Speaker 1: This is Masters in Business with Very Red Holds on
Speaker 1: Bloomberg Radio. This weekend. On the podcast, I have an
Speaker 1: extra special guest, returning after a too long of a wait,
Speaker 1: Professor Aswat Damadoran. What can I say about his breath
Speaker 1: and depth of expertise? Start with valuation, What is a
Speaker 1: company worth and why? Move towards what are the things
Speaker 1: that drive valuations? And then expand out to what happens
Speaker 1: to valuations over the life cycle of a company and
Speaker 1: why those life cycles are getting increasingly shorter over the
Speaker 1: past few decades. And then meld in a little psychology
Speaker 1: and behavioral finance, and you have what is truly a
Speaker 1: master class by one of the great professors in the
Speaker 1: world of finance. I found our conversation to be absolutely fascinating.
Speaker 1: I know you will also with no further ado, Nyu Sterns,
Speaker 1: Professor Aswath Demotorant, I'm glad to be back. So let's
Speaker 1: start out with a little bit on the work you do.
Speaker 1: You're known as the Dean evaluation. What led you into
Speaker 1: that field of study in the world of investing? Can
Speaker 1: I tell you a a little story? But why I'm called
Speaker 1: the Dean Evaluation. I was in CNBC about a decade ago,
Speaker 1: and the host had trouble with my last name, and
Speaker 1: he kept trying and trying. It's so easy. It runs
Speaker 1: with the motor too many wiles, so you don't know
Speaker 1: which one to emphasize and which one not to. So finally,
Speaker 1: after about his fifth try, he said, I give up.
Speaker 1: I'm going to call you Dean, and I said why,
Speaker 1: He said Dan evaluation. It's easier to say so there
Speaker 1: has nothing to do with expertise and everything to do
Speaker 1: with having an unpronounceable last name. So just for the record,
Speaker 1: it's not Damadoran. It's Demotoran exactly, because I don't think
Speaker 1: that's that hard. It only took me nine times and
Speaker 1: I got it right. So let's start with the question
Speaker 1: what lured you to focus on valuation. I am interested
Speaker 1: in numbers. I'm naturally a numbers person, but I've also
Speaker 1: been interested in storytelling. To me, storytelling is much more.
Speaker 1: I mean, if you think about the history of humanity,
Speaker 1: for thousands of years, the way we passed down information
Speaker 1: was with stories, not with numbers. It's only in the
Speaker 1: last century that numbers have come to the forefront. Is
Speaker 1: that correct. It's just the last century. That's fascinating. In fact,
Speaker 1: I think the first numbers were collected by the insurance
Speaker 1: people in the seventeen hundreds, but it was very proprietary
Speaker 1: only they had access. It's the last an Excel really
Speaker 1: has allowed for this acceleration of number crunching. So to me,
Speaker 1: the you know what attracts me to valuation, it's it's
Speaker 1: it's at bridge between stories and numbers. You tell stories
Speaker 1: about companies that you convert into numbers, and those numbers
Speaker 1: eventually become valuations, and I find it attractive. I don't
Speaker 1: want to be a number. I'm not a natural accountant
Speaker 1: or an actuary. I'm not a natural strategy who can
Speaker 1: tell the stories. I like to connect stories numbers, and
Speaker 1: valuation is the place to go to do that. So
Speaker 1: as it's safe to say, narratives drive value, narratives drive
Speaker 1: value absolutely Now, Sometimes narratives drive value to towns and
Speaker 1: cities they really shouldn't go. Sometimes narratives can become fairytales,
Speaker 1: and that's why you need numbers to keep your discipline.
Speaker 1: In fact, when I start my valuation class, I have
Speaker 1: three hundred and fifty nbas who take my class, and
Speaker 1: it's an amphitheater. I start with the question how many
Speaker 1: of you are more naturally number crunches, and about two
Speaker 1: hundred put up their hands. X bankers are recovering accountants, auditors, actuary, scientists, mathematicians,
Speaker 1: and the other one fifty and natural storytellers, liberal arts majors.
Speaker 1: Because MBA programs have become incredibly diverse. And I tell
Speaker 1: them what my endgame for the classes. I said, by
Speaker 1: the end of this class, and I turned to my
Speaker 1: number crunches. I said, look, I hope you have enough
Speaker 1: belief in your own imagination that you're willing to let
Speaker 1: go because they've spent a lifetime being told that being
Speaker 1: subjective is a weakness. Making judgments about something is a weakness.
Speaker 1: And then I turn to my storytelling. So by the
Speaker 1: end of this class, I hope you have enough confidence
Speaker 1: with numbers that you become a discipline storyteller. To me,
Speaker 1: what makes for good valuation is you're either a discipline
Speaker 1: storyteller or an imaginative number cruncher. And I think that
Speaker 1: combination is getting increasingly hard to find because we're very
Speaker 1: early in life. I see this with my wife teaches
Speaker 1: fifth grade. Already, people are being slaughtered natural number cruncher.
Speaker 1: They're going to take number crunching classes, go for a
Speaker 1: number crunching degree, have a number crunching job. You know,
Speaker 1: there are no renaissance people left on Wall Street and
Speaker 1: investing people who can talk about drama and talk about
Speaker 1: numbers at the same time, and I think that's a loss.
Speaker 1: There are a handful, but they certainly are few and
Speaker 1: far between, to say the very least. So you discuss
Speaker 1: on how all this adds up to a puzzle of
Speaker 1: corporate finance that you enjoy untangling. What are some of
Speaker 1: the recent puzzles that you've been trying to tease apart.
Speaker 1: Let's take a basic one. Let's take buybacks. It's a story,
Speaker 1: it's a political hot spot, and everybody's talking about it.
Speaker 1: And I've always wondered, why has there been a shift
Speaker 1: away from dividends to buy backs over the last four decades.
Speaker 1: It's incredibly noticeable. I'm going to write down my answer
Speaker 1: and you tell me. I'm curious as to what your
Speaker 1: answer is. Forty years ago, ninety five percent of the
Speaker 1: cash return by companies took the form of dividends. In
Speaker 1: nineteen eighty one, when I started, dividends were a way
Speaker 1: to go for return cash. Last year, sixty seven percent
Speaker 1: of all cash return by companies took the form of buybacks.
Speaker 1: Two out of three dollars two out of three dollars.
Speaker 1: Collectively a trillion dollars was returning to the form of
Speaker 1: buybacks five hundred and fifty billion dollars in dividends. Clearly,
Speaker 1: this is a trendline. It's not just the US. Across
Speaker 1: the world, you're starting starting to see this phenomenon. So
Speaker 1: that's really interesting because what I wrote down was tax
Speaker 1: efficiency is one of the drivers, and then we could
Speaker 1: talk about stock option plans and what is and isn't
Speaker 1: above the lines adopted. So there's that what's your conclude fact.
Speaker 1: I throw this out to my class and the first
Speaker 1: thing they come up with is in more tax efficient
Speaker 1: to do buybacks then dividends, And in a sense it is,
Speaker 1: but it's actually less tax efficient now than it was
Speaker 1: in nineteen eighty one. When nineteen eighty one, when I started,
Speaker 1: you got dividends, there were tax disordinary income at the
Speaker 1: highest marginal tax rate that penty percent capital gains then
Speaker 1: we're tax or twenty eight percent. So the question is
Speaker 1: if tax efficiency is the issue why were in buybacks
Speaker 1: the dominant way of returning cash pre nineteen eighty one,
Speaker 1: and why have they actually increased as in fact, dividends
Speaker 1: and buybacks and now tax it roughly the same rate
Speaker 1: since two thousand and four. The tax rate and dividends
Speaker 1: and capital gains is fifteen eighteen in twenty one percent.
Speaker 1: They matched up right, So there's actually less tax efficient
Speaker 1: now than it was thirty or forty years ago. Don't cash,
Speaker 1: So that argument kind of The other argument I heard
Speaker 1: was management compensation and the nineteen general stock options. But
Speaker 1: if you get restricted stock, the incentives changed. With stock options.
Speaker 1: There's an argument to be made that you want the
Speaker 1: stock price to go up because your options are worth Course,
Speaker 1: in the nineteen nineties, the argument was, it's buy backs
Speaker 1: are happening because we're increasingly rewarded, rewarding management with stock options,
Speaker 1: they have an incentive to do buy back so that
Speaker 1: they can get the higher price in the options. So
Speaker 1: I said, okay, that's testable. If that is true, buy
Speaker 1: backs should be greater at companies where management stock options
Speaker 1: that are a higher percentage of compensation, and less set
Speaker 1: companies where management options are not issue. And I tested
Speaker 1: that in the nineteen nineties. In fact, that argument didn't
Speaker 1: work hard because, you know, because the companies were doing
Speaker 1: buybacks in the nineteen nineties were not the big companies.
Speaker 1: There were older, you know, companies that were over the
Speaker 1: hill in terms of their business models. And as you
Speaker 1: well known, two thousand and seven, accountants fixed what I
Speaker 1: thought was a horrendous mistake or the part which was
Speaker 1: treating options as free money and essentially expensing it. And
Speaker 1: over the last fifteen years, and maybe people are not
Speaker 1: aware of it, companies have increasingly shifted away from options
Speaker 1: to restricted stock last year. In other words, you get
Speaker 1: a block of stock that you can sell, there's a
Speaker 1: big tax hit for that. Right. It's kind of complicated
Speaker 1: how you have to deal with it because you're not
Speaker 1: selling anything to pay for it. But it shows up
Speaker 1: as companies. It's a different kind of taxes with the options.
Speaker 1: That tax had came when you exercised your option. I
Speaker 1: remember markus Zuckerberg when they went public had to pay
Speaker 1: what a half a billion dollars to the state of
Speaker 1: California for options being exercised. Now, but restricted stock have
Speaker 1: a different set of characteristics, and there you don't have
Speaker 1: the incentive anymore to play with the prices because you're
Speaker 1: going to get the shares anyway, and you're going to
Speaker 1: get the dividends. While you get the shares. If you
Speaker 1: paid our dividends, you still, even on restricted chairs, get
Speaker 1: those dividends. So over the last fifteen years, companies that
Speaker 1: used to give options have increasingly shifted away from restricted
Speaker 1: stock and over options to the reason for buy backs.
Speaker 1: You should have seen a drop off in buybacks, and
Speaker 1: we haven't. So I stepped back and said, what's strong
Speaker 1: with dividends? And let's face the dividends really never made
Speaker 1: sense as a way of returning cash to equity investors.
Speaker 1: Why if you're a long term investor, you want to
Speaker 1: see the jobs. If you think about equity as a
Speaker 1: residual claim, which is the way I think about it,
Speaker 1: you get whatever's left over, then that residual claim should
Speaker 1: change your tier. Whereas dividends historically have been sticky, They're
Speaker 1: like coupons on bonds. And the only reason I can
Speaker 1: think for why dividends became the key way of returning
Speaker 1: cash is I went back to the history of markets.
Speaker 1: Bond markets preceded stock markets, so when stock markets are
Speaker 1: first opened to attract investors to buy stocks. They had
Speaker 1: to be discus isised as bonds, so meaning he had
Speaker 1: a coupon. It was fairly reliable and if you had
Speaker 1: a little upside on the equity, you can go look
Speaker 1: at the original railroad stocks. You put a dividend in
Speaker 1: to get investors who are buying bonds. This is just
Speaker 1: like a bond with price appreciation. And this is in
Speaker 1: a one reason I'm a little skeptical about people who
Speaker 1: claim that they do their investing based on Ben Graham
Speaker 1: Security analysis. It's a great book, but it reflects the time.
Speaker 1: It was a little dated, it was nineteen thirty four,
Speaker 1: and it reflects the risk a version of somebody coming
Speaker 1: off the Great Depression and things of stocks as bonds
Speaker 1: with price appreciation. That's that's a Graham approach investing. Buy
Speaker 1: a bond with price appreciation. So let's combine two things
Speaker 1: that you've said. One is your love of narrative as
Speaker 1: a way of explaining numbers, and the second is I'm
Speaker 1: going to you mentioned railroads. I want to just reference
Speaker 1: what we see in terms of pushback to buy backs
Speaker 1: and from the nineties anecdotally, and I know the plural
Speaker 1: of anecdote is not data, but anecdotally. We always used
Speaker 1: to see the worst time stock buy backs. Heading into
Speaker 1: two thousand, it seemed like the buybacks got bigger and bigger.
Speaker 1: Management tends to be terrible timers, so I used to
Speaker 1: hear that all the time. Then you have the railroad
Speaker 1: crash and a big stock buy back instead of a
Speaker 1: safety upgrade. And so these stories seemed compelling, even though
Speaker 1: they don't reflect the totality of all the buybacks. And
Speaker 1: I'm glad you brought brought up Norfolk Southern because my
Speaker 1: most recent post and buy back starts with two stories.
Speaker 1: One is the Norfolk Southern story and how that initiated
Speaker 1: again this discussion of our buy backs happening at the
Speaker 1: expense of things that of reinvestment, things you need to
Speaker 1: put back. And the second was, of course the Warren
Speaker 1: Buffett story that came out the same week where he
Speaker 1: called you know, essentially called people of post buybacks. You
Speaker 1: know economically it's I mean, strong words for a buffet.
Speaker 1: And again some histories until two thousand and nine or ten,
Speaker 1: Warren Buffett actually spoke out against buybacks. He was a
Speaker 1: big dividend person, and then in two thousand and twelve.
Speaker 1: I think Berkshire Hathaway initiated its buybacks with a cap,
Speaker 1: which is, you know that they would do buybacks as
Speaker 1: long as the price was less than intrinsic value. Now,
Speaker 1: is that a function of Berkshire Hathaway having so much
Speaker 1: cash and not a lot of reasonably priced acquisition targets.
Speaker 1: And I think here's where I think the real reason
Speaker 1: for the buybacks comes in dividends, because they're sticky requires
Speaker 1: some degree of confidence about future learnings. Now, when I
Speaker 1: started in nineteen eighty one, I actually made a list
Speaker 1: of two hundred US companies with reliable and predictable learnings.
Speaker 1: It was easy to do. You had not you know,
Speaker 1: these big company telephone companies, consumer product companies, I come
Speaker 1: to call them widows and orphans, exactly a big brand
Speaker 1: name companies. And I made a list. It was easy
Speaker 1: to do. Today, if you ask me to make a
Speaker 1: list of twenty companies with reliable and predictable earnings, I
Speaker 1: have difficulty twenty. You can't get twenty because everybody's business
Speaker 1: is under disruption. Everything is changing. I mean, welcome to globalization.
Speaker 1: There's a dark side to globalization, and one of the
Speaker 1: dark sides of globalization is business has become more unpredictable,
Speaker 1: Learnings have become less predictable, and if earning has become
Speaker 1: less predictable, what company in its right mind wants to
Speaker 1: increase dividends by twenty percent and then phase the problem
Speaker 1: two years later of saying we've been disrupted, we have
Speaker 1: to go back and cut dividends. I think of buybacks
Speaker 1: as flexible dividends. That's the way I think about it,
Speaker 1: and that's a good thing. In the first quarter of
Speaker 1: twenty twenty, when COVID shut the global economy down, everybody
Speaker 1: felt that the right thing for companies to do is
Speaker 1: hold back cash, right But company, because you got to
Speaker 1: wait this out, and if you look at buybacks, that's
Speaker 1: exactly what happened. Companies announced that they were cutting back
Speaker 1: on buybacks, and buybacks that already anounced we're going to
Speaker 1: be suspended. Buybacks dropped by fifty percent in that quarter,
Speaker 1: which ironically would have been a great time to buy
Speaker 1: some stock. Exactly. We'll come back to the timing issue.
Speaker 1: But dividends continued as if nothing was happening, because, oh really,
Speaker 1: companies were terrified. And this is the problem is companies
Speaker 1: are so attuned to this notion of you can't cut
Speaker 1: dividends that when a company actually cuts dividends, it's usually
Speaker 1: because it's disaster on the horizon. So you're actually stuck
Speaker 1: with a dividen. You're a hotel company, you're paying a dividend.
Speaker 1: You're continuing to pay a dividend because you don't want
Speaker 1: to send the wrong signal. My reaction is, are you
Speaker 1: in denial because everybody around you knows that you can't
Speaker 1: run your business. But that's the problem with dividends is
Speaker 1: the way we've created dividend policies, and let's face it,
Speaker 1: value investors have fed into into this addiction by saying,
Speaker 1: I buy the stock because it never cuts dividends. That's
Speaker 1: really interesting. I have a vivid recollection when I was
Speaker 1: new to investing in the mid nineties of finding these
Speaker 1: giant yielding companies eight nine, ten percent, not realizing until
Speaker 1: someone pulled me aside and said, here's what's going on. Hey,
Speaker 1: these were two percent dividend companies until they got shelacked.
Speaker 1: And even though they're circling the drain, they're still afraid
Speaker 1: to cut the dividend. And that's why it looks like
Speaker 1: it's a nine percent yield that dividends eventually going away.
Speaker 1: We can't still see that anymore. That's got to be history.
Speaker 1: Right last year, they were at least a couple of
Speaker 1: hundred companies with dividendials greater than eight percent, And the
Speaker 1: way I think of them is, these are companies that
Speaker 1: are teetering on the edge of the cliff. And if
Speaker 1: you're a lazy value investor buying high yields, you're going
Speaker 1: to be buying a lot of banks right now. A
Speaker 1: lot of regional banks right now have dividendials of six, seven,
Speaker 1: eight percent. But if you load up your portfolio with those,
Speaker 1: guard only knows what a year or two from now
Speaker 1: you're going to be looking at. Because these companies are
Speaker 1: going to be forced to cut their dividends. Right This
Speaker 1: is not even a question of it's it's not a choice.
Speaker 1: They're going to be forced to cut their dividends. You're
Speaker 1: just buying them just ahead of the precipice. And it's
Speaker 1: not a great way to invest as a reason. But
Speaker 1: to me, that is what I think about as a puzzle.
Speaker 1: When I look at a company doing something and I say,
Speaker 1: why is that happening. I want to generalize the discussion
Speaker 1: because it's easy to get trapped in an anecdotal story
Speaker 1: and draw conclusions that don't apply to the population. And right,
Speaker 1: you probably saw the story about Musk lowering the Twitter value,
Speaker 1: right twenty billion dollars for the stuff, And that's an
Speaker 1: interesting question when first, is this a gaming of the
Speaker 1: system and you're setting yourself up for the great recovery story?
Speaker 1: Does he get it right now? Does he get it
Speaker 1: right down? So there's the taxes that I am puzzled,
Speaker 1: but I'm curious. I want to find out, and I'm
Speaker 1: digging as much as I can, because we do know
Speaker 1: that Federal took a fifty six percent right down on
Speaker 1: their investment in Twitter finance appurchase. They have finance, so
Speaker 1: they invest in the equity. They took a fifty seven
Speaker 1: percent right down, which which is suspiciously closed to the
Speaker 1: knockdown you're seeing from forty four to twenty vallion. So
Speaker 1: I always wonder about these accounting firms that reappraise price.
Speaker 1: They don't ap reappraise value. They repraise price what they're
Speaker 1: based it on. Probably then again, they don't reappraise value,
Speaker 1: they reappraise price and I suspect you think they should
Speaker 1: be reappraising value. I don't think they have the tools
Speaker 1: to be quite honest, I'd rather have an honest pricing
Speaker 1: than a kabuki dance valuation, because you know, it goes
Speaker 1: back to this issue of fair value accounting. Fair value
Speaker 1: accounting is not about value, about pricing. In fact, if
Speaker 1: you look at Fast one fifty seven, which lays out
Speaker 1: the principles of fair value accounting, you're supposed to come
Speaker 1: up with the number that you can get if you
Speaker 1: sold in the market to a willing to a participant
Speaker 1: on an arms length transaction. That's a price mission market
Speaker 1: price market hardest are so in a sense, that's what
Speaker 1: these accountants are doing. And presumably they mark down the
Speaker 1: pricing based on revenues dropping by fifty seven percent. It's
Speaker 1: as simplistic as that. Do we really think Twitter could
Speaker 1: be sold today for twenty billion dollars? I think it
Speaker 1: could be so to somebody with deep pockets, because, let's
Speaker 1: face it, you know you've just got three fifty million users,
Speaker 1: and you know, I've never seen a social media platform
Speaker 1: becomes so much a part of our lives with a
Speaker 1: pricing and a business model that doesn't seem to work right.
Speaker 1: This has been the problem right from the beginning, and
Speaker 1: I think part of the reason is the nature of
Speaker 1: the platform doesn't lend itself easily to the way you
Speaker 1: make money. It's not good for a subscription model, as
Speaker 1: Eaton is finding out right. The three percent the people
Speaker 1: who send out ninety percent the tweets are might. You
Speaker 1: might get them, but you can't make enough money on
Speaker 1: the three percent to cover the business. It's not a
Speaker 1: great advertising model, partly because what makes it attractive. It's
Speaker 1: just limits and characters also limits you in terms of advertising.
Speaker 1: People are hitting and running. They don't sit and read,
Speaker 1: whereas in Facebook I can get to you while they
Speaker 1: are spending an hour talking to your friends. Right, So
Speaker 1: it's different. It's a difficult social media platform to monetize.
Speaker 1: Jack Dorsey found it out, you know, and his subsequent
Speaker 1: people they're found it out. I am not suhere it
Speaker 1: can ever be monetized successfully. I would not buy it
Speaker 1: as a business right what Elon should do. And by
Speaker 1: the way, I'm very good at giving advice to billionaires
Speaker 1: whether they want it or not. It should be like
Speaker 1: a Craigslist or a Wikipedia. Put it into a foundation
Speaker 1: for the public good, and if you really want it
Speaker 1: to be a public square, don't monetize it. Just sell
Speaker 1: enough advertising so it's a break even, and maybe it'll
Speaker 1: be a twenty billion dollar rite off on its next
Speaker 1: or forty four billion dollars. I think he could use
Speaker 1: the tax he can write off only the equity portion
Speaker 1: of forty four billion. Then write offs are going to
Speaker 1: be the banks writing it off. So that's I think
Speaker 1: the reality of this is. I think that is absolutely true.
Speaker 1: I think Twitter plays a role in our lives, which
Speaker 1: for many people, I think they we get our news
Speaker 1: on Twitter first, right, it's the new tape, absolutely where
Speaker 1: news breaks. I've heard that, you know, the quarterback for
Speaker 1: Baltimore wants leave. The first place he read it is
Speaker 1: he posts on Twitter that I'm looking for Lamar Jacks
Speaker 1: and now I'm looking for another place to be. So
Speaker 1: I think it's become this breaking newsplace, joyless track Twitter
Speaker 1: because they get their news stories off very much. So
Speaker 1: I'm in the middle. I had a flight back from
Speaker 1: California and I'm catching up in season three of Drive
Speaker 1: to Survive the f one and one of the drivers
Speaker 1: is leaving to take a gig with another of the
Speaker 1: f one teams and he makes that announcement on Twitter.
Speaker 1: It's it's where people go. It very much could be
Speaker 1: the public square, and I think that's where it might
Speaker 1: end up, but it might need somebody to take a
Speaker 1: big rite before it ends up here. I mean, I've
Speaker 1: given up on trying to figure out Elon's motives in
Speaker 1: doing something. But I think in a sense there is
Speaker 1: a portion of honesty in which is he wanted a
Speaker 1: public forum. He wants it in his stims. That's a problem.
Speaker 1: He wants it in his stims and the way. But
Speaker 1: I think that there is an argument to be made
Speaker 1: that Twitter as it was developing would never make it
Speaker 1: as a successful business, that maybe there's a pathway for
Speaker 1: it to become a part of our lives more like
Speaker 1: one of those regulated utilities, which you know we would
Speaker 1: we are so dependent on. But it's then not going
Speaker 1: to have the growth and the monetization potential that people
Speaker 1: might have seen it originally. So I have a pet
Speaker 1: theory of value Alon, We'll come to it later. What
Speaker 1: I want it's a really circle back to is you
Speaker 1: were describing the difference between price and valuation and it
Speaker 1: kind of raised an idea in my mind? How far
Speaker 1: behind the academic research? The most current academic research do
Speaker 1: you find Wall Street, Finance, the investment community. Because my
Speaker 1: favorite examples modern port folio theory, capital asset pricing model,
Speaker 1: the Farmer French factor model. It seemed like the market
Speaker 1: took a decade or longer to catch up. Is that
Speaker 1: gap still there? Especially when it comes to how do
Speaker 1: we properly value this company? It's interesting the models catch
Speaker 1: up faster than the underlying logic. There are a lot
Speaker 1: of people who use betas now right, but they don't
Speaker 1: understand the core assumption you need to get to betas
Speaker 1: being a measure of risk, which is you got to
Speaker 1: assume that investors have a diversified view of risk, that
Speaker 1: when they think about the risk and a company, they
Speaker 1: don't think of the risk of the company standing alone,
Speaker 1: but the risk it adds to a portfolio. That is
Speaker 1: the core idea band all of modern portfolio the sharp ratio,
Speaker 1: all the work bill shows. And the reason I make
Speaker 1: that claim is I see people who own three stocks
Speaker 1: who might use beta, and I said, look, are you
Speaker 1: sure you want to use beta to measure risks? Because
Speaker 1: you're violating the core assumption and they're not even sure
Speaker 1: what I'm talking about, and that I think is to me.
Speaker 1: The models make it, in fact too much more quickly
Speaker 1: than they should, because I want the intuition to get
Speaker 1: out there first, the logic to be debated first before
Speaker 1: you adopt the models. Greed drives everything. So if somebody
Speaker 1: sees a factor model and they say a factor making money,
Speaker 1: there's an etf. Let's get founded on the fact that
Speaker 1: nobody stops and asks the question, why is that factor
Speaker 1: giving me higher returns? What is the underlying logic? Small
Speaker 1: cap right? For a long time people bought small cap stalks,
Speaker 1: but these says, oh, it makes a return, and I
Speaker 1: would stop and ask them, why do you think small
Speaker 1: cap stalks earn a higher return? The original research, actually
Speaker 1: the former French paper that's fine, argued that market capitalization
Speaker 1: was standing in as a proxy for is that small
Speaker 1: companies were riskier than larger companies. You weren't really making
Speaker 1: higher returns. You just look like you were making higher
Speaker 1: returns and beating the models, but in fact you were
Speaker 1: exposed to risk. On a risk adjustice basis, it's the
Speaker 1: same and that's exactly right, But you'd look good when
Speaker 1: the alphas were calculated because people were using outmoded models
Speaker 1: to measure risk, and you could beat those models, so
Speaker 1: you could gain the system the great positive alphas, but
Speaker 1: looking like you were beating when in fact you were
Speaker 1: just buying small cap stalks. That was a farmer so
Speaker 1: farmer Frenchs. We're not saying you should invest in small
Speaker 1: cap stalks. They were saying, when you invest in small
Speaker 1: cap stalks, it look like you're making money, but they're
Speaker 1: underlying risk liquidity risk, information risk, right, but not as
Speaker 1: covered on Wall Street. Lesson an ETF gets found in
Speaker 1: the next year on small cap stalks, people forget all
Speaker 1: about the risk story. It becomes an alpha story. Everything
Speaker 1: in Wall Street becomes an alpha story. I mean this
Speaker 1: is I mean we might get to ESG. This is
Speaker 1: I think at the core of y ESG has floundered
Speaker 1: is somewhere in the middle of the last decade, people
Speaker 1: decided it would sell better if you sold it as
Speaker 1: an alpha story. So they told people, if you invest
Speaker 1: in good companies, you would make higher duds. I mean,
Speaker 1: this is the hold that thought. Because we're going to
Speaker 1: definitely come to ESG, let's stay with small cap for
Speaker 1: a Second, the most recent academic research I read that
Speaker 1: I thought was kind of compelling was sort of small
Speaker 1: cap within the small cap story that so, first the
Speaker 1: small cap factor kind of went away because it was
Speaker 1: really risk it wasn't actual returns. And then the update was, well,
Speaker 1: if you're looking at small cap, most of the returns
Speaker 1: are driven by the microcap and so that it's not
Speaker 1: the small cap. So is there microcap alpha or is
Speaker 1: that also a risk adjustice. It's even stranger than they
Speaker 1: and much of it is delivered in the first month
Speaker 1: of the year, you know, ninecause of the January effect.
Speaker 1: The January effect. So there's something weird going on here, right,
Speaker 1: I mean, it's been going on for so people dump
Speaker 1: a bunch of junk. They don't want to show their
Speaker 1: books in December. Reasons that by before December thirty first
Speaker 1: to get rid of the low profile stocks and your portfolios.
Speaker 1: That so you essentially push the price down, and then
Speaker 1: January comes around and you make you buy back those stocks.
Speaker 1: The price goes up. Whatever the reason, it's some I
Speaker 1: would not invest based on a small cab phenomenon precisely
Speaker 1: because it's so weird. It doesn't happen over the course
Speaker 1: of the year. It doesn't happen in a cross section.
Speaker 1: It's a small subset of companies, but it hears where
Speaker 1: it is. Staying with our notion of how badly academic
Speaker 1: theory gets transitioned into practice. If you're if you ever
Speaker 1: talk to people who praise small companies, the way they
Speaker 1: praise to come up with a discount rate is they
Speaker 1: use the traditional models risk cre rate, beta, risk premium.
Speaker 1: They come up with the number, and then they will
Speaker 1: add a small cap premium, a premium four percent more
Speaker 1: to push up the discount rate for small companies. So
Speaker 1: if you own a private business and you go to
Speaker 1: Duff and Phelps or you go to Incidence of Value
Speaker 1: my business, they'll come up with a twelve percent discountry,
Speaker 1: and so we're going to add a six percent small
Speaker 1: premium to it. He said, why because remember that eighteen
Speaker 1: percent discountry means a lower value for your business. You're saying,
Speaker 1: he said, why are you doing that? Because there's a
Speaker 1: small cap premium. It's academically proven. They pull out papers say,
Speaker 1: look there's a small cap premium. It's roughly six percent.
Speaker 1: That's extraordinarily sloppy. You're dropping the value of every small
Speaker 1: cap company because you think they're all hit with that
Speaker 1: same bludget. There was actually a very interesting paper that
Speaker 1: came out of a QR, and I think Eliza Peterson
Speaker 1: is one of them, and he argued that it's not
Speaker 1: small cap, it's not a small cap premium, it's a
Speaker 1: small cap junk premium, which basically means that it's small
Speaker 1: cap companies that are of high quality that are earning
Speaker 1: much of the premium. So if you put your money
Speaker 1: across a hundred small cap stocks and you're just investing
Speaker 1: in all hundred of them, you might end up with
Speaker 1: the port for it that does nothing. You need small
Speaker 1: cap and quality, and at that point you're saying, what's
Speaker 1: a small cap got to do with anything? I would
Speaker 1: that if you did a quality effect across the board,
Speaker 1: you're probably going to find a quality effect in large
Speaker 1: gap stocks and MidCap stocks. So I think this is
Speaker 1: one of those cases with the academic research weird off
Speaker 1: in one direction, but the practitioners using the research found
Speaker 1: ways of making money on it, and in the process
Speaker 1: it's taken on a form that none of the academics
Speaker 1: might have done the original research would even recognize. So
Speaker 1: I think that it's not that research takes a long
Speaker 1: time to go into practice. I could live with that.
Speaker 1: It's the way it gets skewed, and it's worse than worse.
Speaker 1: It's true. I think it actually ends up doing more
Speaker 1: damage than good when it goes into practice. That's much
Speaker 1: rather that practitioners never read academic research and try to
Speaker 1: put into practice because in the process of putting into
Speaker 1: practice they just ruin it. So let me give you
Speaker 1: one that I hate, and it's now an ETF. Someone
Speaker 1: did a study, some academic research did a study that
Speaker 1: founds that if you only held stocks during market hours,
Speaker 1: you underperformed holding stocks from when the market is closed.
Speaker 1: And I thought it was the aside from the fact
Speaker 1: that the market is only open six and a half
Speaker 1: hours a day, hold that aside, all the gap ups,
Speaker 1: all the news that breaks after. It just seemed like
Speaker 1: such a silly concept. And now there's an ETF. I'm
Speaker 1: curious what your thoughts are on. I think it's nonsense. Nonsense.
Speaker 1: It's nonsense. I mean, I I my argument and I
Speaker 1: look at me and as their value is, if everybody
Speaker 1: can do it right, then I can almost it's going
Speaker 1: to get it's going if it really exist, get arbitragey.
Speaker 1: So to begin with, everybody knows what the what the
Speaker 1: open hours to the market. This is no secret information. Right,
Speaker 1: you're not finding anything particularly valuable. So what I mean
Speaker 1: in investing you got to bring something to the table, right,
Speaker 1: take something away. That's my view. You have to bring
Speaker 1: something to the table. You have to bring some new
Speaker 1: insight in order to take some alpha away. Or it
Speaker 1: could be some unique characteristic. Pension funds pay no taxes, right,
Speaker 1: that should give them an advances the subsets of the market.
Speaker 1: Plus they're perpetual, so if they buy dividend paying stocks,
Speaker 1: they should be able to on hire returns on a
Speaker 1: post tack bax is because their taxes are zero, right
Speaker 1: do they Well, they try to be clever. The problem
Speaker 1: is momentum is such a strong force that everybody chases it. Right,
Speaker 1: They're not going for the stocks they should go for
Speaker 1: a given their niche properties. They go for stocks that
Speaker 1: everybody else is buying, and therefore they perform as everybody else.
Speaker 1: And in fact, let's you know, let's use Berkshire had
Speaker 1: the way to illustrate how a niche can be exploited. Well,
Speaker 1: to me, one of the reasons weren't. Buffett succeeded. He
Speaker 1: has a lot of good qualities brought in and it's
Speaker 1: one of the reasons he succeeded is the money he
Speaker 1: was investing. I mean, if you think about the money
Speaker 1: he was investing, he's been investing insurance company premiums that
Speaker 1: are collected, right, low cost capital with the perpetual it
Speaker 1: doesn't panic. Right, that's a huge plus. Right, So when
Speaker 1: he bought Goldman Sachs in November of two thousand and
Speaker 1: eight and Bank of American November in two thousand and eight,
Speaker 1: I thought about a traditional portfolio manager doing the same
Speaker 1: thing and trying to explain to their clients what they
Speaker 1: just say. They would have gotten fired. They'd have gotten fired.
Speaker 1: So what the heck are you doing in the middle
Speaker 1: of a crisis. But right, but that's the time to buy.
Speaker 1: You have capital that doesn't panic, it's driven by the
Speaker 1: actuarial tables. You can go out and take positions in
Speaker 1: these companies and say, I don't have to worry about
Speaker 1: my clients asking me to have questions because my clients
Speaker 1: are the actuarial tables. The question is if he can
Speaker 1: do it with insurance company money Why can't all State
Speaker 1: and State Farm and other insurance companies do the same thing.
Speaker 1: What's your answer? Because the answer is an average portfolio
Speaker 1: managers driven by emotion and mood, they can they talk
Speaker 1: the value investing talk. So let me expand that it's
Speaker 1: not your insurance company these Why can't foundations and endowments
Speaker 1: and you know, go down the list of entities that
Speaker 1: has capital that shouldn't panic and has a hundred year
Speaker 1: investment horizons because they're run by people who are still
Speaker 1: judged on a year to year basis. So as soon
Speaker 1: as chat bots take over running portfolios, we should avoid
Speaker 1: this panic or are they just going to pick up
Speaker 1: the panic? Because chatbots are going to just reflect human being.
Speaker 1: That's why I'm not so upbeat about chat bots are
Speaker 1: doing the right thing. They're going to mimic human behavior
Speaker 1: and guess what humans behave in some really bad ways,
Speaker 1: especially during crises. So chat bots are going to just
Speaker 1: magnify that process. So if you think this is going
Speaker 1: to make us more rational, it's not. In fact, you
Speaker 1: have to create a counter chat bot that says, tell
Speaker 1: me what I should be doing, and then I'll do
Speaker 1: the exact opposite. Inverse, chat body there you go. That's
Speaker 1: a product that I would buy. I like it. Yeah,
Speaker 1: quite fascinating. So let's talk a little bit about academy.
Speaker 1: You're not the typical tenured professor. Aside from the fact
Speaker 1: that you've won tons of award and been voted best
Speaker 1: Professor at Stern over and over again. You're very open source.
Speaker 1: You have a blog, you're very active on Twitter. Both
Speaker 1: of these are a little unusual in academia. Tell us,
Speaker 1: tell us why you approach the world that way. I'm
Speaker 1: often asked what I do for a living, and as
Speaker 1: I'm a teacher, that's that's my passion. It's not the valuation,
Speaker 1: it's not corporate finance. I'm a teacher first and foremost.
Speaker 1: I'd tell people if I wasn't teaching valuation and corporate finance,
Speaker 1: I'd be teaching high school algebra. Teaching is my passion.
Speaker 1: Corporate finance and valuation are the things that I use
Speaker 1: to kind of exploit that passion. And that puts me
Speaker 1: at odds with traditional academia because, unfortunately, I think education
Speaker 1: universities have lost their core mission. To me, the core
Speaker 1: mission of a university should be educating the students who
Speaker 1: go through one would think, right, you think, But if
Speaker 1: you're a research university, the mission is muddled. And the
Speaker 1: mission is muddled because you then get you know, you
Speaker 1: get measured on the reputation of your faculty with their
Speaker 1: pure group and what kind of research they do. And
Speaker 1: I tell people, if you think about the constituencies or
Speaker 1: universities serves, you'd expect undergraduate students to be at the
Speaker 1: top of the list, especially at university like NYU where
Speaker 1: our money primarily comes from tuition. These are your customers, right,
Speaker 1: But if you actually look at decisions made at a
Speaker 1: university and you look at where undergraduate students fall on
Speaker 1: that list, they're not even on that list. At the
Speaker 1: top of the list are tenured faculty. I mean I
Speaker 1: describe universities as lunatic asylums where the inmates run the asylum, right,
Speaker 1: And because of that, universities do things where an outside
Speaker 1: of looks at the universities. How the heck do you
Speaker 1: guys get away with this? I'm going to give away
Speaker 1: a secret. As a professor to research university, my teaching
Speaker 1: load is three courses a year that translates into four
Speaker 1: and a half hours a week for thirty weeks a year.
Speaker 1: That's pretty light. That is like, that's it. And once
Speaker 1: you're I know, you're supposed to keep the extra time
Speaker 1: for research, but once you're tenured that there's no your
Speaker 1: landed gentry, your landed gentry. And if you think about
Speaker 1: how much it costs to pay a faculty member who
Speaker 1: works four and a half hours a week, then you
Speaker 1: can very quickly start to untangle why it costs a
Speaker 1: student fifty thousand dollars a year to go through as tuition.
Speaker 1: And so you're implying it costs ten times as much
Speaker 1: as it should if people were legitimately, Yeah, if you're
Speaker 1: just paying for an education, it should be it should
Speaker 1: be one tenth of that. And I think that you know,
Speaker 1: of course, university education is not just courses. That was
Speaker 1: the mistake that Edex and Coursera made when they first
Speaker 1: decided they're going to disrupt the education business by packaging
Speaker 1: these mooks. Remember the big online course that we're supposed
Speaker 1: to change education. It never quite caught on because an
Speaker 1: education is a collection of things. It's the courses you take,
Speaker 1: it's the network you create, it's the entertainment value. Let's
Speaker 1: say you go to notre Dame that Sunday football is
Speaker 1: a big part of your life. And most of all,
Speaker 1: it's parents sending their kids off to a place where
Speaker 1: they can do stupid things for four years and not
Speaker 1: get into too much trouble. I mean, let's face it,
Speaker 1: if you, especially if you have a child the age
Speaker 1: of eighteen to twenty two, you know they're going to
Speaker 1: do stupid things. This speaks stupidity purpose of and you
Speaker 1: send them off to a nice college campus. They can
Speaker 1: do stupid things on campus, and the college kind of
Speaker 1: covers up for that stupidity. So I think, in a sense,
Speaker 1: you're buying a package. It's like the old cable model.
Speaker 1: You bought this package, it's going to cost you fifty
Speaker 1: thousand a year, and because you couldn't untangle the different pieces,
Speaker 1: you paid because you had no choice. I do a
Speaker 1: session called Barbarians at the Gate for universities, I say, loo,
Speaker 1: just as the cable companies ended up with this unbundling
Speaker 1: of the product where people said, you know what, I
Speaker 1: can just get the channels I want by paying directly
Speaker 1: for them, and that kind of untangled the cable business,
Speaker 1: untangling is coming to the education business. People are going
Speaker 1: to be able to buy the network. LinkedIn is in
Speaker 1: fact a very good substitute for going to a college
Speaker 1: and spending four years hanging out with people who might
Speaker 1: never get back to you when you try to reach
Speaker 1: out to them. So essentially, what technology is doing is
Speaker 1: it's unbundling the university model, and over time it's going
Speaker 1: to eat away at the university model. In the university
Speaker 1: is actually contributing to their own disruption. Georgia Tech, for instance,
Speaker 1: allows you to take courses for a fee. It does
Speaker 1: a very good job, and it's a good rev and
Speaker 1: you generate it, but you're already digging a whole for
Speaker 1: your own demise as a university because once you start
Speaker 1: unbundling courses and offering them, people can start pricing them up.
Speaker 1: I'm paying for five courses in an MBA, I'm paying
Speaker 1: fifty thousand dollars, but you're offering the same five courses
Speaker 1: online for two thousand dollars a piece. Five times two
Speaker 1: thousand is our ten thousand, So what's the extra forty
Speaker 1: thousand four? Unbundling basically then makes it transparent that you're
Speaker 1: charging this hefty premium. The only thing universities have going
Speaker 1: for them. That's going to make disruptions slow is parents.
Speaker 1: I mean, if you're eighteen year old came to you
Speaker 1: and said, look dad, our mom, I've looked you know
Speaker 1: I can take I can educate myself by taking all
Speaker 1: these courses online. Most parents are probably still going to
Speaker 1: say that's not education. You've got to because we've been
Speaker 1: that's the only point of cow. Yeah, we've been trained,
Speaker 1: and it takes four years. You go to university. There's
Speaker 1: a degree that comes with this, and there's a screening
Speaker 1: process that goes with it. So I think the reason
Speaker 1: disruption has been so slow to come to education is
Speaker 1: because the people who make the decisions and education, which
Speaker 1: still are the parents, not the kids, have been have
Speaker 1: been trained to believe that you have to go to university,
Speaker 1: go for four years to get a degree. But that's
Speaker 1: going to change. So let me throw a quote of
Speaker 1: yours back at you and get some feedback. And I'm
Speaker 1: very amused by this quote. This will get me shunned
Speaker 1: in the academic world, but who cares. I don't do
Speaker 1: academic research or right to be published anymore. Life is
Speaker 1: too short to be spent writing for an echo chamber
Speaker 1: and rewriting to meet the often arbitrary demands of a reviewer.
Speaker 1: I write only on topics that a interest me and
Speaker 1: be maybe useful to practitioners explain, like, aren't you basically
Speaker 1: thumbing your nose at the entire publisher parish world of
Speaker 1: academia now that you're a tenured professor. Yeah. I think
Speaker 1: there's a degree of hypocrisy that, right, because I did
Speaker 1: get tenure and it was based upon papers that I
Speaker 1: don't even remember what I wrote them on, right, I
Speaker 1: mean that tells you a little bit about what academic
Speaker 1: research is about. It's as a discipline ages, and this
Speaker 1: is I think key. You have to start to ask
Speaker 1: smaller and smaller questions to be able to get published
Speaker 1: and take and I'll take the example of physics one
Speaker 1: hundred years ago or more, Einstein and Moore asking the
Speaker 1: big questions how does the universe get created? What drives
Speaker 1: it today? If you look at a physics journal, they're
Speaker 1: asking questions you don't even understand the title of the
Speaker 1: paper because it's such a small question. There are seven
Speaker 1: co authors. That's the other thing that seems to happen
Speaker 1: as discipline's age is you use this power of numbers,
Speaker 1: one of who might have connections to a reviewer, so
Speaker 1: you add them on and they're asking questions that, to
Speaker 1: be quite honest, nobody cares about, including physicists, because the
Speaker 1: question is so narrowly phrased that you say, who really cares? Well,
Speaker 1: now that we know how the universe was created, don't
Speaker 1: We can't spend any more time on that, zach Or.
Speaker 1: But even if you have questions, because we really still
Speaker 1: don't know how the universe was created. The only problem
Speaker 1: is if you've write a paper on it, it's too
Speaker 1: big to get published because there'll always be loose setts.
Speaker 1: Now people are going to pick up the loosest parts.
Speaker 1: This can't be published. It's not quite ready to be published.
Speaker 1: So as discipline's age, unfortunately the research becomes less and
Speaker 1: less useful to not just the outside world, but even
Speaker 1: the inside world. And for some people they still have
Speaker 1: enjoy doing research. I don't begrudge them that. So there
Speaker 1: are some of my colleagues who was still curious about
Speaker 1: academic questions. But I discovered very early in my life
Speaker 1: that this wasn't my strength. Picking some obscure academic topics,
Speaker 1: spending six months of my life writing a paper that
Speaker 1: darted eyes and cross tease. I'm a teacher, and I
Speaker 1: want the biggest audience I can. So I think of
Speaker 1: everything I do as an extension of teaching, including almost
Speaker 1: all of my writing, and I want the biggest audience
Speaker 1: I can. So why would I restrict my audience to
Speaker 1: just people in my classroom or just people in an
Speaker 1: echo chamber. So it's very selfish. I want to reach
Speaker 1: the biggest audience because as a teacher, you want the
Speaker 1: biggest audience, and this gives me a way of making
Speaker 1: an audience lass. So what sort of pushback did you
Speaker 1: get from the academic community to the statement, which seemed
Speaker 1: to have resonated in certain quarters. I don't hang out
Speaker 1: with the academic community enough to even know, because it
Speaker 1: had to get back to you the social world things.
Speaker 1: In a sense I was. I was labeled a teacher
Speaker 1: professor early on. In fact my chair almost disdainfully by some.
Speaker 1: But for some it's remember, I'm carrying at teach a
Speaker 1: class of three fifty people, So I'm carrying a load
Speaker 1: that actually allows them to do what they want to do,
Speaker 1: which is go back to research. So from a selfish
Speaker 1: rationale for them, this was actually good. I was taking
Speaker 1: this thing that they did not like to do. I
Speaker 1: was doing it for and I was doing it with
Speaker 1: joy because this is what I do. So it serves
Speaker 1: us both. I don't begrudge them their research. They don't
Speaker 1: begrudge me my teaching. We've learned to live at least
Speaker 1: at NYU. And part of the reason I like being
Speaker 1: at NYU is it's a very large faculty, it's a
Speaker 1: very diverse faculty. So I've always been allowed to do
Speaker 1: what I want to do. Could I have done what
Speaker 1: I did at a University of Chicago Stanford Probably not, huh.
Speaker 1: And I think that that basically means that when if
Speaker 1: your joy is teaching, and you want to be an
Speaker 1: academia because you want to teach, you want to pick
Speaker 1: a place where that's not just valued, but that you
Speaker 1: get the freedom to be able to focus on teaching
Speaker 1: and getting a message out to practitioners. Now, so there's
Speaker 1: a couple of attempts at disrupting education. One of which,
Speaker 1: and I'm drawn a plank on the name, is you
Speaker 1: could take up to let's say it's twelve credits a semester,
Speaker 1: you could take forty eight credits online over two years
Speaker 1: at no cost. And these credit these are accredited, and
Speaker 1: when you go to a college, you could cut your
Speaker 1: college costs in half. You go to college for your
Speaker 1: junior and senior year transfer these credits in. Is that
Speaker 1: the same experience then as to what you were describing,
Speaker 1: So when going to school for four years, making that
Speaker 1: social network, making contacts, learning how the world operates in
Speaker 1: a way that you can't when you're just at home
Speaker 1: looking at a compact. These are called hybrid models, and
Speaker 1: a lot of universities have adopted them, not just for
Speaker 1: undergraduate degrees, but for executive programs. Executive programs historically been
Speaker 1: very expensive to go to. But you create these hybrid programs,
Speaker 1: so you take classes online, but one week a year,
Speaker 1: everybody in the program is brought into a physical location
Speaker 1: so they can hang out together, live in the same place.
Speaker 1: That's a networking benefit. You are going to see hybrid
Speaker 1: programs and that's going to be the transitional point because
Speaker 1: doing an education entirely online it's tough to do because
Speaker 1: people lack self discipline. I know, you know, I offer
Speaker 1: my classes online and I start the classes off about
Speaker 1: fifty thousand people start the class with me. I can
Speaker 1: watch them by session because I go twenty six sessions,
Speaker 1: and by the time I get to session twenty six,
Speaker 1: I can actually track how many of the fifty thousand
Speaker 1: i's still there. What's it's huge, It's ninety percent now
Speaker 1: because people have lives to let my class requires a
Speaker 1: lot of time and resources. So in it's eighty minute sessions.
Speaker 1: So even if you just watch the lectures, that's three
Speaker 1: hours every week of just watching the lectures, forget about
Speaker 1: the other stuff. So that's why I created an online
Speaker 1: version of my class where I take my eighty minute
Speaker 1: lecture and I think about how would I deliver that
Speaker 1: lecture if I'd only ten minutes? Wow? And the scary
Speaker 1: thing was, wasn't that difficult? Which tells you a little
Speaker 1: bit about how much buffer as faculty members or as
Speaker 1: professors you get. Is BA for the right word or
Speaker 1: you just taking an example and going into detail and
Speaker 1: nuance that you don't get in ten minutes, And it's
Speaker 1: a lot more. I can tell stories, I can I
Speaker 1: can flesh it out. So I'm not saying the extra
Speaker 1: eighty minutes are useless, but I'm saying that ten minutes
Speaker 1: is where you get the substance the extra eighty minutes
Speaker 1: or where you get the dressing on the substance, and
Speaker 1: you could probably get that dressing in small pieces if
Speaker 1: you want. Because when I do my YouTube videos, essentially
Speaker 1: you're seeing blog posts. You're essentially seeing things that will
Speaker 1: show up as riffs in my class. So that the
Speaker 1: post edit on Tesla. A couple of months ago, I
Speaker 1: value Tesla and asked, you know, how do you explain
Speaker 1: what's happening at Tesla and how do you bring in
Speaker 1: these new businesses that becomes a part of my class somewhere.
Speaker 1: So I tell people who start with the ten minute session,
Speaker 1: that's a realistic estimate. You can you can actually get
Speaker 1: through the sessions, and if this truly interests you, then
Speaker 1: try out this. So I create these con centric circles
Speaker 1: for people who have time, and if you have this
Speaker 1: much time, try these extra things. This much time, go
Speaker 1: the extra mile. So I think by creating enough flexibility,
Speaker 1: you're going to be able to allow people to do
Speaker 1: things online that they can't do right now. So you
Speaker 1: give them the core film and the DVD extras and
Speaker 1: they could choose how much exactly. So you also mentioned
Speaker 1: you're at the intersection of three businesses, education, publishing and
Speaker 1: financial services that are all inefficiently run and deserve to
Speaker 1: be disrupted. What are the similarities between these three areas?
Speaker 1: And can we not say that financial services hasn't been
Speaker 1: wildly disrupted over the past forty years? Has it? Well?
Speaker 1: Trades are free. You could buy the entire market for
Speaker 1: three BIPs. That seems to be enormously disruptive. I could
Speaker 1: venue money without anybody in between us on my phone.
Speaker 1: I used to think, who said the only innovation has
Speaker 1: been the ATMU? Was that a greenspan or vulgar? I think?
Speaker 1: I think that you can do stuff today that was
Speaker 1: either time consuming or expensive or not even available fifty
Speaker 1: years ago, twenty years ago. The customers side yes. And
Speaker 1: here's my question, So why does JP Morgan chase every
Speaker 1: time I get a wire still take fifteen dollars off
Speaker 1: that wire? It just makes this is my problem? Right, bank,
Speaker 1: you can ah for free, but it'll be twenty twelve
Speaker 1: to twenty four hours later. Yeah, but when I get
Speaker 1: from a wire from outside, I can't. I can't tell
Speaker 1: them what to do, so they take their bank and
Speaker 1: their wire money to JP Morgan. You get tinged when
Speaker 1: a wire comes in not outgoing, I get hit both ways. Oh,
Speaker 1: I don't realize that. And so when I so maybe
Speaker 1: when I, when I, when I deliver money to others,
Speaker 1: I can get around the banquet. When it comes to me.
Speaker 1: I have no control of the process. So let's say
Speaker 1: I'm getting five thousand dollars this is what I see
Speaker 1: from JP Morgan Chase. I see four nine seventy five
Speaker 1: put into my account and a wire service fee of
Speaker 1: twenty five dollars for what you know. This is what
Speaker 1: I mean about about these businesses acting like it's nineteen
Speaker 1: eighty five stuff. Take the publishing business, okay, And I'll
Speaker 1: give you an example. One of my publishers I won't
Speaker 1: name them, call me last year and they said, because
Speaker 1: my books have and in multiple editions, multiple editions, and
Speaker 1: I have an Indian edition, which is which is printed
Speaker 1: on cheaper paper and priced at one fifth the price
Speaker 1: because Indians kind of four to pay out the equivalent
Speaker 1: of one hundred dollars. And India is the largest market
Speaker 1: for me outside the US because the big English speaking population,
Speaker 1: lots of students. So I get a call from a
Speaker 1: publisher and they said, well, we've decided to suspend your
Speaker 1: Indian edition. And I said why. They said, this cannibalization
Speaker 1: going on. And I said, what are you talking about
Speaker 1: about only the US spying the Indian They said, there
Speaker 1: are some people in the US who are buying the
Speaker 1: Indian edition. And I said, okay, how many? And they said,
Speaker 1: we don't know, but we do know there's cannibalization going on.
Speaker 1: I said, let me get this straight. You're suspending the
Speaker 1: printing of an Indian edition. This is the largest market
Speaker 1: outside This is gonna be tens of millions of books
Speaker 1: because you think there's cannibalization, but you don't know how
Speaker 1: much cannibalization there is. He said, I guess the way.
Speaker 1: If you put it that way, that's exactly what we're doing.
Speaker 1: And I said, do you realize this makes absolutely no sense.
Speaker 1: You would have to put some flesh on those bones,
Speaker 1: some numbers to determine is it still profitable to do this?
Speaker 1: And I said, do you think the cannibalization is going
Speaker 1: to stop just because you did this? Because you know
Speaker 1: exactly what's going to happen. Indians are not going to
Speaker 1: pay one hundred dollars a book. Some person in India
Speaker 1: or China is going to buy one of the US books.
Speaker 1: They're going to copy every page, They're going to pirate
Speaker 1: the book. Now I've put people There are people who
Speaker 1: bought my book for two dollars outside of train station
Speaker 1: in India because they get the pirated version. And I said,
Speaker 1: would you rather cannibalize yourself and get a reasonable price,
Speaker 1: or would you rather have this Chinese you know, the
Speaker 1: pirated version, cannibalize you and get nothing for it. But
Speaker 1: that can change the decision. And this is the nature
Speaker 1: of how decision making is it at university's publishing and
Speaker 1: banks is there's still the decision making is driven by
Speaker 1: a world that's no longer out there. But it's very
Speaker 1: difficult to create change. And this is the old Clayton
Speaker 1: Christensen argument for why institutions have trouble. The status quo
Speaker 1: is trouble with disruption is you have too many legacy effects.
Speaker 1: So it's almost you can see the person at JP
Speaker 1: Morgan say saying you should stop charging for these wires
Speaker 1: because people are going to use alternate ways of ransferring money.
Speaker 1: And somebody says, but we make one hundred and fifty
Speaker 1: million dollars from the wires we can't do that. That's
Speaker 1: a legacy effect effect. So guess what happens. You essentially
Speaker 1: take your softest businesses and they get disrupted. That's the
Speaker 1: I mean, let's face it, most fintech companies should not
Speaker 1: exist because they're either solving problems that are not problems
Speaker 1: in the first place, or they're doing regulatory arbitrage they're
Speaker 1: bypassing what would normally be regulated, or they're doing taking
Speaker 1: advantage of internship, which is, if banks are charging twenty
Speaker 1: five dollars, let's create a venmore right. And essentially that's
Speaker 1: exactly why I think these statistico institutions are not going
Speaker 1: to be able to partake in the disruption that's coming.
Speaker 1: Is they can see it coming. They will say all
Speaker 1: the right things, but within the organization there's such stickiness
Speaker 1: and innertship that their decisions are still driven by the
Speaker 1: way things used to be, not the way things are. Right.
Speaker 1: It's so funny you said that. One of my colleagues,
Speaker 1: Ben Carlson, and I'm going to paraphrase him, uses the
Speaker 1: phrase experts or people who have an expertise in the
Speaker 1: way the world used to be. And so when things change,
Speaker 1: there is and now this is me speaking. There is
Speaker 1: a void of experts, and all sorts of things rush
Speaker 1: in to fill that vacuum. And so that's how you
Speaker 1: end up with a crazy run up in crypto because
Speaker 1: self proclaimed experts say, no, no, here's the change. But
Speaker 1: the fascinating thing about banks versus other companies, it's very
Speaker 1: difficult for a company to disrupt itself. And I have
Speaker 1: a vivid recollection of seeing Apple do this with the
Speaker 1: first iPod and got smaller and faster and cheaper and
Speaker 1: larger capacity. And you could just imagine that conversation, Hey,
Speaker 1: we're just you know, we're cannibalizing ourselves. And someone must
Speaker 1: have said better that we do it than somebody else.
Speaker 1: Why is that so hard to do? Well? I think that,
Speaker 1: you know, I'm glad you brought up Apple because I
Speaker 1: think of all the things Steve Jobs did that made
Speaker 1: the kind of rebirth of Apple possible, the first was
Speaker 1: on the original iTunes disruption, he told the team, And
Speaker 1: this is I think well documented. Act like you're a startup.
Speaker 1: Don't worry about legacy effects, don't worry about what the
Speaker 1: rest of the company thinks, because they're still thinking our
Speaker 1: businesses computers, And because you can almost see the discussion
Speaker 1: with Apple. Why are we wasting our time on this distraction.
Speaker 1: We should be building a better Mac and trying to
Speaker 1: get back into the PC business. No, Steve Jobs saw
Speaker 1: the writing on the wall that the PC business was
Speaker 1: not going to be the future. That if you fought
Speaker 1: Microsoft in the PC business, you'd have the same result
Speaker 1: you add in the previous decade. You're going to continue
Speaker 1: to lose. But he gave the team the freedom to
Speaker 1: make decisions, but he built on the strengths of Apple.
Speaker 1: At the same time, he said, don't be a startup.
Speaker 1: Act that that's a stranger to the company, drawn the
Speaker 1: resource of the company. But make decisions as if you're
Speaker 1: a startup. Satyn Adela did the same thing at Microsoft
Speaker 1: when he came in, because this was a company with
Speaker 1: two hits, office and windows that had never done another
Speaker 1: thing in their entire corporate life. That all the Zooon,
Speaker 1: to be fair of the Zooon was their ipodon, but
Speaker 1: but it never made None of the stuff would make money,
Speaker 1: never stop. And when he entered the cloud business, first
Speaker 1: thing he did was he said, we're not going to
Speaker 1: acquire our way into this business. That's not the way
Speaker 1: to grow because we're going to be throwing a lot
Speaker 1: of money in there, and we're going to build it
Speaker 1: because we have some strengths. We have people who know
Speaker 1: software really well. We're going to take those strengths. We're
Speaker 1: going to be patient, and we're going to act like
Speaker 1: this is again a standalone business. Don't worry about the
Speaker 1: effect on Office and Windows or what you're doing right. So,
Speaker 1: in my book on the Corporate life Cycle, one of
Speaker 1: the things I talk about a companies that go through
Speaker 1: rebots it's really difficult to do, and I talk about
Speaker 1: what they share in common, and one of the things
Speaker 1: I see is this willingness to be patient and build
Speaker 1: on internal strengths rather than be in a hurry and
Speaker 1: do an acquisition to enter business. But even within Microsoft,
Speaker 1: this is the reason I'm less optimistic about Activision doing
Speaker 1: well for Microsoft as I was about Microsoft's original cloud entry.
Speaker 1: What about before Cloud? What about Xbox? Are you saying
Speaker 1: Xbox never met any money to any money? Really? I
Speaker 1: mean it's ubiquitous. They gave Sony PlayStation and run for
Speaker 1: its money. They Google right, it's called itself alphabet. I
Speaker 1: think of it as snow white in the seven dwarfs
Speaker 1: because ninety percent plus of its revenues still come from
Speaker 1: the search box. Right. So we're going to come back
Speaker 1: to that because I want to talk more about life
Speaker 1: cycle in a few minutes. I want to come back
Speaker 1: to one last thing about college and education. And it's
Speaker 1: the big question that I'm sure a lot of people
Speaker 1: have been asking, which is we talk about costs, we
Speaker 1: talk about value proposition of higher education. From your perspective,
Speaker 1: is the modern college education as it exists today, is
Speaker 1: that still a decent value proposition for all students or
Speaker 1: only some students? It's a subset, right, I mean, I
Speaker 1: think if you think about it, is an economic proposition.
Speaker 1: It probably doesn't make sense for nine people to go
Speaker 1: out much for master's degrees, right undergraduate undergraduate, about half
Speaker 1: the people in my class probably don't don't need that
Speaker 1: degree to kind of really you know. So I think
Speaker 1: in a sense, you know, college education is you know,
Speaker 1: we overestimate the impact it's going to have enough future runnings.
Speaker 1: Even at the very best college you go to Yale,
Speaker 1: it does help you on that first job, but three
Speaker 1: or four years in, when they look at the differences
Speaker 1: across people, the differences in income start to the relationship
Speaker 1: to college. You went to starts to disappear. So if
Speaker 1: you ask me, can I educate myself today? We have
Speaker 1: the resources to do it we need I mean, you
Speaker 1: need to find the right player. You can't just take
Speaker 1: classes randomly. You can educate yourself. That's something we could
Speaker 1: not have done thirty years ago. That option exists for
Speaker 1: people who are self starters. But that's where the discipline
Speaker 1: part comes in. So maybe the startup you need an
Speaker 1: education is a startup that wakes you up at seven
Speaker 1: thirty in the morning and makes you reminds you that
Speaker 1: it's almost like you need that room. Because the reason
Speaker 1: you go to college is your roommate wakes up to
Speaker 1: go to college. He notices you're still sleeping and that
Speaker 1: you have a class at ten, and he nudges you saying,
Speaker 1: aren't you going to class? You might not wake up,
Speaker 1: but if you're guilty about going back to sleep because
Speaker 1: your roommate reminded you. If you can get that discipline
Speaker 1: component into this process, then I think online education can
Speaker 1: do just as good a job as a college education.
Speaker 1: And you can create your networks. You can create a networks.
Speaker 1: They don't have to be called networks. I don't think
Speaker 1: they're the healthiest networks in the world. To begin with,
Speaker 1: the fraternity you belong to, those might not be the
Speaker 1: best connections you have. It takes more work. We're still
Speaker 1: not quite there. I mean I'll give I'll make it personally.
Speaker 1: One of my kids said, should I go to college,
Speaker 1: I'd probably still encourage them to do it. I'd encourage
Speaker 1: them to go to college on a scholarship if they could,
Speaker 1: and would pick a lesser college in the college that
Speaker 1: they get into that they might be the top pick. Really,
Speaker 1: because I think that paying two hundred and twenty five
Speaker 1: thousand dollars or two fifty thousand dollars for a four
Speaker 1: year university education, even if it's at a very top university,
Speaker 1: I can't see the payoff from that economically. No, I'd
Speaker 1: much rather that you went to a lesser school, spent
Speaker 1: the four years there, created and have you know all
Speaker 1: the other stuff that comes to the package, that college
Speaker 1: football that you go to and riding out with friends
Speaker 1: and pay fifty thousands of two fifty thousand, because think
Speaker 1: of what that extra two hundred thousand can do for
Speaker 1: you in the rest of your life. So now I
Speaker 1: think that might be the place to start is rather
Speaker 1: than talking people away from a college education, ask why
Speaker 1: are you spending so much? Is their way you can
Speaker 1: bring it down. And the suggestion you made of these
Speaker 1: hybrid models that might be well worth considering as an
Speaker 1: alternative to going to a four year university and paying
Speaker 1: for every single year. Well arguably senior writers the fourth year.
Speaker 1: Perhaps if you're gonna, if you're gonna give something up,
Speaker 1: you get rid of that early on. Let's talk a
Speaker 1: little bit about the corporate life cycle and valuations. But
Speaker 1: I want to start with a little bit of twists.
Speaker 1: This was a very short life cycle. I actually thought
Speaker 1: of you when the whole meme stock game Stop AMC
Speaker 1: hurts blew up, and I just imagine what you were thinking.
Speaker 1: Here we go again. What was that period like in
Speaker 1: twenty twenty and twenty one, and what were your thoughts
Speaker 1: about what was going on? You know when Game Stop
Speaker 1: took off, I know it went from twenty dollars to
Speaker 1: four hundred dollars. It obviously caught my attention because if
Speaker 1: you think about it, and twenty dollars, it was three
Speaker 1: or four the short sellers. Basically, it seemed on a
Speaker 1: pathway to zero. It seemed that like that was going
Speaker 1: to be the endgame. And then all of a sudden
Speaker 1: you had this group on red at the Wall Street bets,
Speaker 1: and then of course you had the push up. You
Speaker 1: know that they collectively did. I call this the first
Speaker 1: crowd shot in history, right, because usually when I'm sort
Speaker 1: of crowd shot squeeze in history, because historically short squeeze
Speaker 1: has come from rich people deciding to squeeze other rich people, right,
Speaker 1: I mean that's basically how it happens here at a
Speaker 1: collection of people. So it's very much a twenty first
Speaker 1: century phenomenon. In fact, it's a phenomenon that's a social
Speaker 1: media phenomenon because if you think about twenty years ago,
Speaker 1: you couldn't even have gathered together. There's many people in
Speaker 1: the town square. So when that happened, as you know,
Speaker 1: part of me said, this has happened before, so I'm
Speaker 1: not going to get extra hot unto the call it
Speaker 1: because of it. Clearly, this has nothing to do with value.
Speaker 1: It's got to do with mood and momentum. But that's
Speaker 1: not new markets have always been driven by mood and momentum.
Speaker 1: But what social media has run and this I think
Speaker 1: is a more general point I would make is it's
Speaker 1: made mood and momentum stronger, right, because you were able
Speaker 1: to gather together a crowd, a much larger audience. You know,
Speaker 1: I remember reading this book a bit of extraordinary. You
Speaker 1: might have read about popular Delusions to the Crowd book
Speaker 1: Charles Mackie, you know Mackie, and he talked about how
Speaker 1: in the south Sea Bubbles, you know, you created news stories.
Speaker 1: You went to a pub, you acted like you were drunk,
Speaker 1: and then you you blurted out what you you know,
Speaker 1: what you said were secrets about south Sea that nobody
Speaker 1: should know, and then other people in the pub heard you,
Speaker 1: and they went and bought the shares. And I thought
Speaker 1: the original social and I originally wrote about when I
Speaker 1: wrote about CNBC thirty years ago, I said, this is
Speaker 1: today or twenty years ago, I said, this is today's pub,
Speaker 1: which is you go on CNBC, you say, look, I'm
Speaker 1: going to tell you a secret just between you and
Speaker 1: I ing and then so but if you think about
Speaker 1: social media, that now has become the place you go.
Speaker 1: You go to. So you said mood momentum, and there's right,
Speaker 1: there's narrative there also because all these are stories. At
Speaker 1: the core, there is usually a story that makes sense.
Speaker 1: Even the stupidest push ups are driven by a core
Speaker 1: story that has that's some truth loosely based. So for
Speaker 1: you can, for instance, you could argue that GameStop has
Speaker 1: has potential in the online gaming market. Right, I have
Speaker 1: a collection of data of people have shopped at the
Speaker 1: store that they're going to build on it, and that
Speaker 1: a new guy comes in who's done this with an
Speaker 1: online or well, and that's in fact, one of the
Speaker 1: things you find at the core is there's a core
Speaker 1: story that is true. You've just come up with a
Speaker 1: number that has completely no relationship in the magnitude of
Speaker 1: that story. So it's something that it's happened and before.
Speaker 1: But what it shows you is with social media, how
Speaker 1: much what might have been a twenty percent bubble can
Speaker 1: become a hundred percent bubble in the social media age.
Speaker 1: And so it was actually interesting watching a playout. I
Speaker 1: actually went to the Reddit site where there because I
Speaker 1: wanted to see what rational people were giving each other
Speaker 1: for buying the shares. And for people who don't play
Speaker 1: on Reddit, you register it Reddit. You could up vote
Speaker 1: or down voting stories and so all these things bubble
Speaker 1: up to the top where the crowd is enthusiastic about it.
Speaker 1: It's very much bubble ishous. So I was the question
Speaker 1: I was asking was what is the core reason or
Speaker 1: the driver of this and it seemed to be revenge
Speaker 1: revenge in what sense the core reason people were giving
Speaker 1: for buying GameStop had nothing to do with game Stop.
Speaker 1: It's because they wanted to get back at the hedge funds.
Speaker 1: That was, we're going to bring the hedge funds down,
Speaker 1: which is interesting because some of the biggest hedge funds
Speaker 1: were making money from this were on the other side
Speaker 1: of the day. And for order, the more you trade
Speaker 1: the better than It's a human emotion revenge, and here
Speaker 1: you have a collection of people saying we're going to
Speaker 1: take revenge by pushing up the price of game Stop
Speaker 1: and Drive. And you still see this phenomenon AMC or
Speaker 1: seeing the phenomenon bed Bath and beyond, you saw the phenomenon.
Speaker 1: This is something that seems to play out and it's
Speaker 1: usually younger people who have an emotional connected If you
Speaker 1: look at the big companies that are in the meme phase,
Speaker 1: you know, you see you see game Stop, you see AMC.
Speaker 1: You see bed Bath and beyond. It's almost like you
Speaker 1: can see thirty five year olds with nostalgia for the
Speaker 1: malls they used to visit fifteen years ago, and then
Speaker 1: we're going to save this piece of our past. So
Speaker 1: it's interesting there is a collection of things coming together
Speaker 1: in the meme stock phenomenon, but it's just a it's
Speaker 1: an old phenomenon that's replaying out there. So I won't
Speaker 1: blame the investors, the traders. Let's not use the word investors,
Speaker 1: the traders in these stocks for doing something that is irrational.
Speaker 1: I think it just reflects you, man, It's always going
Speaker 1: to be with us. So now let's let's talk a
Speaker 1: little bit about some life cycle stocks, some companies that
Speaker 1: seem to have really gotten shellacked over the past couple
Speaker 1: of years. I'm curious as to your perspective. One of
Speaker 1: the things I noticed, so Amazon had a terrible twenty
Speaker 1: twenty two, as did a number of other companies. But
Speaker 1: a lot of people don't realize twenty twenty one, when
Speaker 1: the market was SMP was up twenty eight percent, Amazon
Speaker 1: was flat up a percent or two. What's going on
Speaker 1: with Amazon in their life cycle? Why do they suddenly
Speaker 1: seem to have lost their mojo. I think that that
Speaker 1: if you think about pricing, is driven by mood and momentum.
Speaker 1: Come easy, go easy, And I think, in a sense,
Speaker 1: to complete the story, you need to bring in what
Speaker 1: happened in twenty nine. In fact, the previous decade in
Speaker 1: these fangam stocks, which was too amazing. One out of
Speaker 1: every six dollars in value in an increase in value
Speaker 1: that came to market. Increase in market cap during the
Speaker 1: last decade happened in Jesse six sixteen percent. One in
Speaker 1: six dollars. Those six companies accounted for sixteen percent of
Speaker 1: the increase in market cap of seven thousand, five hundred
Speaker 1: US stocks. With the implication of that is, if you
Speaker 1: spend the entire decade with none of these stocks in
Speaker 1: your portfolio, I don't see any way in which you
Speaker 1: could have created any kind of positive outfit. Right. It's
Speaker 1: almost like you had to have at least one, hopefully
Speaker 1: more than one. So you're coming off a decade where
Speaker 1: you've added trillions of dollars of market cap, often based
Speaker 1: on flimsy stories that you don't carry through Netflix, we
Speaker 1: can keep adding subscribers. Nobody seemed to ask a question.
Speaker 1: You're going to run out of people on the face
Speaker 1: of the earth before you add subscribes, or get competitors,
Speaker 1: or get competison co top of it. So, in a sense,
Speaker 1: the last two years I don't think of as a
Speaker 1: big drop off in value. It's a return to some
Speaker 1: degree of sanity. Now some companies like Apple and Microsoft
Speaker 1: seem to have held up much better than Tesla, Netflix.
Speaker 1: I'll leave out the pelotins and the purely lockdown stocks,
Speaker 1: but Amazon had a great run. Bezos retires, and personally,
Speaker 1: I'm a giant Amazon user since my college roommate gave
Speaker 1: me a gift certificate sometime in the nineties, and I
Speaker 1: now I'm very comfortable putting my credit card elsewhere. Hey,
Speaker 1: what's the worst you can do? You lose fifty dollars
Speaker 1: and the site you search for something on Amazon, the
Speaker 1: first five results are ads. It's festooned with garbage. It
Speaker 1: was once the go to site and now it's like
Speaker 1: constantly disappointing. Is that just my subjective view or is
Speaker 1: Amazon now at the point in their life cycle where
Speaker 1: delighting the customer is no longer their priority. I think
Speaker 1: they took their eye off the ball. I mean, let's
Speaker 1: face it, Amazon started as a retail company. They built
Speaker 1: their reputation as an arm line retail company. About ten
Speaker 1: years ago. When I valued Amazon, I described it as
Speaker 1: a disruption platform and otherwise I said, this is no
Speaker 1: longer a company that thinks of retail as its core business.
Speaker 1: It's going to disrupt any company in any business if
Speaker 1: it feels are soft spots. And in a sense, you've
Speaker 1: seen Amazon's actions over the decade reflect that. So cloud, cloud, advertising, search,
Speaker 1: what else is Amazon doing well side of retail? Well,
Speaker 1: logistics right there. So in a sense they're bringing in
Speaker 1: businesses that you might have viewed as online payments, online payment,
Speaker 1: in healthcare. They have little experiments that they're running. So
Speaker 1: the only problem is when you're looking at that many
Speaker 1: different businesses, it's difficult to keep focus. And I think
Speaker 1: that you see this with the Alexa write offs. They're
Speaker 1: taking uses. What exactly was the endgame at the Alexa
Speaker 1: What were you trying to do? I was never quite
Speaker 1: clear and what Alexa was supposed to do. You want
Speaker 1: to be in the forefront of voice as an input device, right,
Speaker 1: and but then how do you make red? So what
Speaker 1: is the revenue base, which is, you know, which is
Speaker 1: a weakness at many technos that that Amazon did not
Speaker 1: used to have. I used to describe Amazon as a
Speaker 1: company the rent for revenues first, but always had this
Speaker 1: ie on long term, this is what we want to do.
Speaker 1: And some of the stuff they've done over the last
Speaker 1: few years, I'm not sure what their endgame is other
Speaker 1: than will have more people in our ecosystem. So I
Speaker 1: think that that Amazon took their eye off the ball,
Speaker 1: and you're right, their retail side has become just you know,
Speaker 1: there's a lot of chaos going on there. I don't
Speaker 1: trust Amazon reviews anymore because basically the reviews exactly. I
Speaker 1: think Amazon needs to return to that core business and
Speaker 1: kind of make sure that it's cleaned up to get
Speaker 1: back the customers. But you know, and but they still
Speaker 1: have that disruption army, right, Amazon Prime, and I think
Speaker 1: that they need to make sure that they're not putting
Speaker 1: the loyalty of those Prime numbers to the test, but
Speaker 1: close and I think they need to be careful. I
Speaker 1: think that's part of what the market's doing is sending
Speaker 1: them a warning. Let's see if they listen. So let's
Speaker 1: talk about Google. When the first time I use Google,
Speaker 1: I want to say it was two thousand and one
Speaker 1: or two thousand and two when it was just so simple.
Speaker 1: Nothing was close. It absolutely dominated. The results were great.
Speaker 1: It was Google. No one's even second or third everybody else,
Speaker 1: and they completely upended the search market. You go to
Speaker 1: Google Search now and it's junk, like your first five
Speaker 1: results are garbage. They try and send you to Google
Speaker 1: properties like they are ripe for someone to come along
Speaker 1: with the equivalent of page rank and put that. But
Speaker 1: I still like Google Calendar and Google Drive, and then
Speaker 1: they make money on right Gina all the stuff they
Speaker 1: do that keeps you in there their ecosystem. But let's
Speaker 1: be honest, Google Search is completely polluted. It's garbage. They
Speaker 1: are a handful of nonprofit competitors that do a much
Speaker 1: better job. Again, is this just are all these companies
Speaker 1: inevitably we're gonna eat our seed corn, We're gonna over
Speaker 1: monetize our core customers. So Microsoft hasn't really done that.
Speaker 1: Apple hasn't really done that. Although to be fair, I'm
Speaker 1: a long time Mac user and Apple, you know they
Speaker 1: nickel and dime you for everything from courts this that
Speaker 1: they just haven't it hasn't boomeranged on them. Facebook another
Speaker 1: company that seems to have blown itself up. I think
Speaker 1: it's almost built at every company's DNA that they will
Speaker 1: blow themselves up. It's in nature. That's why. That's why
Speaker 1: life cycles, which is, as you age, you look back
Speaker 1: with nostalgia at what you used to be able to
Speaker 1: do when your twenty five, and then you make the
Speaker 1: stupid mistake of thinking that if you spend enough money
Speaker 1: you can go back to being twenty five. Have any questions,
Speaker 1: you know, you can try paying a plastic surgeon to
Speaker 1: get a gravity works. Its magic anyway. And companies do
Speaker 1: the same thing, which is they're constantly trying to rediscover
Speaker 1: their youth. But eventually you get middle aged Facebook, Google, Apple,
Speaker 1: an entire group of companies a middle aged companies that
Speaker 1: I mean, that's not bad. They've had they've had a
Speaker 1: great younger life, but they have to recognize in your
Speaker 1: middle aged you don't overreach. You don't jump out of bed,
Speaker 1: You very gingerly step out of bed. Because you jump
Speaker 1: out of bed twenty three, you're okay, you land on
Speaker 1: your feet, you jump out of bed, and your fifty five,
Speaker 1: who knows where you will Land right. So I think
Speaker 1: one of the points I've always made is companies need
Speaker 1: to act their age. Apple and Apple and Microsoft have
Speaker 1: tended to act their age. They seem to have adapted
Speaker 1: to being mature company and they know what their limitations are,
Speaker 1: and they're it's made me pure coincidence, but they're the
Speaker 1: oldest companies in this group. They've lived through pains before, right.
Speaker 1: Apple has lived with a newer death experience. Microsoft is
Speaker 1: seeing what happens when your existing projects age. So in
Speaker 1: a sense, they've learned the lessons from this, saying we
Speaker 1: need to be more careful about how we behave because
Speaker 1: we're all the companies. Google and Facebook are young companies
Speaker 1: in terms of chronological age, and so the people running Google,
Speaker 1: it's not some distant memory. They remember when they were
Speaker 1: at peak age. Right twenty seventeen, you looked at Google
Speaker 1: and Facebook. I remember being in a discussion with my
Speaker 1: friend Scott Galloway and he said, we've got to break
Speaker 1: up these companies. They're going to dominate the world. And
Speaker 1: as it, Scott, you don't have to break them up.
Speaker 1: They will do it themselves. They will overreach. It's going
Speaker 1: to be much more effective than any regulated doing it
Speaker 1: so your pathway to face. Because he's worried about Facebook
Speaker 1: taking over the world. I said, don't worry, it'll eventually.
Speaker 1: And this has been the case with technology companies especially,
Speaker 1: They will overreach, and they that overreach will be what
Speaker 1: brings them back to it. When we when Galloway and
Speaker 1: I talked about the four, one of the questions we
Speaker 1: discussed was of the four, which do you think is
Speaker 1: most likely to stumble first? And I thought it was
Speaker 1: obvious that Facebook was part of a much shorter cycle.
Speaker 1: We had gone through Friendster and MySpace and Facebook and
Speaker 1: now Twitter and Instagram and TikTok. They got very lucky
Speaker 1: with some great acquisitions, but it was it was pretty
Speaker 1: clear that Microsoft and Apple both learned how to adopt.
Speaker 1: One of the interesting things I wanted to ask you
Speaker 1: about those two companies. Each of those companies had a
Speaker 1: bit of a crisis, obviously much worse at Apple if
Speaker 1: you remember the famous wired cover Prey with the crown
Speaker 1: of thorns around the apple. But in each case a
Speaker 1: new CEO first, the return of Steve Jobs replaced a
Speaker 1: flown in CEO, and the same thing with Saria Nadella
Speaker 1: replacing Steve Balmer who really seemed to have lost the thread.
Speaker 1: How important is it for a mature company to have
Speaker 1: a mature CEO to come in and maximize their assets.
Speaker 1: That's not age inappropriate. That's not the fifty five year
Speaker 1: old wearing the kid's clothes and looking completely We call
Speaker 1: it AI age inappropriate. I think, I mean, I think
Speaker 1: you're raising a very interesting and a big point about
Speaker 1: corporate governance and how we change management. I mean, one
Speaker 1: of the chapters in my book is about who's the
Speaker 1: right CEO for your company? Because if you listen to
Speaker 1: McKinsey and Harvard Business Review, they claimed the twenty three characteristics.
Speaker 1: That's not true. The right CEO for your company will
Speaker 1: depend on where you're in the life cycle. You're a startup,
Speaker 1: you want a storyteller. You want a visionary. Why because
Speaker 1: you got to get people to buy into your story.
Speaker 1: Your employees, your investors, your customers. You need to let's
Speaker 1: call that person Steve the visionary. Then you get to
Speaker 1: this space where you're building a business. Now you've gone
Speaker 1: from vision. You need somebody pragmatic because if you have
Speaker 1: a visionary, he says, I want this perfectly the way
Speaker 1: my vision tells me, you're never going to get off
Speaker 1: the ground. You need you need a builder. Let's call
Speaker 1: it Bob the Builder. If you want Brianna the builder,
Speaker 1: if you want to stop being sexed and make the
Speaker 1: CEO of you know, somebody of the other sex. Then
Speaker 1: you get to this face where you get to be
Speaker 1: a mature company. You need don the defenders. Somebody's who's
Speaker 1: who's protecting your core business because you take your eye
Speaker 1: off that and you go after new businesses, somebody's going
Speaker 1: to eat your core business. And then you get to
Speaker 1: the last faces. You know, you know who you need
Speaker 1: running the company. Larry the liquidator. I see Danny de
Speaker 1: Vito every time I see bed Bath and beyond right,
Speaker 1: you need somebody coming and saying there is no good
Speaker 1: ending to this story. Right, you can you can hire
Speaker 1: the best see on the world. There's no turnaround here.
Speaker 1: Once you get to the eighteenth it's over. And here's
Speaker 1: the big reason why I think this is going to
Speaker 1: become a bigger issue in the twenty first century. In
Speaker 1: the twentieth century, if you look at let's take Ford right,
Speaker 1: Henry Ford was the perfect CEO for Ford as a startup.
Speaker 1: Why he had a vision visionaries are strange people. They're eccentric.
Speaker 1: So he made the model t only in one color.
Speaker 1: Why because that's the way he wanted everybody to Everybody
Speaker 1: drives a black cart, Why would you want a different color.
Speaker 1: But by the nineteen thirties he was actually developing other
Speaker 1: tastes which were not particularly appropriate for a US automobile company.
Speaker 1: But time took care of the prom He passed on
Speaker 1: and his grandson took over. Time took care of these
Speaker 1: transitions because the typical company in the twentieth century took
Speaker 1: forty years to build up state, forty years at the top,
Speaker 1: and then declined over thirty years, one hundred year life cycle.
Speaker 1: In contrast, think about a Yahoo or a BlackBerry from
Speaker 1: start to end. You're looking at fifteen to twenty years.
Speaker 1: So the life cycles have been raped. I mean, the
Speaker 1: person running the company as a mature company is often
Speaker 1: the same person who as the company, who created the
Speaker 1: visionary who started the company is now running the company.
Speaker 1: And let's face it, now, the guys around BlackBerry were
Speaker 1: great with vision They were terrible managers. They were awful
Speaker 1: at making decisions at a mature company, but they were
Speaker 1: still making the decisions and guess what. The decision they
Speaker 1: made drove the company into the ground. And I think
Speaker 1: that's going to be an increasing problem in the twenty
Speaker 1: first century, because the twenty first century company ages and
Speaker 1: dog gears right much fair. So let's let me bring
Speaker 1: up another company we started hinting about when we were
Speaker 1: talking about Twitter. So I give Tesla and Elon Musk
Speaker 1: huge credit. I think the automobile industry looked at what
Speaker 1: he was building with Tesla, and then often their peripheral
Speaker 1: vision saw what Bezos had done destroying every industry. He touched,
Speaker 1: your profit margin is my opportunity, and they said, we
Speaker 1: better get on the ball with this. So he gets
Speaker 1: if we moved to a fully electrified future, whether it's
Speaker 1: five years from now or ten years from now, at
Speaker 1: least in transportation, he gets full credit. But it seems
Speaker 1: like between Tesla and then SpaceX and then the boring
Speaker 1: company and then Twitter, what's going on with the life
Speaker 1: cycle of Tesla. It seems to have even though by
Speaker 1: the way we're recording this at the end of the
Speaker 1: first quarter in twenty twenty three, the stock has done
Speaker 1: very well this year. Ballpark, It's doubled from its lows
Speaker 1: in twenty twenty three. The other extremely of people who
Speaker 1: convinced this company's a scam, they've always been really a scam,
Speaker 1: and they came the whole thing is accounting, you know, gameplaying,
Speaker 1: that the company has never made money. There's a whole
Speaker 1: Tesla short community might revisit. They convince a whole thing
Speaker 1: is going it's just a pack. The whole thing is
Speaker 1: going to come crashing down, which means that unwilling to
Speaker 1: listen to any story you tell about. Hey, you can't
Speaker 1: dismiss this company. As you said, it's changed the way
Speaker 1: the entire business, the automobile business, a business that was
Speaker 1: immune to change. And think of DeLorean trying to do
Speaker 1: show two years ago, right, it destroyed every person trying
Speaker 1: to change the business. And in ten years Elon Musk
Speaker 1: has done more for climate change and all the yearc
Speaker 1: people put on the face of the earth because he's
Speaker 1: changed how decisions are made in the business. And I've
Speaker 1: tried to navigate that middle ground by saying this company
Speaker 1: is not as amazing as you think it is to
Speaker 1: the Tesla fans, and at the same time, there's something
Speaker 1: special about this company. You need to bring it in.
Speaker 1: I think that the problem with with the company. And
Speaker 1: this is something I would say about any company, to
Speaker 1: say it's it's a company that is wrapped up in
Speaker 1: a person. And what I mean by that is when
Speaker 1: you think Tesla, you think Elon Musk. There's you know.
Speaker 1: For the now, Apple had that issue in the two
Speaker 1: early two thousands with Steve Jobs and the transition to
Speaker 1: the team Tim Clark seems to have gone much better
Speaker 1: than anyone was forecasting. And but it took a while.
Speaker 1: Remember that after Tim Cook came in, people said, you're
Speaker 1: not doing what Steve Jobs that have warrant he disrupting
Speaker 1: a new business. Tim Cook was a business builder in
Speaker 1: a sense. He's a logistics guy, and he says, look
Speaker 1: where a trillion dollar company. We can't be going after
Speaker 1: new businesses and not protecting the core business. So in
Speaker 1: a sense that I might be saying something that'd be sacrilegious,
Speaker 1: but in a sense I think as Apple is better
Speaker 1: off with Tim Cook having run it for the last decade,
Speaker 1: he is the right person for that phase of the
Speaker 1: life Steve Jobs had stayed on because Steve Jobs would
Speaker 1: probably have shot for the moon on something else and
Speaker 1: ended up effectively putting a trillion and a half dollars
Speaker 1: at risk. So I think that you need transitions, but unfortunately,
Speaker 1: we're also creating a structure where we're doing that has
Speaker 1: become more difficult at some of these companies that are
Speaker 1: the twenty first century companies. And what I mean by
Speaker 1: that is, if you don't like the way Mark Zuckerberg
Speaker 1: likes Facebook, he owns only fourteen percent of the stock.
Speaker 1: But but because we allowed, we collectively and we have
Speaker 1: to take the blame for this, we has portfolio managing
Speaker 1: investors allowed Facebook to go public with two classes of shares.
Speaker 1: We've effectively given Mark Zuckerberg fifty seven percent of the
Speaker 1: voting rights in perpetuity. And when this happened, I remember
Speaker 1: asking this question of portfolio manage is why are you
Speaker 1: okay giving up this much power? And the response was
Speaker 1: he's a genius, He's amazing, and he certainly looked like
Speaker 1: one for the first couple of years of them being public.
Speaker 1: And the quiet response I had was, you know, would
Speaker 1: you are you? You know? You know what happens to
Speaker 1: benevolent dictatorships over time is what starts have been as
Speaker 1: a benevolent dictatorship eventually becomes malevolent and you've taken away
Speaker 1: the power to do it. And they said, don't worry
Speaker 1: about that, will never happen. So so let's talk about
Speaker 1: some of the other volent dictatorships that had a similar
Speaker 1: super voting structure. Uber was set up that way. We
Speaker 1: Work was set up that way. I think was there
Speaker 1: now it's also a super I believe they never got
Speaker 1: quite to that stage, but it was heading that sting
Speaker 1: Elizabeth Holmes personality. Yeah, it's probably would have super voting rights.
Speaker 1: So have we now gotten to the point where this
Speaker 1: sort of silliness is over? Or are the venture capitalists
Speaker 1: and investment banks that bring these companies public are they
Speaker 1: still playing that game. I wish I could tell you
Speaker 1: that markets have a good sense to learn and adapt,
Speaker 1: but I don't think they do. It's what strikes me
Speaker 1: as amazing in markets is how much collective amnesia there is.
Speaker 1: So three months of Facebook going up, and all of
Speaker 1: a sudden they've forgotten all the complaints they had at
Speaker 1: Facebook's bottom. So I wish I could tell you that
Speaker 1: investors and portfolio managers would have the stuf. I'm to
Speaker 1: stand up and say, you know what, we're not going
Speaker 1: to take this Two classes of shares anymore. But I
Speaker 1: think once we opened that door, and I blame Google
Speaker 1: for this, Google in its created this process and people
Speaker 1: walked in, it's very difficult to relock that door. No,
Speaker 1: I'm and so I'm not. I wish no that change
Speaker 1: would come back, but I'm not optimistic that it will.
Speaker 1: So now as as good as time as any to
Speaker 1: talk about ESG. And let's start with the G being governance.
Speaker 1: How can anybody in good faith on these companies if
Speaker 1: one of your deciding factors is we want to see
Speaker 1: good governance at the company as we own, I'm going
Speaker 1: to say something about the G in ESC. Right. The
Speaker 1: governance in ESC is not the corporate governance that we've
Speaker 1: talked about in finance for fifty years, which is manages
Speaker 1: being accountable to the owners of a company. That's a
Speaker 1: corporate governance that I was brought up in all the
Speaker 1: research in it. The GESC is stakeholder governance. You're a
Speaker 1: comountable to everybody. You're accountable to shareholders, you're accountable to lenders,
Speaker 1: you're accountable to society or accountable to you know, does
Speaker 1: that make you accountable to nobody? Exactly? Because you then
Speaker 1: have a reason with each group you claim the other
Speaker 1: groups for the reason you're underperformed. So when I look
Speaker 1: at the g and ESG, I have the same reaction
Speaker 1: I had. And I'm old enough to remember when there
Speaker 1: were two Germanys, West Germany and East Germany. I remember
Speaker 1: what East Germany called itself. Do you remember German Democratic Republic?
Speaker 1: There was nothing democratic about it or republic about it.
Speaker 1: The same reaction I have when people say People's Republic
Speaker 1: of China, Right, there's no, it's not like people in
Speaker 1: Beijing centerism. What do the people think? And so William,
Speaker 1: you pick it because you want people to look at
Speaker 1: the name and think you are free and democratic ESG.
Speaker 1: That choice of G was deliberate. It was to make
Speaker 1: it look like they cared about corporate governance, when in
Speaker 1: fact it's the exact opposite of everything thing I think
Speaker 1: of in governance because it makes managers accountable to no one.
Speaker 1: So my naivete about the G and ESG has always
Speaker 1: been hey, in the old days, it was a bunch
Speaker 1: of older white dudes, and that leads to group thing.
Speaker 1: So if we create a little diversity of thought, we
Speaker 1: bring women onto the board, we bring people of colors,
Speaker 1: onto the board. We have geographic diversity, we have domain expertise.
Speaker 1: Diversity will skip the group think and end up with
Speaker 1: a better decision making problem. But that's an empirical question.
Speaker 1: Do we actually do it right? It are more diverse
Speaker 1: boards asking more questions, because that's the way I mean Ultimately,
Speaker 1: governance here means you have a board of directors. It's
Speaker 1: active and aggressive about I would love to see a
Speaker 1: board of directors stop a CEO from doing an acquisition.
Speaker 1: That to me is governance at play, where the board says,
Speaker 1: you know what, this acquisition makes no sense. We're going
Speaker 1: to put break on this process for six months and
Speaker 1: look at the numbers. We're not going to let your
Speaker 1: banker come in and show synergy numbers and push us
Speaker 1: through it. We're going to do our due diligence. How
Speaker 1: often does that happen? And I think that there is
Speaker 1: no evidence that I can see off that having diversity
Speaker 1: by itself makes boards more effective. Now, I think that
Speaker 1: what you need is we need to change the process
Speaker 1: by which we pick the directors a board, because to
Speaker 1: the extent that you have nominating committees and CEOs of
Speaker 1: input in the process, the nature of the process you're
Speaker 1: going to self select. I don't care how diverse the
Speaker 1: board is. You're going to self select. People are less
Speaker 1: likely to ask you those stuff governance questions. What is
Speaker 1: the alternative? Of course, the reality is a person who's
Speaker 1: not an index All right, Hey, I'm going to pick
Speaker 1: a portfolio of a dozen companies and that's my core
Speaker 1: at twelve fifteen should be enough companies to get the
Speaker 1: advantage of portfolio diversification. That means I have six ten directors.
Speaker 1: I have to choose on ten or fifteen companies, ninety people.
Speaker 1: I have to figure that people. You can get people
Speaker 1: to vote from their own congress person, right, how do
Speaker 1: you get self interested investors to put the time in
Speaker 1: to select ninety board members. I think it's going to
Speaker 1: be almost impossible to get that done at the shareholder
Speaker 1: level because so it has to be institutional. It's got
Speaker 1: to be institutional. So I think that unfortunately, this is
Speaker 1: not a process where you can expect shareholders to do
Speaker 1: their homework on who's standing for the board of directors,
Speaker 1: what's their background, do they know the business? I mean,
Speaker 1: who has the time to do this? Especially we tell
Speaker 1: investors to diversify, we also tell them do your due diligence.
Speaker 1: They have lives to live, families to feed, They don't
Speaker 1: have the time to do this. So I think it
Speaker 1: has to be institutional, and I think we need a
Speaker 1: corporate governance core that's not based on looks and checkboxes,
Speaker 1: but based on actions. I want to get no votes
Speaker 1: at meetings recorded, and i'd like to know the percentage
Speaker 1: of the time directors vote. Now. I remember Harold Janine,
Speaker 1: who was CEO of Itte There's no conglomerate in the
Speaker 1: nineteen seventies, said there was that, and he was what
Speaker 1: I call a corporate caesar, a complete power. And he
Speaker 1: said there was not a single action taken by his board,
Speaker 1: whether the decision was not unanimous. And my reaction was,
Speaker 1: that's a rubber stampoort, right if everything you come up
Speaker 1: unanimously gets voted on. So maybe we need less focus
Speaker 1: on how big is the board. In fact, many of
Speaker 1: the corporate governance scores are based on very surface level things.
Speaker 1: Are the insiders are outsiders? How big is the board,
Speaker 1: how divers I'd like to get a sense of how
Speaker 1: effective is the board, how many no votes to get,
Speaker 1: how much pushback to get on CEOs? Because that really
Speaker 1: is a true measure of governance, and we don't have
Speaker 1: that now, and I think that might be a measure
Speaker 1: that could be useful for investors to get a sense
Speaker 1: of is this an effective border an ineffective board, you know,
Speaker 1: because that, as you said, is a useful piece of
Speaker 1: information to investors. It's very hard as a board member,
Speaker 1: especially on a smaller company, to vote no, because these
Speaker 1: are your peers, your colleagues, and it's difficult to be
Speaker 1: you know, we're social primates. It's very difficult to go
Speaker 1: against the group. And when you're thrown an authority figure
Speaker 1: in there, which is the CEO who had a lot
Speaker 1: of money, who knows far more about the company than
Speaker 1: I do, then it's natural. It's psychologically. So that's why
Speaker 1: I think this. You know, we lost track of disincorporate
Speaker 1: governance research. We thought the promise insiders. So if you
Speaker 1: look at the Sarbe and Oxley law, they fixed all
Speaker 1: the surface level problems, which is you kind of have
Speaker 1: your cousin on the board, you kind of your brother
Speaker 1: on the board. Those are insiders. You need outsiders and
Speaker 1: in a sense, and there's research that suggested that big
Speaker 1: boards are less effective than small boards. So they said,
Speaker 1: we're going to have a small board composed of our outsiders,
Speaker 1: and then we added, you know, you have diverse more
Speaker 1: likely to get pushback, and we left it at that.
Speaker 1: But we did the easy stuff. And that's a problem
Speaker 1: with scores is they do the easy stuff. They do
Speaker 1: the checkbox. They don't look at actions which actually change governance.
Speaker 1: And in fact, this, you know, extending this, any scoring
Speaker 1: system is going to create gaming, which is companies are
Speaker 1: going to figure out what drives the score and then
Speaker 1: they're going to game the system to get a higher score.
Speaker 1: That's not because of bad companies, it's because scoring systems
Speaker 1: create gaming. And I saw that play art with governance scores. Now,
Speaker 1: we were told in two thousand and one and two
Speaker 1: when S and P announced Governance Scores, this is going
Speaker 1: to change corporate governance because now we're going to score companies.
Speaker 1: Twenty years later, I look back and say, it changed nothing.
Speaker 1: We've had voting and non voting shares. Governance has actually
Speaker 1: become more difficult now than twenty years ago. And I
Speaker 1: think it's made me a lot more skeptical what scoring
Speaker 1: systems changing behavior. All they do is create gaming, gaming
Speaker 1: that companies used to make their scores higher without changing anything.
Speaker 1: That of consequence quite fascinating. Let's talk a little bit
Speaker 1: about the state evaluation today. We've seen a lot of
Speaker 1: factors driving prices, especially the rapid rise in federal reserve
Speaker 1: rates and the big inflation we saw in twenty one
Speaker 1: and twenty two. How do you look at the market
Speaker 1: overall in twenty twenty three. I think it's a market
Speaker 1: driven by two macro forces. One is inflation, the others
Speaker 1: what's going to happen to the economy. And at the
Speaker 1: start of this year I said those are going to
Speaker 1: dominate the discussion. So now we've had this distraction and
Speaker 1: a sense for markets with the banking crisis, and it's
Speaker 1: in a sense of side game that's going on, but
Speaker 1: ultimately what happens in the banking crisis, you could actually
Speaker 1: argue that it was inflation that created the banking crisis
Speaker 1: in the first place, meaning inflation or the FED increases
Speaker 1: inflation drives interest rates. In fact, I think one of
Speaker 1: the most unhealthy things we've done over the last decade
Speaker 1: is we've given the FED powers. It's never it never
Speaker 1: has Feds don't set the Fed doesn't set it rate
Speaker 1: it chases rates. The reason rates went up last year
Speaker 1: with the without the FED is inflation was going up,
Speaker 1: and once rates went up, you had banks like Silicon
Speaker 1: Valley Bank with which had bonds at low rates, which
Speaker 1: had to reprice the bond. So inflation is at the
Speaker 1: core of almost everything. We've seen in markets for the
Speaker 1: last year in three months, and it's always been the case.
Speaker 1: Once inflation enters gets on stage, it's it's a hog.
Speaker 1: It's it's an attention hog. It takes every it sucks
Speaker 1: up everything. So I think right now inflation is at
Speaker 1: the core of almost everything you do. Whether you're a
Speaker 1: trader or an investor, you have to think about inflation
Speaker 1: because you have no choice. It really interesting now if
Speaker 1: we look at the FEDS two percent inflation target, um,
Speaker 1: you have zero or interest rates for a decade, so
Speaker 1: you can't really blame that. You have the lockdown, the
Speaker 1: supply chains, the fiscal stimulus, the shortages of labor, semiconductor's, houses, cars,
Speaker 1: seems to be a lot of moving parts, a very
Speaker 1: non traditional type of inflation. How should the FED be behaving? Go, Well,
Speaker 1: let's go back to March twenty twenty one, when CPI
Speaker 1: ran up through their two percent target. Should they have
Speaker 1: taken notice that they probably should have because here's the problem.
Speaker 1: And I wrote a piece then saying, you know, even
Speaker 1: if inflation is purely supplied that because initially they claim
Speaker 1: was this is transitory, it's going to be very very
Speaker 1: short time. I said, even if that's true to the
Speaker 1: extent that there's a possibility that it's not transitory, you
Speaker 1: need to act now. And the reason I said that
Speaker 1: is inflation is as much as psychological phenomenon as an
Speaker 1: economic phenomenon. I mean, I'll give you an example. I
Speaker 1: know the restaurant that I live next to, a Mexican restaurant.
Speaker 1: The price of a burrito, it stayed the same for
Speaker 1: a decade, right, then he has fairly low inflation flash right,
Speaker 1: And he didn't, but then he raised prices. And then
Speaker 1: once he started, he's on this this core. Now every month,
Speaker 1: every month I go in, the price is up another
Speaker 1: ten or fifteen cents. Because he's being prudent. He's saying, look,
Speaker 1: I'm going to raise the prices because I need to
Speaker 1: pay my employees. They're going to ask me for higher wages.
Speaker 1: So once inflation gets embedded in people's psyche it starts
Speaker 1: to affect how people, how people ask for wage increases,
Speaker 1: how much you raise prices, which meets often the only
Speaker 1: way you can break the back of inflation is to
Speaker 1: BRender people into hostages. You basically tell people, don't go
Speaker 1: ask for a pay raise, you might lose your job.
Speaker 1: Don't raise prices because people might not come in, which
Speaker 1: is an economic recessions of Volker nightmare that played out
Speaker 1: where he said, look, I'm going to break the back
Speaker 1: of inflation, and he did. It took a very severe recession,
Speaker 1: because that's the only way you can break that cycle
Speaker 1: of higher prices. I think wherein that cycle, which is
Speaker 1: one reason inflation is so stagged. It's so stubborn. It's
Speaker 1: not going away quickly. It's because it's not just about
Speaker 1: fixing the supply chains. It's now in people's psyches. People
Speaker 1: are asking for pay raises based upon I mean, look
Speaker 1: at the LA School district strike and the pay raisers
Speaker 1: teachers were asking for it was like seven percent eight
Speaker 1: percent a year. Not three years ago they'd have asked
Speaker 1: for three percent a year. So let's let's address that.
Speaker 1: Because I sometimes feel that we take things for granted
Speaker 1: and don't see both sides of the problem. In the
Speaker 1: bottom I don't know if you want to hold quartile
Speaker 1: or bottom half of the wage earners. Certainly minimum wage
Speaker 1: has lagged everything for thirty years. It's lagged inflation. It's
Speaker 1: like productivity. It's certainly lagged the stock market and executive compensation.
Speaker 1: Nobody was Are you upset when wages were deflationary? Right?
Speaker 1: But suddenly and those of us that aren't in the
Speaker 1: bottom half of the wage pool look at it and
Speaker 1: say stroker chan and say, oh, now this is inflationary.
Speaker 1: We have to do something about it. It seems like
Speaker 1: a lot of the burden of fighting inflation and just
Speaker 1: landing on the people who can least afford. That's exactly
Speaker 1: the reason you don't want to get let inflation get
Speaker 1: out of control, because the people who pay the price
Speaker 1: to fight inflation are not the not the upper middle
Speaker 1: class and the wealthy, it's the people at the bat
Speaker 1: Because when you have a recession, guess who lose their
Speaker 1: jobs first. It's a day you know, day to day.
Speaker 1: You know an hourly worker who said, you know you're
Speaker 1: going to work less hours, are going to pay you less.
Speaker 1: So I think you're absolutely right. The people that inflation
Speaker 1: punishes the most now, not the wealthy people they can
Speaker 1: find places to put their money and earn money to
Speaker 1: cover inflation, the people who can least afford. That's why
Speaker 1: inflation is a hidden tax. It's the worst possible boot
Speaker 1: tax because the people paying it are the people who
Speaker 1: can least afford to pay it. So let's bring this
Speaker 1: back to equities and valuation. It seemed in twenty and
Speaker 1: twenty one and even in twenty two, lots of companies
Speaker 1: were able to pass through their input cost increases to
Speaker 1: the end consumer. And then after a while it seemed
Speaker 1: companies that no longer had input costs going up continued
Speaker 1: to raise prices. What does that do? First? What does
Speaker 1: inflation generally due to valuation? And are the greed inflation
Speaker 1: stories accurate or is that you know, a little political
Speaker 1: wrangling on the second. Let me take the second question first.
Speaker 1: I've heard that story and it should show up as
Speaker 1: higher profit margins and higher returns that you're making. We've
Speaker 1: been a pretty record high and the margins have been
Speaker 1: rising now for a decade, partly because the subset of
Speaker 1: companies with the highest market caps and our technology, I mean,
Speaker 1: my very efficial so and they a software company could
Speaker 1: deliver thirty five percent margins because of unity economics, the
Speaker 1: extra unit of software cost you nothing. So if you
Speaker 1: clean up for that, and you look at twenty one
Speaker 1: and twenty two and said dead margins go up because
Speaker 1: that's the inflationary use. I mean in some sectors, margins
Speaker 1: obviously continue to creep up parts of software, but overall
Speaker 1: margins for US companies have been pretty stagnant. So if
Speaker 1: there's been price gouging, it's not showing up as higher
Speaker 1: profits in the aggregate. That doesn't mean some companies are
Speaker 1: not price couging, but in the aggregate, the story doesn't
Speaker 1: hold up. On the first issue of how does it
Speaker 1: affect valuation, I think that it boils down to pricing power.
Speaker 1: If you have pricing power, you can insulate your yourself
Speaker 1: against inflation by passing it through. And there are some
Speaker 1: companies that clearly a pricing power that have done that,
Speaker 1: which is one reason equities have been remarkably resilient given
Speaker 1: what's happened to interest rates and costs of capital. Twenty
Speaker 1: twenty two is a record deer in terms of how
Speaker 1: much cost a capital of companies went up in one year,
Speaker 1: the biggest single year increase I've seen in the sixty
Speaker 1: plus years that have tracked the data for no. So
Speaker 1: I think that equities have been resilience precisely for that
Speaker 1: reason they've been able to pass the earnings through. Is
Speaker 1: it fair to say equities or an inflation hedge, because
Speaker 1: I've heard that my whole career, and it never really
Speaker 1: russ not collectively if you have a subset of companies
Speaker 1: which your pricing power. Because it turns out that if
Speaker 1: you look at equities collectively, that that pricing power is
Speaker 1: not complete. You don't you're not able to pass inflation
Speaker 1: through completely. So I think equity neither. No financial asset
Speaker 1: can be a good investment if inflation is rising, whether
Speaker 1: it's stalks or bonds or any kind of financial asset,
Speaker 1: because no, collectively, you don't have enough pricing power to
Speaker 1: pass it through. So here we are on the good side.
Speaker 1: It seems that inflation peaked a couple of quarters ago
Speaker 1: and have come down wherever we look, lumber, energy prices,
Speaker 1: copper going down the list of all the things, even
Speaker 1: container shipping containers and things like that have come back
Speaker 1: to pre pandemic level. But it seems on the services side,
Speaker 1: whether we're talking about apartment rentals, clearly a shortage labor
Speaker 1: in the United States another big shortage. So how do
Speaker 1: you look at this not like the nineteen seventies inflation.
Speaker 1: How do you look at this version of inflation that's
Speaker 1: a psychologically, that's the part of inflation, that's stuff. So
Speaker 1: if we see inflation expectations start to come down, that
Speaker 1: should be a positive for the FED. Because I'm not
Speaker 1: a big fan of surveys, especially expectation surveys, because all
Speaker 1: you get from the survey people is, hey, here's what
Speaker 1: happened in the past three months, and their psychology is
Speaker 1: reflecting that. I know the FED pays close attention to
Speaker 1: inflation expectations, So if we see those rolling over, that
Speaker 1: would be a positive sign. We're closer to the end
Speaker 1: of the the cycle. I think so. And I think
Speaker 1: that's so. The FED is keeping its eyes on wage
Speaker 1: increases in different sectors, it's looking at pricing and subsets
Speaker 1: of services, and it's looking for a break in that
Speaker 1: inflationary cycle. I think they want the break you need
Speaker 1: to get from six or five or wherever we are
Speaker 1: right now to two percent. It's a pretty significant break, Hey, listen,
Speaker 1: if we had a four hand or I think the
Speaker 1: markets rally, yeah, And I think that that's part of
Speaker 1: the reason, is that at some point the FED has
Speaker 1: to decide whether two is where their end game is
Speaker 1: or whether they said there's nothing magical about two, right, Well,
Speaker 1: when you're at zero, two looks like a ways to go.
Speaker 1: When you're at five, three seems a little more. And
Speaker 1: I remember in the nineteen eighties people are saying, let's
Speaker 1: target a five percent inflation or a five percent inflation,
Speaker 1: and they were okay with that, right, So there's nothing
Speaker 1: particularly magical about two. And in fact, if I step back,
Speaker 1: it's not high inflation per se that makes it difficult
Speaker 1: to run businesses. It's unstable inflation. In fact, I give
Speaker 1: people a choice between two economies. The first is two
Speaker 1: percent inflation, the second is five percent inflation. As which
Speaker 1: economy would rather be in as an investor, as a business.
Speaker 1: They all pick the two percent, right, and they said,
Speaker 1: let me change the problem a little bit. Let's assume
Speaker 1: the country with five percent inflation, it's going to be
Speaker 1: five percent guaranteed everywhere forever, and the two percent inflation,
Speaker 1: you go from zero to four back to zero to
Speaker 1: four and say which wouldn't you rather be? And the
Speaker 1: answer is I'd rather be in the five percent guarantee.
Speaker 1: It's stability in inflation that really you're aspiring to do,
Speaker 1: and historically high inflation has gone with more instability, right,
Speaker 1: So I think that the FED has to not just
Speaker 1: have an inflation level in its target as to think
Speaker 1: of ways in which how can we make that level
Speaker 1: more stable over time? A band which is tied a bit, guys,
Speaker 1: I think it makes it easier than to make long
Speaker 1: term investments and make judgments if you have a band
Speaker 1: that's tighter then if it's this wide band. So let
Speaker 1: me ask you a kind of impossible question. Given everything
Speaker 1: that's the FED did following September eleventh and the financial
Speaker 1: crisis and then the pandemic, has the FED been too
Speaker 1: active or is that too aggressive a hand on the
Speaker 1: wheel and that's leading to inflation volatility. I'll tell you
Speaker 1: what my parents told me when I was a young child,
Speaker 1: which his children should be seen and not heard. And
Speaker 1: I would say the same thing about FED chairman and
Speaker 1: people on the committee. I wish we saw less of
Speaker 1: them and a little mistress about them. I mean, I
Speaker 1: remember an Alan Greenspan was the FED chair. Not only
Speaker 1: was he a person of a few words, it was
Speaker 1: difficult to extract a sentence from him, and most people
Speaker 1: wouldn't even have been able to tell you who said
Speaker 1: on the federal open market committing the nineties because it
Speaker 1: wasn't the center of the un voice like it is today. Right.
Speaker 1: I have a vivid recollection of him saying to a congressman,
Speaker 1: if if you think you understood what I just said,
Speaker 1: then you've gotten it wrong, like he's trying to be
Speaker 1: pick whereas today, So do we have too much transparence?
Speaker 1: I think I think I think I'm hearing too much
Speaker 1: from FED members telling me what they think about inflation. Right,
Speaker 1: I think it'd be good for the FED to go
Speaker 1: a little silent for a while. I mean, doesn't mean
Speaker 1: that the federal open market. Don't make this make yourself
Speaker 1: the center of the investing universe. It's not healthy for
Speaker 1: anybody involved in the process. We've had that problem with politicians,
Speaker 1: with central bankers. Maybe social media is to blame for
Speaker 1: some of that. I know I only have you for
Speaker 1: a limited time, so so let me jump to my
Speaker 1: favorite questions before we wrap up. Starting with tell us
Speaker 1: what you've been either watching or listening to. What has
Speaker 1: been keeping you entertained for the past couple of years.
Speaker 1: I read, and what's junk? I mean that's you know
Speaker 1: I So you read quality and you watch junk. That's
Speaker 1: the barbell I read. I don't even read quality. I
Speaker 1: read crime novels. I love serial killer books. Mike Connolly
Speaker 1: is what I'm reading. Right, We're gonna get to your
Speaker 1: book list in a minute. What's the junk you're watching? Um?
Speaker 1: My favorite streaming service is HBO, and the reason is simple.
Speaker 1: On Netflix, you have to watch, you have to start.
Speaker 1: I have more false starts on Netflix than any other streams.
Speaker 1: That's interesting because I start a show and ten minutes
Speaker 1: said I said, I don't want to watch this. Do
Speaker 1: you ever have people say no, no, you gotta give
Speaker 1: it three or four episodes. I'm like, that's like you're
Speaker 1: telling me I have to watch Godfather one and two
Speaker 1: to get to Godfather. The reason I'm not going to
Speaker 1: do that in Netflix is their business model is to
Speaker 1: throw one hundred shows at the wall and hope three stick.
Speaker 1: HBO is at the other end of the extreme. Whether
Speaker 1: you watch The Last of Us so you watch any
Speaker 1: of the shows, what do you like the show? And
Speaker 1: not clearly thought went into the show. It's not something
Speaker 1: that I slapped together. So HBO remains my streaming network
Speaker 1: of choice. What's your favorite shows? I like The Last
Speaker 1: of Us. I think it was a very Last of Us.
Speaker 1: The Last of Us okay, a little dark, a little dark,
Speaker 1: and a little dystopian. Normally not my but the fact
Speaker 1: that I watched all eight episodes tells me that they
Speaker 1: were able to keep me hooked on a show, even
Speaker 1: though I'm not a Walking Dead fan or a fan
Speaker 1: of strange stuff that goes on in other universes. So
Speaker 1: I watched the first season of White Lotus. I haven't
Speaker 1: been motivated to watch the second season. I don't know
Speaker 1: if you I was. It's a pure entertainment value. It's
Speaker 1: like you said, job right, right, and I and I
Speaker 1: watched it simply because you watch it for just the
Speaker 1: craziness of what's going on. And you know. I also
Speaker 1: love Bosh on Amazon. My wife washes. It's because I
Speaker 1: like market Michael Conley, I like the books he writes,
Speaker 1: I like I like Bosh. I watched the Chernobyl documentary
Speaker 1: and it's an amazing documentary. View it's a it's a
Speaker 1: it's not actually it's a mockumentary, which is they take
Speaker 1: the documentary and they've made it a movie really extraordinarily
Speaker 1: well done. Again, a very dark story because it's Chernobyl story.
Speaker 1: How can you make it a happy ending? But it
Speaker 1: actually takes you through the series of mistakes that pile up.
Speaker 1: And as you watch it, do you recognize how you
Speaker 1: make eight billion dollar trading mistakes? Right? Is you take
Speaker 1: a small mistake, you cover it up, you make a
Speaker 1: bigger mistake, and then a bigger mistake. So I I
Speaker 1: fairly diverse viewing across I watch. I gonna have six
Speaker 1: different streaming services, so that watching anything on Apple TV.
Speaker 1: Since we've been talking watch I know on Apple TV
Speaker 1: that you know, I've been watching Severance and and I
Speaker 1: really love great show. And Apple TV again is following
Speaker 1: the HBO exactly that I love Ted Lasso. Who don't
Speaker 1: know it's it's a fun movie. It's a it's a
Speaker 1: movie that feels, you know, leaves you feeling good afterwards.
Speaker 1: Have you started shrinking? I haven't. It's next on My Life,
Speaker 1: delightful and the cast is great and it's full of
Speaker 1: lovely surprises that that is exactly what I was thinking, is,
Speaker 1: don't throw everything on the wall to a small number
Speaker 1: of high even though we were documentary was it was
Speaker 1: on Apple was really interesting. So so let's talk about
Speaker 1: mentors who helped to shape your career, both in academia, publishing,
Speaker 1: and finance. I did my PhD at UCLA, and I
Speaker 1: remember it was my second year. The head of the
Speaker 1: department called me in and said, we have this visiting
Speaker 1: professor from the University of Chicago comes here every summer
Speaker 1: because he likes to play tennis. And I said, who
Speaker 1: is it. He says, this guy called Jean Farmer, And
Speaker 1: I was actually Jean's TA for those summers. He used
Speaker 1: to come to UCLA and we played more tennis than
Speaker 1: you know. See, he didn't use me as a research
Speaker 1: assistant as much as he used me as a tennis partner.
Speaker 1: You know. But it's a fun person to talk to,
Speaker 1: you know. You know, you think of him as a rigid,
Speaker 1: efficient market person, but he actually had very very broad
Speaker 1: thoughts about market's very pragmatic, very practical, and it told
Speaker 1: me that researchers didn't have to be this highbrow people
Speaker 1: who thought in abstract terms, who never talked in the
Speaker 1: language that normal people use. So I worked with Jane
Speaker 1: dick Roll, who was a professor at UCLA was one
Speaker 1: of the people on my committee. But Tom Copeland was
Speaker 1: one of the people as well, and Tom was then
Speaker 1: a young professor at UCLA, went on to McKinsey wrote
Speaker 1: a book on valuation, the McKinsey Valuation Book with Tim Kohler,
Speaker 1: So he actually was a great teacher. I took my
Speaker 1: first corporate finance class as an MBA from Tim Copeland.
Speaker 1: So I when I think about why I went into
Speaker 1: teaching finance, it's because of the joy that he seemed
Speaker 1: to have in talking about finance. And this guy's having
Speaker 1: so much fun talking about this topic, it must be
Speaker 1: worth exploring. So I remember that when I teach corporate
Speaker 1: finance that I can evoke interest in people that can
Speaker 1: lead them into lots of places. And it's not what
Speaker 1: I'm saying, it's how much joy and enjoyment I feel
Speaker 1: the passion I bring to a topic. You know, I
Speaker 1: know one of the people that I've tracked in investing
Speaker 1: that I look up to is Mike Mobussan. Now, whether
Speaker 1: you've had my conduction, it's always the lie. Again. He's
Speaker 1: a person who's in multiple disciplines. He can talk about
Speaker 1: and and I love talking to him because I always
Speaker 1: get good ideas about business and markets because of something
Speaker 1: he might say about basketball. That's interesting because we do
Speaker 1: that investing all the time. The hot hand phenomenon, right,
Speaker 1: it shows up in mutual funds where people put their
Speaker 1: money in a mutual fund managing. He's got a hot hand.
Speaker 1: So there are you know, my mentor what I've learned
Speaker 1: as human beings come as a package. There are good
Speaker 1: things and bad things, and I've learned not to put
Speaker 1: people on pedestals because then you're asking for disappointment. It's
Speaker 1: one of the pet peeves I have about people who
Speaker 1: put more in Buffett in a pedestal. There are lots
Speaker 1: of things that Buffett does that I admire, including the
Speaker 1: fact that he's a core philosophy that he goes back
Speaker 1: to no matter what happens. But there are things that
Speaker 1: he says and doesn't so I don't agree with That
Speaker 1: doesn't mean that I'm rejecting the good stuff. It just
Speaker 1: means I'm taking it as a package. I wish people
Speaker 1: thought about that, because I get asked to mentor people.
Speaker 1: Every week. I get students writing me, can you be
Speaker 1: my mentor? And I said, maybe, rather than mentoring, I
Speaker 1: can give you some guidance, but except the fact that
Speaker 1: my guidance is not going to be perfect. Take the
Speaker 1: good stuff, reject the bad stuff, and do this with
Speaker 1: a bunch of people. You're probably better off than holding
Speaker 1: one person up as a mentor and say I'm going
Speaker 1: to do what that person did. In my life's experience,
Speaker 1: I've learned things from Gene, I've learned things from Tom Copeland,
Speaker 1: I've learned things from Mike Bobus, and I've learned things
Speaker 1: from my Uber drivers. So I mean you can get
Speaker 1: mentorship places. You know, the shop you go into every day,
Speaker 1: the guy behind the counter is always happy, even though
Speaker 1: he's got this job of handing out coffees three a second,
Speaker 1: how does he manage to stay happy? Maybe ask I me,
Speaker 1: you know, what do you do that puts you in
Speaker 1: a good mood? And the things you learn from those
Speaker 1: people are essentially going to be a package that's going
Speaker 1: to be worth a lot more than picking a single
Speaker 1: person and a mentor and saying I'm going to do
Speaker 1: everything that that person does very interesting. Let's talk about books.
Speaker 1: What are some of your favorites? What are you reading
Speaker 1: right now? In my book, somebody has to get killed
Speaker 1: and multiple people have to get killed for that book
Speaker 1: to be exciting. So I love books on serial killers.
Speaker 1: From Hannibal let the Silence, Silence of the Lambs. I
Speaker 1: mean I read those books before they became movies. Michael Connolly,
Speaker 1: who writes books about Harry Bosh, who's a detective in
Speaker 1: LA I love you know, I love good writing. I
Speaker 1: love good writing to the extent that you read the
Speaker 1: book not so much because of what the story is,
Speaker 1: but because how the story is stored. I mean, I
Speaker 1: love John Grisham simply because he's a great writer. I
Speaker 1: love Stephen King because he's a great writer. I'm not
Speaker 1: a horror story fan, but I'll read a King book
Speaker 1: because it's extremely well dridden, keeps me engaged. I started
Speaker 1: reading on a plane earlier this year. Stephen King on
Speaker 1: writing right, and it's fascinating. He essentially just is telling
Speaker 1: his own life story through how he learned to write.
Speaker 1: And really good storytellers are great storytellers. Absolutely. Our last
Speaker 1: two questions, what sort of advice would you give a
Speaker 1: recent college grad who is interested in a career in finance.
Speaker 1: Remember that finance has multiple careers. You know, you don't
Speaker 1: have to end up at Goldman Sachs to be in finance.
Speaker 1: You could go work for a small, privately owned business
Speaker 1: in Pennsylvania and be doing finance. Because finance, basically, to me,
Speaker 1: it's a sense of definition. Is involves the use of
Speaker 1: any decision that has money involved in it is a
Speaker 1: financial decision. Define that way. Finance is all around you.
Speaker 1: You can work in a nonprofit and do finance. You
Speaker 1: can work for the government and do finance. You can
Speaker 1: work for a company, you can work for a bank,
Speaker 1: you can work for a consulting firm. And you ask
Speaker 1: me which one of those should I pick? Part of
Speaker 1: it is lifestyle choice, right, So don't go work for
Speaker 1: Goldman Sachs saying look, I want a good balance of
Speaker 1: life and work. It's not going to be there, right,
Speaker 1: And often you've got to accept compromises. Life is about tradeoffs.
Speaker 1: And if you say, look, I want to balance lifestyle,
Speaker 1: accept the fact that you might have to settle for
Speaker 1: a lower pay and live away from a big city
Speaker 1: because that's where your lifestyle might best be played out.
Speaker 1: So a small privately owned entity in Pennsylvania, Vanguard Group
Speaker 1: is that what you're refining. It could be a Vanguard
Speaker 1: Group it it could be a plumber plumbing business in Pittsburgh.
Speaker 1: If you're from that area, you're a Steelers fan. So
Speaker 1: I think had in a sense. If you are willing
Speaker 1: to kind of think out of the box, there are
Speaker 1: finance helps all over. You can pick the part of
Speaker 1: the work where do you want to live in. You
Speaker 1: can pick the type of business you want to work
Speaker 1: for and accept the fact that he might make fifty
Speaker 1: percent less than he might have had working for Morgan
Speaker 1: Stanley or Goldman Sex. And our final question, what do
Speaker 1: you know about the world of finance and investing today?
Speaker 1: You wish you knew forty or so years ago when
Speaker 1: you were first getting started in the field, that behavioral
Speaker 1: and emotional factors play a much much bigger role than
Speaker 1: economics and decision making on economic decisions, starting with where
Speaker 1: you buy a house, how much you pay for a house,
Speaker 1: where you go to college, what stalks you buy, you know,
Speaker 1: And it's something that I've had to learn the hard
Speaker 1: way as I've watched markets adjust and go through booms,
Speaker 1: and bus I've learned that, you know, you need to
Speaker 1: be as much psychologists as economists to think about economic questions.
Speaker 1: And it's made me. It's made me humbler because often
Speaker 1: when you have this rational view of the wood and
Speaker 1: your models, you start to believe that you drive the
Speaker 1: wood and the decisions there. But you don't. You're an observer.
Speaker 1: And when behavior is different than what you predicted, rather
Speaker 1: than pick on the people who behave differently than you
Speaker 1: predicted and call them irrational, think of this as human
Speaker 1: nature and say why am I not factoring that in
Speaker 1: into my decision making? Quite fascinating. Professor Demotoran, thank you
Speaker 1: so much for being so generous with your time. We
Speaker 1: have been speaking with nyus Aswath Demotoran, professor of finance
Speaker 1: at the Stern School of Business. Be sure and check
Speaker 1: out his new book, which will be out in December
Speaker 1: of this year, The Corporate Life Cycle, Business Investment and
Speaker 1: Management Implications. If you enjoy this conversation, well, be sure
Speaker 1: and check out any of the previous four hundred and
Speaker 1: eighty six we've done over the past eight or nine years.
Speaker 1: You can find those at YouTube, iTunes, Spotify, wherever you
Speaker 1: find your favorite podcasts. Sign up for my daily reading
Speaker 1: list at Rihaltz dot com. You can follow me on
Speaker 1: Twitter at Riholtz. Check out all of the Bloomberg podcasts
Speaker 1: at podcast I would be remiss if I forgot to
Speaker 1: thank the crack team that helps me put these conversations
Speaker 1: together each week. Samantha Danziger is my audio engineer. Paris
Speaker 1: Wald is my producer, Attica val Bron is our project manager.
Speaker 1: Sean Russo is my researcher. I'm Barry Rihalts. You've been
Speaker 1: listening to Masters in Business on Bloomberg Radio.