write a paper on it, it's too 751 00:41:14,840 --> 00:41:17,400 Speaker 1: big to get published because there'll always be loose setts. 752 00:41:17,480 --> 00:41:19,319 Speaker 1: Now people are going to pick up the loosest parts. 753 00:41:19,680 --> 00:41:23,040 Speaker 1: This can't be published. It's not quite ready to be published. 754 00:41:23,480 --> 00:41:27,719 Speaker 1: So as discipline's age, unfortunately the research becomes less and 755 00:41:27,880 --> 00:41:31,360 Speaker 1: less useful to not just the outside world, but even 756 00:41:31,400 --> 00:41:34,640 Speaker 1: the inside world. And for some people they still have 757 00:41:35,120 --> 00:41:37,919 Speaker 1: enjoy doing research. I don't begrudge them that. So there 758 00:41:37,920 --> 00:41:40,279 Speaker 1: are some of my colleagues who was still curious about 759 00:41:40,320 --> 00:41:44,080 Speaker 1: academic questions. But I discovered very early in my life 760 00:41:44,080 --> 00:41:48,600 Speaker 1: that this wasn't my strength. Picking some obscure academic topics, 761 00:41:48,640 --> 00:41:51,120 Speaker 1: spending six months of my life writing a paper that 762 00:41:51,239 --> 00:41:54,799 Speaker 1: darted eyes and cross tease. I'm a teacher, and I 763 00:41:54,840 --> 00:41:56,960 Speaker 1: want the biggest audience I can. So I think of 764 00:41:57,000 --> 00:41:59,720 Speaker 1: everything I do as an extension of teaching, including almost 765 00:41:59,760 --> 00:42:02,680 Speaker 1: all of my writing, and I want the biggest audience 766 00:42:02,719 --> 00:42:05,160 Speaker 1: I can. So why would I restrict my audience to 767 00:42:05,239 --> 00:42:07,880 Speaker 1: just people in my classroom or just people in an 768 00:42:07,920 --> 00:42:11,040 Speaker 1: echo chamber. So it's very selfish. I want to reach 769 00:42:11,040 --> 00:42:13,200 Speaker 1: the biggest audience because as a teacher, you want the 770 00:42:13,239 --> 00:42:15,959 Speaker 1: biggest audience, and this gives me a way of making 771 00:42:15,920 --> 00:42:18,560 Speaker 1: an audience lass. So what sort of pushback did you 772 00:42:18,680 --> 00:42:23,680 Speaker 1: get from the academic community to the statement, which seemed 773 00:42:23,719 --> 00:42:26,759 Speaker 1: to have resonated in certain quarters. I don't hang out 774 00:42:26,800 --> 00:42:30,960 Speaker 1: with the academic community enough to even know, because it 775 00:42:31,120 --> 00:42:33,360 Speaker 1: had to get back to you the social world things. 776 00:42:33,560 --> 00:42:37,000 Speaker 1: In a sense I was. I was labeled a teacher 777 00:42:37,280 --> 00:42:42,759 Speaker 1: professor early on. In fact my chair almost disdainfully by some. 778 00:42:43,000 --> 00:42:45,880 Speaker 1: But for some it's remember, I'm carrying at teach a 779 00:42:45,880 --> 00:42:48,279 Speaker 1: class of three fifty people, So I'm carrying a load 780 00:42:48,360 --> 00:42:50,799 Speaker 1: that actually allows them to do what they want to do, 781 00:42:50,800 --> 00:42:53,760 Speaker 1: which is go back to research. So from a selfish 782 00:42:54,160 --> 00:42:56,640 Speaker 1: rationale for them, this was actually good. I was taking 783 00:42:56,680 --> 00:42:58,960 Speaker 1: this thing that they did not like to do. I 784 00:42:59,000 --> 00:43:00,920 Speaker 1: was doing it for and I was doing it with 785 00:43:01,080 --> 00:43:03,680 Speaker 1: joy because this is what I do. So it serves 786 00:43:03,719 --> 00:43:07,040 Speaker 1: us both. I don't begrudge them their research. They don't 787 00:43:07,040 --> 00:43:09,839 Speaker 1: begrudge me my teaching. We've learned to live at least 788 00:43:09,840 --> 00:43:12,520 Speaker 1: at NYU. And part of the reason I like being 789 00:43:12,560 --> 00:43:15,400 Speaker 1: at NYU is it's a very large faculty, it's a 790 00:43:15,480 --> 00:43:19,200 Speaker 1: very diverse faculty. So I've always been allowed to do 791 00:43:19,239 --> 00:43:21,640 Speaker 1: what I want to do. Could I have done what 792 00:43:21,760 --> 00:43:27,480 Speaker 1: I did at a University of Chicago Stanford Probably not, huh. 793 00:43:27,960 --> 00:43:31,879 Speaker 1: And I think that that basically means that when if 794 00:43:31,960 --> 00:43:34,200 Speaker 1: your joy is teaching, and you want to be an 795 00:43:34,239 --> 00:43:36,239 Speaker 1: academia because you want to teach, you want to pick 796 00:43:36,280 --> 00:43:40,440 Speaker 1: a place where that's not just valued, but that you 797 00:43:40,480 --> 00:43:43,880 Speaker 1: get the freedom to be able to focus on teaching 798 00:43:44,000 --> 00:43:47,840 Speaker 1: and getting a message out to practitioners. Now, so there's 799 00:43:47,880 --> 00:43:53,320 Speaker 1: a couple of attempts at disrupting education. One of which, 800 00:43:53,360 --> 00:43:56,160 Speaker 1: and I'm drawn a plank on the name, is you 801 00:43:56,160 --> 00:43:59,640 Speaker 1: could take up to let's say it's twelve credits a semester, 802 00:44:00,160 --> 00:44:04,080 Speaker 1: you could take forty eight credits online over two years 803 00:44:04,120 --> 00:44:08,359 Speaker 1: at no cost. And these credit these are accredited, and 804 00:44:08,400 --> 00:44:11,080 Speaker 1: when you go to a college, you could cut your 805 00:44:11,120 --> 00:44:13,719 Speaker 1: college costs in half. You go to college for your 806 00:44:13,760 --> 00:44:17,480 Speaker 1: junior and senior year transfer these credits in. Is that 807 00:44:17,640 --> 00:44:20,920 Speaker 1: the same experience then as to what you were describing, 808 00:44:21,239 --> 00:44:25,120 Speaker 1: So when going to school for four years, making that 809 00:44:25,280 --> 00:44:31,319 Speaker 1: social network, making contacts, learning how the world operates in 810 00:44:31,320 --> 00:44:33,480 Speaker 1: a way that you can't when you're just at home 811 00:44:33,480 --> 00:44:35,880 Speaker 1: looking at a compact. These are called hybrid models, and 812 00:44:35,920 --> 00:44:38,640 Speaker 1: a lot of universities have adopted them, not just for 813 00:44:39,320 --> 00:44:43,480 Speaker 1: undergraduate degrees, but for executive programs. Executive programs historically been 814 00:44:43,560 --> 00:44:46,920 Speaker 1: very expensive to go to. But you create these hybrid programs, 815 00:44:46,920 --> 00:44:50,319 Speaker 1: so you take classes online, but one week a year, 816 00:44:51,120 --> 00:44:55,440 Speaker 1: everybody in the program is brought into a physical location 817 00:44:55,560 --> 00:44:58,080 Speaker 1: so they can hang out together, live in the same place. 818 00:44:58,520 --> 00:45:02,120 Speaker 1: That's a networking benefit. You are going to see hybrid 819 00:45:02,160 --> 00:45:05,240 Speaker 1: programs and that's going to be the transitional point because 820 00:45:05,360 --> 00:45:08,680 Speaker 1: doing an education entirely online it's tough to do because 821 00:45:08,760 --> 00:45:12,000 Speaker 1: people lack self discipline. I know, you know, I offer 822 00:45:12,040 --> 00:45:15,800 Speaker 1: my classes online and I start the classes off about 823 00:45:15,800 --> 00:45:18,640 Speaker 1: fifty thousand people start the class with me. I can 824 00:45:18,719 --> 00:45:21,960 Speaker 1: watch them by session because I go twenty six sessions, 825 00:45:22,400 --> 00:45:24,480 Speaker 1: and by the time I get to session twenty six, 826 00:45:24,560 --> 00:45:26,920 Speaker 1: I can actually track how many of the fifty thousand 827 00:45:26,920 --> 00:45:31,360 Speaker 1: i's still there. What's it's huge, It's ninety percent now 828 00:45:31,400 --> 00:45:33,880 Speaker 1: because people have lives to let my class requires a 829 00:45:33,880 --> 00:45:37,880 Speaker 1: lot of time and resources. So in it's eighty minute sessions. 830 00:45:37,880 --> 00:45:40,239 Speaker 1: So even if you just watch the lectures, that's three 831 00:45:40,320 --> 00:45:43,319 Speaker 1: hours every week of just watching the lectures, forget about 832 00:45:43,360 --> 00:45:47,200 Speaker 1: the other stuff. So that's why I created an online 833 00:45:47,280 --> 00:45:49,400 Speaker 1: version of my class where I take my eighty minute 834 00:45:49,520 --> 00:45:52,080 Speaker 1: lecture and I think about how would I deliver that 835 00:45:52,160 --> 00:45:56,040 Speaker 1: lecture if I'd only ten minutes? Wow? And the scary 836 00:45:56,080 --> 00:45:58,319 Speaker 1: thing was, wasn't that difficult? Which tells you a little 837 00:45:58,320 --> 00:46:01,759 Speaker 1: bit about how much buffer as faculty members or as 838 00:46:01,840 --> 00:46:04,360 Speaker 1: professors you get. Is BA for the right word or 839 00:46:04,520 --> 00:46:07,719 Speaker 1: you just taking an example and going into detail and 840 00:46:07,840 --> 00:46:10,719 Speaker 1: nuance that you don't get in ten minutes, And it's 841 00:46:10,719 --> 00:46:13,200 Speaker 1: a lot more. I can tell stories, I can I 842 00:46:13,239 --> 00:46:15,280 Speaker 1: can flesh it out. So I'm not saying the extra 843 00:46:15,360 --> 00:46:18,800 Speaker 1: eighty minutes are useless, but I'm saying that ten minutes 844 00:46:18,920 --> 00:46:21,400 Speaker 1: is where you get the substance the extra eighty minutes 845 00:46:21,480 --> 00:46:24,439 Speaker 1: or where you get the dressing on the substance, and 846 00:46:24,520 --> 00:46:27,680 Speaker 1: you could probably get that dressing in small pieces if 847 00:46:27,680 --> 00:46:31,239 Speaker 1: you want. Because when I do my YouTube videos, essentially 848 00:46:31,280 --> 00:46:35,359 Speaker 1: you're seeing blog posts. You're essentially seeing things that will 849 00:46:35,400 --> 00:46:38,279 Speaker 1: show up as riffs in my class. So that the 850 00:46:38,520 --> 00:46:40,719 Speaker 1: post edit on Tesla. A couple of months ago, I 851 00:46:40,840 --> 00:46:42,760 Speaker 1: value Tesla and asked, you know, how do you explain 852 00:46:42,800 --> 00:46:45,040 Speaker 1: what's happening at Tesla and how do you bring in 853 00:46:45,080 --> 00:46:48,360 Speaker 1: these new businesses that becomes a part of my class somewhere. 854 00:46:48,440 --> 00:46:50,680 Speaker 1: So I tell people who start with the ten minute session, 855 00:46:51,080 --> 00:46:54,279 Speaker 1: that's a realistic estimate. You can you can actually get 856 00:46:54,320 --> 00:46:57,600 Speaker 1: through the sessions, and if this truly interests you, then 857 00:46:58,120 --> 00:47:00,880 Speaker 1: try out this. So I create these con centric circles 858 00:47:00,880 --> 00:47:02,560 Speaker 1: for people who have time, and if you have this 859 00:47:02,680 --> 00:47:05,839 Speaker 1: much time, try these extra things. This much time, go 860 00:47:05,960 --> 00:47:09,640 Speaker 1: the extra mile. So I think by creating enough flexibility, 861 00:47:09,680 --> 00:47:11,759 Speaker 1: you're going to be able to allow people to do 862 00:47:11,960 --> 00:47:15,200 Speaker 1: things online that they can't do right now. So you 863 00:47:15,600 --> 00:47:19,160 Speaker 1: give them the core film and the DVD extras and 864 00:47:19,239 --> 00:47:22,840 Speaker 1: they could choose how much exactly. So you also mentioned 865 00:47:22,880 --> 00:47:27,279 Speaker 1: you're at the intersection of three businesses, education, publishing and 866 00:47:27,400 --> 00:47:32,040 Speaker 1: financial services that are all inefficiently run and deserve to 867 00:47:32,120 --> 00:47:37,879 Speaker 1: be disrupted. What are the similarities between these three areas? 868 00:47:38,360 --> 00:47:42,919 Speaker 1: And can we not say that financial services hasn't been 869 00:47:42,960 --> 00:47:47,560 Speaker 1: wildly disrupted over the past forty years? Has it? Well? 870 00:47:47,680 --> 00:47:50,759 Speaker 1: Trades are free. You could buy the entire market for 871 00:47:51,040 --> 00:47:54,839 Speaker 1: three BIPs. That seems to be enormously disruptive. I could 872 00:47:55,160 --> 00:47:59,120 Speaker 1: venue money without anybody in between us on my phone. 873 00:48:00,440 --> 00:48:03,480 Speaker 1: I used to think, who said the only innovation has 874 00:48:03,480 --> 00:48:07,840 Speaker 1: been the ATMU? Was that a greenspan or vulgar? I think? 875 00:48:08,320 --> 00:48:12,080 Speaker 1: I think that you can do stuff today that was 876 00:48:12,200 --> 00:48:17,240 Speaker 1: either time consuming or expensive or not even available fifty 877 00:48:17,320 --> 00:48:21,560 Speaker 1: years ago, twenty years ago. The customers side yes. And 878 00:48:21,640 --> 00:48:24,319 Speaker 1: here's my question, So why does JP Morgan chase every 879 00:48:24,320 --> 00:48:27,040 Speaker 1: time I get a wire still take fifteen dollars off 880 00:48:27,080 --> 00:48:31,080 Speaker 1: that wire? It just makes this is my problem? Right, bank, 881 00:48:31,160 --> 00:48:34,280 Speaker 1: you can ah for free, but it'll be twenty twelve 882 00:48:34,320 --> 00:48:36,640 Speaker 1: to twenty four hours later. Yeah, but when I get 883 00:48:36,760 --> 00:48:39,520 Speaker 1: from a wire from outside, I can't. I can't tell 884 00:48:39,560 --> 00:48:41,560 Speaker 1: them what to do, so they take their bank and 885 00:48:41,600 --> 00:48:44,919 Speaker 1: their wire money to JP Morgan. You get tinged when 886 00:48:44,920 --> 00:48:48,879 Speaker 1: a wire comes in not outgoing, I get hit both ways. Oh, 887 00:48:48,920 --> 00:48:51,840 Speaker 1: I don't realize that. And so when I so maybe 888 00:48:51,840 --> 00:48:54,280 Speaker 1: when I, when I, when I deliver money to others, 889 00:48:54,280 --> 00:48:56,400 Speaker 1: I can get around the banquet. When it comes to me. 890 00:48:56,440 --> 00:48:59,080 Speaker 1: I have no control of the process. So let's say 891 00:48:59,080 --> 00:49:01,200 Speaker 1: I'm getting five thousand dollars this is what I see 892 00:49:01,239 --> 00:49:04,200 Speaker 1: from JP Morgan Chase. I see four nine seventy five 893 00:49:04,560 --> 00:49:08,799 Speaker 1: put into my account and a wire service fee of 894 00:49:08,880 --> 00:49:12,799 Speaker 1: twenty five dollars for what you know. This is what 895 00:49:12,840 --> 00:49:16,719 Speaker 1: I mean about about these businesses acting like it's nineteen 896 00:49:16,880 --> 00:49:20,839 Speaker 1: eighty five stuff. Take the publishing business, okay, And I'll 897 00:49:20,840 --> 00:49:22,879 Speaker 1: give you an example. One of my publishers I won't 898 00:49:22,960 --> 00:49:27,000 Speaker 1: name them, call me last year and they said, because 899 00:49:27,280 --> 00:49:30,360 Speaker 1: my books have and in multiple editions, multiple editions, and 900 00:49:30,360 --> 00:49:32,960 Speaker 1: I have an Indian edition, which is which is printed 901 00:49:32,960 --> 00:49:36,040 Speaker 1: on cheaper paper and priced at one fifth the price 902 00:49:36,200 --> 00:49:38,840 Speaker 1: because Indians kind of four to pay out the equivalent 903 00:49:38,840 --> 00:49:42,800 Speaker 1: of one hundred dollars. And India is the largest market 904 00:49:42,920 --> 00:49:46,000 Speaker 1: for me outside the US because the big English speaking population, 905 00:49:46,200 --> 00:49:48,520 Speaker 1: lots of students. So I get a call from a 906 00:49:48,520 --> 00:49:52,319 Speaker 1: publisher and they said, well, we've decided to suspend your 907 00:49:52,840 --> 00:49:57,080 Speaker 1: Indian edition. And I said why. They said, this cannibalization 908 00:49:57,400 --> 00:49:59,640 Speaker 1: going on. And I said, what are you talking about 909 00:49:59,640 --> 00:50:02,040 Speaker 1: about only the US spying the Indian They said, there 910 00:50:02,040 --> 00:50:04,319 Speaker 1: are some people in the US who are buying the 911 00:50:04,360 --> 00:50:07,239 Speaker 1: Indian edition. And I said, okay, how many? And they said, 912 00:50:07,280 --> 00:50:10,040 Speaker 1: we don't know, but we do know there's cannibalization going on. 913 00:50:10,080 --> 00:50:13,200 Speaker 1: I said, let me get this straight. You're suspending the 914 00:50:13,239 --> 00:50:16,480 Speaker 1: printing of an Indian edition. This is the largest market 915 00:50:16,560 --> 00:50:19,120 Speaker 1: outside This is gonna be tens of millions of books 916 00:50:19,160 --> 00:50:22,080 Speaker 1: because you think there's cannibalization, but you don't know how 917 00:50:22,160 --> 00:50:25,879 Speaker 1: much cannibalization there is. He said, I guess the way. 918 00:50:26,120 --> 00:50:28,239 Speaker 1: If you put it that way, that's exactly what we're doing. 919 00:50:28,239 --> 00:50:31,600 Speaker 1: And I said, do you realize this makes absolutely no sense. 920 00:50:32,040 --> 00:50:33,960 Speaker 1: You would have to put some flesh on those bones, 921 00:50:34,000 --> 00:50:37,920 Speaker 1: some numbers to determine is it still profitable to do this? 922 00:50:37,960 --> 00:50:40,480 Speaker 1: And I said, do you think the cannibalization is going 923 00:50:40,520 --> 00:50:43,200 Speaker 1: to stop just because you did this? Because you know 924 00:50:43,280 --> 00:50:45,279 Speaker 1: exactly what's going to happen. Indians are not going to 925 00:50:45,320 --> 00:50:48,200 Speaker 1: pay one hundred dollars a book. Some person in India 926 00:50:48,239 --> 00:50:50,600 Speaker 1: or China is going to buy one of the US books. 927 00:50:50,800 --> 00:50:54,360 Speaker 1: They're going to copy every page, They're going to pirate 928 00:50:54,520 --> 00:50:58,080 Speaker 1: the book. Now I've put people There are people who 929 00:50:58,080 --> 00:51:00,360 Speaker 1: bought my book for two dollars outside of train station 930 00:51:00,400 --> 00:51:03,759 Speaker 1: in India because they get the pirated version. And I said, 931 00:51:03,840 --> 00:51:07,880 Speaker 1: would you rather cannibalize yourself and get a reasonable price, 932 00:51:08,440 --> 00:51:12,440 Speaker 1: or would you rather have this Chinese you know, the 933 00:51:12,520 --> 00:51:18,040 Speaker 1: pirated version, cannibalize you and get nothing for it. But 934 00:51:18,160 --> 00:51:21,160 Speaker 1: that can change the decision. And this is the nature 935 00:51:21,600 --> 00:51:25,000 Speaker 1: of how decision making is it at university's publishing and 936 00:51:25,200 --> 00:51:29,600 Speaker 1: banks is there's still the decision making is driven by 937 00:51:29,600 --> 00:51:33,560 Speaker 1: a world that's no longer out there. But it's very 938 00:51:33,600 --> 00:51:36,920 Speaker 1: difficult to create change. And this is the old Clayton 939 00:51:37,000 --> 00:51:41,200 Speaker 1: Christensen argument for why institutions have trouble. The status quo 940 00:51:41,239 --> 00:51:44,480 Speaker 1: is trouble with disruption is you have too many legacy effects. 941 00:51:44,480 --> 00:51:46,359 Speaker 1: So it's almost you can see the person at JP 942 00:51:46,480 --> 00:51:49,160 Speaker 1: Morgan say saying you should stop charging for these wires 943 00:51:49,160 --> 00:51:52,040 Speaker 1: because people are going to use alternate ways of ransferring money. 944 00:51:52,040 --> 00:51:54,520 Speaker 1: And somebody says, but we make one hundred and fifty 945 00:51:54,560 --> 00:51:58,640 Speaker 1: million dollars from the wires we can't do that. That's 946 00:51:58,640 --> 00:52:02,360 Speaker 1: a legacy effect effect. So guess what happens. You essentially 947 00:52:02,719 --> 00:52:07,319 Speaker 1: take your softest businesses and they get disrupted. That's the 948 00:52:07,480 --> 00:52:10,040 Speaker 1: I mean, let's face it, most fintech companies should not 949 00:52:10,160 --> 00:52:14,080 Speaker 1: exist because they're either solving problems that are not problems 950 00:52:14,120 --> 00:52:17,960 Speaker 1: in the first place, or they're doing regulatory arbitrage they're 951 00:52:18,000 --> 00:52:23,160 Speaker 1: bypassing what would normally be regulated, or they're doing taking 952 00:52:23,160 --> 00:52:25,960 Speaker 1: advantage of internship, which is, if banks are charging twenty 953 00:52:25,960 --> 00:52:30,640 Speaker 1: five dollars, let's create a venmore right. And essentially that's 954 00:52:30,760 --> 00:52:35,120 Speaker 1: exactly why I think these statistico institutions are not going 955 00:52:35,120 --> 00:52:37,960 Speaker 1: to be able to partake in the disruption that's coming. 956 00:52:38,640 --> 00:52:41,600 Speaker 1: Is they can see it coming. They will say all 957 00:52:41,640 --> 00:52:45,960 Speaker 1: the right things, but within the organization there's such stickiness 958 00:52:45,960 --> 00:52:50,080 Speaker 1: and innertship that their decisions are still driven by the 959 00:52:50,120 --> 00:52:52,719 Speaker 1: way things used to be, not the way things are. Right. 960 00:52:52,719 --> 00:52:55,080 Speaker 1: It's so funny you said that. One of my colleagues, 961 00:52:55,120 --> 00:52:59,080 Speaker 1: Ben Carlson, and I'm going to paraphrase him, uses the 962 00:52:59,120 --> 00:53:03,040 Speaker 1: phrase experts or people who have an expertise in the 963 00:53:03,080 --> 00:53:07,160 Speaker 1: way the world used to be. And so when things change, 964 00:53:07,520 --> 00:53:10,360 Speaker 1: there is and now this is me speaking. There is 965 00:53:10,360 --> 00:53:13,680 Speaker 1: a void of experts, and all sorts of things rush 966 00:53:13,719 --> 00:53:17,040 Speaker 1: in to fill that vacuum. And so that's how you 967 00:53:17,200 --> 00:53:21,560 Speaker 1: end up with a crazy run up in crypto because 968 00:53:22,120 --> 00:53:26,080 Speaker 1: self proclaimed experts say, no, no, here's the change. But 969 00:53:26,200 --> 00:53:32,280 Speaker 1: the fascinating thing about banks versus other companies, it's very 970 00:53:32,320 --> 00:53:36,799 Speaker 1: difficult for a company to disrupt itself. And I have 971 00:53:36,880 --> 00:53:41,360 Speaker 1: a vivid recollection of seeing Apple do this with the 972 00:53:41,400 --> 00:53:45,799 Speaker 1: first iPod and got smaller and faster and cheaper and 973 00:53:45,960 --> 00:53:50,359 Speaker 1: larger capacity. And you could just imagine that conversation, Hey, 974 00:53:50,400 --> 00:53:54,239 Speaker 1: we're just you know, we're cannibalizing ourselves. And someone must 975 00:53:54,239 --> 00:53:56,800 Speaker 1: have said better that we do it than somebody else. 976 00:53:57,480 --> 00:53:59,879 Speaker 1: Why is that so hard to do? Well? I think that, 977 00:54:00,239 --> 00:54:02,160 Speaker 1: you know, I'm glad you brought up Apple because I 978 00:54:02,239 --> 00:54:05,720 Speaker 1: think of all the things Steve Jobs did that made 979 00:54:05,880 --> 00:54:10,000 Speaker 1: the kind of rebirth of Apple possible, the first was 980 00:54:10,400 --> 00:54:15,880 Speaker 1: on the original iTunes disruption, he told the team, And 981 00:54:16,520 --> 00:54:19,960 Speaker 1: this is I think well documented. Act like you're a startup. 982 00:54:20,239 --> 00:54:23,080 Speaker 1: Don't worry about legacy effects, don't worry about what the 983 00:54:23,120 --> 00:54:25,759 Speaker 1: rest of the company thinks, because they're still thinking our 984 00:54:25,800 --> 00:54:29,560 Speaker 1: businesses computers, And because you can almost see the discussion 985 00:54:29,600 --> 00:54:32,239 Speaker 1: with Apple. Why are we wasting our time on this distraction. 986 00:54:32,280 --> 00:54:35,160 Speaker 1: We should be building a better Mac and trying to 987 00:54:35,200 --> 00:54:38,160 Speaker 1: get back into the PC business. No, Steve Jobs saw 988 00:54:38,160 --> 00:54:40,279 Speaker 1: the writing on the wall that the PC business was 989 00:54:40,360 --> 00:54:43,600 Speaker 1: not going to be the future. That if you fought 990 00:54:43,640 --> 00:54:46,160 Speaker 1: Microsoft in the PC business, you'd have the same result 991 00:54:46,200 --> 00:54:48,080 Speaker 1: you add in the previous decade. You're going to continue 992 00:54:48,120 --> 00:54:53,080 Speaker 1: to lose. But he gave the team the freedom to 993 00:54:53,200 --> 00:54:55,760 Speaker 1: make decisions, but he built on the strengths of Apple. 994 00:54:55,800 --> 00:54:57,720 Speaker 1: At the same time, he said, don't be a startup. 995 00:54:57,719 --> 00:55:00,640 Speaker 1: Act that that's a stranger to the company, drawn the 996 00:55:00,640 --> 00:55:03,239 Speaker 1: resource of the company. But make decisions as if you're 997 00:55:03,239 --> 00:55:06,640 Speaker 1: a startup. Satyn Adela did the same thing at Microsoft 998 00:55:07,239 --> 00:55:09,400 Speaker 1: when he came in, because this was a company with 999 00:55:09,440 --> 00:55:12,600 Speaker 1: two hits, office and windows that had never done another 1000 00:55:12,640 --> 00:55:15,080 Speaker 1: thing in their entire corporate life. That all the Zooon, 1001 00:55:15,200 --> 00:55:17,960 Speaker 1: to be fair of the Zooon was their ipodon, but 1002 00:55:18,080 --> 00:55:20,800 Speaker 1: but it never made None of the stuff would make money, 1003 00:55:21,000 --> 00:55:24,640 Speaker 1: never stop. And when he entered the cloud business, first 1004 00:55:24,640 --> 00:55:26,040 Speaker 1: thing he did was he said, we're not going to 1005 00:55:26,120 --> 00:55:29,040 Speaker 1: acquire our way into this business. That's not the way 1006 00:55:29,080 --> 00:55:31,000 Speaker 1: to grow because we're going to be throwing a lot 1007 00:55:31,040 --> 00:55:33,960 Speaker 1: of money in there, and we're going to build it 1008 00:55:34,000 --> 00:55:36,960 Speaker 1: because we have some strengths. We have people who know 1009 00:55:37,560 --> 00:55:40,600 Speaker 1: software really well. We're going to take those strengths. We're 1010 00:55:40,640 --> 00:55:43,080 Speaker 1: going to be patient, and we're going to act like 1011 00:55:43,160 --> 00:55:45,840 Speaker 1: this is again a standalone business. Don't worry about the 1012 00:55:45,840 --> 00:55:48,879 Speaker 1: effect on Office and Windows or what you're doing right. So, 1013 00:55:49,480 --> 00:55:51,520 Speaker 1: in my book on the Corporate life Cycle, one of 1014 00:55:51,520 --> 00:55:53,520 Speaker 1: the things I talk about a companies that go through 1015 00:55:53,560 --> 00:55:56,840 Speaker 1: rebots it's really difficult to do, and I talk about 1016 00:55:56,880 --> 00:55:58,920 Speaker 1: what they share in common, and one of the things 1017 00:55:58,960 --> 00:56:02,800 Speaker 1: I see is this willingness to be patient and build 1018 00:56:02,800 --> 00:56:05,600 Speaker 1: on internal strengths rather than be in a hurry and 1019 00:56:05,680 --> 00:56:09,719 Speaker 1: do an acquisition to enter business. But even within Microsoft, 1020 00:56:09,760 --> 00:56:14,840 Speaker 1: this is the reason I'm less optimistic about Activision doing 1021 00:56:14,880 --> 00:56:19,720 Speaker 1: well for Microsoft as I was about Microsoft's original cloud entry. 1022 00:56:19,760 --> 00:56:23,920 Speaker 1: What about before Cloud? What about Xbox? Are you saying 1023 00:56:24,120 --> 00:56:26,920 Speaker 1: Xbox never met any money to any money? Really? I 1024 00:56:26,960 --> 00:56:30,920 Speaker 1: mean it's ubiquitous. They gave Sony PlayStation and run for 1025 00:56:30,960 --> 00:56:33,440 Speaker 1: its money. They Google right, it's called itself alphabet. I 1026 00:56:33,520 --> 00:56:35,440 Speaker 1: think of it as snow white in the seven dwarfs 1027 00:56:35,520 --> 00:56:38,359 Speaker 1: because ninety percent plus of its revenues still come from 1028 00:56:38,400 --> 00:56:40,480 Speaker 1: the search box. Right. So we're going to come back 1029 00:56:40,480 --> 00:56:42,759 Speaker 1: to that because I want to talk more about life 1030 00:56:42,800 --> 00:56:46,200 Speaker 1: cycle in a few minutes. I want to come back 1031 00:56:46,239 --> 00:56:52,640 Speaker 1: to one last thing about college and education. And it's 1032 00:56:52,719 --> 00:56:54,760 Speaker 1: the big question that I'm sure a lot of people 1033 00:56:54,800 --> 00:56:58,319 Speaker 1: have been asking, which is we talk about costs, we 1034 00:56:58,400 --> 00:57:04,239 Speaker 1: talk about value proposition of higher education. From your perspective, 1035 00:57:04,560 --> 00:57:09,680 Speaker 1: is the modern college education as it exists today, is 1036 00:57:09,680 --> 00:57:14,520 Speaker 1: that still a decent value proposition for all students or 1037 00:57:14,600 --> 00:57:17,280 Speaker 1: only some students? It's a subset, right, I mean, I 1038 00:57:17,320 --> 00:57:19,880 Speaker 1: think if you think about it, is an economic proposition. 1039 00:57:20,040 --> 00:57:23,840 Speaker 1: It probably doesn't make sense for nine people to go 1040 00:57:23,880 --> 00:57:29,160 Speaker 1: out much for master's degrees, right undergraduate undergraduate, about half 1041 00:57:29,200 --> 00:57:33,720 Speaker 1: the people in my class probably don't don't need that 1042 00:57:33,920 --> 00:57:36,160 Speaker 1: degree to kind of really you know. So I think 1043 00:57:36,160 --> 00:57:41,200 Speaker 1: in a sense, you know, college education is you know, 1044 00:57:41,360 --> 00:57:45,200 Speaker 1: we overestimate the impact it's going to have enough future runnings. 1045 00:57:45,240 --> 00:57:47,040 Speaker 1: Even at the very best college you go to Yale, 1046 00:57:47,080 --> 00:57:49,800 Speaker 1: it does help you on that first job, but three 1047 00:57:49,880 --> 00:57:52,040 Speaker 1: or four years in, when they look at the differences 1048 00:57:52,080 --> 00:57:56,800 Speaker 1: across people, the differences in income start to the relationship 1049 00:57:56,880 --> 00:57:59,840 Speaker 1: to college. You went to starts to disappear. So if 1050 00:57:59,840 --> 00:58:02,880 Speaker 1: you ask me, can I educate myself today? We have 1051 00:58:02,960 --> 00:58:06,440 Speaker 1: the resources to do it we need I mean, you 1052 00:58:06,520 --> 00:58:08,760 Speaker 1: need to find the right player. You can't just take 1053 00:58:08,800 --> 00:58:12,600 Speaker 1: classes randomly. You can educate yourself. That's something we could 1054 00:58:12,640 --> 00:58:15,560 Speaker 1: not have done thirty years ago. That option exists for 1055 00:58:15,720 --> 00:58:18,840 Speaker 1: people who are self starters. But that's where the discipline 1056 00:58:18,880 --> 00:58:21,240 Speaker 1: part comes in. So maybe the startup you need an 1057 00:58:21,360 --> 00:58:24,560 Speaker 1: education is a startup that wakes you up at seven 1058 00:58:24,680 --> 00:58:28,040 Speaker 1: thirty in the morning and makes you reminds you that 1059 00:58:28,120 --> 00:58:30,320 Speaker 1: it's almost like you need that room. Because the reason 1060 00:58:30,360 --> 00:58:32,200 Speaker 1: you go to college is your roommate wakes up to 1061 00:58:32,240 --> 00:58:35,560 Speaker 1: go to college. He notices you're still sleeping and that 1062 00:58:35,640 --> 00:58:37,880 Speaker 1: you have a class at ten, and he nudges you saying, 1063 00:58:38,080 --> 00:58:40,440 Speaker 1: aren't you going to class? You might not wake up, 1064 00:58:40,960 --> 00:58:43,360 Speaker 1: but if you're guilty about going back to sleep because 1065 00:58:43,400 --> 00:58:47,400 Speaker 1: your roommate reminded you. If you can get that discipline 1066 00:58:47,440 --> 00:58:52,520 Speaker 1: component into this process, then I think online education can 1067 00:58:52,600 --> 00:58:55,880 Speaker 1: do just as good a job as a college education. 1068 00:58:56,000 --> 00:58:58,520 Speaker 1: And you can create your networks. You can create a networks. 1069 00:58:58,520 --> 00:59:01,040 Speaker 1: They don't have to be called networks. I don't think 1070 00:59:01,040 --> 00:59:03,120 Speaker 1: they're the healthiest networks in the world. To begin with, 1071 00:59:03,160 --> 00:59:06,800 Speaker 1: the fraternity you belong to, those might not be the 1072 00:59:06,840 --> 00:59:11,000 Speaker 1: best connections you have. It takes more work. We're still 1073 00:59:11,080 --> 00:59:14,320 Speaker 1: not quite there. I mean I'll give I'll make it personally. 1074 00:59:14,320 --> 00:59:16,400 Speaker 1: One of my kids said, should I go to college, 1075 00:59:16,440 --> 00:59:19,760 Speaker 1: I'd probably still encourage them to do it. I'd encourage 1076 00:59:19,800 --> 00:59:22,560 Speaker 1: them to go to college on a scholarship if they could, 1077 00:59:22,600 --> 00:59:25,040 Speaker 1: and would pick a lesser college in the college that 1078 00:59:25,080 --> 00:59:28,280 Speaker 1: they get into that they might be the top pick. Really, 1079 00:59:29,040 --> 00:59:32,240 Speaker 1: because I think that paying two hundred and twenty five 1080 00:59:32,280 --> 00:59:34,680 Speaker 1: thousand dollars or two fifty thousand dollars for a four 1081 00:59:34,760 --> 00:59:38,960 Speaker 1: year university education, even if it's at a very top university, 1082 00:59:39,160 --> 00:59:43,480 Speaker 1: I can't see the payoff from that economically. No, I'd 1083 00:59:43,560 --> 00:59:45,560 Speaker 1: much rather that you went to a lesser school, spent 1084 00:59:45,600 --> 00:59:49,760 Speaker 1: the four years there, created and have you know all 1085 00:59:49,880 --> 00:59:52,560 Speaker 1: the other stuff that comes to the package, that college 1086 00:59:52,600 --> 00:59:55,480 Speaker 1: football that you go to and riding out with friends 1087 00:59:56,200 --> 00:59:59,240 Speaker 1: and pay fifty thousands of two fifty thousand, because think 1088 00:59:59,280 --> 01:00:01,400 Speaker 1: of what that extra two hundred thousand can do for 1089 01:00:01,480 --> 01:00:04,440 Speaker 1: you in the rest of your life. So now I 1090 01:00:04,480 --> 01:00:06,439 Speaker 1: think that might be the place to start is rather 1091 01:00:06,520 --> 01:00:09,440 Speaker 1: than talking people away from a college education, ask why 1092 01:00:09,440 --> 01:00:11,160 Speaker 1: are you spending so much? Is their way you can 1093 01:00:11,160 --> 01:00:13,400 Speaker 1: bring it down. And the suggestion you made of these 1094 01:00:13,480 --> 01:00:17,000 Speaker 1: hybrid models that might be well worth considering as an 1095 01:00:17,040 --> 01:00:19,920 Speaker 1: alternative to going to a four year university and paying 1096 01:00:19,960 --> 01:00:23,880 Speaker 1: for every single year. Well arguably senior writers the fourth year. 1097 01:00:24,560 --> 01:00:27,120 Speaker 1: Perhaps if you're gonna, if you're gonna give something up, 1098 01:00:27,160 --> 01:00:30,320 Speaker 1: you get rid of that early on. Let's talk a 1099 01:00:30,320 --> 01:00:34,520 Speaker 1: little bit about the corporate life cycle and valuations. But 1100 01:00:34,600 --> 01:00:36,640 Speaker 1: I want to start with a little bit of twists. 1101 01:00:37,080 --> 01:00:40,840 Speaker 1: This was a very short life cycle. I actually thought 1102 01:00:40,880 --> 01:00:46,800 Speaker 1: of you when the whole meme stock game Stop AMC 1103 01:00:47,160 --> 01:00:50,680 Speaker 1: hurts blew up, and I just imagine what you were thinking. 1104 01:00:50,720 --> 01:00:54,360 Speaker 1: Here we go again. What was that period like in 1105 01:00:54,400 --> 01:00:57,160 Speaker 1: twenty twenty and twenty one, and what were your thoughts 1106 01:00:57,200 --> 01:01:00,760 Speaker 1: about what was going on? You know when Game Stop 1107 01:01:01,240 --> 01:01:03,480 Speaker 1: took off, I know it went from twenty dollars to 1108 01:01:03,560 --> 01:01:06,600 Speaker 1: four hundred dollars. It obviously caught my attention because if 1109 01:01:06,640 --> 01:01:09,320 Speaker 1: you think about it, and twenty dollars, it was three 1110 01:01:09,400 --> 01:01:12,240 Speaker 1: or four the short sellers. Basically, it seemed on a 1111 01:01:12,280 --> 01:01:14,520 Speaker 1: pathway to zero. It seemed that like that was going 1112 01:01:14,560 --> 01:01:16,640 Speaker 1: to be the endgame. And then all of a sudden 1113 01:01:16,680 --> 01:01:19,560 Speaker 1: you had this group on red at the Wall Street bets, 1114 01:01:19,560 --> 01:01:22,440 Speaker 1: and then of course you had the push up. You 1115 01:01:22,480 --> 01:01:24,880 Speaker 1: know that they collectively did. I call this the first 1116 01:01:24,920 --> 01:01:28,440 Speaker 1: crowd shot in history, right, because usually when I'm sort 1117 01:01:28,480 --> 01:01:32,240 Speaker 1: of crowd shot squeeze in history, because historically short squeeze 1118 01:01:32,280 --> 01:01:36,000 Speaker 1: has come from rich people deciding to squeeze other rich people, right, 1119 01:01:36,040 --> 01:01:38,080 Speaker 1: I mean that's basically how it happens here at a 1120 01:01:38,160 --> 01:01:41,040 Speaker 1: collection of people. So it's very much a twenty first 1121 01:01:41,040 --> 01:01:44,440 Speaker 1: century phenomenon. In fact, it's a phenomenon that's a social 1122 01:01:44,440 --> 01:01:47,360 Speaker 1: media phenomenon because if you think about twenty years ago, 1123 01:01:47,400 --> 01:01:50,400 Speaker 1: you couldn't even have gathered together. There's many people in 1124 01:01:50,480 --> 01:01:53,760 Speaker 1: the town square. So when that happened, as you know, 1125 01:01:53,920 --> 01:01:56,400 Speaker 1: part of me said, this has happened before, so I'm 1126 01:01:56,400 --> 01:02:00,280 Speaker 1: not going to get extra hot unto the call it 1127 01:02:00,400 --> 01:02:03,000 Speaker 1: because of it. Clearly, this has nothing to do with value. 1128 01:02:03,040 --> 01:02:05,520 Speaker 1: It's got to do with mood and momentum. But that's 1129 01:02:05,560 --> 01:02:08,480 Speaker 1: not new markets have always been driven by mood and momentum. 1130 01:02:08,640 --> 01:02:10,760 Speaker 1: But what social media has run and this I think 1131 01:02:10,800 --> 01:02:13,560 Speaker 1: is a more general point I would make is it's 1132 01:02:13,600 --> 01:02:16,800 Speaker 1: made mood and momentum stronger, right, because you were able 1133 01:02:16,840 --> 01:02:20,440 Speaker 1: to gather together a crowd, a much larger audience. You know, 1134 01:02:20,520 --> 01:02:24,040 Speaker 1: I remember reading this book a bit of extraordinary. You 1135 01:02:24,120 --> 01:02:28,360 Speaker 1: might have read about popular Delusions to the Crowd book 1136 01:02:28,440 --> 01:02:32,080 Speaker 1: Charles Mackie, you know Mackie, and he talked about how 1137 01:02:32,200 --> 01:02:35,800 Speaker 1: in the south Sea Bubbles, you know, you created news stories. 1138 01:02:35,800 --> 01:02:38,560 Speaker 1: You went to a pub, you acted like you were drunk, 1139 01:02:39,320 --> 01:02:43,520 Speaker 1: and then you you blurted out what you you know, 1140 01:02:43,520 --> 01:02:47,000 Speaker 1: what you said were secrets about south Sea that nobody 1141 01:02:47,040 --> 01:02:50,040 Speaker 1: should know, and then other people in the pub heard you, 1142 01:02:50,120 --> 01:02:52,000 Speaker 1: and they went and bought the shares. And I thought 1143 01:02:52,040 --> 01:02:54,520 Speaker 1: the original social and I originally wrote about when I 1144 01:02:54,520 --> 01:02:57,000 Speaker 1: wrote about CNBC thirty years ago, I said, this is 1145 01:02:57,280 --> 01:02:59,920 Speaker 1: today or twenty years ago, I said, this is today's pub, 1146 01:03:00,480 --> 01:03:03,080 Speaker 1: which is you go on CNBC, you say, look, I'm 1147 01:03:03,080 --> 01:03:05,080 Speaker 1: going to tell you a secret just between you and 1148 01:03:05,120 --> 01:03:09,160 Speaker 1: I ing and then so but if you think about 1149 01:03:09,200 --> 01:03:12,080 Speaker 1: social media, that now has become the place you go. 1150 01:03:12,160 --> 01:03:16,840 Speaker 1: You go to. So you said mood momentum, and there's right, 1151 01:03:16,920 --> 01:03:20,480 Speaker 1: there's narrative there also because all these are stories. At 1152 01:03:20,520 --> 01:03:23,280 Speaker 1: the core, there is usually a story that makes sense. 1153 01:03:23,360 --> 01:03:26,560 Speaker 1: Even the stupidest push ups are driven by a core 1154 01:03:26,680 --> 01:03:30,040 Speaker 1: story that has that's some truth loosely based. So for 1155 01:03:30,080 --> 01:03:32,640 Speaker 1: you can, for instance, you could argue that GameStop has 1156 01:03:33,440 --> 01:03:36,800 Speaker 1: has potential in the online gaming market. Right, I have 1157 01:03:36,840 --> 01:03:39,000 Speaker 1: a collection of data of people have shopped at the 1158 01:03:39,040 --> 01:03:41,120 Speaker 1: store that they're going to build on it, and that 1159 01:03:41,240 --> 01:03:43,560 Speaker 1: a new guy comes in who's done this with an 1160 01:03:43,560 --> 01:03:47,480 Speaker 1: online or well, and that's in fact, one of the 1161 01:03:47,520 --> 01:03:49,520 Speaker 1: things you find at the core is there's a core 1162 01:03:49,680 --> 01:03:52,600 Speaker 1: story that is true. You've just come up with a 1163 01:03:52,760 --> 01:03:56,520 Speaker 1: number that has completely no relationship in the magnitude of 1164 01:03:56,560 --> 01:04:00,560 Speaker 1: that story. So it's something that it's happened and before. 1165 01:04:00,640 --> 01:04:03,160 Speaker 1: But what it shows you is with social media, how 1166 01:04:03,280 --> 01:04:06,080 Speaker 1: much what might have been a twenty percent bubble can 1167 01:04:06,120 --> 01:04:10,280 Speaker 1: become a hundred percent bubble in the social media age. 1168 01:04:10,640 --> 01:04:13,560 Speaker 1: And so it was actually interesting watching a playout. I 1169 01:04:13,600 --> 01:04:16,440 Speaker 1: actually went to the Reddit site where there because I 1170 01:04:16,480 --> 01:04:19,800 Speaker 1: wanted to see what rational people were giving each other 1171 01:04:20,640 --> 01:04:23,400 Speaker 1: for buying the shares. And for people who don't play 1172 01:04:23,440 --> 01:04:26,479 Speaker 1: on Reddit, you register it Reddit. You could up vote 1173 01:04:26,560 --> 01:04:29,120 Speaker 1: or down voting stories and so all these things bubble 1174 01:04:29,200 --> 01:04:32,800 Speaker 1: up to the top where the crowd is enthusiastic about it. 1175 01:04:32,800 --> 01:04:35,959 Speaker 1: It's very much bubble ishous. So I was the question 1176 01:04:35,960 --> 01:04:38,760 Speaker 1: I was asking was what is the core reason or 1177 01:04:38,760 --> 01:04:41,000 Speaker 1: the driver of this and it seemed to be revenge 1178 01:04:41,520 --> 01:04:45,240 Speaker 1: revenge in what sense the core reason people were giving 1179 01:04:45,280 --> 01:04:47,880 Speaker 1: for buying GameStop had nothing to do with game Stop. 1180 01:04:48,000 --> 01:04:50,800 Speaker 1: It's because they wanted to get back at the hedge funds. 1181 01:04:50,880 --> 01:04:53,200 Speaker 1: That was, we're going to bring the hedge funds down, 1182 01:04:53,560 --> 01:04:55,920 Speaker 1: which is interesting because some of the biggest hedge funds 1183 01:04:56,280 --> 01:04:59,000 Speaker 1: were making money from this were on the other side 1184 01:04:59,040 --> 01:05:01,120 Speaker 1: of the day. And for order, the more you trade 1185 01:05:01,160 --> 01:05:03,520 Speaker 1: the better than It's a human emotion revenge, and here 1186 01:05:03,600 --> 01:05:05,440 Speaker 1: you have a collection of people saying we're going to 1187 01:05:05,520 --> 01:05:08,800 Speaker 1: take revenge by pushing up the price of game Stop 1188 01:05:08,880 --> 01:05:11,640 Speaker 1: and Drive. And you still see this phenomenon AMC or 1189 01:05:11,680 --> 01:05:14,520 Speaker 1: seeing the phenomenon bed Bath and beyond, you saw the phenomenon. 1190 01:05:15,120 --> 01:05:18,040 Speaker 1: This is something that seems to play out and it's 1191 01:05:18,160 --> 01:05:22,160 Speaker 1: usually younger people who have an emotional connected If you 1192 01:05:22,160 --> 01:05:24,400 Speaker 1: look at the big companies that are in the meme phase, 1193 01:05:24,480 --> 01:05:27,280 Speaker 1: you know, you see you see game Stop, you see AMC. 1194 01:05:27,520 --> 01:05:30,280 Speaker 1: You see bed Bath and beyond. It's almost like you 1195 01:05:30,320 --> 01:05:33,360 Speaker 1: can see thirty five year olds with nostalgia for the 1196 01:05:33,520 --> 01:05:37,280 Speaker 1: malls they used to visit fifteen years ago, and then 1197 01:05:37,280 --> 01:05:41,040 Speaker 1: we're going to save this piece of our past. So 1198 01:05:41,080 --> 01:05:44,000 Speaker 1: it's interesting there is a collection of things coming together 1199 01:05:44,040 --> 01:05:47,000 Speaker 1: in the meme stock phenomenon, but it's just a it's 1200 01:05:47,040 --> 01:05:50,240 Speaker 1: an old phenomenon that's replaying out there. So I won't 1201 01:05:50,280 --> 01:05:53,480 Speaker 1: blame the investors, the traders. Let's not use the word investors, 1202 01:05:53,560 --> 01:05:57,680 Speaker 1: the traders in these stocks for doing something that is irrational. 1203 01:05:58,400 --> 01:06:00,880 Speaker 1: I think it just reflects you, man, It's always going 1204 01:06:00,920 --> 01:06:03,400 Speaker 1: to be with us. So now let's let's talk a 1205 01:06:03,440 --> 01:06:08,040 Speaker 1: little bit about some life cycle stocks, some companies that 1206 01:06:08,560 --> 01:06:11,640 Speaker 1: seem to have really gotten shellacked over the past couple 1207 01:06:11,640 --> 01:06:15,960 Speaker 1: of years. I'm curious as to your perspective. One of 1208 01:06:16,000 --> 01:06:19,320 Speaker 1: the things I noticed, so Amazon had a terrible twenty 1209 01:06:19,360 --> 01:06:23,000 Speaker 1: twenty two, as did a number of other companies. But 1210 01:06:23,080 --> 01:06:26,480 Speaker 1: a lot of people don't realize twenty twenty one, when 1211 01:06:26,480 --> 01:06:30,080 Speaker 1: the market was SMP was up twenty eight percent, Amazon 1212 01:06:30,240 --> 01:06:33,080 Speaker 1: was flat up a percent or two. What's going on 1213 01:06:33,160 --> 01:06:36,880 Speaker 1: with Amazon in their life cycle? Why do they suddenly 1214 01:06:36,920 --> 01:06:39,520 Speaker 1: seem to have lost their mojo. I think that that 1215 01:06:40,840 --> 01:06:43,600 Speaker 1: if you think about pricing, is driven by mood and momentum. 1216 01:06:43,760 --> 01:06:46,080 Speaker 1: Come easy, go easy, And I think, in a sense, 1217 01:06:46,080 --> 01:06:48,000 Speaker 1: to complete the story, you need to bring in what 1218 01:06:48,080 --> 01:06:51,280 Speaker 1: happened in twenty nine. In fact, the previous decade in 1219 01:06:51,400 --> 01:06:55,680 Speaker 1: these fangam stocks, which was too amazing. One out of 1220 01:06:55,680 --> 01:06:59,040 Speaker 1: every six dollars in value in an increase in value 1221 01:06:59,080 --> 01:07:01,480 Speaker 1: that came to market. Increase in market cap during the 1222 01:07:01,520 --> 01:07:05,880 Speaker 1: last decade happened in Jesse six sixteen percent. One in 1223 01:07:05,960 --> 01:07:09,440 Speaker 1: six dollars. Those six companies accounted for sixteen percent of 1224 01:07:09,520 --> 01:07:12,160 Speaker 1: the increase in market cap of seven thousand, five hundred 1225 01:07:12,200 --> 01:07:14,840 Speaker 1: US stocks. With the implication of that is, if you 1226 01:07:14,840 --> 01:07:17,280 Speaker 1: spend the entire decade with none of these stocks in 1227 01:07:17,320 --> 01:07:20,200 Speaker 1: your portfolio, I don't see any way in which you 1228 01:07:20,280 --> 01:07:23,560 Speaker 1: could have created any kind of positive outfit. Right. It's 1229 01:07:23,640 --> 01:07:26,480 Speaker 1: almost like you had to have at least one, hopefully 1230 01:07:26,520 --> 01:07:29,680 Speaker 1: more than one. So you're coming off a decade where 1231 01:07:29,680 --> 01:07:33,400 Speaker 1: you've added trillions of dollars of market cap, often based 1232 01:07:33,480 --> 01:07:38,600 Speaker 1: on flimsy stories that you don't carry through Netflix, we 1233 01:07:38,640 --> 01:07:41,840 Speaker 1: can keep adding subscribers. Nobody seemed to ask a question. 1234 01:07:41,960 --> 01:07:43,560 Speaker 1: You're going to run out of people on the face 1235 01:07:43,560 --> 01:07:46,160 Speaker 1: of the earth before you add subscribes, or get competitors, 1236 01:07:46,280 --> 01:07:48,960 Speaker 1: or get competison co top of it. So, in a sense, 1237 01:07:48,960 --> 01:07:51,200 Speaker 1: the last two years I don't think of as a 1238 01:07:51,200 --> 01:07:54,600 Speaker 1: big drop off in value. It's a return to some 1239 01:07:54,720 --> 01:07:58,120 Speaker 1: degree of sanity. Now some companies like Apple and Microsoft 1240 01:07:58,240 --> 01:08:02,920 Speaker 1: seem to have held up much better than Tesla, Netflix. 1241 01:08:03,200 --> 01:08:07,920 Speaker 1: I'll leave out the pelotins and the purely lockdown stocks, 1242 01:08:08,000 --> 01:08:15,280 Speaker 1: but Amazon had a great run. Bezos retires, and personally, 1243 01:08:16,120 --> 01:08:20,360 Speaker 1: I'm a giant Amazon user since my college roommate gave 1244 01:08:20,400 --> 01:08:24,600 Speaker 1: me a gift certificate sometime in the nineties, and I 1245 01:08:24,800 --> 01:08:28,599 Speaker 1: now I'm very comfortable putting my credit card elsewhere. Hey, 1246 01:08:28,760 --> 01:08:30,759 Speaker 1: what's the worst you can do? You lose fifty dollars 1247 01:08:31,280 --> 01:08:35,000 Speaker 1: and the site you search for something on Amazon, the 1248 01:08:35,040 --> 01:08:39,320 Speaker 1: first five results are ads. It's festooned with garbage. It 1249 01:08:39,479 --> 01:08:42,320 Speaker 1: was once the go to site and now it's like 1250 01:08:42,680 --> 01:08:46,760 Speaker 1: constantly disappointing. Is that just my subjective view or is 1251 01:08:46,840 --> 01:08:50,120 Speaker 1: Amazon now at the point in their life cycle where 1252 01:08:50,280 --> 01:08:53,439 Speaker 1: delighting the customer is no longer their priority. I think 1253 01:08:53,439 --> 01:08:55,880 Speaker 1: they took their eye off the ball. I mean, let's 1254 01:08:55,920 --> 01:08:58,880 Speaker 1: face it, Amazon started as a retail company. They built 1255 01:08:58,880 --> 01:09:01,479 Speaker 1: their reputation as an arm line retail company. About ten 1256 01:09:01,560 --> 01:09:04,519 Speaker 1: years ago. When I valued Amazon, I described it as 1257 01:09:04,560 --> 01:09:07,479 Speaker 1: a disruption platform and otherwise I said, this is no 1258 01:09:07,560 --> 01:09:11,080 Speaker 1: longer a company that thinks of retail as its core business. 1259 01:09:11,200 --> 01:09:14,639 Speaker 1: It's going to disrupt any company in any business if 1260 01:09:14,680 --> 01:09:16,840 Speaker 1: it feels are soft spots. And in a sense, you've 1261 01:09:16,840 --> 01:09:22,559 Speaker 1: seen Amazon's actions over the decade reflect that. So cloud, cloud, advertising, search, 1262 01:09:22,640 --> 01:09:25,200 Speaker 1: what else is Amazon doing well side of retail? Well, 1263 01:09:25,360 --> 01:09:28,360 Speaker 1: logistics right there. So in a sense they're bringing in 1264 01:09:28,439 --> 01:09:32,920 Speaker 1: businesses that you might have viewed as online payments, online payment, 1265 01:09:33,479 --> 01:09:36,559 Speaker 1: in healthcare. They have little experiments that they're running. So 1266 01:09:37,120 --> 01:09:39,400 Speaker 1: the only problem is when you're looking at that many 1267 01:09:39,479 --> 01:09:43,280 Speaker 1: different businesses, it's difficult to keep focus. And I think 1268 01:09:43,320 --> 01:09:46,080 Speaker 1: that you see this with the Alexa write offs. They're 1269 01:09:46,120 --> 01:09:49,479 Speaker 1: taking uses. What exactly was the endgame at the Alexa 1270 01:09:49,600 --> 01:09:51,719 Speaker 1: What were you trying to do? I was never quite 1271 01:09:51,760 --> 01:09:54,240 Speaker 1: clear and what Alexa was supposed to do. You want 1272 01:09:54,280 --> 01:09:57,840 Speaker 1: to be in the forefront of voice as an input device, right, 1273 01:09:57,920 --> 01:09:59,439 Speaker 1: and but then how do you make red? So what 1274 01:09:59,600 --> 01:10:01,960 Speaker 1: is the revenue base, which is, you know, which is 1275 01:10:02,000 --> 01:10:04,880 Speaker 1: a weakness at many technos that that Amazon did not 1276 01:10:05,120 --> 01:10:06,800 Speaker 1: used to have. I used to describe Amazon as a 1277 01:10:06,800 --> 01:10:09,320 Speaker 1: company the rent for revenues first, but always had this 1278 01:10:09,439 --> 01:10:11,840 Speaker 1: ie on long term, this is what we want to do. 1279 01:10:12,560 --> 01:10:14,840 Speaker 1: And some of the stuff they've done over the last 1280 01:10:14,880 --> 01:10:18,040 Speaker 1: few years, I'm not sure what their endgame is other 1281 01:10:18,160 --> 01:10:21,880 Speaker 1: than will have more people in our ecosystem. So I 1282 01:10:22,000 --> 01:10:24,800 Speaker 1: think that that Amazon took their eye off the ball, 1283 01:10:24,880 --> 01:10:29,200 Speaker 1: and you're right, their retail side has become just you know, 1284 01:10:29,280 --> 01:10:31,360 Speaker 1: there's a lot of chaos going on there. I don't 1285 01:10:31,400 --> 01:10:39,840 Speaker 1: trust Amazon reviews anymore because basically the reviews exactly. I 1286 01:10:39,960 --> 01:10:43,519 Speaker 1: think Amazon needs to return to that core business and 1287 01:10:44,000 --> 01:10:46,920 Speaker 1: kind of make sure that it's cleaned up to get 1288 01:10:47,040 --> 01:10:50,320 Speaker 1: back the customers. But you know, and but they still 1289 01:10:50,360 --> 01:10:53,360 Speaker 1: have that disruption army, right, Amazon Prime, and I think 1290 01:10:53,479 --> 01:10:56,320 Speaker 1: that they need to make sure that they're not putting 1291 01:10:56,360 --> 01:10:59,720 Speaker 1: the loyalty of those Prime numbers to the test, but 1292 01:11:00,280 --> 01:11:02,439 Speaker 1: close and I think they need to be careful. I 1293 01:11:02,560 --> 01:11:04,719 Speaker 1: think that's part of what the market's doing is sending 1294 01:11:04,760 --> 01:11:07,200 Speaker 1: them a warning. Let's see if they listen. So let's 1295 01:11:07,240 --> 01:11:10,439 Speaker 1: talk about Google. When the first time I use Google, 1296 01:11:11,880 --> 01:11:14,920 Speaker 1: I want to say it was two thousand and one 1297 01:11:15,040 --> 01:11:18,040 Speaker 1: or two thousand and two when it was just so simple. 1298 01:11:18,760 --> 01:11:24,120 Speaker 1: Nothing was close. It absolutely dominated. The results were great. 1299 01:11:24,320 --> 01:11:29,120 Speaker 1: It was Google. No one's even second or third everybody else, 1300 01:11:29,160 --> 01:11:33,479 Speaker 1: and they completely upended the search market. You go to 1301 01:11:33,600 --> 01:11:37,880 Speaker 1: Google Search now and it's junk, like your first five 1302 01:11:38,000 --> 01:11:41,479 Speaker 1: results are garbage. They try and send you to Google 1303 01:11:41,600 --> 01:11:45,200 Speaker 1: properties like they are ripe for someone to come along 1304 01:11:45,720 --> 01:11:49,160 Speaker 1: with the equivalent of page rank and put that. But 1305 01:11:49,479 --> 01:11:53,120 Speaker 1: I still like Google Calendar and Google Drive, and then 1306 01:11:53,439 --> 01:11:55,600 Speaker 1: they make money on right Gina all the stuff they 1307 01:11:55,720 --> 01:12:00,280 Speaker 1: do that keeps you in there their ecosystem. But let's 1308 01:12:00,320 --> 01:12:04,720 Speaker 1: be honest, Google Search is completely polluted. It's garbage. They 1309 01:12:04,720 --> 01:12:08,160 Speaker 1: are a handful of nonprofit competitors that do a much 1310 01:12:08,240 --> 01:12:12,040 Speaker 1: better job. Again, is this just are all these companies 1311 01:12:12,240 --> 01:12:17,400 Speaker 1: inevitably we're gonna eat our seed corn, We're gonna over 1312 01:12:17,640 --> 01:12:22,880 Speaker 1: monetize our core customers. So Microsoft hasn't really done that. 1313 01:12:23,479 --> 01:12:26,519 Speaker 1: Apple hasn't really done that. Although to be fair, I'm 1314 01:12:26,560 --> 01:12:29,280 Speaker 1: a long time Mac user and Apple, you know they 1315 01:12:29,400 --> 01:12:31,840 Speaker 1: nickel and dime you for everything from courts this that 1316 01:12:32,720 --> 01:12:38,000 Speaker 1: they just haven't it hasn't boomeranged on them. Facebook another 1317 01:12:38,040 --> 01:12:41,160 Speaker 1: company that seems to have blown itself up. I think 1318 01:12:41,520 --> 01:12:44,559 Speaker 1: it's almost built at every company's DNA that they will 1319 01:12:44,600 --> 01:12:47,400 Speaker 1: blow themselves up. It's in nature. That's why. That's why 1320 01:12:47,520 --> 01:12:51,200 Speaker 1: life cycles, which is, as you age, you look back 1321 01:12:51,280 --> 01:12:54,080 Speaker 1: with nostalgia at what you used to be able to 1322 01:12:54,160 --> 01:12:55,680 Speaker 1: do when your twenty five, and then you make the 1323 01:12:55,720 --> 01:12:58,400 Speaker 1: stupid mistake of thinking that if you spend enough money 1324 01:12:58,439 --> 01:13:01,439 Speaker 1: you can go back to being twenty five. Have any questions, 1325 01:13:01,520 --> 01:13:04,240 Speaker 1: you know, you can try paying a plastic surgeon to 1326 01:13:04,320 --> 01:13:08,000 Speaker 1: get a gravity works. Its magic anyway. And companies do 1327 01:13:08,120 --> 01:13:11,560 Speaker 1: the same thing, which is they're constantly trying to rediscover 1328 01:13:11,680 --> 01:13:16,360 Speaker 1: their youth. But eventually you get middle aged Facebook, Google, Apple, 1329 01:13:16,880 --> 01:13:19,280 Speaker 1: an entire group of companies a middle aged companies that 1330 01:13:19,439 --> 01:13:21,760 Speaker 1: I mean, that's not bad. They've had they've had a 1331 01:13:21,880 --> 01:13:25,439 Speaker 1: great younger life, but they have to recognize in your 1332 01:13:25,520 --> 01:13:28,280 Speaker 1: middle aged you don't overreach. You don't jump out of bed, 1333 01:13:28,680 --> 01:13:32,280 Speaker 1: You very gingerly step out of bed. Because you jump 1334 01:13:32,320 --> 01:13:34,439 Speaker 1: out of bed twenty three, you're okay, you land on 1335 01:13:34,479 --> 01:13:36,439 Speaker 1: your feet, you jump out of bed, and your fifty five, 1336 01:13:36,760 --> 01:13:39,240 Speaker 1: who knows where you will Land right. So I think 1337 01:13:39,360 --> 01:13:42,000 Speaker 1: one of the points I've always made is companies need 1338 01:13:42,200 --> 01:13:45,560 Speaker 1: to act their age. Apple and Apple and Microsoft have 1339 01:13:45,800 --> 01:13:49,280 Speaker 1: tended to act their age. They seem to have adapted 1340 01:13:49,320 --> 01:13:53,639 Speaker 1: to being mature company and they know what their limitations are, 1341 01:13:53,760 --> 01:13:56,840 Speaker 1: and they're it's made me pure coincidence, but they're the 1342 01:13:56,960 --> 01:14:01,280 Speaker 1: oldest companies in this group. They've lived through pains before, right. 1343 01:14:01,720 --> 01:14:04,920 Speaker 1: Apple has lived with a newer death experience. Microsoft is 1344 01:14:04,960 --> 01:14:08,120 Speaker 1: seeing what happens when your existing projects age. So in 1345 01:14:08,200 --> 01:14:11,560 Speaker 1: a sense, they've learned the lessons from this, saying we 1346 01:14:11,800 --> 01:14:14,439 Speaker 1: need to be more careful about how we behave because 1347 01:14:14,479 --> 01:14:17,520 Speaker 1: we're all the companies. Google and Facebook are young companies 1348 01:14:17,560 --> 01:14:22,559 Speaker 1: in terms of chronological age, and so the people running Google, 1349 01:14:22,800 --> 01:14:26,200 Speaker 1: it's not some distant memory. They remember when they were 1350 01:14:26,760 --> 01:14:29,800 Speaker 1: at peak age. Right twenty seventeen, you looked at Google 1351 01:14:29,840 --> 01:14:32,200 Speaker 1: and Facebook. I remember being in a discussion with my 1352 01:14:32,280 --> 01:14:34,040 Speaker 1: friend Scott Galloway and he said, we've got to break 1353 01:14:34,120 --> 01:14:35,960 Speaker 1: up these companies. They're going to dominate the world. And 1354 01:14:36,000 --> 01:14:38,760 Speaker 1: as it, Scott, you don't have to break them up. 1355 01:14:38,880 --> 01:14:43,200 Speaker 1: They will do it themselves. They will overreach. It's going 1356 01:14:43,240 --> 01:14:46,080 Speaker 1: to be much more effective than any regulated doing it 1357 01:14:47,080 --> 01:14:49,960 Speaker 1: so your pathway to face. Because he's worried about Facebook 1358 01:14:50,000 --> 01:14:52,760 Speaker 1: taking over the world. I said, don't worry, it'll eventually. 1359 01:14:53,080 --> 01:14:55,759 Speaker 1: And this has been the case with technology companies especially, 1360 01:14:56,280 --> 01:14:59,360 Speaker 1: They will overreach, and they that overreach will be what 1361 01:14:59,640 --> 01:15:03,720 Speaker 1: brings them back to it. When we when Galloway and 1362 01:15:03,760 --> 01:15:06,720 Speaker 1: I talked about the four, one of the questions we 1363 01:15:06,960 --> 01:15:10,479 Speaker 1: discussed was of the four, which do you think is 1364 01:15:10,640 --> 01:15:13,880 Speaker 1: most likely to stumble first? And I thought it was 1365 01:15:13,960 --> 01:15:18,080 Speaker 1: obvious that Facebook was part of a much shorter cycle. 1366 01:15:18,520 --> 01:15:21,479 Speaker 1: We had gone through Friendster and MySpace and Facebook and 1367 01:15:21,520 --> 01:15:26,120 Speaker 1: now Twitter and Instagram and TikTok. They got very lucky 1368 01:15:26,160 --> 01:15:31,360 Speaker 1: with some great acquisitions, but it was it was pretty 1369 01:15:31,400 --> 01:15:35,400 Speaker 1: clear that Microsoft and Apple both learned how to adopt. 1370 01:15:35,560 --> 01:15:37,600 Speaker 1: One of the interesting things I wanted to ask you 1371 01:15:37,680 --> 01:15:42,320 Speaker 1: about those two companies. Each of those companies had a 1372 01:15:42,439 --> 01:15:45,840 Speaker 1: bit of a crisis, obviously much worse at Apple if 1373 01:15:45,840 --> 01:15:50,800 Speaker 1: you remember the famous wired cover Prey with the crown 1374 01:15:50,840 --> 01:15:54,880 Speaker 1: of thorns around the apple. But in each case a 1375 01:15:55,080 --> 01:15:59,479 Speaker 1: new CEO first, the return of Steve Jobs replaced a 1376 01:15:59,560 --> 01:16:02,320 Speaker 1: flown in CEO, and the same thing with Saria Nadella 1377 01:16:02,800 --> 01:16:07,360 Speaker 1: replacing Steve Balmer who really seemed to have lost the thread. 1378 01:16:07,960 --> 01:16:10,960 Speaker 1: How important is it for a mature company to have 1379 01:16:11,680 --> 01:16:15,959 Speaker 1: a mature CEO to come in and maximize their assets. 1380 01:16:16,520 --> 01:16:21,200 Speaker 1: That's not age inappropriate. That's not the fifty five year 1381 01:16:21,240 --> 01:16:26,040 Speaker 1: old wearing the kid's clothes and looking completely We call 1382 01:16:26,120 --> 01:16:30,200 Speaker 1: it AI age inappropriate. I think, I mean, I think 1383 01:16:30,200 --> 01:16:33,759 Speaker 1: you're raising a very interesting and a big point about 1384 01:16:33,840 --> 01:16:36,880 Speaker 1: corporate governance and how we change management. I mean, one 1385 01:16:36,960 --> 01:16:39,479 Speaker 1: of the chapters in my book is about who's the 1386 01:16:39,600 --> 01:16:41,840 Speaker 1: right CEO for your company? Because if you listen to 1387 01:16:41,960 --> 01:16:45,520 Speaker 1: McKinsey and Harvard Business Review, they claimed the twenty three characteristics. 1388 01:16:46,240 --> 01:16:49,000 Speaker 1: That's not true. The right CEO for your company will 1389 01:16:49,040 --> 01:16:51,320 Speaker 1: depend on where you're in the life cycle. You're a startup, 1390 01:16:51,560 --> 01:16:54,439 Speaker 1: you want a storyteller. You want a visionary. Why because 1391 01:16:54,520 --> 01:16:56,400 Speaker 1: you got to get people to buy into your story. 1392 01:16:56,479 --> 01:17:00,360 Speaker 1: Your employees, your investors, your customers. You need to let's 1393 01:17:00,360 --> 01:17:03,720 Speaker 1: call that person Steve the visionary. Then you get to 1394 01:17:03,840 --> 01:17:06,840 Speaker 1: this space where you're building a business. Now you've gone 1395 01:17:06,880 --> 01:17:09,960 Speaker 1: from vision. You need somebody pragmatic because if you have 1396 01:17:10,040 --> 01:17:12,720 Speaker 1: a visionary, he says, I want this perfectly the way 1397 01:17:12,840 --> 01:17:15,360 Speaker 1: my vision tells me, you're never going to get off 1398 01:17:15,400 --> 01:17:19,400 Speaker 1: the ground. You need you need a builder. Let's call 1399 01:17:19,439 --> 01:17:22,200 Speaker 1: it Bob the Builder. If you want Brianna the builder, 1400 01:17:22,240 --> 01:17:24,200 Speaker 1: if you want to stop being sexed and make the 1401 01:17:24,280 --> 01:17:27,360 Speaker 1: CEO of you know, somebody of the other sex. Then 1402 01:17:27,640 --> 01:17:29,240 Speaker 1: you get to this face where you get to be 1403 01:17:29,280 --> 01:17:32,439 Speaker 1: a mature company. You need don the defenders. Somebody's who's 1404 01:17:32,720 --> 01:17:35,519 Speaker 1: who's protecting your core business because you take your eye 1405 01:17:35,560 --> 01:17:38,280 Speaker 1: off that and you go after new businesses, somebody's going 1406 01:17:38,320 --> 01:17:39,960 Speaker 1: to eat your core business. And then you get to 1407 01:17:40,040 --> 01:17:43,200 Speaker 1: the last faces. You know, you know who you need 1408 01:17:43,320 --> 01:17:46,200 Speaker 1: running the company. Larry the liquidator. I see Danny de 1409 01:17:46,280 --> 01:17:49,760 Speaker 1: Vito every time I see bed Bath and beyond right, 1410 01:17:49,920 --> 01:17:52,920 Speaker 1: you need somebody coming and saying there is no good 1411 01:17:53,040 --> 01:17:55,920 Speaker 1: ending to this story. Right, you can you can hire 1412 01:17:56,000 --> 01:17:58,200 Speaker 1: the best see on the world. There's no turnaround here. 1413 01:17:58,600 --> 01:18:01,360 Speaker 1: Once you get to the eighteenth it's over. And here's 1414 01:18:01,479 --> 01:18:03,160 Speaker 1: the big reason why I think this is going to 1415 01:18:03,200 --> 01:18:06,240 Speaker 1: become a bigger issue in the twenty first century. In 1416 01:18:06,320 --> 01:18:09,080 Speaker 1: the twentieth century, if you look at let's take Ford right, 1417 01:18:09,479 --> 01:18:12,759 Speaker 1: Henry Ford was the perfect CEO for Ford as a startup. 1418 01:18:12,840 --> 01:18:16,720 Speaker 1: Why he had a vision visionaries are strange people. They're eccentric. 1419 01:18:16,840 --> 01:18:18,719 Speaker 1: So he made the model t only in one color. 1420 01:18:18,800 --> 01:18:22,200 Speaker 1: Why because that's the way he wanted everybody to Everybody 1421 01:18:22,320 --> 01:18:24,280 Speaker 1: drives a black cart, Why would you want a different color. 1422 01:18:25,240 --> 01:18:30,280 Speaker 1: But by the nineteen thirties he was actually developing other 1423 01:18:30,439 --> 01:18:34,679 Speaker 1: tastes which were not particularly appropriate for a US automobile company. 1424 01:18:34,760 --> 01:18:37,680 Speaker 1: But time took care of the prom He passed on 1425 01:18:37,920 --> 01:18:41,880 Speaker 1: and his grandson took over. Time took care of these 1426 01:18:41,960 --> 01:18:46,080 Speaker 1: transitions because the typical company in the twentieth century took 1427 01:18:46,160 --> 01:18:48,800 Speaker 1: forty years to build up state, forty years at the top, 1428 01:18:48,880 --> 01:18:52,040 Speaker 1: and then declined over thirty years, one hundred year life cycle. 1429 01:18:52,800 --> 01:18:55,720 Speaker 1: In contrast, think about a Yahoo or a BlackBerry from 1430 01:18:55,840 --> 01:18:58,439 Speaker 1: start to end. You're looking at fifteen to twenty years. 1431 01:18:58,479 --> 01:19:00,560 Speaker 1: So the life cycles have been raped. I mean, the 1432 01:19:00,760 --> 01:19:03,400 Speaker 1: person running the company as a mature company is often 1433 01:19:03,439 --> 01:19:05,640 Speaker 1: the same person who as the company, who created the 1434 01:19:05,840 --> 01:19:08,639 Speaker 1: visionary who started the company is now running the company. 1435 01:19:08,680 --> 01:19:11,800 Speaker 1: And let's face it, now, the guys around BlackBerry were 1436 01:19:11,840 --> 01:19:15,360 Speaker 1: great with vision They were terrible managers. They were awful 1437 01:19:15,640 --> 01:19:18,120 Speaker 1: at making decisions at a mature company, but they were 1438 01:19:18,160 --> 01:19:20,800 Speaker 1: still making the decisions and guess what. The decision they 1439 01:19:20,840 --> 01:19:24,360 Speaker 1: made drove the company into the ground. And I think 1440 01:19:24,400 --> 01:19:26,960 Speaker 1: that's going to be an increasing problem in the twenty 1441 01:19:27,000 --> 01:19:30,640 Speaker 1: first century, because the twenty first century company ages and 1442 01:19:30,760 --> 01:19:33,920 Speaker 1: dog gears right much fair. So let's let me bring 1443 01:19:34,080 --> 01:19:37,120 Speaker 1: up another company we started hinting about when we were 1444 01:19:37,160 --> 01:19:41,599 Speaker 1: talking about Twitter. So I give Tesla and Elon Musk 1445 01:19:42,040 --> 01:19:47,320 Speaker 1: huge credit. I think the automobile industry looked at what 1446 01:19:47,600 --> 01:19:50,919 Speaker 1: he was building with Tesla, and then often their peripheral 1447 01:19:51,040 --> 01:19:56,360 Speaker 1: vision saw what Bezos had done destroying every industry. He touched, 1448 01:19:57,160 --> 01:20:01,720 Speaker 1: your profit margin is my opportunity, and they said, we 1449 01:20:01,920 --> 01:20:04,280 Speaker 1: better get on the ball with this. So he gets 1450 01:20:05,240 --> 01:20:08,679 Speaker 1: if we moved to a fully electrified future, whether it's 1451 01:20:08,720 --> 01:20:10,680 Speaker 1: five years from now or ten years from now, at 1452 01:20:10,760 --> 01:20:15,320 Speaker 1: least in transportation, he gets full credit. But it seems 1453 01:20:15,400 --> 01:20:18,639 Speaker 1: like between Tesla and then SpaceX and then the boring 1454 01:20:18,720 --> 01:20:22,519 Speaker 1: company and then Twitter, what's going on with the life 1455 01:20:22,560 --> 01:20:25,599 Speaker 1: cycle of Tesla. It seems to have even though by 1456 01:20:25,640 --> 01:20:28,040 Speaker 1: the way we're recording this at the end of the 1457 01:20:28,080 --> 01:20:30,360 Speaker 1: first quarter in twenty twenty three, the stock has done 1458 01:20:30,479 --> 01:20:34,360 Speaker 1: very well this year. Ballpark, It's doubled from its lows 1459 01:20:34,400 --> 01:20:37,120 Speaker 1: in twenty twenty three. The other extremely of people who 1460 01:20:37,240 --> 01:20:41,519 Speaker 1: convinced this company's a scam, they've always been really a scam, 1461 01:20:43,000 --> 01:20:46,960 Speaker 1: and they came the whole thing is accounting, you know, gameplaying, 1462 01:20:47,120 --> 01:20:49,599 Speaker 1: that the company has never made money. There's a whole 1463 01:20:50,320 --> 01:20:54,240 Speaker 1: Tesla short community might revisit. They convince a whole thing 1464 01:20:54,400 --> 01:20:57,519 Speaker 1: is going it's just a pack. The whole thing is 1465 01:20:57,520 --> 01:21:00,519 Speaker 1: going to come crashing down, which means that unwilling to 1466 01:21:00,640 --> 01:21:03,240 Speaker 1: listen to any story you tell about. Hey, you can't 1467 01:21:03,280 --> 01:21:05,880 Speaker 1: dismiss this company. As you said, it's changed the way 1468 01:21:06,080 --> 01:21:09,519 Speaker 1: the entire business, the automobile business, a business that was 1469 01:21:09,640 --> 01:21:12,000 Speaker 1: immune to change. And think of DeLorean trying to do 1470 01:21:12,200 --> 01:21:16,080 Speaker 1: show two years ago, right, it destroyed every person trying 1471 01:21:16,160 --> 01:21:18,840 Speaker 1: to change the business. And in ten years Elon Musk 1472 01:21:18,880 --> 01:21:21,000 Speaker 1: has done more for climate change and all the yearc 1473 01:21:21,160 --> 01:21:23,479 Speaker 1: people put on the face of the earth because he's 1474 01:21:23,560 --> 01:21:26,240 Speaker 1: changed how decisions are made in the business. And I've 1475 01:21:26,280 --> 01:21:28,960 Speaker 1: tried to navigate that middle ground by saying this company 1476 01:21:29,120 --> 01:21:31,560 Speaker 1: is not as amazing as you think it is to 1477 01:21:31,720 --> 01:21:35,200 Speaker 1: the Tesla fans, and at the same time, there's something 1478 01:21:35,320 --> 01:21:37,479 Speaker 1: special about this company. You need to bring it in. 1479 01:21:38,320 --> 01:21:41,120 Speaker 1: I think that the problem with with the company. And 1480 01:21:41,200 --> 01:21:43,479 Speaker 1: this is something I would say about any company, to 1481 01:21:43,560 --> 01:21:46,840 Speaker 1: say it's it's a company that is wrapped up in 1482 01:21:46,960 --> 01:21:50,040 Speaker 1: a person. And what I mean by that is when 1483 01:21:50,080 --> 01:21:52,240 Speaker 1: you think Tesla, you think Elon Musk. There's you know. 1484 01:21:52,400 --> 01:21:54,920 Speaker 1: For the now, Apple had that issue in the two 1485 01:21:55,000 --> 01:21:58,880 Speaker 1: early two thousands with Steve Jobs and the transition to 1486 01:21:58,880 --> 01:22:02,240 Speaker 1: the team Tim Clark seems to have gone much better 1487 01:22:02,520 --> 01:22:05,840 Speaker 1: than anyone was forecasting. And but it took a while. 1488 01:22:05,960 --> 01:22:09,040 Speaker 1: Remember that after Tim Cook came in, people said, you're 1489 01:22:09,120 --> 01:22:11,639 Speaker 1: not doing what Steve Jobs that have warrant he disrupting 1490 01:22:11,680 --> 01:22:14,519 Speaker 1: a new business. Tim Cook was a business builder in 1491 01:22:14,600 --> 01:22:17,120 Speaker 1: a sense. He's a logistics guy, and he says, look 1492 01:22:17,120 --> 01:22:19,760 Speaker 1: where a trillion dollar company. We can't be going after 1493 01:22:19,920 --> 01:22:22,800 Speaker 1: new businesses and not protecting the core business. So in 1494 01:22:22,880 --> 01:22:27,120 Speaker 1: a sense that I might be saying something that'd be sacrilegious, 1495 01:22:27,200 --> 01:22:29,280 Speaker 1: but in a sense I think as Apple is better 1496 01:22:29,439 --> 01:22:32,439 Speaker 1: off with Tim Cook having run it for the last decade, 1497 01:22:32,960 --> 01:22:35,120 Speaker 1: he is the right person for that phase of the 1498 01:22:35,240 --> 01:22:38,880 Speaker 1: life Steve Jobs had stayed on because Steve Jobs would 1499 01:22:38,880 --> 01:22:41,040 Speaker 1: probably have shot for the moon on something else and 1500 01:22:41,240 --> 01:22:44,240 Speaker 1: ended up effectively putting a trillion and a half dollars 1501 01:22:44,280 --> 01:22:49,600 Speaker 1: at risk. So I think that you need transitions, but unfortunately, 1502 01:22:49,680 --> 01:22:52,800 Speaker 1: we're also creating a structure where we're doing that has 1503 01:22:52,800 --> 01:22:55,200 Speaker 1: become more difficult at some of these companies that are 1504 01:22:55,200 --> 01:22:57,960 Speaker 1: the twenty first century companies. And what I mean by 1505 01:22:58,000 --> 01:23:00,960 Speaker 1: that is, if you don't like the way Mark Zuckerberg 1506 01:23:01,280 --> 01:23:04,679 Speaker 1: likes Facebook, he owns only fourteen percent of the stock. 1507 01:23:05,000 --> 01:23:09,479 Speaker 1: But but because we allowed, we collectively and we have 1508 01:23:09,560 --> 01:23:12,320 Speaker 1: to take the blame for this, we has portfolio managing 1509 01:23:12,400 --> 01:23:17,639 Speaker 1: investors allowed Facebook to go public with two classes of shares. 1510 01:23:18,640 --> 01:23:22,720 Speaker 1: We've effectively given Mark Zuckerberg fifty seven percent of the 1511 01:23:22,840 --> 01:23:27,080 Speaker 1: voting rights in perpetuity. And when this happened, I remember 1512 01:23:27,120 --> 01:23:29,280 Speaker 1: asking this question of portfolio manage is why are you 1513 01:23:29,520 --> 01:23:32,600 Speaker 1: okay giving up this much power? And the response was 1514 01:23:32,840 --> 01:23:36,960 Speaker 1: he's a genius, He's amazing, and he certainly looked like 1515 01:23:37,120 --> 01:23:40,000 Speaker 1: one for the first couple of years of them being public. 1516 01:23:40,439 --> 01:23:43,920 Speaker 1: And the quiet response I had was, you know, would 1517 01:23:43,960 --> 01:23:46,240 Speaker 1: you are you? You know? You know what happens to 1518 01:23:46,360 --> 01:23:50,080 Speaker 1: benevolent dictatorships over time is what starts have been as 1519 01:23:50,080 --> 01:23:54,960 Speaker 1: a benevolent dictatorship eventually becomes malevolent and you've taken away 1520 01:23:55,000 --> 01:23:56,800 Speaker 1: the power to do it. And they said, don't worry 1521 01:23:56,800 --> 01:23:59,080 Speaker 1: about that, will never happen. So so let's talk about 1522 01:23:59,160 --> 01:24:01,879 Speaker 1: some of the other volent dictatorships that had a similar 1523 01:24:03,040 --> 01:24:07,439 Speaker 1: super voting structure. Uber was set up that way. We 1524 01:24:07,680 --> 01:24:10,519 Speaker 1: Work was set up that way. I think was there 1525 01:24:10,640 --> 01:24:13,760 Speaker 1: now it's also a super I believe they never got 1526 01:24:13,960 --> 01:24:16,679 Speaker 1: quite to that stage, but it was heading that sting 1527 01:24:16,720 --> 01:24:20,280 Speaker 1: Elizabeth Holmes personality. Yeah, it's probably would have super voting rights. 1528 01:24:20,360 --> 01:24:22,720 Speaker 1: So have we now gotten to the point where this 1529 01:24:22,920 --> 01:24:27,240 Speaker 1: sort of silliness is over? Or are the venture capitalists 1530 01:24:27,640 --> 01:24:30,760 Speaker 1: and investment banks that bring these companies public are they 1531 01:24:30,840 --> 01:24:33,080 Speaker 1: still playing that game. I wish I could tell you 1532 01:24:33,240 --> 01:24:37,280 Speaker 1: that markets have a good sense to learn and adapt, 1533 01:24:38,320 --> 01:24:43,200 Speaker 1: but I don't think they do. It's what strikes me 1534 01:24:43,240 --> 01:24:46,600 Speaker 1: as amazing in markets is how much collective amnesia there is. 1535 01:24:47,760 --> 01:24:49,800 Speaker 1: So three months of Facebook going up, and all of 1536 01:24:49,840 --> 01:24:52,559 Speaker 1: a sudden they've forgotten all the complaints they had at 1537 01:24:52,640 --> 01:24:55,720 Speaker 1: Facebook's bottom. So I wish I could tell you that 1538 01:24:55,880 --> 01:25:00,360 Speaker 1: investors and portfolio managers would have the stuf. I'm to 1539 01:25:00,439 --> 01:25:02,320 Speaker 1: stand up and say, you know what, we're not going 1540 01:25:02,360 --> 01:25:05,120 Speaker 1: to take this Two classes of shares anymore. But I 1541 01:25:05,240 --> 01:25:07,559 Speaker 1: think once we opened that door, and I blame Google 1542 01:25:07,640 --> 01:25:12,200 Speaker 1: for this, Google in its created this process and people 1543 01:25:12,360 --> 01:25:16,760 Speaker 1: walked in, it's very difficult to relock that door. No, 1544 01:25:16,920 --> 01:25:19,519 Speaker 1: I'm and so I'm not. I wish no that change 1545 01:25:19,560 --> 01:25:21,960 Speaker 1: would come back, but I'm not optimistic that it will. 1546 01:25:22,080 --> 01:25:23,800 Speaker 1: So now as as good as time as any to 1547 01:25:23,880 --> 01:25:28,240 Speaker 1: talk about ESG. And let's start with the G being governance. 1548 01:25:28,800 --> 01:25:34,280 Speaker 1: How can anybody in good faith on these companies if 1549 01:25:34,439 --> 01:25:37,880 Speaker 1: one of your deciding factors is we want to see 1550 01:25:38,040 --> 01:25:40,880 Speaker 1: good governance at the company as we own, I'm going 1551 01:25:40,920 --> 01:25:44,000 Speaker 1: to say something about the G in ESC. Right. The 1552 01:25:44,120 --> 01:25:47,040 Speaker 1: governance in ESC is not the corporate governance that we've 1553 01:25:47,080 --> 01:25:50,360 Speaker 1: talked about in finance for fifty years, which is manages 1554 01:25:50,400 --> 01:25:52,800 Speaker 1: being accountable to the owners of a company. That's a 1555 01:25:52,840 --> 01:25:55,160 Speaker 1: corporate governance that I was brought up in all the 1556 01:25:55,280 --> 01:25:59,720 Speaker 1: research in it. The GESC is stakeholder governance. You're a 1557 01:26:00,000 --> 01:26:04,080 Speaker 1: comountable to everybody. You're accountable to shareholders, you're accountable to lenders, 1558 01:26:04,120 --> 01:26:07,000 Speaker 1: you're accountable to society or accountable to you know, does 1559 01:26:07,040 --> 01:26:10,680 Speaker 1: that make you accountable to nobody? Exactly? Because you then 1560 01:26:10,880 --> 01:26:13,680 Speaker 1: have a reason with each group you claim the other 1561 01:26:13,760 --> 01:26:17,120 Speaker 1: groups for the reason you're underperformed. So when I look 1562 01:26:17,160 --> 01:26:19,240 Speaker 1: at the g and ESG, I have the same reaction 1563 01:26:19,320 --> 01:26:21,320 Speaker 1: I had. And I'm old enough to remember when there 1564 01:26:21,320 --> 01:26:24,360 Speaker 1: were two Germanys, West Germany and East Germany. I remember 1565 01:26:24,400 --> 01:26:30,200 Speaker 1: what East Germany called itself. Do you remember German Democratic Republic? 1566 01:26:30,880 --> 01:26:34,040 Speaker 1: There was nothing democratic about it or republic about it. 1567 01:26:34,200 --> 01:26:36,639 Speaker 1: The same reaction I have when people say People's Republic 1568 01:26:36,720 --> 01:26:39,320 Speaker 1: of China, Right, there's no, it's not like people in 1569 01:26:39,400 --> 01:26:42,799 Speaker 1: Beijing centerism. What do the people think? And so William, 1570 01:26:42,840 --> 01:26:45,519 Speaker 1: you pick it because you want people to look at 1571 01:26:45,560 --> 01:26:49,280 Speaker 1: the name and think you are free and democratic ESG. 1572 01:26:49,760 --> 01:26:53,439 Speaker 1: That choice of G was deliberate. It was to make 1573 01:26:53,520 --> 01:26:56,800 Speaker 1: it look like they cared about corporate governance, when in 1574 01:26:56,880 --> 01:27:00,439 Speaker 1: fact it's the exact opposite of everything thing I think 1575 01:27:00,520 --> 01:27:04,800 Speaker 1: of in governance because it makes managers accountable to no one. 1576 01:27:05,360 --> 01:27:09,679 Speaker 1: So my naivete about the G and ESG has always 1577 01:27:09,720 --> 01:27:12,880 Speaker 1: been hey, in the old days, it was a bunch 1578 01:27:12,960 --> 01:27:16,040 Speaker 1: of older white dudes, and that leads to group thing. 1579 01:27:16,520 --> 01:27:19,680 Speaker 1: So if we create a little diversity of thought, we 1580 01:27:19,880 --> 01:27:22,040 Speaker 1: bring women onto the board, we bring people of colors, 1581 01:27:22,080 --> 01:27:26,800 Speaker 1: onto the board. We have geographic diversity, we have domain expertise. 1582 01:27:26,920 --> 01:27:31,320 Speaker 1: Diversity will skip the group think and end up with 1583 01:27:31,520 --> 01:27:35,639 Speaker 1: a better decision making problem. But that's an empirical question. 1584 01:27:35,800 --> 01:27:38,759 Speaker 1: Do we actually do it right? It are more diverse 1585 01:27:38,960 --> 01:27:43,080 Speaker 1: boards asking more questions, because that's the way I mean Ultimately, 1586 01:27:43,320 --> 01:27:45,439 Speaker 1: governance here means you have a board of directors. It's 1587 01:27:45,520 --> 01:27:48,439 Speaker 1: active and aggressive about I would love to see a 1588 01:27:48,520 --> 01:27:52,240 Speaker 1: board of directors stop a CEO from doing an acquisition. 1589 01:27:52,400 --> 01:27:55,759 Speaker 1: That to me is governance at play, where the board says, 1590 01:27:56,160 --> 01:27:59,320 Speaker 1: you know what, this acquisition makes no sense. We're going 1591 01:27:59,400 --> 01:28:02,000 Speaker 1: to put break on this process for six months and 1592 01:28:02,120 --> 01:28:03,559 Speaker 1: look at the numbers. We're not going to let your 1593 01:28:03,600 --> 01:28:06,720 Speaker 1: banker come in and show synergy numbers and push us 1594 01:28:06,760 --> 01:28:09,479 Speaker 1: through it. We're going to do our due diligence. How 1595 01:28:09,520 --> 01:28:13,040 Speaker 1: often does that happen? And I think that there is 1596 01:28:13,439 --> 01:28:16,920 Speaker 1: no evidence that I can see off that having diversity 1597 01:28:17,960 --> 01:28:22,640 Speaker 1: by itself makes boards more effective. Now, I think that 1598 01:28:22,880 --> 01:28:26,200 Speaker 1: what you need is we need to change the process 1599 01:28:26,400 --> 01:28:28,920 Speaker 1: by which we pick the directors a board, because to 1600 01:28:29,040 --> 01:28:31,720 Speaker 1: the extent that you have nominating committees and CEOs of 1601 01:28:31,800 --> 01:28:34,559 Speaker 1: input in the process, the nature of the process you're 1602 01:28:34,560 --> 01:28:37,519 Speaker 1: going to self select. I don't care how diverse the 1603 01:28:37,560 --> 01:28:39,519 Speaker 1: board is. You're going to self select. People are less 1604 01:28:39,640 --> 01:28:43,320 Speaker 1: likely to ask you those stuff governance questions. What is 1605 01:28:43,360 --> 01:28:46,080 Speaker 1: the alternative? Of course, the reality is a person who's 1606 01:28:46,120 --> 01:28:48,160 Speaker 1: not an index All right, Hey, I'm going to pick 1607 01:28:48,200 --> 01:28:50,760 Speaker 1: a portfolio of a dozen companies and that's my core 1608 01:28:51,160 --> 01:28:54,439 Speaker 1: at twelve fifteen should be enough companies to get the 1609 01:28:54,560 --> 01:29:01,760 Speaker 1: advantage of portfolio diversification. That means I have six ten directors. 1610 01:29:01,840 --> 01:29:07,000 Speaker 1: I have to choose on ten or fifteen companies, ninety people. 1611 01:29:07,040 --> 01:29:09,080 Speaker 1: I have to figure that people. You can get people 1612 01:29:09,080 --> 01:29:11,360 Speaker 1: to vote from their own congress person, right, how do 1613 01:29:11,439 --> 01:29:14,640 Speaker 1: you get self interested investors to put the time in 1614 01:29:15,080 --> 01:29:18,680 Speaker 1: to select ninety board members. I think it's going to 1615 01:29:18,760 --> 01:29:22,479 Speaker 1: be almost impossible to get that done at the shareholder 1616 01:29:22,560 --> 01:29:24,800 Speaker 1: level because so it has to be institutional. It's got 1617 01:29:24,840 --> 01:29:29,120 Speaker 1: to be institutional. So I think that unfortunately, this is 1618 01:29:29,200 --> 01:29:31,840 Speaker 1: not a process where you can expect shareholders to do 1619 01:29:31,920 --> 01:29:34,439 Speaker 1: their homework on who's standing for the board of directors, 1620 01:29:34,520 --> 01:29:37,240 Speaker 1: what's their background, do they know the business? I mean, 1621 01:29:37,280 --> 01:29:39,760 Speaker 1: who has the time to do this? Especially we tell 1622 01:29:39,800 --> 01:29:43,240 Speaker 1: investors to diversify, we also tell them do your due diligence. 1623 01:29:43,360 --> 01:29:46,479 Speaker 1: They have lives to live, families to feed, They don't 1624 01:29:46,520 --> 01:29:48,080 Speaker 1: have the time to do this. So I think it 1625 01:29:48,200 --> 01:29:50,360 Speaker 1: has to be institutional, and I think we need a 1626 01:29:50,439 --> 01:29:55,000 Speaker 1: corporate governance core that's not based on looks and checkboxes, 1627 01:29:55,560 --> 01:29:59,400 Speaker 1: but based on actions. I want to get no votes 1628 01:29:59,600 --> 01:30:03,320 Speaker 1: at meetings recorded, and i'd like to know the percentage 1629 01:30:03,320 --> 01:30:07,280 Speaker 1: of the time directors vote. Now. I remember Harold Janine, 1630 01:30:07,360 --> 01:30:10,439 Speaker 1: who was CEO of Itte There's no conglomerate in the 1631 01:30:10,560 --> 01:30:14,320 Speaker 1: nineteen seventies, said there was that, and he was what 1632 01:30:14,439 --> 01:30:18,600 Speaker 1: I call a corporate caesar, a complete power. And he 1633 01:30:18,680 --> 01:30:22,200 Speaker 1: said there was not a single action taken by his board, 1634 01:30:22,280 --> 01:30:25,160 Speaker 1: whether the decision was not unanimous. And my reaction was, 1635 01:30:25,680 --> 01:30:28,080 Speaker 1: that's a rubber stampoort, right if everything you come up 1636 01:30:28,240 --> 01:30:32,519 Speaker 1: unanimously gets voted on. So maybe we need less focus 1637 01:30:32,640 --> 01:30:34,400 Speaker 1: on how big is the board. In fact, many of 1638 01:30:34,400 --> 01:30:37,559 Speaker 1: the corporate governance scores are based on very surface level things. 1639 01:30:37,600 --> 01:30:39,880 Speaker 1: Are the insiders are outsiders? How big is the board, 1640 01:30:40,080 --> 01:30:42,760 Speaker 1: how divers I'd like to get a sense of how 1641 01:30:42,840 --> 01:30:45,160 Speaker 1: effective is the board, how many no votes to get, 1642 01:30:45,200 --> 01:30:48,559 Speaker 1: how much pushback to get on CEOs? Because that really 1643 01:30:49,000 --> 01:30:51,920 Speaker 1: is a true measure of governance, and we don't have 1644 01:30:52,120 --> 01:30:54,679 Speaker 1: that now, and I think that might be a measure 1645 01:30:54,720 --> 01:30:56,960 Speaker 1: that could be useful for investors to get a sense 1646 01:30:57,000 --> 01:31:00,360 Speaker 1: of is this an effective border an ineffective board, you know, 1647 01:31:00,800 --> 01:31:02,840 Speaker 1: because that, as you said, is a useful piece of 1648 01:31:02,920 --> 01:31:07,160 Speaker 1: information to investors. It's very hard as a board member, 1649 01:31:07,320 --> 01:31:11,920 Speaker 1: especially on a smaller company, to vote no, because these 1650 01:31:12,000 --> 01:31:16,360 Speaker 1: are your peers, your colleagues, and it's difficult to be 1651 01:31:17,479 --> 01:31:21,160 Speaker 1: you know, we're social primates. It's very difficult to go 1652 01:31:21,360 --> 01:31:24,599 Speaker 1: against the group. And when you're thrown an authority figure 1653 01:31:24,680 --> 01:31:26,439 Speaker 1: in there, which is the CEO who had a lot 1654 01:31:26,520 --> 01:31:29,000 Speaker 1: of money, who knows far more about the company than 1655 01:31:29,080 --> 01:31:34,040 Speaker 1: I do, then it's natural. It's psychologically. So that's why 1656 01:31:34,080 --> 01:31:37,320 Speaker 1: I think this. You know, we lost track of disincorporate 1657 01:31:37,400 --> 01:31:40,400 Speaker 1: governance research. We thought the promise insiders. So if you 1658 01:31:40,439 --> 01:31:42,559 Speaker 1: look at the Sarbe and Oxley law, they fixed all 1659 01:31:42,600 --> 01:31:45,200 Speaker 1: the surface level problems, which is you kind of have 1660 01:31:45,280 --> 01:31:47,280 Speaker 1: your cousin on the board, you kind of your brother 1661 01:31:47,360 --> 01:31:50,840 Speaker 1: on the board. Those are insiders. You need outsiders and 1662 01:31:51,080 --> 01:31:53,800 Speaker 1: in a sense, and there's research that suggested that big 1663 01:31:53,880 --> 01:31:56,479 Speaker 1: boards are less effective than small boards. So they said, 1664 01:31:56,720 --> 01:32:01,600 Speaker 1: we're going to have a small board composed of our outsiders, 1665 01:32:01,640 --> 01:32:03,800 Speaker 1: and then we added, you know, you have diverse more 1666 01:32:03,880 --> 01:32:06,640 Speaker 1: likely to get pushback, and we left it at that. 1667 01:32:07,160 --> 01:32:09,559 Speaker 1: But we did the easy stuff. And that's a problem 1668 01:32:09,640 --> 01:32:11,880 Speaker 1: with scores is they do the easy stuff. They do 1669 01:32:12,000 --> 01:32:16,599 Speaker 1: the checkbox. They don't look at actions which actually change governance. 1670 01:32:17,160 --> 01:32:20,240 Speaker 1: And in fact, this, you know, extending this, any scoring 1671 01:32:20,400 --> 01:32:24,120 Speaker 1: system is going to create gaming, which is companies are 1672 01:32:24,120 --> 01:32:25,920 Speaker 1: going to figure out what drives the score and then 1673 01:32:25,960 --> 01:32:28,439 Speaker 1: they're going to game the system to get a higher score. 1674 01:32:28,760 --> 01:32:31,759 Speaker 1: That's not because of bad companies, it's because scoring systems 1675 01:32:31,840 --> 01:32:36,040 Speaker 1: create gaming. And I saw that play art with governance scores. Now, 1676 01:32:36,120 --> 01:32:38,080 Speaker 1: we were told in two thousand and one and two 1677 01:32:38,160 --> 01:32:40,680 Speaker 1: when S and P announced Governance Scores, this is going 1678 01:32:40,760 --> 01:32:43,639 Speaker 1: to change corporate governance because now we're going to score companies. 1679 01:32:44,320 --> 01:32:47,040 Speaker 1: Twenty years later, I look back and say, it changed nothing. 1680 01:32:47,160 --> 01:32:50,240 Speaker 1: We've had voting and non voting shares. Governance has actually 1681 01:32:50,280 --> 01:32:53,880 Speaker 1: become more difficult now than twenty years ago. And I 1682 01:32:54,040 --> 01:32:56,920 Speaker 1: think it's made me a lot more skeptical what scoring 1683 01:32:57,040 --> 01:33:01,719 Speaker 1: systems changing behavior. All they do is create gaming, gaming 1684 01:33:01,840 --> 01:33:06,559 Speaker 1: that companies used to make their scores higher without changing anything. 1685 01:33:06,640 --> 01:33:11,040 Speaker 1: That of consequence quite fascinating. Let's talk a little bit 1686 01:33:11,120 --> 01:33:15,560 Speaker 1: about the state evaluation today. We've seen a lot of 1687 01:33:15,680 --> 01:33:22,160 Speaker 1: factors driving prices, especially the rapid rise in federal reserve 1688 01:33:22,280 --> 01:33:26,040 Speaker 1: rates and the big inflation we saw in twenty one 1689 01:33:26,080 --> 01:33:28,679 Speaker 1: and twenty two. How do you look at the market 1690 01:33:28,920 --> 01:33:33,719 Speaker 1: overall in twenty twenty three. I think it's a market 1691 01:33:33,840 --> 01:33:37,439 Speaker 1: driven by two macro forces. One is inflation, the others 1692 01:33:37,439 --> 01:33:39,160 Speaker 1: what's going to happen to the economy. And at the 1693 01:33:39,200 --> 01:33:40,920 Speaker 1: start of this year I said those are going to 1694 01:33:41,080 --> 01:33:44,080 Speaker 1: dominate the discussion. So now we've had this distraction and 1695 01:33:44,200 --> 01:33:47,320 Speaker 1: a sense for markets with the banking crisis, and it's 1696 01:33:47,360 --> 01:33:49,640 Speaker 1: in a sense of side game that's going on, but 1697 01:33:49,840 --> 01:33:52,360 Speaker 1: ultimately what happens in the banking crisis, you could actually 1698 01:33:52,479 --> 01:33:55,599 Speaker 1: argue that it was inflation that created the banking crisis 1699 01:33:55,880 --> 01:33:59,760 Speaker 1: in the first place, meaning inflation or the FED increases 1700 01:34:00,160 --> 01:34:02,519 Speaker 1: inflation drives interest rates. In fact, I think one of 1701 01:34:02,560 --> 01:34:05,959 Speaker 1: the most unhealthy things we've done over the last decade 1702 01:34:06,120 --> 01:34:09,320 Speaker 1: is we've given the FED powers. It's never it never 1703 01:34:09,479 --> 01:34:12,680 Speaker 1: has Feds don't set the Fed doesn't set it rate 1704 01:34:13,680 --> 01:34:17,040 Speaker 1: it chases rates. The reason rates went up last year 1705 01:34:17,120 --> 01:34:19,400 Speaker 1: with the without the FED is inflation was going up, 1706 01:34:19,960 --> 01:34:23,120 Speaker 1: and once rates went up, you had banks like Silicon 1707 01:34:23,240 --> 01:34:25,720 Speaker 1: Valley Bank with which had bonds at low rates, which 1708 01:34:25,760 --> 01:34:28,320 Speaker 1: had to reprice the bond. So inflation is at the 1709 01:34:28,439 --> 01:34:31,320 Speaker 1: core of almost everything. We've seen in markets for the 1710 01:34:31,439 --> 01:34:34,680 Speaker 1: last year in three months, and it's always been the case. 1711 01:34:34,840 --> 01:34:40,040 Speaker 1: Once inflation enters gets on stage, it's it's a hog. 1712 01:34:40,160 --> 01:34:42,759 Speaker 1: It's it's an attention hog. It takes every it sucks 1713 01:34:42,840 --> 01:34:46,320 Speaker 1: up everything. So I think right now inflation is at 1714 01:34:46,360 --> 01:34:48,479 Speaker 1: the core of almost everything you do. Whether you're a 1715 01:34:48,600 --> 01:34:50,839 Speaker 1: trader or an investor, you have to think about inflation 1716 01:34:50,880 --> 01:34:54,360 Speaker 1: because you have no choice. It really interesting now if 1717 01:34:54,400 --> 01:34:58,320 Speaker 1: we look at the FEDS two percent inflation target, um, 1718 01:34:59,040 --> 01:35:02,040 Speaker 1: you have zero or interest rates for a decade, so 1719 01:35:02,400 --> 01:35:05,479 Speaker 1: you can't really blame that. You have the lockdown, the 1720 01:35:05,560 --> 01:35:12,080 Speaker 1: supply chains, the fiscal stimulus, the shortages of labor, semiconductor's, houses, cars, 1721 01:35:12,880 --> 01:35:15,960 Speaker 1: seems to be a lot of moving parts, a very 1722 01:35:16,680 --> 01:35:24,080 Speaker 1: non traditional type of inflation. How should the FED be behaving? Go, Well, 1723 01:35:24,160 --> 01:35:27,160 Speaker 1: let's go back to March twenty twenty one, when CPI 1724 01:35:27,439 --> 01:35:30,400 Speaker 1: ran up through their two percent target. Should they have 1725 01:35:30,520 --> 01:35:33,599 Speaker 1: taken notice that they probably should have because here's the problem. 1726 01:35:33,640 --> 01:35:36,479 Speaker 1: And I wrote a piece then saying, you know, even 1727 01:35:36,560 --> 01:35:40,360 Speaker 1: if inflation is purely supplied that because initially they claim 1728 01:35:40,560 --> 01:35:43,080 Speaker 1: was this is transitory, it's going to be very very 1729 01:35:43,160 --> 01:35:45,880 Speaker 1: short time. I said, even if that's true to the 1730 01:35:46,000 --> 01:35:49,800 Speaker 1: extent that there's a possibility that it's not transitory, you 1731 01:35:49,920 --> 01:35:52,400 Speaker 1: need to act now. And the reason I said that 1732 01:35:52,479 --> 01:35:55,800 Speaker 1: is inflation is as much as psychological phenomenon as an 1733 01:35:55,840 --> 01:35:58,680 Speaker 1: economic phenomenon. I mean, I'll give you an example. I 1734 01:35:59,200 --> 01:36:02,240 Speaker 1: know the restaurant that I live next to, a Mexican restaurant. 1735 01:36:02,240 --> 01:36:04,840 Speaker 1: The price of a burrito, it stayed the same for 1736 01:36:05,000 --> 01:36:10,240 Speaker 1: a decade, right, then he has fairly low inflation flash right, 1737 01:36:10,880 --> 01:36:14,200 Speaker 1: And he didn't, but then he raised prices. And then 1738 01:36:14,280 --> 01:36:18,040 Speaker 1: once he started, he's on this this core. Now every month, 1739 01:36:18,120 --> 01:36:20,000 Speaker 1: every month I go in, the price is up another 1740 01:36:20,080 --> 01:36:23,360 Speaker 1: ten or fifteen cents. Because he's being prudent. He's saying, look, 1741 01:36:23,400 --> 01:36:25,519 Speaker 1: I'm going to raise the prices because I need to 1742 01:36:25,600 --> 01:36:28,120 Speaker 1: pay my employees. They're going to ask me for higher wages. 1743 01:36:28,680 --> 01:36:32,960 Speaker 1: So once inflation gets embedded in people's psyche it starts 1744 01:36:33,040 --> 01:36:36,640 Speaker 1: to affect how people, how people ask for wage increases, 1745 01:36:36,720 --> 01:36:39,639 Speaker 1: how much you raise prices, which meets often the only 1746 01:36:39,760 --> 01:36:43,400 Speaker 1: way you can break the back of inflation is to 1747 01:36:44,400 --> 01:36:47,720 Speaker 1: BRender people into hostages. You basically tell people, don't go 1748 01:36:47,800 --> 01:36:49,479 Speaker 1: ask for a pay raise, you might lose your job. 1749 01:36:49,680 --> 01:36:52,519 Speaker 1: Don't raise prices because people might not come in, which 1750 01:36:52,680 --> 01:36:56,880 Speaker 1: is an economic recessions of Volker nightmare that played out 1751 01:36:56,920 --> 01:36:58,760 Speaker 1: where he said, look, I'm going to break the back 1752 01:36:58,840 --> 01:37:01,960 Speaker 1: of inflation, and he did. It took a very severe recession, 1753 01:37:02,400 --> 01:37:05,519 Speaker 1: because that's the only way you can break that cycle 1754 01:37:05,640 --> 01:37:09,040 Speaker 1: of higher prices. I think wherein that cycle, which is 1755 01:37:09,080 --> 01:37:12,800 Speaker 1: one reason inflation is so stagged. It's so stubborn. It's 1756 01:37:12,840 --> 01:37:16,040 Speaker 1: not going away quickly. It's because it's not just about 1757 01:37:16,080 --> 01:37:19,160 Speaker 1: fixing the supply chains. It's now in people's psyches. People 1758 01:37:19,200 --> 01:37:22,040 Speaker 1: are asking for pay raises based upon I mean, look 1759 01:37:22,040 --> 01:37:25,919 Speaker 1: at the LA School district strike and the pay raisers 1760 01:37:26,200 --> 01:37:29,080 Speaker 1: teachers were asking for it was like seven percent eight 1761 01:37:29,160 --> 01:37:31,800 Speaker 1: percent a year. Not three years ago they'd have asked 1762 01:37:31,840 --> 01:37:34,320 Speaker 1: for three percent a year. So let's let's address that. 1763 01:37:34,479 --> 01:37:38,559 Speaker 1: Because I sometimes feel that we take things for granted 1764 01:37:39,240 --> 01:37:42,880 Speaker 1: and don't see both sides of the problem. In the 1765 01:37:43,040 --> 01:37:45,080 Speaker 1: bottom I don't know if you want to hold quartile 1766 01:37:45,200 --> 01:37:48,759 Speaker 1: or bottom half of the wage earners. Certainly minimum wage 1767 01:37:49,320 --> 01:37:53,760 Speaker 1: has lagged everything for thirty years. It's lagged inflation. It's 1768 01:37:53,800 --> 01:37:58,400 Speaker 1: like productivity. It's certainly lagged the stock market and executive compensation. 1769 01:37:59,080 --> 01:38:02,960 Speaker 1: Nobody was Are you upset when wages were deflationary? Right? 1770 01:38:03,280 --> 01:38:06,200 Speaker 1: But suddenly and those of us that aren't in the 1771 01:38:06,240 --> 01:38:08,360 Speaker 1: bottom half of the wage pool look at it and 1772 01:38:08,479 --> 01:38:11,880 Speaker 1: say stroker chan and say, oh, now this is inflationary. 1773 01:38:12,800 --> 01:38:15,920 Speaker 1: We have to do something about it. It seems like 1774 01:38:16,120 --> 01:38:20,080 Speaker 1: a lot of the burden of fighting inflation and just 1775 01:38:20,320 --> 01:38:23,240 Speaker 1: landing on the people who can least afford. That's exactly 1776 01:38:23,360 --> 01:38:25,680 Speaker 1: the reason you don't want to get let inflation get 1777 01:38:25,720 --> 01:38:28,080 Speaker 1: out of control, because the people who pay the price 1778 01:38:28,320 --> 01:38:32,439 Speaker 1: to fight inflation are not the not the upper middle 1779 01:38:32,520 --> 01:38:34,479 Speaker 1: class and the wealthy, it's the people at the bat 1780 01:38:34,640 --> 01:38:36,400 Speaker 1: Because when you have a recession, guess who lose their 1781 01:38:36,479 --> 01:38:39,120 Speaker 1: jobs first. It's a day you know, day to day. 1782 01:38:39,200 --> 01:38:41,519 Speaker 1: You know an hourly worker who said, you know you're 1783 01:38:41,520 --> 01:38:43,519 Speaker 1: going to work less hours, are going to pay you less. 1784 01:38:44,080 --> 01:38:47,599 Speaker 1: So I think you're absolutely right. The people that inflation 1785 01:38:47,880 --> 01:38:50,720 Speaker 1: punishes the most now, not the wealthy people they can 1786 01:38:50,840 --> 01:38:53,920 Speaker 1: find places to put their money and earn money to 1787 01:38:54,080 --> 01:38:57,479 Speaker 1: cover inflation, the people who can least afford. That's why 1788 01:38:57,520 --> 01:39:00,240 Speaker 1: inflation is a hidden tax. It's the worst possible boot 1789 01:39:00,240 --> 01:39:02,840 Speaker 1: tax because the people paying it are the people who 1790 01:39:02,840 --> 01:39:04,960 Speaker 1: can least afford to pay it. So let's bring this 1791 01:39:05,120 --> 01:39:10,240 Speaker 1: back to equities and valuation. It seemed in twenty and 1792 01:39:10,360 --> 01:39:14,160 Speaker 1: twenty one and even in twenty two, lots of companies 1793 01:39:14,240 --> 01:39:19,000 Speaker 1: were able to pass through their input cost increases to 1794 01:39:19,080 --> 01:39:22,920 Speaker 1: the end consumer. And then after a while it seemed 1795 01:39:22,960 --> 01:39:28,040 Speaker 1: companies that no longer had input costs going up continued 1796 01:39:28,160 --> 01:39:31,200 Speaker 1: to raise prices. What does that do? First? What does 1797 01:39:31,360 --> 01:39:36,000 Speaker 1: inflation generally due to valuation? And are the greed inflation 1798 01:39:36,160 --> 01:39:39,599 Speaker 1: stories accurate or is that you know, a little political 1799 01:39:39,680 --> 01:39:42,719 Speaker 1: wrangling on the second. Let me take the second question first. 1800 01:39:42,800 --> 01:39:45,400 Speaker 1: I've heard that story and it should show up as 1801 01:39:45,520 --> 01:39:49,360 Speaker 1: higher profit margins and higher returns that you're making. We've 1802 01:39:49,400 --> 01:39:52,160 Speaker 1: been a pretty record high and the margins have been 1803 01:39:52,280 --> 01:39:55,880 Speaker 1: rising now for a decade, partly because the subset of 1804 01:39:55,960 --> 01:39:58,880 Speaker 1: companies with the highest market caps and our technology, I mean, 1805 01:39:59,200 --> 01:40:02,599 Speaker 1: my very efficial so and they a software company could 1806 01:40:02,600 --> 01:40:05,160 Speaker 1: deliver thirty five percent margins because of unity economics, the 1807 01:40:05,320 --> 01:40:07,920 Speaker 1: extra unit of software cost you nothing. So if you 1808 01:40:08,160 --> 01:40:10,680 Speaker 1: clean up for that, and you look at twenty one 1809 01:40:10,720 --> 01:40:13,320 Speaker 1: and twenty two and said dead margins go up because 1810 01:40:13,320 --> 01:40:17,080 Speaker 1: that's the inflationary use. I mean in some sectors, margins 1811 01:40:17,200 --> 01:40:20,679 Speaker 1: obviously continue to creep up parts of software, but overall 1812 01:40:20,800 --> 01:40:23,479 Speaker 1: margins for US companies have been pretty stagnant. So if 1813 01:40:23,520 --> 01:40:27,960 Speaker 1: there's been price gouging, it's not showing up as higher 1814 01:40:28,000 --> 01:40:31,640 Speaker 1: profits in the aggregate. That doesn't mean some companies are 1815 01:40:31,680 --> 01:40:34,120 Speaker 1: not price couging, but in the aggregate, the story doesn't 1816 01:40:34,160 --> 01:40:38,240 Speaker 1: hold up. On the first issue of how does it 1817 01:40:38,320 --> 01:40:42,719 Speaker 1: affect valuation, I think that it boils down to pricing power. 1818 01:40:42,760 --> 01:40:45,759 Speaker 1: If you have pricing power, you can insulate your yourself 1819 01:40:45,800 --> 01:40:48,360 Speaker 1: against inflation by passing it through. And there are some 1820 01:40:48,520 --> 01:40:50,760 Speaker 1: companies that clearly a pricing power that have done that, 1821 01:40:51,160 --> 01:40:54,960 Speaker 1: which is one reason equities have been remarkably resilient given 1822 01:40:55,040 --> 01:40:58,599 Speaker 1: what's happened to interest rates and costs of capital. Twenty 1823 01:40:58,680 --> 01:41:00,640 Speaker 1: twenty two is a record deer in terms of how 1824 01:41:00,760 --> 01:41:03,280 Speaker 1: much cost a capital of companies went up in one year, 1825 01:41:03,439 --> 01:41:07,080 Speaker 1: the biggest single year increase I've seen in the sixty 1826 01:41:07,120 --> 01:41:10,120 Speaker 1: plus years that have tracked the data for no. So 1827 01:41:10,439 --> 01:41:13,080 Speaker 1: I think that equities have been resilience precisely for that 1828 01:41:13,200 --> 01:41:15,880 Speaker 1: reason they've been able to pass the earnings through. Is 1829 01:41:15,920 --> 01:41:19,000 Speaker 1: it fair to say equities or an inflation hedge, because 1830 01:41:19,000 --> 01:41:21,840 Speaker 1: I've heard that my whole career, and it never really 1831 01:41:21,960 --> 01:41:25,280 Speaker 1: russ not collectively if you have a subset of companies 1832 01:41:25,280 --> 01:41:28,360 Speaker 1: which your pricing power. Because it turns out that if 1833 01:41:28,400 --> 01:41:31,680 Speaker 1: you look at equities collectively, that that pricing power is 1834 01:41:31,760 --> 01:41:34,679 Speaker 1: not complete. You don't you're not able to pass inflation 1835 01:41:34,800 --> 01:41:39,599 Speaker 1: through completely. So I think equity neither. No financial asset 1836 01:41:40,479 --> 01:41:43,400 Speaker 1: can be a good investment if inflation is rising, whether 1837 01:41:43,400 --> 01:41:45,880 Speaker 1: it's stalks or bonds or any kind of financial asset, 1838 01:41:45,960 --> 01:41:49,880 Speaker 1: because no, collectively, you don't have enough pricing power to 1839 01:41:50,000 --> 01:41:54,200 Speaker 1: pass it through. So here we are on the good side. 1840 01:41:54,479 --> 01:41:57,880 Speaker 1: It seems that inflation peaked a couple of quarters ago 1841 01:41:57,960 --> 01:42:02,839 Speaker 1: and have come down wherever we look, lumber, energy prices, 1842 01:42:02,920 --> 01:42:04,840 Speaker 1: copper going down the list of all the things, even 1843 01:42:04,920 --> 01:42:08,639 Speaker 1: container shipping containers and things like that have come back 1844 01:42:08,680 --> 01:42:12,639 Speaker 1: to pre pandemic level. But it seems on the services side, 1845 01:42:13,240 --> 01:42:17,800 Speaker 1: whether we're talking about apartment rentals, clearly a shortage labor 1846 01:42:17,880 --> 01:42:21,200 Speaker 1: in the United States another big shortage. So how do 1847 01:42:21,280 --> 01:42:25,879 Speaker 1: you look at this not like the nineteen seventies inflation. 1848 01:42:26,000 --> 01:42:28,680 Speaker 1: How do you look at this version of inflation that's 1849 01:42:28,720 --> 01:42:32,760 Speaker 1: a psychologically, that's the part of inflation, that's stuff. So 1850 01:42:32,920 --> 01:42:36,960 Speaker 1: if we see inflation expectations start to come down, that 1851 01:42:37,520 --> 01:42:40,439 Speaker 1: should be a positive for the FED. Because I'm not 1852 01:42:40,560 --> 01:42:45,000 Speaker 1: a big fan of surveys, especially expectation surveys, because all 1853 01:42:45,160 --> 01:42:48,640 Speaker 1: you get from the survey people is, hey, here's what 1854 01:42:48,760 --> 01:42:51,519 Speaker 1: happened in the past three months, and their psychology is 1855 01:42:52,000 --> 01:42:55,439 Speaker 1: reflecting that. I know the FED pays close attention to 1856 01:42:55,600 --> 01:43:00,479 Speaker 1: inflation expectations, So if we see those rolling over, that 1857 01:43:00,600 --> 01:43:02,920 Speaker 1: would be a positive sign. We're closer to the end 1858 01:43:02,960 --> 01:43:05,800 Speaker 1: of the the cycle. I think so. And I think 1859 01:43:05,880 --> 01:43:09,000 Speaker 1: that's so. The FED is keeping its eyes on wage 1860 01:43:09,040 --> 01:43:13,720 Speaker 1: increases in different sectors, it's looking at pricing and subsets 1861 01:43:13,760 --> 01:43:16,479 Speaker 1: of services, and it's looking for a break in that 1862 01:43:16,640 --> 01:43:20,160 Speaker 1: inflationary cycle. I think they want the break you need 1863 01:43:20,240 --> 01:43:23,800 Speaker 1: to get from six or five or wherever we are 1864 01:43:23,960 --> 01:43:27,880 Speaker 1: right now to two percent. It's a pretty significant break, Hey, listen, 1865 01:43:27,920 --> 01:43:29,479 Speaker 1: if we had a four hand or I think the 1866 01:43:29,600 --> 01:43:32,320 Speaker 1: markets rally, yeah, And I think that that's part of 1867 01:43:32,360 --> 01:43:35,240 Speaker 1: the reason, is that at some point the FED has 1868 01:43:35,400 --> 01:43:39,479 Speaker 1: to decide whether two is where their end game is 1869 01:43:39,920 --> 01:43:42,840 Speaker 1: or whether they said there's nothing magical about two, right, Well, 1870 01:43:42,840 --> 01:43:45,120 Speaker 1: when you're at zero, two looks like a ways to go. 1871 01:43:45,320 --> 01:43:48,080 Speaker 1: When you're at five, three seems a little more. And 1872 01:43:48,160 --> 01:43:50,320 Speaker 1: I remember in the nineteen eighties people are saying, let's 1873 01:43:50,320 --> 01:43:53,280 Speaker 1: target a five percent inflation or a five percent inflation, 1874 01:43:53,400 --> 01:43:56,080 Speaker 1: and they were okay with that, right, So there's nothing 1875 01:43:56,240 --> 01:44:00,240 Speaker 1: particularly magical about two. And in fact, if I step back, 1876 01:44:00,280 --> 01:44:03,639 Speaker 1: it's not high inflation per se that makes it difficult 1877 01:44:03,680 --> 01:44:07,880 Speaker 1: to run businesses. It's unstable inflation. In fact, I give 1878 01:44:07,920 --> 01:44:11,760 Speaker 1: people a choice between two economies. The first is two 1879 01:44:11,800 --> 01:44:14,920 Speaker 1: percent inflation, the second is five percent inflation. As which 1880 01:44:14,960 --> 01:44:17,639 Speaker 1: economy would rather be in as an investor, as a business. 1881 01:44:17,920 --> 01:44:19,519 Speaker 1: They all pick the two percent, right, and they said, 1882 01:44:19,880 --> 01:44:21,799 Speaker 1: let me change the problem a little bit. Let's assume 1883 01:44:21,880 --> 01:44:23,880 Speaker 1: the country with five percent inflation, it's going to be 1884 01:44:23,960 --> 01:44:28,280 Speaker 1: five percent guaranteed everywhere forever, and the two percent inflation, 1885 01:44:28,360 --> 01:44:30,680 Speaker 1: you go from zero to four back to zero to 1886 01:44:30,800 --> 01:44:32,760 Speaker 1: four and say which wouldn't you rather be? And the 1887 01:44:32,840 --> 01:44:36,000 Speaker 1: answer is I'd rather be in the five percent guarantee. 1888 01:44:38,120 --> 01:44:42,560 Speaker 1: It's stability in inflation that really you're aspiring to do, 1889 01:44:42,840 --> 01:44:47,320 Speaker 1: and historically high inflation has gone with more instability, right, 1890 01:44:47,400 --> 01:44:49,800 Speaker 1: So I think that the FED has to not just 1891 01:44:50,000 --> 01:44:53,639 Speaker 1: have an inflation level in its target as to think 1892 01:44:53,680 --> 01:44:56,080 Speaker 1: of ways in which how can we make that level 1893 01:44:56,200 --> 01:45:00,240 Speaker 1: more stable over time? A band which is tied a bit, guys, 1894 01:45:00,280 --> 01:45:02,639 Speaker 1: I think it makes it easier than to make long 1895 01:45:02,800 --> 01:45:06,360 Speaker 1: term investments and make judgments if you have a band 1896 01:45:06,439 --> 01:45:09,120 Speaker 1: that's tighter then if it's this wide band. So let 1897 01:45:09,200 --> 01:45:14,120 Speaker 1: me ask you a kind of impossible question. Given everything 1898 01:45:14,200 --> 01:45:17,919 Speaker 1: that's the FED did following September eleventh and the financial 1899 01:45:18,000 --> 01:45:22,519 Speaker 1: crisis and then the pandemic, has the FED been too 1900 01:45:22,640 --> 01:45:26,360 Speaker 1: active or is that too aggressive a hand on the 1901 01:45:26,439 --> 01:45:29,680 Speaker 1: wheel and that's leading to inflation volatility. I'll tell you 1902 01:45:29,760 --> 01:45:32,200 Speaker 1: what my parents told me when I was a young child, 1903 01:45:32,280 --> 01:45:35,360 Speaker 1: which his children should be seen and not heard. And 1904 01:45:35,680 --> 01:45:38,000 Speaker 1: I would say the same thing about FED chairman and 1905 01:45:38,120 --> 01:45:40,479 Speaker 1: people on the committee. I wish we saw less of 1906 01:45:40,600 --> 01:45:43,240 Speaker 1: them and a little mistress about them. I mean, I 1907 01:45:43,360 --> 01:45:47,160 Speaker 1: remember an Alan Greenspan was the FED chair. Not only 1908 01:45:47,320 --> 01:45:49,920 Speaker 1: was he a person of a few words, it was 1909 01:45:50,040 --> 01:45:52,519 Speaker 1: difficult to extract a sentence from him, and most people 1910 01:45:52,560 --> 01:45:54,719 Speaker 1: wouldn't even have been able to tell you who said 1911 01:45:54,800 --> 01:45:57,840 Speaker 1: on the federal open market committing the nineties because it 1912 01:45:58,040 --> 01:46:01,479 Speaker 1: wasn't the center of the un voice like it is today. Right. 1913 01:46:01,560 --> 01:46:04,200 Speaker 1: I have a vivid recollection of him saying to a congressman, 1914 01:46:05,040 --> 01:46:08,400 Speaker 1: if if you think you understood what I just said, 1915 01:46:08,479 --> 01:46:11,600 Speaker 1: then you've gotten it wrong, like he's trying to be 1916 01:46:12,040 --> 01:46:15,920 Speaker 1: pick whereas today, So do we have too much transparence? 1917 01:46:16,000 --> 01:46:18,800 Speaker 1: I think I think I think I'm hearing too much 1918 01:46:18,960 --> 01:46:22,760 Speaker 1: from FED members telling me what they think about inflation. Right, 1919 01:46:23,240 --> 01:46:25,600 Speaker 1: I think it'd be good for the FED to go 1920 01:46:26,280 --> 01:46:29,040 Speaker 1: a little silent for a while. I mean, doesn't mean 1921 01:46:29,120 --> 01:46:32,799 Speaker 1: that the federal open market. Don't make this make yourself 1922 01:46:32,880 --> 01:46:35,640 Speaker 1: the center of the investing universe. It's not healthy for 1923 01:46:35,760 --> 01:46:39,360 Speaker 1: anybody involved in the process. We've had that problem with politicians, 1924 01:46:39,479 --> 01:46:43,960 Speaker 1: with central bankers. Maybe social media is to blame for 1925 01:46:44,040 --> 01:46:46,840 Speaker 1: some of that. I know I only have you for 1926 01:46:46,880 --> 01:46:49,320 Speaker 1: a limited time, so so let me jump to my 1927 01:46:50,160 --> 01:46:55,519 Speaker 1: favorite questions before we wrap up. Starting with tell us 1928 01:46:55,600 --> 01:46:58,559 Speaker 1: what you've been either watching or listening to. What has 1929 01:46:58,600 --> 01:47:01,760 Speaker 1: been keeping you entertained for the past couple of years. 1930 01:47:02,040 --> 01:47:04,560 Speaker 1: I read, and what's junk? I mean that's you know 1931 01:47:04,680 --> 01:47:07,439 Speaker 1: I So you read quality and you watch junk. That's 1932 01:47:07,479 --> 01:47:10,000 Speaker 1: the barbell I read. I don't even read quality. I 1933 01:47:10,120 --> 01:47:13,160 Speaker 1: read crime novels. I love serial killer books. Mike Connolly 1934 01:47:13,280 --> 01:47:15,720 Speaker 1: is what I'm reading. Right, We're gonna get to your 1935 01:47:15,760 --> 01:47:19,360 Speaker 1: book list in a minute. What's the junk you're watching? Um? 1936 01:47:21,000 --> 01:47:27,120 Speaker 1: My favorite streaming service is HBO, and the reason is simple. 1937 01:47:27,160 --> 01:47:29,200 Speaker 1: On Netflix, you have to watch, you have to start. 1938 01:47:29,280 --> 01:47:32,759 Speaker 1: I have more false starts on Netflix than any other streams. 1939 01:47:32,880 --> 01:47:35,400 Speaker 1: That's interesting because I start a show and ten minutes 1940 01:47:35,439 --> 01:47:37,800 Speaker 1: said I said, I don't want to watch this. Do 1941 01:47:38,040 --> 01:47:39,800 Speaker 1: you ever have people say no, no, you gotta give 1942 01:47:39,840 --> 01:47:42,680 Speaker 1: it three or four episodes. I'm like, that's like you're 1943 01:47:42,720 --> 01:47:44,720 Speaker 1: telling me I have to watch Godfather one and two 1944 01:47:44,800 --> 01:47:46,920 Speaker 1: to get to Godfather. The reason I'm not going to 1945 01:47:47,000 --> 01:47:49,280 Speaker 1: do that in Netflix is their business model is to 1946 01:47:49,360 --> 01:47:52,679 Speaker 1: throw one hundred shows at the wall and hope three stick. 1947 01:47:53,640 --> 01:47:55,880 Speaker 1: HBO is at the other end of the extreme. Whether 1948 01:47:55,880 --> 01:47:58,040 Speaker 1: you watch The Last of Us so you watch any 1949 01:47:58,080 --> 01:47:59,880 Speaker 1: of the shows, what do you like the show? And 1950 01:48:00,080 --> 01:48:02,840 Speaker 1: not clearly thought went into the show. It's not something 1951 01:48:02,880 --> 01:48:08,040 Speaker 1: that I slapped together. So HBO remains my streaming network 1952 01:48:08,080 --> 01:48:11,040 Speaker 1: of choice. What's your favorite shows? I like The Last 1953 01:48:11,080 --> 01:48:13,400 Speaker 1: of Us. I think it was a very Last of Us. 1954 01:48:13,960 --> 01:48:17,200 Speaker 1: The Last of Us okay, a little dark, a little dark, 1955 01:48:17,320 --> 01:48:20,719 Speaker 1: and a little dystopian. Normally not my but the fact 1956 01:48:20,760 --> 01:48:23,760 Speaker 1: that I watched all eight episodes tells me that they 1957 01:48:23,800 --> 01:48:26,200 Speaker 1: were able to keep me hooked on a show, even 1958 01:48:26,280 --> 01:48:28,599 Speaker 1: though I'm not a Walking Dead fan or a fan 1959 01:48:28,720 --> 01:48:31,640 Speaker 1: of strange stuff that goes on in other universes. So 1960 01:48:31,800 --> 01:48:34,920 Speaker 1: I watched the first season of White Lotus. I haven't 1961 01:48:34,960 --> 01:48:37,200 Speaker 1: been motivated to watch the second season. I don't know 1962 01:48:37,280 --> 01:48:40,240 Speaker 1: if you I was. It's a pure entertainment value. It's 1963 01:48:40,240 --> 01:48:42,439 Speaker 1: like you said, job right, right, and I and I 1964 01:48:42,600 --> 01:48:46,760 Speaker 1: watched it simply because you watch it for just the 1965 01:48:47,560 --> 01:48:50,920 Speaker 1: craziness of what's going on. And you know. I also 1966 01:48:51,400 --> 01:48:55,360 Speaker 1: love Bosh on Amazon. My wife washes. It's because I 1967 01:48:55,439 --> 01:48:57,880 Speaker 1: like market Michael Conley, I like the books he writes, 1968 01:48:57,920 --> 01:49:02,600 Speaker 1: I like I like Bosh. I watched the Chernobyl documentary 1969 01:49:02,640 --> 01:49:06,080 Speaker 1: and it's an amazing documentary. View it's a it's a 1970 01:49:06,240 --> 01:49:09,040 Speaker 1: it's not actually it's a mockumentary, which is they take 1971 01:49:09,120 --> 01:49:12,320 Speaker 1: the documentary and they've made it a movie really extraordinarily 1972 01:49:12,320 --> 01:49:16,280 Speaker 1: well done. Again, a very dark story because it's Chernobyl story. 1973 01:49:16,320 --> 01:49:18,600 Speaker 1: How can you make it a happy ending? But it 1974 01:49:18,680 --> 01:49:23,479 Speaker 1: actually takes you through the series of mistakes that pile up. 1975 01:49:23,520 --> 01:49:25,160 Speaker 1: And as you watch it, do you recognize how you 1976 01:49:25,280 --> 01:49:28,639 Speaker 1: make eight billion dollar trading mistakes? Right? Is you take 1977 01:49:28,680 --> 01:49:30,439 Speaker 1: a small mistake, you cover it up, you make a 1978 01:49:30,479 --> 01:49:33,720 Speaker 1: bigger mistake, and then a bigger mistake. So I I 1979 01:49:34,200 --> 01:49:37,599 Speaker 1: fairly diverse viewing across I watch. I gonna have six 1980 01:49:37,720 --> 01:49:41,599 Speaker 1: different streaming services, so that watching anything on Apple TV. 1981 01:49:41,720 --> 01:49:44,599 Speaker 1: Since we've been talking watch I know on Apple TV 1982 01:49:44,840 --> 01:49:47,680 Speaker 1: that you know, I've been watching Severance and and I 1983 01:49:47,880 --> 01:49:50,360 Speaker 1: really love great show. And Apple TV again is following 1984 01:49:50,400 --> 01:49:53,960 Speaker 1: the HBO exactly that I love Ted Lasso. Who don't 1985 01:49:54,000 --> 01:49:56,479 Speaker 1: know it's it's a fun movie. It's a it's a 1986 01:49:56,560 --> 01:49:59,880 Speaker 1: movie that feels, you know, leaves you feeling good afterwards. 1987 01:50:00,960 --> 01:50:04,400 Speaker 1: Have you started shrinking? I haven't. It's next on My Life, 1988 01:50:04,479 --> 01:50:06,840 Speaker 1: delightful and the cast is great and it's full of 1989 01:50:06,960 --> 01:50:10,479 Speaker 1: lovely surprises that that is exactly what I was thinking, is, 1990 01:50:11,000 --> 01:50:13,599 Speaker 1: don't throw everything on the wall to a small number 1991 01:50:13,680 --> 01:50:17,439 Speaker 1: of high even though we were documentary was it was 1992 01:50:18,360 --> 01:50:21,320 Speaker 1: on Apple was really interesting. So so let's talk about 1993 01:50:21,400 --> 01:50:26,840 Speaker 1: mentors who helped to shape your career, both in academia, publishing, 1994 01:50:26,960 --> 01:50:30,800 Speaker 1: and finance. I did my PhD at UCLA, and I 1995 01:50:31,080 --> 01:50:34,680 Speaker 1: remember it was my second year. The head of the 1996 01:50:34,760 --> 01:50:36,880 Speaker 1: department called me in and said, we have this visiting 1997 01:50:36,960 --> 01:50:40,920 Speaker 1: professor from the University of Chicago comes here every summer 1998 01:50:41,000 --> 01:50:43,479 Speaker 1: because he likes to play tennis. And I said, who 1999 01:50:43,600 --> 01:50:45,760 Speaker 1: is it. He says, this guy called Jean Farmer, And 2000 01:50:46,040 --> 01:50:49,639 Speaker 1: I was actually Jean's TA for those summers. He used 2001 01:50:49,640 --> 01:50:52,200 Speaker 1: to come to UCLA and we played more tennis than 2002 01:50:52,439 --> 01:50:54,360 Speaker 1: you know. See, he didn't use me as a research 2003 01:50:54,439 --> 01:50:56,880 Speaker 1: assistant as much as he used me as a tennis partner. 2004 01:50:57,280 --> 01:51:01,080 Speaker 1: You know. But it's a fun person to talk to, 2005 01:51:01,360 --> 01:51:03,679 Speaker 1: you know. You know, you think of him as a rigid, 2006 01:51:03,760 --> 01:51:07,160 Speaker 1: efficient market person, but he actually had very very broad 2007 01:51:07,240 --> 01:51:11,800 Speaker 1: thoughts about market's very pragmatic, very practical, and it told 2008 01:51:11,840 --> 01:51:14,800 Speaker 1: me that researchers didn't have to be this highbrow people 2009 01:51:14,800 --> 01:51:17,360 Speaker 1: who thought in abstract terms, who never talked in the 2010 01:51:17,520 --> 01:51:21,679 Speaker 1: language that normal people use. So I worked with Jane 2011 01:51:21,760 --> 01:51:25,040 Speaker 1: dick Roll, who was a professor at UCLA was one 2012 01:51:25,080 --> 01:51:29,120 Speaker 1: of the people on my committee. But Tom Copeland was 2013 01:51:29,640 --> 01:51:32,040 Speaker 1: one of the people as well, and Tom was then 2014 01:51:32,120 --> 01:51:34,960 Speaker 1: a young professor at UCLA, went on to McKinsey wrote 2015 01:51:34,960 --> 01:51:38,439 Speaker 1: a book on valuation, the McKinsey Valuation Book with Tim Kohler, 2016 01:51:39,080 --> 01:51:41,040 Speaker 1: So he actually was a great teacher. I took my 2017 01:51:41,120 --> 01:51:44,599 Speaker 1: first corporate finance class as an MBA from Tim Copeland. 2018 01:51:44,680 --> 01:51:48,000 Speaker 1: So I when I think about why I went into 2019 01:51:48,080 --> 01:51:50,880 Speaker 1: teaching finance, it's because of the joy that he seemed 2020 01:51:50,880 --> 01:51:53,599 Speaker 1: to have in talking about finance. And this guy's having 2021 01:51:53,680 --> 01:51:56,479 Speaker 1: so much fun talking about this topic, it must be 2022 01:51:56,600 --> 01:52:00,240 Speaker 1: worth exploring. So I remember that when I teach corporate 2023 01:52:00,240 --> 01:52:02,640 Speaker 1: finance that I can evoke interest in people that can 2024 01:52:02,760 --> 01:52:05,640 Speaker 1: lead them into lots of places. And it's not what 2025 01:52:05,800 --> 01:52:09,000 Speaker 1: I'm saying, it's how much joy and enjoyment I feel 2026 01:52:09,160 --> 01:52:12,600 Speaker 1: the passion I bring to a topic. You know, I 2027 01:52:13,040 --> 01:52:15,679 Speaker 1: know one of the people that I've tracked in investing 2028 01:52:15,800 --> 01:52:18,599 Speaker 1: that I look up to is Mike Mobussan. Now, whether 2029 01:52:18,600 --> 01:52:23,480 Speaker 1: you've had my conduction, it's always the lie. Again. He's 2030 01:52:23,520 --> 01:52:26,360 Speaker 1: a person who's in multiple disciplines. He can talk about 2031 01:52:27,120 --> 01:52:30,240 Speaker 1: and and I love talking to him because I always 2032 01:52:30,280 --> 01:52:34,599 Speaker 1: get good ideas about business and markets because of something 2033 01:52:34,680 --> 01:52:38,560 Speaker 1: he might say about basketball. That's interesting because we do 2034 01:52:38,680 --> 01:52:42,120 Speaker 1: that investing all the time. The hot hand phenomenon, right, 2035 01:52:42,360 --> 01:52:44,880 Speaker 1: it shows up in mutual funds where people put their 2036 01:52:44,880 --> 01:52:46,960 Speaker 1: money in a mutual fund managing. He's got a hot hand. 2037 01:52:47,600 --> 01:52:51,120 Speaker 1: So there are you know, my mentor what I've learned 2038 01:52:51,160 --> 01:52:53,880 Speaker 1: as human beings come as a package. There are good 2039 01:52:53,960 --> 01:52:56,320 Speaker 1: things and bad things, and I've learned not to put 2040 01:52:56,400 --> 01:53:00,800 Speaker 1: people on pedestals because then you're asking for disappointment. It's 2041 01:53:00,840 --> 01:53:03,040 Speaker 1: one of the pet peeves I have about people who 2042 01:53:03,120 --> 01:53:05,160 Speaker 1: put more in Buffett in a pedestal. There are lots 2043 01:53:05,200 --> 01:53:08,800 Speaker 1: of things that Buffett does that I admire, including the 2044 01:53:08,800 --> 01:53:11,479 Speaker 1: fact that he's a core philosophy that he goes back 2045 01:53:11,560 --> 01:53:14,640 Speaker 1: to no matter what happens. But there are things that 2046 01:53:14,720 --> 01:53:16,760 Speaker 1: he says and doesn't so I don't agree with That 2047 01:53:16,880 --> 01:53:20,040 Speaker 1: doesn't mean that I'm rejecting the good stuff. It just 2048 01:53:20,200 --> 01:53:23,040 Speaker 1: means I'm taking it as a package. I wish people 2049 01:53:23,200 --> 01:53:25,840 Speaker 1: thought about that, because I get asked to mentor people. 2050 01:53:26,280 --> 01:53:28,320 Speaker 1: Every week. I get students writing me, can you be 2051 01:53:28,439 --> 01:53:31,280 Speaker 1: my mentor? And I said, maybe, rather than mentoring, I 2052 01:53:31,360 --> 01:53:33,519 Speaker 1: can give you some guidance, but except the fact that 2053 01:53:33,600 --> 01:53:35,640 Speaker 1: my guidance is not going to be perfect. Take the 2054 01:53:35,760 --> 01:53:38,320 Speaker 1: good stuff, reject the bad stuff, and do this with 2055 01:53:38,439 --> 01:53:41,360 Speaker 1: a bunch of people. You're probably better off than holding 2056 01:53:41,439 --> 01:53:43,280 Speaker 1: one person up as a mentor and say I'm going 2057 01:53:43,360 --> 01:53:46,760 Speaker 1: to do what that person did. In my life's experience, 2058 01:53:46,840 --> 01:53:50,120 Speaker 1: I've learned things from Gene, I've learned things from Tom Copeland, 2059 01:53:50,120 --> 01:53:52,320 Speaker 1: I've learned things from Mike Bobus, and I've learned things 2060 01:53:52,400 --> 01:53:55,640 Speaker 1: from my Uber drivers. So I mean you can get 2061 01:53:55,760 --> 01:54:01,639 Speaker 1: mentorship places. You know, the shop you go into every day, 2062 01:54:01,720 --> 01:54:04,639 Speaker 1: the guy behind the counter is always happy, even though 2063 01:54:04,680 --> 01:54:08,360 Speaker 1: he's got this job of handing out coffees three a second, 2064 01:54:09,040 --> 01:54:11,479 Speaker 1: how does he manage to stay happy? Maybe ask I me, 2065 01:54:11,479 --> 01:54:13,360 Speaker 1: you know, what do you do that puts you in 2066 01:54:13,439 --> 01:54:16,920 Speaker 1: a good mood? And the things you learn from those 2067 01:54:17,040 --> 01:54:19,280 Speaker 1: people are essentially going to be a package that's going 2068 01:54:19,360 --> 01:54:21,920 Speaker 1: to be worth a lot more than picking a single 2069 01:54:22,000 --> 01:54:23,720 Speaker 1: person and a mentor and saying I'm going to do 2070 01:54:23,800 --> 01:54:27,599 Speaker 1: everything that that person does very interesting. Let's talk about books. 2071 01:54:27,640 --> 01:54:29,479 Speaker 1: What are some of your favorites? What are you reading 2072 01:54:29,560 --> 01:54:32,880 Speaker 1: right now? In my book, somebody has to get killed 2073 01:54:32,920 --> 01:54:35,160 Speaker 1: and multiple people have to get killed for that book 2074 01:54:35,200 --> 01:54:38,280 Speaker 1: to be exciting. So I love books on serial killers. 2075 01:54:38,360 --> 01:54:42,600 Speaker 1: From Hannibal let the Silence, Silence of the Lambs. I 2076 01:54:42,680 --> 01:54:45,800 Speaker 1: mean I read those books before they became movies. Michael Connolly, 2077 01:54:45,840 --> 01:54:48,360 Speaker 1: who writes books about Harry Bosh, who's a detective in 2078 01:54:48,520 --> 01:54:52,440 Speaker 1: LA I love you know, I love good writing. I 2079 01:54:52,560 --> 01:54:55,200 Speaker 1: love good writing to the extent that you read the 2080 01:54:55,280 --> 01:54:59,520 Speaker 1: book not so much because of what the story is, 2081 01:54:59,760 --> 01:55:02,400 Speaker 1: but because how the story is stored. I mean, I 2082 01:55:02,520 --> 01:55:05,800 Speaker 1: love John Grisham simply because he's a great writer. I 2083 01:55:05,920 --> 01:55:08,760 Speaker 1: love Stephen King because he's a great writer. I'm not 2084 01:55:08,840 --> 01:55:11,520 Speaker 1: a horror story fan, but I'll read a King book 2085 01:55:11,560 --> 01:55:16,880 Speaker 1: because it's extremely well dridden, keeps me engaged. I started 2086 01:55:16,960 --> 01:55:20,600 Speaker 1: reading on a plane earlier this year. Stephen King on 2087 01:55:20,840 --> 01:55:26,360 Speaker 1: writing right, and it's fascinating. He essentially just is telling 2088 01:55:26,520 --> 01:55:30,040 Speaker 1: his own life story through how he learned to write. 2089 01:55:30,560 --> 01:55:35,840 Speaker 1: And really good storytellers are great storytellers. Absolutely. Our last 2090 01:55:35,920 --> 01:55:38,840 Speaker 1: two questions, what sort of advice would you give a 2091 01:55:38,920 --> 01:55:43,760 Speaker 1: recent college grad who is interested in a career in finance. 2092 01:55:44,880 --> 01:55:48,480 Speaker 1: Remember that finance has multiple careers. You know, you don't 2093 01:55:48,520 --> 01:55:50,640 Speaker 1: have to end up at Goldman Sachs to be in finance. 2094 01:55:50,720 --> 01:55:54,320 Speaker 1: You could go work for a small, privately owned business 2095 01:55:54,400 --> 01:55:58,600 Speaker 1: in Pennsylvania and be doing finance. Because finance, basically, to me, 2096 01:55:59,280 --> 01:56:01,840 Speaker 1: it's a sense of definition. Is involves the use of 2097 01:56:01,920 --> 01:56:04,160 Speaker 1: any decision that has money involved in it is a 2098 01:56:04,240 --> 01:56:07,960 Speaker 1: financial decision. Define that way. Finance is all around you. 2099 01:56:08,080 --> 01:56:10,520 Speaker 1: You can work in a nonprofit and do finance. You 2100 01:56:10,600 --> 01:56:13,200 Speaker 1: can work for the government and do finance. You can 2101 01:56:13,240 --> 01:56:14,720 Speaker 1: work for a company, you can work for a bank, 2102 01:56:14,800 --> 01:56:17,400 Speaker 1: you can work for a consulting firm. And you ask 2103 01:56:17,480 --> 01:56:19,880 Speaker 1: me which one of those should I pick? Part of 2104 01:56:19,960 --> 01:56:22,240 Speaker 1: it is lifestyle choice, right, So don't go work for 2105 01:56:22,320 --> 01:56:25,280 Speaker 1: Goldman Sachs saying look, I want a good balance of 2106 01:56:25,560 --> 01:56:28,200 Speaker 1: life and work. It's not going to be there, right, 2107 01:56:28,920 --> 01:56:32,680 Speaker 1: And often you've got to accept compromises. Life is about tradeoffs. 2108 01:56:32,800 --> 01:56:35,200 Speaker 1: And if you say, look, I want to balance lifestyle, 2109 01:56:35,280 --> 01:56:37,000 Speaker 1: accept the fact that you might have to settle for 2110 01:56:37,040 --> 01:56:40,880 Speaker 1: a lower pay and live away from a big city 2111 01:56:41,000 --> 01:56:44,600 Speaker 1: because that's where your lifestyle might best be played out. 2112 01:56:44,800 --> 01:56:49,720 Speaker 1: So a small privately owned entity in Pennsylvania, Vanguard Group 2113 01:56:49,840 --> 01:56:51,440 Speaker 1: is that what you're refining. It could be a Vanguard 2114 01:56:51,480 --> 01:56:55,480 Speaker 1: Group it it could be a plumber plumbing business in Pittsburgh. 2115 01:56:55,520 --> 01:56:59,080 Speaker 1: If you're from that area, you're a Steelers fan. So 2116 01:56:59,440 --> 01:57:02,000 Speaker 1: I think had in a sense. If you are willing 2117 01:57:02,240 --> 01:57:04,920 Speaker 1: to kind of think out of the box, there are 2118 01:57:05,000 --> 01:57:07,520 Speaker 1: finance helps all over. You can pick the part of 2119 01:57:07,560 --> 01:57:09,640 Speaker 1: the work where do you want to live in. You 2120 01:57:09,680 --> 01:57:11,600 Speaker 1: can pick the type of business you want to work 2121 01:57:11,680 --> 01:57:13,800 Speaker 1: for and accept the fact that he might make fifty 2122 01:57:13,880 --> 01:57:16,200 Speaker 1: percent less than he might have had working for Morgan 2123 01:57:16,280 --> 01:57:19,440 Speaker 1: Stanley or Goldman Sex. And our final question, what do 2124 01:57:19,520 --> 01:57:22,600 Speaker 1: you know about the world of finance and investing today? 2125 01:57:22,760 --> 01:57:25,640 Speaker 1: You wish you knew forty or so years ago when 2126 01:57:25,680 --> 01:57:29,000 Speaker 1: you were first getting started in the field, that behavioral 2127 01:57:29,080 --> 01:57:34,440 Speaker 1: and emotional factors play a much much bigger role than 2128 01:57:34,560 --> 01:57:38,800 Speaker 1: economics and decision making on economic decisions, starting with where 2129 01:57:38,840 --> 01:57:40,440 Speaker 1: you buy a house, how much you pay for a house, 2130 01:57:40,520 --> 01:57:43,720 Speaker 1: where you go to college, what stalks you buy, you know, 2131 01:57:44,000 --> 01:57:47,440 Speaker 1: And it's something that I've had to learn the hard 2132 01:57:47,520 --> 01:57:51,040 Speaker 1: way as I've watched markets adjust and go through booms, 2133 01:57:51,080 --> 01:57:53,760 Speaker 1: and bus I've learned that, you know, you need to 2134 01:57:53,840 --> 01:57:58,040 Speaker 1: be as much psychologists as economists to think about economic questions. 2135 01:57:58,440 --> 01:58:02,040 Speaker 1: And it's made me. It's made me humbler because often 2136 01:58:02,160 --> 01:58:04,520 Speaker 1: when you have this rational view of the wood and 2137 01:58:04,560 --> 01:58:07,600 Speaker 1: your models, you start to believe that you drive the 2138 01:58:07,680 --> 01:58:11,280 Speaker 1: wood and the decisions there. But you don't. You're an observer. 2139 01:58:12,000 --> 01:58:15,520 Speaker 1: And when behavior is different than what you predicted, rather 2140 01:58:15,600 --> 01:58:18,880 Speaker 1: than pick on the people who behave differently than you 2141 01:58:18,960 --> 01:58:22,640 Speaker 1: predicted and call them irrational, think of this as human 2142 01:58:22,720 --> 01:58:24,960 Speaker 1: nature and say why am I not factoring that in 2143 01:58:25,400 --> 01:58:32,040 Speaker 1: into my decision making? Quite fascinating. Professor Demotoran, thank you 2144 01:58:32,120 --> 01:58:35,680 Speaker 1: so much for being so generous with your time. We 2145 01:58:35,920 --> 01:58:41,000 Speaker 1: have been speaking with nyus Aswath Demotoran, professor of finance 2146 01:58:41,120 --> 01:58:44,240 Speaker 1: at the Stern School of Business. Be sure and check 2147 01:58:44,320 --> 01:58:47,480 Speaker 1: out his new book, which will be out in December 2148 01:58:47,520 --> 01:58:51,920 Speaker 1: of this year, The Corporate Life Cycle, Business Investment and 2149 01:58:52,160 --> 01:58:57,280 Speaker 1: Management Implications. If you enjoy this conversation, well, be sure 2150 01:58:57,320 --> 01:58:59,480 Speaker 1: and check out any of the previous four hundred and 2151 01:58:59,520 --> 01:59:03,040 Speaker 1: eighty six we've done over the past eight or nine years. 2152 01:59:03,560 --> 01:59:08,120 Speaker 1: You can find those at YouTube, iTunes, Spotify, wherever you 2153 01:59:08,280 --> 01:59:12,160 Speaker 1: find your favorite podcasts. Sign up for my daily reading 2154 01:59:12,200 --> 01:59:14,640 Speaker 1: list at Rihaltz dot com. You can follow me on 2155 01:59:14,760 --> 01:59:19,080 Speaker 1: Twitter at Riholtz. Check out all of the Bloomberg podcasts 2156 01:59:19,600 --> 01:59:22,720 Speaker 1: at podcast I would be remiss if I forgot to 2157 01:59:22,800 --> 01:59:25,760 Speaker 1: thank the crack team that helps me put these conversations 2158 01:59:25,840 --> 01:59:30,760 Speaker 1: together each week. Samantha Danziger is my audio engineer. Paris 2159 01:59:30,840 --> 01:59:34,520 Speaker 1: Wald is my producer, Attica val Bron is our project manager. 2160 01:59:34,840 --> 01:59:39,320 Speaker 1: Sean Russo is my researcher. I'm Barry Rihalts. You've been 2161 01:59:39,400 --> 01:59:42,720 Speaker 1: listening to Masters in Business on Bloomberg Radio.