Speaker 1: Brought to you by Bank of America. Merrill Lynch seeing
Speaker 1: what others have seen, but uncovering what others may not.
Speaker 1: Global Research that helps you harness disruption. Voted top global
Speaker 1: research firm five years running. Merrill Lynch, Pierce, Fenner and
Speaker 1: Smith Incorporated. This is Masters in Business with Barry Ridholds
Speaker 1: on Bloomberg Radio. This week on the podcast, we have
Speaker 1: n y u sterns Aswath Dama Doren. He is a
Speaker 1: professor at n y U Stern and specializes in valuation
Speaker 1: and let me spend a moment or two just explaining
Speaker 1: exactly what that means. Whenever you make a purchase, be
Speaker 1: it a private, non publicly traded company, it could be
Speaker 1: private equity, it could be venture capital, or a public company,
Speaker 1: or a hedge fond or a mutual fund or anything
Speaker 1: like that, or a market or an index, you are
Speaker 1: making a valuation decision. You are basically saying this company
Speaker 1: is worth paying this much money for because I expect
Speaker 1: there to be gains in the future, and there are
Speaker 1: a few people in the world who are better at
Speaker 1: making that assessment than than our guest. Um. I'll leave
Speaker 1: out all the specific details of his curriculum VITAE. It's
Speaker 1: too long to list. I need. All I need really
Speaker 1: need to say is he's a rock star professor um.
Speaker 1: Incredibly insightful, eloquent, intelligent, uh sort of guy, really really
Speaker 1: interesting conversation. I this was one of those interviews where
Speaker 1: I expected it to be good and I was delighted
Speaker 1: with how absolutely fascinating the guests was. So with no
Speaker 1: further ado, my conversation with n y U S. Aswath Damadharin.
Speaker 1: This is Master's in Business with Barry Ridholts on Bloomberg Radio.
Speaker 1: My special guest today is n y U S Professor
Speaker 1: Aswath Demodrin. He is the Kirshner Family Chair in Finance
Speaker 1: Education at the n y U Stern School of Business.
Speaker 1: I'm only going to give you an abbreviated version of
Speaker 1: his curriculum vita. Otherwise we'll take up the full hour.
Speaker 1: A b. S. At Madras University and MS from the
Speaker 1: Indian Institute of Management N B A. And PhD from
Speaker 1: the University of California at Los Angeles. He is the
Speaker 1: recipient of too many fellowships and awards for teaching excellence
Speaker 1: to to note other than to point out he is
Speaker 1: the five time winner of the Professor of the Year
Speaker 1: at n y U. He is also the author of
Speaker 1: several highly regarded academic texts on corporate finance, valuation, and
Speaker 1: investment management. He's written so many books. Let me just
Speaker 1: reference a few, The Little of Stock Valuation, investment valuation
Speaker 1: tools and techniques, corporate finance theory and practice, investment philosophies,
Speaker 1: successful strategies, and the investors who made them work, and
Speaker 1: on and on us with Delmaradin. Welcome to Bloomberg. Thank you,
Speaker 1: I'm glad to be here. I'm I'm excited to have
Speaker 1: you because this is an area that is so important
Speaker 1: to investors and we really don't dive as deeply into
Speaker 1: it as we probably should. So so let's just start
Speaker 1: right from the beginning. Where should investors be thinking when
Speaker 1: they look at the question of valuation. I think the
Speaker 1: first thing investors have to be asking is whether they
Speaker 1: should be doing evaluation in the first place, because valuation
Speaker 1: requires two things. One is it requires a willingness to
Speaker 1: learn the basic tools. And many investors want to do valuation,
Speaker 1: but they don't want to learn about accounting. They want
Speaker 1: to do evaluation, but they don't want to learn about
Speaker 1: present value. They want to do valuation, but they don't
Speaker 1: want to understand the basics that drive risk and return.
Speaker 1: And that's lazy. It's lazy, and it leads to you
Speaker 1: spending a lot of time thinking your value companies and
Speaker 1: you walk away with actually nothing to show for it.
Speaker 1: So the first question I would ask you is do
Speaker 1: you have time to be willing to do things you
Speaker 1: might not enjoy doing learning those twos? What is the
Speaker 1: alternative to not learning to do just put your money
Speaker 1: in an index. Fun in the world would be far
Speaker 1: better off if you just put your money in the
Speaker 1: next one, went back to doing what you did with
Speaker 1: the rest of your life. Be a doctor, be an engineer,
Speaker 1: be a plumber, do what you do in your regular life.
Speaker 1: You investing for what it's meant to do, which is
Speaker 1: to preserve and grow what you save from your job.
Speaker 1: And I think for a lot And that's the other
Speaker 1: point it emphasized, because a lot of people invest for
Speaker 1: the wrong reason. They want to get rich. I mean
Speaker 1: that's the reality. We invest because we want to beat
Speaker 1: the market. It's a lottery ticket. We're gonna We're gonna
Speaker 1: find the next to Apple, the next Google, and I
Speaker 1: think in the process we make mistakes, and then we
Speaker 1: beat ourselves up about the mistakes we make, and that
Speaker 1: leads to more mistakes. Sounds fairly like a familiar story.
Speaker 1: So so let's talk about the accounting work. I assume
Speaker 1: you're talking about looking at account statements, looking at balance sheets,
Speaker 1: looking at cash flows. How does the average investor wrap
Speaker 1: their head around. I would say keep it simple, because
Speaker 1: I think if you take an accounting class, the problem
Speaker 1: is an accounting class is all about debit and credit
Speaker 1: and getting you into the nitty gritty of the footnotes.
Speaker 1: I actually did an exercise where I do these webcasts
Speaker 1: where I actually took the propran gamble ten K, and
Speaker 1: what I did was I did a webcast where I
Speaker 1: talked about how little of the ten K is actually
Speaker 1: useful in valuation and how much of it is noise.
Speaker 1: Accountants throw in small stuff with the big stuffy. They're
Speaker 1: incapable of telling the difference the stuff that maddens the
Speaker 1: stuff that doesn't because there accountants the detail oriented, they've
Speaker 1: focused on it. I was about to say, not only
Speaker 1: the detail oriented, but when it comes to a ten K,
Speaker 1: the typical responses, hey disclose it all better to get
Speaker 1: it out than be accused of hiding something later. In fact,
Speaker 1: that the point I make is data is not information.
Speaker 1: We're mistaking the two. We have a lot more data
Speaker 1: than we used to have thirty five years ago. Typical
Speaker 1: ten K now is five times longer than it used
Speaker 1: to be thirty years ago. Really, that's fascinating because of
Speaker 1: all the disclosure requirements. And that's part of the problem
Speaker 1: is people think that if you throw everything into a
Speaker 1: ten K, you are being more informative. I actually suggest
Speaker 1: that maybe we should go back to fifteen page ten ks,
Speaker 1: where you focus on the things that really matter, like
Speaker 1: a nutrition statement on the side of the canda soda.
Speaker 1: Here's the important metrics that you need to know. I'll
Speaker 1: give you an example of a completely useless section of
Speaker 1: a ten K where they describe the risks that they
Speaker 1: might face, like twenty pages. It's exactly it's a lawyer
Speaker 1: writing that stuff. Right in case we get suited. We
Speaker 1: told you competition could come in and take the market,
Speaker 1: as if you didn't know that when you invested. So
Speaker 1: I would actually argue that we're moving in the wrong
Speaker 1: direction by pushing more and more disclosure requirements When In fact,
Speaker 1: we need more focus in financial statements, better and more
Speaker 1: focused exactly releases as opposed to just to your volume.
Speaker 1: In fact, I do a fifteen minute webcast and exactly
Speaker 1: the accounting. I need you to know things like do
Speaker 1: you know the difference between gross income operating income in
Speaker 1: net income? If you don't, you're in trouble, right, So
Speaker 1: the basic stuff so that once you can, it's more
Speaker 1: financial statement analysis and accounting that I want you to know.
Speaker 1: Can you read a statement of cash flows? That's that's
Speaker 1: quite quite interesting. So when we talk about non cash
Speaker 1: charges and amorization and appreciation and goodwill and all these
Speaker 1: fun geeky terms, are these of any assistance to the
Speaker 1: average investor? Most of them are not. I'll tell you
Speaker 1: I've described good will as the most destructive accounting item
Speaker 1: ever created in history. So let's let's delve into that.
Speaker 1: Define goodwill for people who may not be familiar with
Speaker 1: the phrase goodwill is the accountant admitting he screwed up.
Speaker 1: Because that's the way to think about it. Right. So
Speaker 1: if you have a company with the four billion dollar
Speaker 1: book bellion, I pay ten billion the accounting, there's a
Speaker 1: six billion dollar problem to explain away, so he shows
Speaker 1: it as good will. So it's very squishy, it's very elastic.
Speaker 1: You could put whatever you want into that. It's it's
Speaker 1: a plug variable. You put it in because your balance
Speaker 1: sheet has to balance. It is a very unpleasant requirement.
Speaker 1: So good will exist for one reason alone. It balances
Speaker 1: balance sheets. It's a plug variable. In fact, I send
Speaker 1: these suggestions to I F R S and to GAP
Speaker 1: that they never seem to take. And one of the
Speaker 1: suggestions I've sent a few years ago was, let's rename
Speaker 1: goodwill as an algebra when you have a missing barriable
Speaker 1: to make X, because then we wouldn't do crazy things
Speaker 1: like paying for goodwill. I'm Barry Ridlts. You're listening to
Speaker 1: Masters in Business on Bloomberg Radio. My guest today is
Speaker 1: Professor as Damadarn of n y U Stern School of Business.
Speaker 1: He is an expert in the valuation of corporations. Let's
Speaker 1: talk about two of the hottest companies out there, both
Speaker 1: of which seem to have a somewhat ambiguous valuation, Tesla
Speaker 1: and Amazon. So let's let's talk about Tesla. You've done
Speaker 1: so much work on that. What is the bottom line
Speaker 1: with the valuation of Tesla. I mean, with all young companies,
Speaker 1: it's a story that you tell about the company that
Speaker 1: drives your evaluation. The narrative, and with Tesla, the narrative
Speaker 1: can lead you to different places. I mean, I'll give
Speaker 1: you I'll give you an example. When I first valued
Speaker 1: Tesla was about three years ago. I value them as
Speaker 1: a luxury automobile company. I gave them the margins of
Speaker 1: luxury automobile companies, and I gave them the growth you
Speaker 1: can get as a luxury automobile company. Came up with
Speaker 1: about a hundred dollars per share. Okay, the problem with
Speaker 1: Tesla is you've got, for lack of a better word,
Speaker 1: a delusional CEO who kind of keeps expanding the story
Speaker 1: on you. Right because in a sense, today he's an
Speaker 1: automobile company. Tomorrow is a clean energy company. They have
Speaker 1: tomorrow god only knows where. So the story for Tesla
Speaker 1: I call it the ultimate story stock, which is people
Speaker 1: have stopped talking about numbers. The numbers really, and that's
Speaker 1: why Tesla stock price can take all this punish mint
Speaker 1: of deliveries not being on time. It's still hang in
Speaker 1: there because the people who invest in Tesla have bought
Speaker 1: into Elon Musk's story. Is there an Elon Musk premium?
Speaker 1: I think there's an Elon Musk fandom, which essentially Tesla
Speaker 1: investors are not investors like other companies. They don't invest
Speaker 1: in the company for the earnings that cash flows. They're
Speaker 1: not worried about delivery schedules not being met. They're buying
Speaker 1: the Elon Musk story. So there was There was just
Speaker 1: an article out the other day, that Bloomberg release that showed,
Speaker 1: amongst luxury automakers BMW, Audie, Mercedes and others plus Tesla
Speaker 1: in terms of sheer volume last quarter, Tesla's beating everybody.
Speaker 1: And is that a fair statement? And I think Tesla
Speaker 1: has some incredible strengths, which is I mean, can you
Speaker 1: imagine another automobile company telling the world that they're going
Speaker 1: to come out with a new model in two thousand
Speaker 1: and eighteen and four hundred thousand people signing up today
Speaker 1: and putting down insane It's nobody else will do it.
Speaker 1: So how about just the idea of someone saying, I
Speaker 1: have an idea, let's make a new automobile company that
Speaker 1: has hasn't been done? And how many And that's why
Speaker 1: I feel frustrated with Tesla because at the core, it
Speaker 1: has something very powerful, this connection to customers, that no
Speaker 1: other automobile company does. And the reason I'm frustrated is
Speaker 1: I want them to build this incredible, great automobile company.
Speaker 1: I want focus here. Instead, what do I get? I
Speaker 1: get them acquiring Solar City and telling me that they're
Speaker 1: building battery panels and solar power. Well, you're gonna buy
Speaker 1: a battery pack, put in your garage, put the solar
Speaker 1: cells on your roof, and now we've made you completely
Speaker 1: independent off the grid. Look what we've done for you
Speaker 1: as an automobile purchaser. And in a sense, I think,
Speaker 1: once you've established yourself as an automobile company, maybe you
Speaker 1: want to do this, But already you have enough on
Speaker 1: your plate. Why would you want to load up more
Speaker 1: stuff on your plate? Especially because I think Solar City
Speaker 1: is a commodity in a commodity business with a huge
Speaker 1: amount of dead So it's almost like you're adding three
Speaker 1: distractions to a company that already has so much to
Speaker 1: focus on. If I were Testla, I'd looking at getting
Speaker 1: the Tesla three delivered on time, because that's going to
Speaker 1: be disastrous. If you've got four hundred thousand people expecting
Speaker 1: the car to be delivered in two thousand and eighteen,
Speaker 1: and that doesn't get and this is this is the
Speaker 1: low cost under forty dollars exactly every person all electric automobile,
Speaker 1: which ironically General Motors um turns out to be ahead
Speaker 1: of Tesla with Chevy with their their first they had
Speaker 1: the vaults and now they have the vaults, They're actually
Speaker 1: gonna beat Tesla the market. Yeah, but I think Tesla
Speaker 1: will win that game simply because General Motors wants to
Speaker 1: go after the fifteen maybe the lowest. I mean a
Speaker 1: Tesla will never be a fully mass market automobile company
Speaker 1: because I think in a sense they will always trade
Speaker 1: at a premium over a GM car. So I think
Speaker 1: they will have that price premium and a profit margin.
Speaker 1: But all of that presupposes that they make the trains
Speaker 1: run on time. I could talk about Tesla all day.
Speaker 1: Will come back to that. Let's talk about Amazon. I
Speaker 1: mentioned there was a uh euron Musk premium. Is there
Speaker 1: a Jeff Bezos premium at Amazon? And I think it's deserved.
Speaker 1: I mean, Amazon has been one of my pet obsessions
Speaker 1: for twenty years. It's a company that I valued first
Speaker 1: in seven and I valued pretty much every year since.
Speaker 1: I tell people I bought Amazon four times and I've
Speaker 1: sold Amazon four times, which kind of tells you where
Speaker 1: I am with Amazon, Right. Have you regretted all of
Speaker 1: those cells? No, because I think in a sense, I
Speaker 1: I have to stay true to my faith, which is
Speaker 1: I buy companies because I think, like an investor, the
Speaker 1: price has to be less than the value. Amazon is
Speaker 1: a company where the price can take off and go
Speaker 1: well ahead of value for extended stretches for years. And
Speaker 1: I think part of the reason I think people are
Speaker 1: willing to pay a premium is I've never seen a
Speaker 1: company where a CEO has been more consistent about his narrative.
Speaker 1: In fact, he's the the anti Elon Musk. Right. If
Speaker 1: you go back to and then you read the letter
Speaker 1: that Amazon said to I don't know whether you've ever
Speaker 1: read that Jeff Bezos. There's a great letter that's online
Speaker 1: on what he told people he would do as a company,
Speaker 1: and he's done it, and he's stayed exactly true to
Speaker 1: the script. There have been a handful of pivots, but
Speaker 1: he's pretty much been fairly consist Their minor shifts, of course,
Speaker 1: course changes, not wholesale reversals in any ways. In the fact,
Speaker 1: I describe Amazon as a field of dreams company, right,
Speaker 1: which is if we is what the story he told is,
Speaker 1: if we build it, they will come. Basically said, we're
Speaker 1: gonna go after revenues first, We're not going to worry
Speaker 1: about profits, and once we build the revenues, the profits
Speaker 1: will come. And he stayed true not just to that
Speaker 1: story in terms of what he said, but how he acts.
Speaker 1: You look at the Kindle, you look at it basically
Speaker 1: go product by product. So yeah, let's go through. You
Speaker 1: have the Kindle, you have the Amazon Fires, Amazon Tia,
Speaker 1: Amazon Prime. Right. Basically, Amazon Prime is I started Amazon
Speaker 1: Prime a few years years ago. I was late to
Speaker 1: the party, and it's just become indispensable. Amazon Music, Amazon Video,
Speaker 1: and what they share in common is Amazon sells every
Speaker 1: one of those products at cost or below. They're open
Speaker 1: about it. Amazon Prime they charge you go to the
Speaker 1: ten K, they actually tell you how much it was.
Speaker 1: They give you the cost or how much it costs
Speaker 1: them to service. It's about three. Basically they're saying, look,
Speaker 1: why's subsidizing it, But they say it's okay because if
Speaker 1: we build it, they'll come. Your colleague, an n y
Speaker 1: U professor Galloway, has been suggesting Amazon should go out
Speaker 1: and buy the US Postal Service. Of course, they're shipping
Speaker 1: costs are now in the billions, soon to be tens
Speaker 1: of billions of dollars, and you know whatever our FedEx
Speaker 1: and UPS. I'd be terrified where where Amazon is going next? Right,
Speaker 1: because Amazon has this insane capacity to destroy almost every
Speaker 1: business for everybody else in the business. Now it's done
Speaker 1: in the retail business already. The reason I will I
Speaker 1: will be hesitant to buy Netflix X is because Amazon
Speaker 1: is entering big time into that business. Ups and FedEx.
Speaker 1: You look at Amazon entering the business because here's what
Speaker 1: Amazon does with every business they go into. They sell
Speaker 1: below cost, They challenge you to match up with them,
Speaker 1: and they can keep going long after you dropped out
Speaker 1: of the game. So I think that Scot's right. I mean,
Speaker 1: I think that there is change coming to this business.
Speaker 1: I'm Barry Ridhults. You're listening to Masters in Business on
Speaker 1: Bloomberg Radio. My guest today is Aswath Damadarn. He is
Speaker 1: a professor of finance at n y u's Stern School
Speaker 1: of Business. He is also an author of numerous books,
Speaker 1: including the Little Book Evaluation and Investment Philosophies, Successful Strategies
Speaker 1: and the investors who made them work well. We were
Speaker 1: previously talking about Tesla and Amazon, and but these are
Speaker 1: public companies and the market gives us an approximate valuation
Speaker 1: every day. Let's talk a little bit about private companies
Speaker 1: where there isn't that public valuation. How do you go
Speaker 1: about valuing a non traded private company. I think knowing
Speaker 1: the prices a crutch, right, I mean, in a sense
Speaker 1: you value should not be a function of knowing the price.
Speaker 1: We use it in public companies often as a feedback
Speaker 1: loop to make sure we aren't screwing up too badly.
Speaker 1: So it's true when you value a private business you
Speaker 1: look for that crutch. It's not dead, though it depends
Speaker 1: on the private business. I valued over multiple times on
Speaker 1: my blog. And there there is a pricing. It's a
Speaker 1: VC pricing or a Saudi Sovereign Fund pricing of the company.
Speaker 1: But is that a true pricing. I've I've heard people
Speaker 1: make that argument. But what you're essentially doing is instead
Speaker 1: of taking the collective wisdom of millions of investors. However, misguarded.
Speaker 1: They may be at times you're lying on one person
Speaker 1: rinning a check and that valuation. In fact, this is statistical.
Speaker 1: It's a statistical problem. In the regular market, you have
Speaker 1: hundreds and hundreds of people trying to assess the price
Speaker 1: your one person. So all you need is one crazy person.
Speaker 1: In fact, I wrote an article on VC pricing just
Speaker 1: a couple of weeks ago on how VC pricing can
Speaker 1: very quickly get out of control because all you need
Speaker 1: is one crazy person to drive the pricing process out
Speaker 1: of control. It's a feedback feedback, it's a feedback loops.
Speaker 1: So but it's so that's that's part of the problem.
Speaker 1: The other part is when a VC says I've got
Speaker 1: five percent of a company and I paid fifty million,
Speaker 1: you can't extrapolate that simply because vcs, when they invest
Speaker 1: in the equity and a company often get these options
Speaker 1: on the side right roundside protect so it's much more
Speaker 1: so it's a much sweeter deal than exactly. So it's
Speaker 1: a much more difficult place to get a price, but
Speaker 1: at least you have a price. I think it gets
Speaker 1: really tough if you ask me to value the hot
Speaker 1: dog stand outside right, because I can value it. There
Speaker 1: is no price I can compare it to, and it
Speaker 1: makes me uncomfortable. It makes everybody uncomfortable not to have
Speaker 1: something check, and that I think is a psychological problem
Speaker 1: with valuing private businesses. You value the business, say, how
Speaker 1: do I know I'm even within the ballpark? Right? You're stuck,
Speaker 1: stuck relying on the metrics that exactly that you use
Speaker 1: um And to make sure people understand, when you talk
Speaker 1: about options, vcs very often have the right to reinvest
Speaker 1: in a subsequent round at a same or discounted price
Speaker 1: to whatever that next valuation is. When you say options,
Speaker 1: it's not actually options, it's it's so they're getting this
Speaker 1: upside advantage. You also get a downside protection sometimes, which
Speaker 1: is the value decreases. They are allowed ways of escaping
Speaker 1: from that. So vcs are pretty careful about putting those
Speaker 1: options in, and founders go along because it allows them
Speaker 1: them to inflate that because I'm sure because when the
Speaker 1: journalist says, you know, so such in the Terranniss valued
Speaker 1: at nine billion, they're often extrapolating from a VC investment.
Speaker 1: So it serves the founder and the vcs to at
Speaker 1: least put out the surface number that everybody is buying into.
Speaker 1: So you mentioned Taranis, which was widely known as a
Speaker 1: unicorn before the nar would have turned out to be
Speaker 1: pretty much nonsense. And now the whole thing is sort
Speaker 1: of mid collapse. We're watching it doing enron Um not
Speaker 1: quite the same underlying issues as Enron had. But when
Speaker 1: when the business school case is written on that, it's
Speaker 1: going to be really interesting to see how people missed
Speaker 1: all the warning signs. What about some of the other
Speaker 1: Silicon Valley unicorns, the billion dollar private companies. You mentioned Uber?
Speaker 1: What is uberworth? Well, according to the pricing, it's worth
Speaker 1: over sixty billion. What do you think it's worth. I
Speaker 1: think it's worth a number, and well it's my estimate
Speaker 1: of the value. I'm not sure what the legit number
Speaker 1: is because Uber is very I think the part of
Speaker 1: the problem with Uber is we know what it can do.
Speaker 1: It can grow revenues like crazy. It's in kind. I
Speaker 1: go to cities where you would not think Uber would
Speaker 1: be there, but it's there, such as give me a few.
Speaker 1: I was in Moscow's Apolo, Jakarta and Delhi last summer.
Speaker 1: Every single city, I asked the audience, how many of
Speaker 1: you got your Uber and in every single city. To
Speaker 1: the people in the in the session said they came
Speaker 1: in by Uber. That's astonishing. They're that widespread. That's the
Speaker 1: good news that they know how to grow because they
Speaker 1: have a very low capital intensity model. To grow in
Speaker 1: the city, all they need to do is hire a guy,
Speaker 1: put them in a motel room, ask them to get
Speaker 1: some drivers together. Because they don't own the cars, they
Speaker 1: don't have the driver, they don't the drivers don't work
Speaker 1: for them. The problem for Ruber is they have a
Speaker 1: business model which is indefensible. What I mean by that
Speaker 1: is they can grow revenues, but they can't make money
Speaker 1: right because entry is easy. So that what was happening.
Speaker 1: What's happening in the U S and it's concerning every
Speaker 1: right sharing company is Lift offers Uber drivers two thousand
Speaker 1: dollars to switch to lift. Uber offers Lift and to
Speaker 1: make them exclusive, so they pay them money. So basically
Speaker 1: what's happening is the expenses are way out of control.
Speaker 1: So well, revenues are doubling, costs are tripling. So the
Speaker 1: way I described it, you've got to get an exit
Speaker 1: from this, but you've got to come up with the
Speaker 1: defensible business. You've got increased stickiness, and much of what
Speaker 1: you're seeing in the right sharing space in the last
Speaker 1: year is how to increase stickiness. Staking is in the
Speaker 1: sense of keeping drivers attached to you, keeping customers with you.
Speaker 1: I'm very results you're listening to Masters in Business on
Speaker 1: Bloomberg Radio. My guest today is Professor Aswat Damadarn. He
Speaker 1: is of n y U Stern School of Business and
Speaker 1: he is an expert in valuing companies, both private and public.
Speaker 1: Let's let's talk a little bit about valuing stocks and
Speaker 1: the market. Generally. We've if you've been an investor for
Speaker 1: any length of time, you may have noticed that valuations
Speaker 1: in general have been creeping up over the years. Not
Speaker 1: just things are a little pricey today, but generally things
Speaker 1: have gone up in price in the stock market. And
Speaker 1: there are a number of different theories as to why. First,
Speaker 1: is that a fair valuation. Two stocks generally look pricier
Speaker 1: this decade, in last decade than five, six, seven decades.
Speaker 1: It's not debatable, right, the p ratios are up, capes
Speaker 1: are up, price to book ray shows up. You take
Speaker 1: any multiple there at high but hears the way to
Speaker 1: think about it investing is not an absolute game. You
Speaker 1: say I invest or not. It's a relative game. So
Speaker 1: if you're not going to invest in stocks, the question
Speaker 1: is ware you can invest instead, And what do you
Speaker 1: have is a game that has fundamentally changed on that dimension.
Speaker 1: In two thousand and seven, if you didn't invest in stocks,
Speaker 1: you might have put your money in T bonds and
Speaker 1: made four percent in corporate bonds and made five and
Speaker 1: a half to six percent. But today you don't invest
Speaker 1: in stocks. You invest in T bonds you make one
Speaker 1: point five percent, or corporate bonds and make two and
Speaker 1: a half percent. Stocks look expensive relative to their own industry,
Speaker 1: but they don't look expensive relative to what my other
Speaker 1: choices are. So in other words, you can't just look
Speaker 1: at a single metric in isolation like priceto earnings ratio
Speaker 1: and say, hey stocks or cheaper stocks. If it was
Speaker 1: that simple, you buy it when the pe was low,
Speaker 1: you sell when the pus high, and then you get
Speaker 1: that's not That's been my pet peeve with especially chilla,
Speaker 1: the chilla cape right, because it's become this single metric,
Speaker 1: it's a nobel price when they're pushing it. Therefore, it
Speaker 1: might so, first if you think about the cape, and
Speaker 1: you look at the history. It goes back to seventy one,
Speaker 1: and you can show all kinds of relationships in cape
Speaker 1: now and returns in the future, So it's and there
Speaker 1: again the statistics are incontestable, which is if you have
Speaker 1: if the CAPE is high now, returns in the future
Speaker 1: I have tended to be lower. So people then say, okay,
Speaker 1: that means you should be out of stocks now because
Speaker 1: the CAPE is at twenty six or twenty seven or
Speaker 1: twenty depending on how you compute it. But that assumes
Speaker 1: that the underlying alternative, which is what you can make
Speaker 1: if you don't invest in stocks, hasn't changed, and it has.
Speaker 1: Someone used the number not too long ago that if
Speaker 1: you were out of stocks when the cape was um,
Speaker 1: either someone elevated or very very of it over the
Speaker 1: past thirty years, you would have missed of the stock rally.
Speaker 1: So you can't look at it in isolation. In fact,
Speaker 1: what I did was I took Schiller's own numbers. Let's
Speaker 1: to be accused of using some variant. I took Schiller's
Speaker 1: own numbers that go back to eighteen seventy one, and
Speaker 1: I put in an Excel spreadsheet which is on my
Speaker 1: blog where I try different market timing strategies based on Cape. Like,
Speaker 1: for instance, I said, what would happen if every time
Speaker 1: the CAPE was twenty above the median from the previous
Speaker 1: fifty years, I sold stocks and the CAPE was twenty five?
Speaker 1: Because I mean, ultimately, if you want me to time
Speaker 1: markets based on strips, and then I tried. I could
Speaker 1: not find a single timing strategy over the last fifty
Speaker 1: years where I could use Cape to make money. I
Speaker 1: tell people correlations are not cash because all too often
Speaker 1: when people tell them to send me the stuff on Cape,
Speaker 1: it's look at the correlation in CAPE and future returns.
Speaker 1: And I said, I've never been able to make money
Speaker 1: in correlations. Tell me how I used this to make money,
Speaker 1: And at least based on the testing I did, I
Speaker 1: couldn't find a single way you could use Cape to
Speaker 1: make money from timing. Monk, we just just look at
Speaker 1: the past decade. If you would have used Cape, you
Speaker 1: would have sat in in a pretty nice bond rally,
Speaker 1: but you would have missed a two plus percent equity rally.
Speaker 1: It would have been would have been pretty pretty off. Um. So,
Speaker 1: so let's talk about a couple of people have some
Speaker 1: theories I think are interesting. Cliff Fastness of a qu
Speaker 1: R said, it used to be very expensive to buy stocks.
Speaker 1: You didn't have indexes, you didn't have a lot of
Speaker 1: things that made it friction lists and and efficient. It
Speaker 1: was time consuming, expensive, and you had to be paid.
Speaker 1: Investors had to be paid or reasonable ry to return
Speaker 1: to compensate for that initial friction. And most of those frictions,
Speaker 1: according to Cliff, have gone away. Is that a fair
Speaker 1: way to look at it? I don't buy it. I mean,
Speaker 1: I don't think there are enough, there were ever enough
Speaker 1: frictions in this game to explain anything but a very
Speaker 1: small prime because as transactions costs, argument you can always
Speaker 1: make about value that what you pay today is a
Speaker 1: function of expected future transactions. Where I'm using transactions costs broadly,
Speaker 1: and it's always been the case that have been in
Speaker 1: a less liquid market, you're willing to pay less upfront
Speaker 1: simply because you worry about in the US market, And
Speaker 1: I mean, unless you're going back to nineteen twenty five
Speaker 1: or five, for the last fifty years, I've pretty much
Speaker 1: had this option of investing in index one's. So the
Speaker 1: Van Guard five index one goes back to what the
Speaker 1: nineteen seventy seventy. So I've always had that option. I've
Speaker 1: chosen not to use the option. And transactions cost starting
Speaker 1: in the eighties started sliding very very quick, so it's
Speaker 1: almost it's not like we've gone from seven percent bid
Speaker 1: ask spreads to half a percent. So if in fact,
Speaker 1: there's a very simple, testable way you could test a
Speaker 1: cliff strategy, which is to break companies down into large
Speaker 1: market gap all the way down to the least traded stocks.
Speaker 1: And if he's right, the least traded stocks shouldn't mean
Speaker 1: the ones that went up the most. The that's where
Speaker 1: they so the most liquid stocks you should actually see
Speaker 1: underperforming the least liquid stocks. If the argument for prices
Speaker 1: going up was this, hey, transactions costs have gone down.
Speaker 1: What about the concept that in the old days to
Speaker 1: build a company you needed a lot of capital, a
Speaker 1: lot of steel, building, staffing. When you look at Facebook's
Speaker 1: purchase of WhatsApp, of WhatsApp, or or go through the
Speaker 1: whole list Instagram, go through, they're they're making these purchases
Speaker 1: small little companies run by four or five people. You
Speaker 1: don't even need the servers and the know how you
Speaker 1: used to ten twenty years ago. It's all in the cloud,
Speaker 1: it's all modular. Those sort of things are readily available.
Speaker 1: So companies today are so much require so much less capital,
Speaker 1: so much less staffing. They deserve a higher multiple because
Speaker 1: the cost structure is so cheap. It's a mixed blessing. Right.
Speaker 1: Because you can grow really fast, you can also shrink
Speaker 1: really fast. Right, Because I have this stare of a
Speaker 1: life cycles infrastructure companies, the old time infrastructure companies. It
Speaker 1: did take you decades to build up the company. But
Speaker 1: once you've built up the company, you could live off
Speaker 1: the fat for a really long time exactly, and you
Speaker 1: could make money for thirty forty fifty years before the
Speaker 1: decline set in. And the decline was slow because the
Speaker 1: same forces that took you a long time to grow
Speaker 1: are now working in your favor as you decline. In contrast,
Speaker 1: you take a tech company. I described tech companies as
Speaker 1: aging in dog years like a tenure Tech companies like
Speaker 1: a seventy year infrastructure company. You can grow really fast
Speaker 1: because as you pointed out, it doesn't require the kind
Speaker 1: of capital investment you did as as an old time
Speaker 1: infrastructure company. But it also means you don't get to
Speaker 1: enjoy the fat for very long. I mean, I think
Speaker 1: of BlackBerry in two thousand and six, it was a star.
Speaker 1: By two thousand and nine it was dead man walking. Basically,
Speaker 1: it's a company that went to where. And that's I
Speaker 1: think when you think about valuation, is valuing across a
Speaker 1: life cycle. I'm not sure that the value of a
Speaker 1: twenty year old life cycle tech company is going to
Speaker 1: be higher than the value of a hundred year infrastructure company,
Speaker 1: because I've got two valued across the cycle, and the
Speaker 1: tech companies are probably more susceptible exact to rapid change
Speaker 1: than someone who's making dishwashing soap or something exactly. That's
Speaker 1: that's a very different So let's let's talk about some
Speaker 1: of your favorite valuation techniques. What do you think is
Speaker 1: the most informative measure of a company's valuation. I ultimately
Speaker 1: am a believer that companies should be price based on
Speaker 1: three things. One is their cash flows. The second is
Speaker 1: the value of their growth, not growth per se, but
Speaker 1: how much it's costing them to get the growth and
Speaker 1: the expensive growth, not just the growth percentage. So I
Speaker 1: bring in both sides. Growth has a good side. It
Speaker 1: makes my revenues grow faster. Growth has a bad side.
Speaker 1: I've got to set aside earnings to cover the growth.
Speaker 1: The net effect is what drives the value of growth.
Speaker 1: Companies globally destroy value as they grow, destroy destroy value
Speaker 1: as it grow. It's one of the scariest statistics on growth.
Speaker 1: So always a mixed fee things when the company says
Speaker 1: we're going to grow, because my first reaction is exactly
Speaker 1: so that I look at the value growth and I
Speaker 1: look at risk. So when I do a discounted Casulow valuation,
Speaker 1: people think of it as some kind of new model.
Speaker 1: People have always valued businesses based on cash flow growth
Speaker 1: at risk. I'm sure there's a Venetian glassmaker in the
Speaker 1: four hundreds, and he might not have gone through a
Speaker 1: d c of model, but I'm sure he asked questions about, hey,
Speaker 1: what are your cash loss He knew better than to
Speaker 1: trust your accounting numbers. Even then, he talked about growth
Speaker 1: in the cost of growth, and he talked about risks.
Speaker 1: So to me, when I value a company, I've got
Speaker 1: to bring those into what I end up with as
Speaker 1: a as a number for the company. What's what's the
Speaker 1: third factor? It's risks, So it's cash flows, growth, the value, growth,
Speaker 1: and risk. So those three factors play out no matter
Speaker 1: how complicated my discounted. That's the end game that I'm
Speaker 1: looking at. So what do you think are the most
Speaker 1: overrated valuation metrics? I think accounting valuation to me is pointless, right,
Speaker 1: So I mean book value or i've I see price,
Speaker 1: the book gets tossed out. All that's exactly now. And
Speaker 1: to me, there's that two things on book value. The
Speaker 1: reason people get so caught up with book values first
Speaker 1: they think that it actually is a measure of what
Speaker 1: you would get if you liquidate the company today, which
Speaker 1: is absolutely absurd. So what about tobin Que ratio? And
Speaker 1: I think it's the same lazy approach, right. The tobanqueue
Speaker 1: approach was developed for a different era with a lot
Speaker 1: of manufacturing company, heavy heavy heavy manufacturing companies where perhaps
Speaker 1: they had factories, they had machinery, They are things that
Speaker 1: could be liquidated in bankrupts exactly. So again there's there's
Speaker 1: a attachment. We have two techniques that we're developed for
Speaker 1: a different age, and we keep trying to apply those
Speaker 1: techniques to the new age companies, which are eighty percent
Speaker 1: the market now is that of by market cap or
Speaker 1: by number of market gaps. So basically are are at
Speaker 1: least some aspect of them. But as a new age
Speaker 1: it's their value comes not from physical assets. So I
Speaker 1: think of Co Cola as a new age company in
Speaker 1: the sense of the physical investments at Coca Cola makes
Speaker 1: a completely useless in my determining what the value of
Speaker 1: Coca Cola really So it's what is it? Brand recognition,
Speaker 1: intellectual property exactly right. So it's a capacity to charge
Speaker 1: a dollar for a can of water with crap and
Speaker 1: sugar and syrup thrown into it. It costs the three
Speaker 1: cents to make. It's it's pure pricing power. That pricing
Speaker 1: power is not going to be reflected if I look
Speaker 1: at the plant and equipment. In fact, when they're sold
Speaker 1: off their bottling, they were telling us a look, you know,
Speaker 1: physical assets don't matter. It's all about brand name, right.
Speaker 1: It's the purest brand name play you can make because
Speaker 1: the bottling is separated from from the rest of the company.
Speaker 1: So what about a company like Walt Disney where you
Speaker 1: have a mix of assets. You have you have the
Speaker 1: theme parks, you have the television studios, you have there's
Speaker 1: so many different moving parts. How do you put a valuation.
Speaker 1: I'm a Disney investor. You know what scares me the most?
Speaker 1: At forty percent of Disney's value comes from ESPN. That's
Speaker 1: the facts. You have a lot of competition for ESPN.
Speaker 1: And here's why ESPN has been the greatest cash cow
Speaker 1: in broadcasting history. Every person who's listening to the show
Speaker 1: who has cable, well, it's not that they're paying seven
Speaker 1: dollars each month of their cable bill is going to ESPN.
Speaker 1: Now what happens when we unbundled in people's That's what
Speaker 1: scares me, right because for two decades it was cable
Speaker 1: or nothing. And now my son was who's who's not
Speaker 1: quite thirty, has got the cable because you know, and
Speaker 1: the reason he's able to use it doesn't watch live sports.
Speaker 1: So to him watching Hulu, Netflix, the way I describe ESPN,
Speaker 1: it's the only thing left between cable and the abyss.
Speaker 1: Because you take life sports out of cable, you've taken
Speaker 1: the lifeblood out of cable. So if people want to
Speaker 1: find more of your research and writing other than the
Speaker 1: books on Amazon, where can they find your your valuation
Speaker 1: discussions and where is your blog? I describe myself as
Speaker 1: a Kim Kardashian evaluation, I am. I'm never shy about
Speaker 1: exposing the material that I have. So I write a blog,
Speaker 1: whichever I do write once a week, and where is that?
Speaker 1: And that's it's a Google blog. So it's actually it's
Speaker 1: called music on Musings on Markets. It's a Google blog.
Speaker 1: So if you type in musings on Markets and my name,
Speaker 1: it should pop up. And I don't put right every day,
Speaker 1: but I write whenever I find something interesting right about.
Speaker 1: So this week I wrote about Deutschebek Why because I
Speaker 1: was just interested in the necessarily exactly the mess that's
Speaker 1: been created. Wells Fargo should be next to New Cross.
Speaker 1: But I drom I value the San Diego Clippers when
Speaker 1: Steve Barmber bought it for two billion, because I was curious,
Speaker 1: it's really worth two billion? I mean, I'm sort of
Speaker 1: the Los Angeles Clippers because I lived in Los Angeles.
Speaker 1: I know how much of a poor cousin the Clippers
Speaker 1: out of the Lakers in l A. And I said,
Speaker 1: you're playing two billion for the Clippers. If that's true,
Speaker 1: how should I pay for the Lakers? I valued Aryan Foster,
Speaker 1: the running back for the Houston the NFL team at
Speaker 1: one point issue tracking stock on his earning st right.
Speaker 1: So I valued a running back in the NFL. And
Speaker 1: this summer I was actually I was watching my kids
Speaker 1: and these are grown up kids with a Pokemon Go
Speaker 1: all over, and I said, when it was a Nintendo
Speaker 1: really doubled in value just because everybody's using Pokemon Go.
Speaker 1: So when I think about value, I just think about
Speaker 1: value across the board. I'm I would know what the
Speaker 1: pricing of bitcoin is. Why is bitcoin press? So I'm
Speaker 1: I describe myself not as an expert in valuation, but
Speaker 1: as a dabbler invaluation. I'm just fascinated by how people
Speaker 1: attach numbers to things, and I look at them in
Speaker 1: my blog. So musing on musing zen market, people are
Speaker 1: gonna just look for Aswadamadaran and using zo market. There's
Speaker 1: a website I have called the Modern Online. So if
Speaker 1: you'd open The Modern Online, which is where you actually
Speaker 1: apologize for it not being pretty, because I'm the reason
Speaker 1: is I get offers from people who are web designers
Speaker 1: and they keep saying, I can make your website look
Speaker 1: really much more attractive, and you can because I need
Speaker 1: to be because I visit my website at least once
Speaker 1: every day or two to add stuff. It's a constant
Speaker 1: because you look at the amount of stuff and on
Speaker 1: the website, it's got there incrementally. So the way it
Speaker 1: works is Wednesday, I taught Monday, I taught a class.
Speaker 1: When I teach the class, it's actually recorded. A YouTube
Speaker 1: video is created out of the class, and I go
Speaker 1: to my website and I put the YouTube video, and
Speaker 1: I put the link to the class, and I put
Speaker 1: the lecture notes I put. I put pretty much my
Speaker 1: entire life is on the website, so you can get
Speaker 1: my classes, my writing, my essentially any aspect of what
Speaker 1: I do in business, I put on that website. So
Speaker 1: I do that. I give a YouTube channel. I have
Speaker 1: a YouTube channel on which I put playlists. The players
Speaker 1: some of the playlists are of my classes. Every time
Speaker 1: I do a blog post, I've learned that I can
Speaker 1: double the number of people who are exposed to that
Speaker 1: blog post by putting a YouTube video on the blog post.
Speaker 1: And what do you discuss the post? I've discovered people
Speaker 1: have stopped reading. A lot of people will never have
Speaker 1: done the other direction. To me, I could read so
Speaker 1: much more than watching a video or listening to it,
Speaker 1: and people have told me they'll listen to this podcast.
Speaker 1: There are a couple of apps that will let you
Speaker 1: listen to it at I think one point five times
Speaker 1: the speed. There's an optimal number. But I've tried to
Speaker 1: do that and I found that that's really especially a
Speaker 1: conversation that might be a little more complex or nuanced.
Speaker 1: I find it's a challenge. So what I do? Then?
Speaker 1: I do the blog post. It's actually I sit in
Speaker 1: front of my computer with slides, so teacher treated like
Speaker 1: a class. I said, if I had twelve minutes to
Speaker 1: take this blog post and teach a class around it,
Speaker 1: because that's to me, I mean, I love teaching, and
Speaker 1: to me, a blog post is just another opportunity to
Speaker 1: talk about a company, so and generalize the discussion because
Speaker 1: I don't want a blog post to ever be about
Speaker 1: just Deutsche Bank. So when I value Deutsche Bank, I
Speaker 1: want would be able to take what I do in
Speaker 1: dotche Bank and value wells fargoing. You're not You're not
Speaker 1: giving them a fish, you're teaching them to fish. Here's
Speaker 1: an example. Now apply the selfwhere in fact, where I
Speaker 1: describe it as would rather be transparently wrong than opaquely right.
Speaker 1: And what I mean by that is, this is a
Speaker 1: business where people want to be opaquely right. You listen
Speaker 1: to c NBC. You see people coming on, and they
Speaker 1: talked for about six minutes. In the end of six minutes,
Speaker 1: you say, what exactly did they say? They've been so opaque,
Speaker 1: that they're so careful because they don't want to be wrong,
Speaker 1: that they've kind of covered every base and they put
Speaker 1: smoke and mirrors in there. I'd rather be open about
Speaker 1: what I think. So I'm gonna say, dotes what twenty
Speaker 1: one and a half and I'm buying it at thirteen
Speaker 1: point two. Here's why I think it's what twenty one
Speaker 1: And I could be absolutely wrong about every single one,
Speaker 1: but at least if I'm wrong, you can tell me
Speaker 1: what part of my valuation I screwed up on, you know? Um.
Speaker 1: Professor tetlock Of of Wharton UH describes what you just
Speaker 1: discussed as weasel words that when you whenever you see
Speaker 1: someone discussing something and they're hoping to be opaquely wrong,
Speaker 1: you'll hear them say there's a possibility, there's a better
Speaker 1: than even chance. And when you step back and look
Speaker 1: at all these statements. In reality, they have no meaning
Speaker 1: because no matter what the outcome is, they get to say, well,
Speaker 1: I told you that this was a possibility, it's happened,
Speaker 1: and when it doesn't happen, it's like, well, I said
Speaker 1: it was only a possibility. I could tell the Giants
Speaker 1: may win the Super Bowl this year. They may, I
Speaker 1: think they And if they don't, well I told you
Speaker 1: they only all right. So if people want to find
Speaker 1: your work, they could go to Musing on Markets by
Speaker 1: Professor Aswadamadarin. Your YouTube channel, which is gonna be just
Speaker 1: search for your name on YouTube should find it. For
Speaker 1: those of you who enjoy this conversation, be sure and
Speaker 1: check out our podcast extras. Will we keep the tape
Speaker 1: rolling and continue chatting ab out all things valuation. We
Speaker 1: love your comments and feedback. Be Shoran right to us
Speaker 1: at m IB podcast at Bloomberg dot net. Check out
Speaker 1: my daily column on Bloomberg View dot com, or follow
Speaker 1: me on Twitter at Rid Halts. I'm Barry Ridlts. You've
Speaker 1: been listening to Masters in Business on Bloomberg Radio, brought
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Speaker 1: That's the power of Global Connections. Bank of America North
Speaker 1: America member f D I C. Welcome to the podcast. UM,
Speaker 1: I don't know why I do this. I do this
Speaker 1: every week. Thank you, professor. This is really so interesting.
Speaker 1: I mentioned to you I want to mention on the air. Um.
Speaker 1: There are a few cf as in my office. They
Speaker 1: were all excited when they heard you were, UM coming
Speaker 1: on the show. Oh, he's the man, he's the man
Speaker 1: on valuation. So a lot of these quite sans came
Speaker 1: from them. They make me look much smarter than I
Speaker 1: actually am. Um, let's talk about some before I get
Speaker 1: into my favorite questions. And I know only have you
Speaker 1: for a finite amount of time. Let's let's see if
Speaker 1: I could find some of the questions that we skipped
Speaker 1: through before that I thought were, um, really interesting. So
Speaker 1: one of the questions that came from one of our
Speaker 1: c f A s Hey, there are certain companies that
Speaker 1: are cheap, aren't They cheap for a reason? And most
Speaker 1: companies that are cheap are cheaper a reason. The whole
Speaker 1: idea in investing is to separate the five percent of
Speaker 1: companies that are cheap that shouldn't be cheap from the
Speaker 1: ninety percent that are cheap for a good reason. So
Speaker 1: you think the best approach for someone who's an expert
Speaker 1: in valuation is to take a value oriented investment tact
Speaker 1: that that's the best strategy. But if you're not going
Speaker 1: to be even one of those indexers. But I'm saying,
Speaker 1: value oriented to me, is a much broader concept than
Speaker 1: value oriented to know, old time value investor. So who
Speaker 1: Warren Buffett do you think that's a or Benjamin Graham
Speaker 1: old time? You're looking at it slightly differently, And here's
Speaker 1: the difference. They actually want to buy companies where the
Speaker 1: price is less than the value. What's what's already on
Speaker 1: the ground. I mean, if you think about the classic
Speaker 1: net net strategy, the ten screens, what Ben Graham wanted
Speaker 1: was a company which had a hundred dollars in cash,
Speaker 1: no doubt, andrust trading at fifty dollars. How many of
Speaker 1: those are that exactly right? So, in a sense, the
Speaker 1: the sphere of old time value investing each year gets
Speaker 1: smaller and smaller. So when I was in Omaha last
Speaker 1: year and I was talking to the portfolio mans, because
Speaker 1: for some reason, when they were pulled, they picked me
Speaker 1: as one of the people they wanted to listen to.
Speaker 1: They probably would never invite me back again. And I said,
Speaker 1: old time value investing suffers from three proms. One is
Speaker 1: it's extraordinarily rigid. Right, if all these rules right, it's
Speaker 1: very ritualistic. You've got to go through all the rituals
Speaker 1: of being a value investor. And it's very righteous. They
Speaker 1: believe they're the chosen ones, right, they've done the right thing,
Speaker 1: and they think the rest of the world deserves They're
Speaker 1: very puritanical. Right, They're going to get it, and they
Speaker 1: deserve and they want the text. So they're actually waiting
Speaker 1: for the tech stalk collapse because they can wag their
Speaker 1: fingers and say I told you so, So you told
Speaker 1: that to them, and and that's why you think you're
Speaker 1: not getting invited back. They did they chuckle or well.
Speaker 1: I think that they they know in their heart of
Speaker 1: hearts that this is I mean, it's it's I think
Speaker 1: there are enough people in there who got past the
Speaker 1: self delusion, who know, in a moment of honesty, that
Speaker 1: this is what's crippling old time value investing. Now, when
Speaker 1: you say crippling, some of the old time value investors,
Speaker 1: and I guess Warren Buffett has to be in that group,
Speaker 1: have done fairly well for themselves. And in fact, the
Speaker 1: fact that we keep going back to Warren Buffett as
Speaker 1: the name more improving. He's more revealing than anything else.
Speaker 1: And even Warrant's not been warrened for quite a while.
Speaker 1: It's been for the last ten years. He's played a
Speaker 1: very different game, and it's an insider game where he
Speaker 1: gets special deals from companies, and he gets fantastic, fantastic
Speaker 1: deals because he brings the warm Buffett good housekeeping seal
Speaker 1: of approvingly, they're buying credibility. That's when I love the
Speaker 1: fact that when you compare Lehman Brothers and Goldman Sachs,
Speaker 1: Lehman Brothers turn Dick Fold rejected a warm buffet lifeline
Speaker 1: and subsequently went out of business. In Goldman Sacks is
Speaker 1: doing better than ever because they took the buffet lifeline.
Speaker 1: In fact, I'll give you a statistic that I think
Speaker 1: is very indicative of value there if you compare active
Speaker 1: value investors, these old time value investors to a value
Speaker 1: investing index fund. Because value investing index fund. Basically, what
Speaker 1: you do is you just buy all the low price
Speaker 1: to bookstocks and these talks. You put them in an
Speaker 1: index fund. The average active value investor underperforms the value
Speaker 1: index fund by about one and a half percent base.
Speaker 1: The average active growth investment investor underperforms the average growth
Speaker 1: fund by only fifty basis points. So they both underperformed.
Speaker 1: But the average value investor actually and wonder why that is?
Speaker 1: And I think the reason is very simple. What does
Speaker 1: an old time value investor bring to the table that's unique.
Speaker 1: Anybody can compute low p right or low price to
Speaker 1: book or go the financial ratios. So at least a
Speaker 1: growth investor might have a chance because you've got to
Speaker 1: think about or they could they could have some competitive
Speaker 1: advantage and assessing a market and making judgments and whether
Speaker 1: wober will succeed or not. So the message I left
Speaker 1: them is, don't be so right, is because the average
Speaker 1: growth investor actually does much better. You know, they both underperforming,
Speaker 1: both underperform. At least they're less underperforming than you are.
Speaker 1: So so let's talk about those um dimensions. Let's talk
Speaker 1: about the Farmer French factor model. You talked about a
Speaker 1: liquid small cap stuffs. We know small cap is a
Speaker 1: factor that tends to outperform. We also know valuation tends
Speaker 1: to outprice price book right, and then the same thing
Speaker 1: with quality if you eliminate the high debt laden companies.
Speaker 1: So so, given what we know about those those factors, um,
Speaker 1: what is that telling us about just straight up valuation
Speaker 1: based investment? I think two things. One is we have
Speaker 1: too much data now and part of the problems you
Speaker 1: have so much data and everybody's looking. Every year there's
Speaker 1: a new factor that people see up to six smart
Speaker 1: datas and you know, so now you they've added momentum,
Speaker 1: and they've added there's just six is three factor model,
Speaker 1: and so you could create any And that's why when
Speaker 1: people talk about these these index funds, which are they're
Speaker 1: early quasi index funds where you do a little bit
Speaker 1: of active stuff on the side. You're just not buying
Speaker 1: it based on market cap. You basically using different basically
Speaker 1: tilted You're they're using the proxy data from the past.
Speaker 1: And here's my cautionary note. Any time use any of
Speaker 1: these things, you're implicitly assuming mean reversion, right. I mean, ever,
Speaker 1: if you look at ninety percent of investing it's based
Speaker 1: on and mean reversion worked incredibly well in the US
Speaker 1: market in the twentieth century, except for steam companies and levels.
Speaker 1: And the reason it did was if you look at
Speaker 1: the history of economic growth over the centuries and you
Speaker 1: plot the US between and two thousand and that graph.
Speaker 1: On that graph, it's like watching a patient going to
Speaker 1: a coma because if you look at it typical, you know,
Speaker 1: when you go to a hospital, they say that it
Speaker 1: is an unusual period of history, an incredibly stable period,
Speaker 1: which made me reverse the whole post war exactly from
Speaker 1: not because you were the global economy, you could do it.
Speaker 1: And I remember recessions used to be so predictable. You
Speaker 1: have a recession and six months in this would happen,
Speaker 1: and three months later and it was it was almost
Speaker 1: like you were on on a regular So many of
Speaker 1: these things that we know work from the farmer friends
Speaker 1: are based on looking at US data from through two
Speaker 1: thousand two, so you have to look at out sample data,
Speaker 1: and not even with the out sample data, I think
Speaker 1: there's been a structural shift in the world. The US
Speaker 1: is no longer the center of the universe. To me,
Speaker 1: the wake up moment is two thousand and eight. I
Speaker 1: describe September twelve to two tho eight, that's a Friday
Speaker 1: before the Lehman collapse, as the last day of innocence
Speaker 1: for me. That's interesting because I used to describe the
Speaker 1: world as developer markets versus emerging markets. I used to
Speaker 1: draw on meter version, And the lesson I got from
Speaker 1: two thousand and eight was and maybe there's been a
Speaker 1: structural shift, and all these things that look like they
Speaker 1: work will continue to look like they work, but if
Speaker 1: you put your money behind them, they might not work
Speaker 1: anymore because you're looking at a very different economic model.
Speaker 1: So I'm wary of all these because it's so easy
Speaker 1: to make money on paper. So so how come more
Speaker 1: people are not beating the market. If if all these
Speaker 1: things beat the market, why is the average active investors
Speaker 1: still under performing the market by one to I mean,
Speaker 1: I've never seen active investing in the state of angst
Speaker 1: that it's in right now. I mean, I know active investors,
Speaker 1: and these are really smart people. Who mean I mean,
Speaker 1: I know I've known them for thirty years and they
Speaker 1: were They've always been extraordinary confident people, at least in
Speaker 1: their own abilities. They might say collectively, they all lose,
Speaker 1: but we win because those people are having second thoughts
Speaker 1: about what they they They might never mentioned with their clients.
Speaker 1: Of course they couldn't do it. But when I add
Speaker 1: them in an honest moment, they said, I don't know
Speaker 1: what I'm doing in this listeness anything. Charlie Ellis has
Speaker 1: been talking about the paradox of skill since the nineties seventies,
Speaker 1: the right, the whole idea that it's not that these
Speaker 1: people are bad or dumb, it's that there are so
Speaker 1: many of them and they're smart and good. That advantage
Speaker 1: goes away. If everybody is really well schooled and well
Speaker 1: educated and intelligent and and really skillful, how can that
Speaker 1: group essentially you beat anyone else. And he has a
Speaker 1: very simple way to think about, you know, Tom Friedman
Speaker 1: at this world becoming the investment world has become a
Speaker 1: flatter place. I tell people in six if you're an
Speaker 1: investor in New York, you started off already with a
Speaker 1: competitive advantage over a guy in Des Moines, Iowa. Because
Speaker 1: the sec offices you could get to them, right, you
Speaker 1: can go to get to get to a ten K
Speaker 1: or a ten Q. You actually had to show up
Speaker 1: at the offices and get the physical copy. There were
Speaker 1: no online PDF versions, so you had competitive advantages coming
Speaker 1: from location, from where you work from. As the data
Speaker 1: has become more accessible and everybody has, you know, computers
Speaker 1: that they can use, and you can't claim I'm the
Speaker 1: only main frame computer in the world now have it?
Speaker 1: The words become a flatter place. So it doesn't surprise
Speaker 1: me that the payoff to active investing has dropped. And
Speaker 1: the more people tried, the worst they're going to do
Speaker 1: because as they tried, they're expanding more resources to kind
Speaker 1: of run in place. So I think Charlie was prescient
Speaker 1: when he wrote that. Not that was way back, but
Speaker 1: I think it's kind of caught up with the word now.
Speaker 1: So um god, there's so many other questions I want
Speaker 1: to plow through before I get to my my run
Speaker 1: of favorite questions, my standard questions. UM, let me ask
Speaker 1: you one or two other questions about we talked about Tesla,
Speaker 1: We talked about um Amazon in in the original forecasts
Speaker 1: or or or strategic plan that Besos made. I don't
Speaker 1: recall ever reading anything about the cloud based computing and
Speaker 1: how they had built such a substantial infrastructure on their own.
Speaker 1: How did the idea of of hey, let's sell this
Speaker 1: to people so we can monetize something that we have
Speaker 1: to do ourselves. When did that come along? And that's
Speaker 1: a five or ten billion dollar business, isn't it? And
Speaker 1: I think it's in that sense of Amazon in the
Speaker 1: nineties never talked about because it was a book retailer.
Speaker 1: Seven really in the letter. In the letter you never
Speaker 1: mentioned that there were a book He said, whatever business
Speaker 1: we're in, we're going to go after businesses that we
Speaker 1: think our big businesses where the existing players are not
Speaker 1: playing the game we think, and we're going to sell
Speaker 1: stuff at costa below in that business. So in a
Speaker 1: sense he was laying the framework for what was the
Speaker 1: first retail business, then the entertainment business, now the cloud
Speaker 1: computing business. Right it's it's it's the basic business models.
Speaker 1: We're going to go after big businesses. If I were
Speaker 1: a bank, my worst case scenarios that some of Amazon
Speaker 1: decides that the next thing they want to do is
Speaker 1: big time fintech. Let's face it, there's no business where
Speaker 1: there's s value added by the existing players in the game,
Speaker 1: for sure. And you think about Amazon has everybody's credit
Speaker 1: card on file, what do they have half a billion quireants,
Speaker 1: and they know a lot more about me than I
Speaker 1: ever want them to know. Right you open up an
Speaker 1: Amazon page, it's kind of creepy because they said, oh,
Speaker 1: you might want to look at these five items, just
Speaker 1: like Netflix. Right see. I find it less creepy from
Speaker 1: Amazon than I do from Facebook. So when I go
Speaker 1: to Amazon and um, Norah Jones has a new CD
Speaker 1: coming out, Amazon knows I bought a Norah Jones c
Speaker 1: D six years ago and it shows up in you
Speaker 1: may want to see these That's different than going to
Speaker 1: a hall. So I could kind of Hey, if I
Speaker 1: for kids who are listening, there used to be a
Speaker 1: store called Tower Records, and right by n y U
Speaker 1: on on Fourth Street and Broadway. If I walked into
Speaker 1: Tower Records and they said, hey, I know you. You
Speaker 1: were here for the Peter Gabriel album a few years ago.
Speaker 1: Here's a new one, that wouldn't necessarily be all that creepy.
Speaker 1: But when I so, We're redoing a room in the
Speaker 1: house and I'm searching for polls like nibs for a
Speaker 1: for a cabinet, and I'm not on Facebook. I'm in
Speaker 1: a wholly different part of the Internet. And then I
Speaker 1: show up on Facebook and here adds for that's really creepy.
Speaker 1: And that's why when I leave Facebook, I log out
Speaker 1: so they can't track me because I find that and
Speaker 1: I don't know if that's still true that used to
Speaker 1: be true. I find that really creepy, really obnoxious, and
Speaker 1: that's why I'm not an act. And you're right, Amazon,
Speaker 1: at least it's the commercial relationship, the stuff. You understand
Speaker 1: why they do and I've bought that stuff. That's the
Speaker 1: other thing is if I've bought books or CDs from
Speaker 1: Amazon and they say our recommendation engine said you bought this,
Speaker 1: and this and this, you might be interested in this.
Speaker 1: That's not a big intrusive leap as opposed to, oh,
Speaker 1: let's see how Susie's baby is doing. No, I don't
Speaker 1: need you to sell me this. You know, chrome and
Speaker 1: leather a pole. I decided not to get it, stopped
Speaker 1: following me around the internet. And I think that this
Speaker 1: goes to the heart of big data, right, because again,
Speaker 1: big data has become this buzzword that everybody throws out.
Speaker 1: Nine percent companies that claim to use big data have
Speaker 1: no idea what to do with it. I saw, you know,
Speaker 1: job job listing, for I think it was I don't
Speaker 1: know toys r US saying well, we want a big
Speaker 1: data specialist and saying, what the heck are you guys
Speaker 1: going to do with big data? The companies that are
Speaker 1: the biggest users of big data are Google, Facebook, Nextlix,
Speaker 1: and Amazon because to them, big data actually is collecting information.
Speaker 1: And Netflix actually is even bigger into big data because
Speaker 1: they're actually making shows based on because they remember, not recommending,
Speaker 1: they're actually going out building products because they can. They're
Speaker 1: not only did they know what you watch, they also
Speaker 1: know when you stopped watching it's it's again kind of creepy,
Speaker 1: you're going to show? They remember twenty seven minutes you
Speaker 1: gave up on the show. To actually track what shows
Speaker 1: you're watching, what shows you stopping watching, when you're stopping watching,
Speaker 1: what might have caused you to stop watching, and in
Speaker 1: a sense that incorporating all of that into trying to
Speaker 1: make shows that are just for you, right, which is
Speaker 1: so bizarre because if you read William Goldman in Confessions
Speaker 1: of a of a Screenwriter, he describes the quote I
Speaker 1: love and applies to investing. As much as Hollywood, nobody
Speaker 1: knows anything they passed on Star wars. No one wants
Speaker 1: to make it people. I think Indiana Jones was twelve.
Speaker 1: Studio said no to it, and he has a hundred
Speaker 1: examples of all these blockbuster films that left to the
Speaker 1: studio test and left to the big data people. Right,
Speaker 1: So it makes me nervous that the quality of as
Speaker 1: long as there are independents who can do that. On
Speaker 1: the other hand, I gotta say, in general, the Amazon
Speaker 1: recommendation engine pretty good. The net Flix recommendation engine really
Speaker 1: not bad. Um. And I find myself sometimes logging out
Speaker 1: of Google Search because I want to see the objective.
Speaker 1: So when you search for something that modifies the Google
Speaker 1: Search out algorithm, anything I've clicked on is actually if
Speaker 1: So I have a Firefox and a Chrome open up
Speaker 1: at once. I'm not logged into Firefox, but i am
Speaker 1: logged into Chrome. Because every now and then I'll search
Speaker 1: for something and I'll see the same results that I've
Speaker 1: seen previously come up. It's like, no, no, I'm looking
Speaker 1: for something new, not trying to find something I looked
Speaker 1: for before. I hop over to Firefox, and now it's
Speaker 1: a whole not logged into Google, it's a whole different
Speaker 1: run of results. So that raises a whole another question
Speaker 1: about how effective big data is and about the lines
Speaker 1: that are being crossed along the way, which is privacy.
Speaker 1: So when I hear people complain about privacy, I tell them, look,
Speaker 1: your privacy has gone already. It's you and I are
Speaker 1: both over fifty. We care about privacy. Kids happily open
Speaker 1: the kimono for wait, I get a free coupon. Here,
Speaker 1: you have access to every They don't think in terms
Speaker 1: of privacy, which may they may end up regretting that.
Speaker 1: They will, they will absolutely regret it because I think
Speaker 1: two things are happening. One is our visions are being
Speaker 1: narrowed because, as you said, the one of the advantages
Speaker 1: of not being directed to the things you like specifically
Speaker 1: look at you. So Pandora has a recommendation engine, which
Speaker 1: I think is great. But Spotify just started this thing
Speaker 1: where it's their new weekly playlist. Is hey, these are
Speaker 1: Obviously if you listen to all death metal, country music,
Speaker 1: probably isn't gonna work. But if you want to expand
Speaker 1: your horizons just a little bit, and that excitement of
Speaker 1: discovery gets lost if you're only fed the same stuff.
Speaker 1: All right, I could talk about this stuff forever. But
Speaker 1: I have questions I have to get to with you.
Speaker 1: Of course, I think people want to hear less of
Speaker 1: me and more of you, so you know, let me
Speaker 1: find my favorite questions. Um, we got through a lot
Speaker 1: of stuff, even if we didn't get through everything. By
Speaker 1: the way you people are hearing this now, you should
Speaker 1: realize there's like eight pages of questions in eighteen point fonts.
Speaker 1: So I don't have to swint when I when I
Speaker 1: see it. So you and I talked a little bit
Speaker 1: about this. You come from the southern part of India,
Speaker 1: you move to l a four um grad school, you
Speaker 1: teach there, you go get your n b A and
Speaker 1: your PhD. How do you give up the southern California
Speaker 1: climate and come to New York with our miserable winters? How? How?
Speaker 1: What are very reluctantly? I love New York as a city.
Speaker 1: I love the fact that it's never boring, that things
Speaker 1: are always happening. But I like leaving the city sometimes.
Speaker 1: I know the feeling, and I do miss southern California weather,
Speaker 1: especially on those days where I have to go out
Speaker 1: shovel snow. So it's up and I it's it's been
Speaker 1: thirty one years in New York, and I think it's time.
Speaker 1: I'm at a stage in my life where I'm I
Speaker 1: don't have to be in New York all year. So
Speaker 1: at some point in time, more sooner rather than later,
Speaker 1: I'll be back in California and enjoying the weather exactly.
Speaker 1: So let's talk about I mentioned UM Berkeley where you
Speaker 1: were a lecturer, U c l A, where you got
Speaker 1: your m b A and PhD. Who were some of
Speaker 1: your early mentors who guided your career in law. It's
Speaker 1: interesting when I was a PhD student at U c
Speaker 1: l A. We had a professor of the University of
Speaker 1: Chicago visit every summer because every winter because he didn't
Speaker 1: want the guy called Jeane Farmer. And Jeane used to
Speaker 1: love to play tennis, and I was I used to
Speaker 1: teach tennis for a long time. I was given I
Speaker 1: was assigned as his r A simply because I could
Speaker 1: play tennis with him, and so it was I was exposed.
Speaker 1: So Jean was a very big influence on me. Um
Speaker 1: Dick Roll, who was at U c l A then,
Speaker 1: was a big researcher, and you know how difficult it
Speaker 1: was to test the Kapam and other models was a
Speaker 1: big influence Tom Copeland, who taught me corporate finance and
Speaker 1: then went on to McKinsey to write the first valuation
Speaker 1: but kind of embedded the liking for valuation and corporate finance.
Speaker 1: So I was lucky. It was an interesting and exciting
Speaker 1: time to be in finance. And I think in a
Speaker 1: sense it's um when I look at how finance has
Speaker 1: kind of changed over time. It's like any other discipline.
Speaker 1: When you start the discipline, you ask really big questions,
Speaker 1: like in physics a hundred years ago, your Einstein and
Speaker 1: Bore asking questions about the meaning of the universe. You
Speaker 1: look at a physics journal, now you've got seven people
Speaker 1: co writing a paper on a title that nobody outside
Speaker 1: physics can even understand what they're writing about. As disciplines age,
Speaker 1: they narrow and the same things happens. You get specialists,
Speaker 1: right So, and that's what's happened in finances. We have
Speaker 1: lots of specialists. And that's not through just in academia.
Speaker 1: It's happened in practice as well. The industry has matured,
Speaker 1: it's matured and it's created specialists, and we've lost something
Speaker 1: in the process. We've lost those generalists because when I
Speaker 1: first started working with investment banks in the nineteen eighties,
Speaker 1: I'd go into an investment bank and you'd have somebody
Speaker 1: who has a bankerbody could talk about the theater. You
Speaker 1: could talk about stock markets, you could talk about born markets,
Speaker 1: you could talk about history. And I mean the old
Speaker 1: notion of a renaissance man. I mean there were a
Speaker 1: few of them around, and they brought perspective to discussions
Speaker 1: that you don't have anymore. I've said in on banking
Speaker 1: discussions we have it doesn't really smart people around the table,
Speaker 1: but they're in an echo chamber where they talk to
Speaker 1: each other in the little segment of the world, and
Speaker 1: they've completely lost perspective. This guy is a biotech specialist.
Speaker 1: That guy only the software. It's not like anybody who's
Speaker 1: broad anymore. So I think we need some some you know.
Speaker 1: My newest book is coming out in two months. It's
Speaker 1: called Narrative and Numbers. It's about storytelling and valuation, because
Speaker 1: to me, it's become all Excel, spread sheets and models
Speaker 1: all the time. People have no sense of commons that
Speaker 1: they're not bringing common sense and they're not bringing in
Speaker 1: So the book I wrote was about how when I
Speaker 1: do valuation. I start with a story for the company
Speaker 1: with it's Tesla or Amazon, our doutsche bank, and the
Speaker 1: valuation comes out of this story, rather than me sitting
Speaker 1: in front of a spreadsheet and just making up numbers
Speaker 1: as I go along. That's really that's really interesting. Let's
Speaker 1: let's talk about the investors who influenced you. I referenced
Speaker 1: some value investors who you said, Hey, that's old school,
Speaker 1: and we don't know how well that works anymore. Who
Speaker 1: are the investors who have influenced I learned a little
Speaker 1: bit from everybody. I learned from Warren Buffett. I've learned
Speaker 1: the importance of having a core philosophy that you go
Speaker 1: back to when in doubt. The active money managers are
Speaker 1: running to have no core philosophy, have investment strategies. You
Speaker 1: ask them, what's your philosophy? They side by low ps
Speaker 1: talks and I said, that's not a philosophy, that's a strategy.
Speaker 1: And I think if you have a philosophy, it's a
Speaker 1: way of thinking of about markets, thinking about how markets
Speaker 1: make mistakes and why you should be able to take
Speaker 1: advantage of mistakes. So I've learned from watching people like
Speaker 1: Warren Buffett about how important it is to have a
Speaker 1: core philosophy that is yours, that's not somebody else's, that
Speaker 1: you can go back to. I've learned from Mike Mobuson
Speaker 1: was one of my favorite people to talk because when
Speaker 1: you talk about renaissance man, he's he's one of those, right.
Speaker 1: He can talk about philosophy, can talk about psychology, can
Speaker 1: talk about finance, you can talk. And I love talking
Speaker 1: to him simply because he tells me things that I said.
Speaker 1: You know what, I never thought about that it came
Speaker 1: from a different discipline, but everything is kind of related.
Speaker 1: I'll give an example. This summer, I was in Florence
Speaker 1: and I was not that you've got the Bruno Leski
Speaker 1: Dome in Florence is amazing dome. And I was looking
Speaker 1: at the dome in my As I was looking at
Speaker 1: the dome, I was thinking about the fact that Bruno
Speaker 1: Leski was He was an artist he loved and this
Speaker 1: dome required huge amounts of science and architecture, and he
Speaker 1: taught himself enough that he was able to build the dome.
Speaker 1: And I thought about how he was willing to leave
Speaker 1: his preferred habitat and go into these areas because he
Speaker 1: had to be multi skilled, and how much we need
Speaker 1: more people like that who leave their preferred habitat and
Speaker 1: move into areas that don't come easily to them and
Speaker 1: try at least to get conversant with those areas out
Speaker 1: of their comfort zone, learn a new new discipline, and
Speaker 1: then bring it back to where you start. Um. Everybody
Speaker 1: loves this question. What are some of your favorite books?
Speaker 1: Be they abound, investing, fiction, non fiction, it doesn't matter.
Speaker 1: I do. I mean I read. I've read Ben Graham,
Speaker 1: and I read it with a very different lens than
Speaker 1: most people. I don't read it for the techniques. Let's face,
Speaker 1: Ben Graham valued stocks as of their were bonds too.
Speaker 1: He was a natural fixed income guy who thought about
Speaker 1: how do I make a stock look like a bond?
Speaker 1: So of dividends with the equivalent of coupons. But what
Speaker 1: I get out of is a philosophy about investing, which
Speaker 1: is you've got to have the essence of values, faith
Speaker 1: that you if you believe that something is worth something,
Speaker 1: you shouldn't be letting the price system provide your feedback
Speaker 1: and change your So I like I like security analysis.
Speaker 1: Evaluation is a faith based exercisectly it's a faith based
Speaker 1: exercise because you have to faith in your value and
Speaker 1: faith that the market will correct its mistakes. And it's
Speaker 1: faith because you ask me for proof or either I
Speaker 1: can offer you nothing. Well, isn't that where mean reversion
Speaker 1: comes in? Hey, it's always eventually return to it always
Speaker 1: is what I don't historically. And see that's the problem
Speaker 1: is you ask me for guarantees. I can offer you data.
Speaker 1: I can offer you the past. But if you say
Speaker 1: is that going to happen for sure? And say I don't.
Speaker 1: So it's history plus faith equals future performance. That was saying, So,
Speaker 1: so what other books do you like? Um? I like?
Speaker 1: And this is going to be off kilter. I called
Speaker 1: David Liss, who writes books, their novels L I S
Speaker 1: T l I S S. And one of his books
Speaker 1: was A Conspiracy of Paper. It's a it's a book
Speaker 1: set in the days after the south Sea Bubble in London.
Speaker 1: It's a novel around that and it talks about how
Speaker 1: the bubble was created. Like people, so what would happen
Speaker 1: is south Sea Bubble is of course this this company
Speaker 1: that was created which really not for a purpose to
Speaker 1: be determined, for purpose to be determined, and it was there.
Speaker 1: It was a bubble in the sense people bought into
Speaker 1: the story and the price went up and collapsed. But
Speaker 1: he talked about how the people running the company would
Speaker 1: send people out to to two bars or you know,
Speaker 1: and two taverns and whispered to other people about what
Speaker 1: was private information, but whisper loud enough that other people
Speaker 1: could hear them. It was your CNBC of its death.
Speaker 1: It was I was gonna say, the first investor relationships
Speaker 1: exactly right. So it's so basically as I was reading it,
Speaker 1: I was talking about I was thinking about how little.
Speaker 1: So it's incredibly descriptive about how markets work then and
Speaker 1: how rumors got spread and how bubbles God created. And
Speaker 1: to me, when I look at how about, not much
Speaker 1: has changed, right, So, David Less conspiracy of paper, David
Speaker 1: List conspiracy. You know a lot of the classic books
Speaker 1: fifty two hundred years old. They Richard Wykoff had a book,
Speaker 1: I think, How I Trade Stocks and Bonds, And if
Speaker 1: you opened it up today and substitute of the word
Speaker 1: internet for telegram and and the word railroad for shipping,
Speaker 1: it would be no different than the lettle More books, right,
Speaker 1: I mean the madness of crowds. I mean there's I
Speaker 1: actually don't read much current stuff. I like Michael Lewis
Speaker 1: why because he can spend a great story everything. I
Speaker 1: don't think quite by it, because you can tell that
Speaker 1: he's such a good story writer that he has an agenda.
Speaker 1: He wants to go along with that agenda. So I
Speaker 1: try to fight it, whether it's Moneyball or flash Moneyball
Speaker 1: is hard to fight. It's it's hard to fight because
Speaker 1: the end of it is saying we should all be
Speaker 1: doing it, but then we've discovered the downside. Well, once
Speaker 1: every that goes back to Charlie Ellis, once we're all
Speaker 1: doing it, the competitive advantage goes goes away, right, So
Speaker 1: so I love Michael Lewis for that reason. I like
Speaker 1: James Stewart for all of the Barbarians, Barbarians of the
Speaker 1: Gate and the book, and so I like reading not
Speaker 1: so dry. I read very few books which are about
Speaker 1: how to get rich quickly. I don't read any of
Speaker 1: the Warren Buffett. There's always more lessons in the failures.
Speaker 1: When genius failed. That's that's one of the books I
Speaker 1: should have mass and then Bethany McLean's Smartest Guys in
Speaker 1: the room about Enron. The lessons are in the failures,
Speaker 1: not the lesson I'm looking for. To me, the big
Speaker 1: there are two things that get me into trouble investing.
Speaker 1: One is hubris, the second is over confidence. The two
Speaker 1: are right. Any book that reminds me that hubris and
Speaker 1: over confidence historically have been set ups for disaster is
Speaker 1: a good reminder for me, right, because it's so easy
Speaker 1: to get caught up in I know more than everybody else.
Speaker 1: I can put stuff into martws and not recognize how
Speaker 1: much of this stuff you don't control. No doubt about that. Um. So,
Speaker 1: this is a question that comes from a reader. You
Speaker 1: mentioned tennis. What do you do to keep mentally and
Speaker 1: or physically fit? What do you do to relax outside
Speaker 1: of the office? You know what? As I walk around
Speaker 1: New York, I get valuation cues almost everywhere, which is,
Speaker 1: you know, I'm looking at things and I'm trying to
Speaker 1: generalize from it. So to me, everything has some lessons
Speaker 1: for me in investing. Whether I'm at a ball game
Speaker 1: and I remember that we're going to a Yankee game
Speaker 1: and watching the This was in two thousand nine, with
Speaker 1: the New Yankee Citium. I took my kids and watching
Speaker 1: the Yankees run onto the field, and I'm thinking about
Speaker 1: least commitments and debt because what I'm thinking what I'm seeing,
Speaker 1: you know, Mark to Shara run out of first based
Speaker 1: seven years at twenty three million. Actually, I took the
Speaker 1: present value of commitments and in the infield and it
Speaker 1: came up with seven hundred million dollars of commitments and said,
Speaker 1: if I were buying the Yankees, this is a dead
Speaker 1: issue that I should be worrying about it. So to me,
Speaker 1: life is full of lessons. That's why the brunal Lesky
Speaker 1: Dome was a typical example. I'm looking at things and
Speaker 1: I'm saying, what can I learn about my Because to
Speaker 1: be a successful investor, I don't need to understand how
Speaker 1: Warren Buffett invest and how I need to understand what
Speaker 1: makes me tech, what makes me comfortable, what makes me uncomfortable.
Speaker 1: So I'm constantly looking for feedback from the world that
Speaker 1: I can use to kind of look inside myself, because
Speaker 1: self delusion is so easy when you're an investor. So
Speaker 1: that's that's a little bit of Peter Lynch. You know,
Speaker 1: invest what you know. Although the self delusion issue I'm
Speaker 1: always wrestling with I remember the middle of the financial crisis.
Speaker 1: You can walk into any Manhattan right restaurant, no reservation,
Speaker 1: best seat in the house, it didn't matter. It was empty.
Speaker 1: But then when things started to take pick up again,
Speaker 1: and if you mid by middle nine, everybody weren't back
Speaker 1: to normal, but things were normalizing. But that's in Manhattan
Speaker 1: where there was a trillion dollar bail out. A lot
Speaker 1: of it passed through this part of the country. There's
Speaker 1: a risk that our perspective in this little island off
Speaker 1: the east coast of America is huge. And I think
Speaker 1: when you look at things like Brexit, it should be
Speaker 1: a warning sign that we've lost perspective. Right we are,
Speaker 1: So it's easy in New York to say, well, this
Speaker 1: company should do this, We should be doing this on
Speaker 1: India aggregate incrementally, this is good for the country. What
Speaker 1: we're forgetting that's the average exactly. And we're talking about
Speaker 1: a fifty five year old steelworker in Pennsylvania. He gets
Speaker 1: little consolation out of the fact that free trade is
Speaker 1: going to create more world world when he says, where
Speaker 1: the heck am I going to get my paycheck next month?
Speaker 1: And I think politically, when you look at what's happening
Speaker 1: around the world. We're paying a price for almost deliberate
Speaker 1: blindness in the financial capitals of the world, the kind
Speaker 1: of cost that are being created in the rest of
Speaker 1: the country sometimes And and to me, that was in Brexit,
Speaker 1: when you saw the divide between London and the rest
Speaker 1: of the UK. In London, what was a sent voting
Speaker 1: against Brexit? It was a signal of how big the
Speaker 1: divide is between how the financial sector sometimes looks at
Speaker 1: things and how the rest of the market is looking
Speaker 1: at those same things. And I also think that folks
Speaker 1: like you and I, who tend to be rational and
Speaker 1: tend to be data driven, assume everybody else in the
Speaker 1: world is rational. And sometimes people you know, you talk
Speaker 1: to people who voted against Brexit, and you could demonstrate
Speaker 1: for them this is gonna hurt not just London, not
Speaker 1: just England. This will ultimately hurt you. You will have
Speaker 1: less wealth because of it. And the answers I don't care.
Speaker 1: I have to what the current situation is unacceptable. I
Speaker 1: had to vote my protests And in fact that's why
Speaker 1: I wrote the book on Storytelling a number crunching. I said,
Speaker 1: if you have a valuation, all you present his numbers.
Speaker 1: People will forget fifteen minutes after you leave the room.
Speaker 1: But the stories, the story stays, The story stays. And
Speaker 1: that's why I've had to incorporate my teaching, because when
Speaker 1: I first started teaching, I taught like a number cruncher,
Speaker 1: all numbers, all the time. And I learned that if
Speaker 1: people want the things that people I have students have
Speaker 1: been at that thirty one years and the things that
Speaker 1: I remember from my class, and not the numbers that
Speaker 1: they talked about, but a story I might have toldn anecdote.
Speaker 1: So the power of emotions is huge in this process.
Speaker 1: We've evolved to tell stories long before there was written language.
Speaker 1: Stories are memorable, and that's not an accident, it's it's
Speaker 1: actually built in um. So what do you do to
Speaker 1: to to stay physically and mentally fit? What do you
Speaker 1: do outside of work? I run, I watched a movie.
Speaker 1: I still play tennis. I still play tennis, and not
Speaker 1: as much as i'd like to because I don't like
Speaker 1: to play indoors, so that means I'm restricted to bang.
Speaker 1: And one reason I will probably moved to California sooner
Speaker 1: or later is because I can play tennis all the time.
Speaker 1: Down the street and outside. Um, I gotta work on
Speaker 1: my forehand. My backhand is good. My forehand is actually
Speaker 1: for me to reverse back hands. You can groove in
Speaker 1: much better. And once you get into the back end, right,
Speaker 1: That's what I'm saying. My back hand is fine. I
Speaker 1: got I'm also a lefty. There's actually an investment lesson
Speaker 1: in that too. The reason your forehand gives you more
Speaker 1: trouble is you try more stuff. There's more you try
Speaker 1: big stuff, there's more stuff that you're supposed to just stroking.
Speaker 1: And the same thing in investing. More activity often hurts
Speaker 1: you in investing when you try to do too much,
Speaker 1: and sometimes doing the more natural thing and not forcing
Speaker 1: more activity is the best thing you can do. And tennis,
Speaker 1: that shows up as your forehand versus your back hand. Right,
Speaker 1: I like you, I'm backwards. My forehand is better. The
Speaker 1: last two questions, UM, you work with a lot of
Speaker 1: millennials and college students. Someone comes to you and says, hey,
Speaker 1: I'm thinking about going into finance as a career. What
Speaker 1: sort of advice do you give them? I asked them
Speaker 1: why why? Because why do you want to go on
Speaker 1: to find it? And if their answer is because I
Speaker 1: think I can make more money. I said, come back
Speaker 1: with a better reason and then we'll talk about this,
Speaker 1: because I think especially the subset of finance, it's investment, banking,
Speaker 1: and consulting. The reality is, and I see this. My
Speaker 1: forecasts are all as I said, no grown up, but
Speaker 1: my seventeen year old is thinking about going to college.
Speaker 1: He's an amazing writer. He writes poetry that doesn't drive
Speaker 1: something that's beyond my comprehend because to me, poetry means
Speaker 1: the last word should always rhyme. He's a poet. He's
Speaker 1: a great writer. And he came to me and said, Dad,
Speaker 1: you know, I really love writing, but I think I
Speaker 1: should be going to a business school. And I said
Speaker 1: why and he said, well, that's how you can make money.
Speaker 1: I want. I want to end up in banking and
Speaker 1: make money like everybody else. And I said, you know, so,
Speaker 1: it's a terrible way to structure your life. I mean,
Speaker 1: if you're going to go into finance, do it because
Speaker 1: you like being in finance. You like doing valuation in them.
Speaker 1: And I think that that's I think the key to
Speaker 1: me is I think a lot of people are in
Speaker 1: finance and finance for exactly the wrong reasons and finance
Speaker 1: because this is what they don't like what they're doing.
Speaker 1: They don't enjoy it. It's not part of their solf.
Speaker 1: I mean, it's so to me. If they say that
Speaker 1: it's beyond money, then ask them what do you enjoy doing?
Speaker 1: Do you enjoy working on short term projects where you
Speaker 1: get a quick payoff or do you like working on
Speaker 1: something long term? Because that tells me whether they're better
Speaker 1: suited for a dealmaking job like M and A, or
Speaker 1: whether they're more suited to a consulting job you work
Speaker 1: with a client for multiple years. Because finance is such
Speaker 1: a big area that I can find a place for
Speaker 1: you depending on what your skill set is, what you
Speaker 1: enjoy doing. And our final question, what is it that
Speaker 1: you know about valuation and investing today that you wish
Speaker 1: you knew thirty years ago when you started teaching That
Speaker 1: I can be horribly wrong and be okay with it.
Speaker 1: I used to be afraid to be wrong, so I
Speaker 1: would pick companies where you're less likely to be wrong.
Speaker 1: I'm okay now with being wrong, and I know it's
Speaker 1: not necessarily my fault. It's the there's so many things
Speaker 1: out of my control, and I think I've understood how
Speaker 1: much luck is the dominant paradigm in this business, much
Speaker 1: as we'd like to tell the world that it's skillful
Speaker 1: people to make money and this is a game. Or
Speaker 1: if you're lucky, you can do some really crappy stuff
Speaker 1: and get away with it, and if you're not, you
Speaker 1: can do everything right and still and still end up
Speaker 1: losing money. So I've learned to be okay with people
Speaker 1: who invest off the seat of their pants, invest based
Speaker 1: on astrological science. If it works for them, it works
Speaker 1: for them. If you look use charts, if you can
Speaker 1: make money doing whatever you're doing, Who am I to
Speaker 1: come in and say that's a bad way of making money.
Speaker 1: Because you make a million dollars and I make a
Speaker 1: million dollars, we spend it the same way. So why
Speaker 1: does it matter that I make a million off long
Speaker 1: term investing based on value and you may chamillion based
Speaker 1: on supporting resistance lines. Well, the question is is it
Speaker 1: luck or repeatable? You know, the worst thing that happens
Speaker 1: to somebody is they walk into a casino, they win money,
Speaker 1: or the first goofy stocks they buy makes money, and
Speaker 1: they keep looking for that same sort of It's the process,
Speaker 1: not the outcome exactly, and you have to enjoy the process.
Speaker 1: And I tell people here's a very simple test and
Speaker 1: whether you should be an active investor. Let's say you
Speaker 1: get to be eighty five year in your deathbed, I
Speaker 1: come and ask you. I come and ask you about it.
Speaker 1: You've been an active investor for sixty years and you've
Speaker 1: actually made a nine percent return, and you could have
Speaker 1: made nine and a half percent investing in an index fund.
Speaker 1: So come and ask you whether you regret having spent
Speaker 1: a lifetime trying to pick stocks. If your answer is yes,
Speaker 1: my suggestion is you don't be an active investor because
Speaker 1: I invest actively, not because I hope to be rewarded.
Speaker 1: I invest actively because I truly enjoy this. It's a
Speaker 1: process that you like absolutely. Professor Domadaran, this has been
Speaker 1: absolutely fascinating. Thank you for being so generous with your time.
Speaker 1: We've been speaking with n y U Sterns, professor of
Speaker 1: finance who specializes in valuation. Professor Aswa Doma Dorn. If
Speaker 1: you enjoy this conversation, be sure and look up an
Speaker 1: inch or down an inch on iTunes and you'll see
Speaker 1: all of the other hundred and ten or so uh
Speaker 1: conversations we've had. I would be remiss if I did
Speaker 1: not forget. Thank my booker Taylor Riggs, my recording engineer,
Speaker 1: Charlie Vollmer, and my head of research Michael bat Nick.
Speaker 1: Be sure and send us an email and tell us
Speaker 1: what you would like to hear more of m IB
Speaker 1: podcast at Bloomberg dot net. I'm Barry rid Halts. You've
Speaker 1: been listening to Masters in Business on Bloomberg Radio, brought
Speaker 1: to you by Bank of America. Merrill Lynch. Seeing what
Speaker 1: others have seen, but uncovering what others may not. Global
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