1 00:00:08,840 --> 00:00:12,959 Speaker 1: Hello, and welcome to another episode of the Odd Lots podcast. 2 00:00:13,080 --> 00:00:17,000 Speaker 1: I'm Joe Wisenthal, and one of the things that I 3 00:00:17,040 --> 00:00:20,520 Speaker 1: like about this podcast is is that we can ask 4 00:00:20,960 --> 00:00:23,599 Speaker 1: the really dumb questions that you know, everyone sort of 5 00:00:23,640 --> 00:00:26,079 Speaker 1: takes it for granted and we don't talk about them. 6 00:00:26,120 --> 00:00:28,280 Speaker 1: But I feel like we can just ask the really 7 00:00:28,400 --> 00:00:31,040 Speaker 1: simple questions of finance. I thought you were going to 8 00:00:31,120 --> 00:00:34,320 Speaker 1: say you enjoy spending thirty minutes on the phone with 9 00:00:34,360 --> 00:00:37,760 Speaker 1: me every week, but no, you you like asking dumb questions. 10 00:00:38,920 --> 00:00:41,080 Speaker 1: I always thought that that what you said before kind 11 00:00:41,080 --> 00:00:44,879 Speaker 1: of goes without saying because comes through all of our 12 00:00:44,880 --> 00:00:47,760 Speaker 1: conversations that this is my favorite half an hour of 13 00:00:47,800 --> 00:00:50,040 Speaker 1: the week. Because of course that's true. But you know 14 00:00:50,080 --> 00:00:52,600 Speaker 1: what I'm saying, Like last week we're like we talked 15 00:00:52,640 --> 00:00:54,680 Speaker 1: to a currency trader, or like how do you pick 16 00:00:54,720 --> 00:00:56,880 Speaker 1: what currencies to buy ourselves? It's just like just the 17 00:00:57,000 --> 00:01:00,160 Speaker 1: really basic stuff. Yeah, it's like a remedial course for 18 00:01:00,200 --> 00:01:02,880 Speaker 1: people who are in the market to day in and 19 00:01:03,000 --> 00:01:06,080 Speaker 1: day out. But it kind of gives us a chance 20 00:01:06,160 --> 00:01:09,120 Speaker 1: to step back from the stuff that we take for granted, 21 00:01:09,280 --> 00:01:12,280 Speaker 1: I guess, and actually dig into what exactly it is 22 00:01:12,319 --> 00:01:14,480 Speaker 1: that we're talking about. It's kind of funny because I 23 00:01:14,560 --> 00:01:17,640 Speaker 1: kind of like to think we're having a sophisticated conversation here, 24 00:01:18,120 --> 00:01:21,759 Speaker 1: and yet you just described this as a remedial course. Sorry. Sorry, 25 00:01:22,360 --> 00:01:24,160 Speaker 1: I think that's fair. I think like I think we 26 00:01:24,160 --> 00:01:26,679 Speaker 1: can do both. Yeah, I think so. So okay, so 27 00:01:26,920 --> 00:01:30,480 Speaker 1: what basic pillar of markets or finance are we going 28 00:01:30,520 --> 00:01:34,200 Speaker 1: to learn about today? So today we're going to go 29 00:01:34,360 --> 00:01:38,560 Speaker 1: to like the heart of investing, sort of the simplest, 30 00:01:38,640 --> 00:01:42,760 Speaker 1: most basic thing that people will think about when they 31 00:01:42,800 --> 00:01:45,479 Speaker 1: think about what investing is, and that is thinking about 32 00:01:45,720 --> 00:01:50,160 Speaker 1: what stocks are worth. Now, Okay, so I guess this 33 00:01:50,360 --> 00:01:54,880 Speaker 1: is kind of a simple topic, but it's definitely a 34 00:01:54,960 --> 00:01:57,440 Speaker 1: really timely one because I'm pretty sure I just saw 35 00:01:57,520 --> 00:02:02,240 Speaker 1: a headline go by about a record number of investors 36 00:02:02,240 --> 00:02:05,640 Speaker 1: who think stocks are overvalued in the US market, And 37 00:02:05,680 --> 00:02:10,000 Speaker 1: of course, the notion of things being overvalued, not just stocks, 38 00:02:10,120 --> 00:02:14,720 Speaker 1: that's a pretty prominent theme in markets right now. It 39 00:02:14,800 --> 00:02:16,800 Speaker 1: absolutely is. And of course, you know a few weeks 40 00:02:16,840 --> 00:02:19,480 Speaker 1: ago that we had another episode with a pair of 41 00:02:19,520 --> 00:02:24,600 Speaker 1: accounting professors talking about new ideas and stock market valuation. 42 00:02:24,960 --> 00:02:27,080 Speaker 1: But like I think, when people learn about investing, they 43 00:02:27,120 --> 00:02:30,600 Speaker 1: think about Warren Buffett, and they think about Benjamin Graham 44 00:02:30,600 --> 00:02:34,200 Speaker 1: and dot and security analysis and reading income statements and 45 00:02:34,280 --> 00:02:36,680 Speaker 1: just like trying to put a number on the stock 46 00:02:36,880 --> 00:02:38,760 Speaker 1: and then looking the stock and saying, well should it 47 00:02:38,840 --> 00:02:41,320 Speaker 1: go up or down from here? And that's simple. That 48 00:02:41,440 --> 00:02:46,000 Speaker 1: simplicity there is, you know, just incredibly important thing. But 49 00:02:46,160 --> 00:02:47,799 Speaker 1: we don't. But how do you do it? I don't, 50 00:02:48,160 --> 00:02:50,079 Speaker 1: you know. I don't think most people really know how 51 00:02:50,080 --> 00:02:52,079 Speaker 1: to even go about the process. No. I guess we 52 00:02:52,200 --> 00:02:55,760 Speaker 1: throw around words like pe ratios and forward earnings and 53 00:02:55,800 --> 00:02:58,200 Speaker 1: things like that. But let's dig into it a little 54 00:02:58,200 --> 00:03:00,400 Speaker 1: bit more. So, who do we have so we have 55 00:03:00,800 --> 00:03:04,480 Speaker 1: the best possible guest for the subject. He is considered 56 00:03:04,520 --> 00:03:08,160 Speaker 1: to be the foremost expert on the subject of valuing stocks. 57 00:03:08,480 --> 00:03:11,840 Speaker 1: He is Oswath Damodarin, a professor at the Stern School 58 00:03:11,840 --> 00:03:16,120 Speaker 1: of Business at New York University. He teaches about the 59 00:03:16,160 --> 00:03:20,040 Speaker 1: topics of corporate finance and equity valuation. He runs a 60 00:03:20,120 --> 00:03:24,840 Speaker 1: great blog where he discusses how he values certain companies. 61 00:03:24,880 --> 00:03:27,920 Speaker 1: He's come on TV on Bloomberg TV several times to 62 00:03:27,960 --> 00:03:31,480 Speaker 1: discuss it. So Professor Damodarin, thank you very much for 63 00:03:31,560 --> 00:03:35,080 Speaker 1: joining the Odd Loaves podcast. Thank you, Joe. I Before 64 00:03:35,120 --> 00:03:37,680 Speaker 1: I start, I'm going to bash a few few groups 65 00:03:37,680 --> 00:03:41,360 Speaker 1: that I always start to bash with. Soles. Don't ask 66 00:03:41,360 --> 00:03:43,360 Speaker 1: the contents about value. I mean, I think it's the 67 00:03:43,360 --> 00:03:47,400 Speaker 1: wrong group to ask, because realistically, I think accountants that 68 00:03:47,520 --> 00:03:51,360 Speaker 1: the job to do invaluation is not one of those jobs. Second, 69 00:03:51,760 --> 00:03:54,920 Speaker 1: anybody tells you there's something new, evaluation is lying. Everything 70 00:03:54,960 --> 00:03:59,080 Speaker 1: invaluation is old and tested. Now it's all old wine 71 00:03:59,080 --> 00:04:01,920 Speaker 1: in a new bottle. Third, and I think this is 72 00:04:02,000 --> 00:04:05,520 Speaker 1: this will set the table for the entire discussion. Value 73 00:04:05,640 --> 00:04:08,320 Speaker 1: and price are two different things. You can either value 74 00:04:08,360 --> 00:04:11,400 Speaker 1: a stock or you can price the stock. Tracy mentioned 75 00:04:11,440 --> 00:04:16,080 Speaker 1: price earnings ratios and forward earnings. That's a classic analyst technique. 76 00:04:16,080 --> 00:04:19,719 Speaker 1: It's for pricing a stock. And here's the contrast. The 77 00:04:19,760 --> 00:04:22,200 Speaker 1: price of the stock is determined by demand and supply, 78 00:04:22,360 --> 00:04:24,960 Speaker 1: mood and momentum. And so when you use price earnings 79 00:04:25,040 --> 00:04:29,320 Speaker 1: ratios and comparable firms and future earnings, you're pricing a company. 80 00:04:29,640 --> 00:04:31,880 Speaker 1: To value a company, you've got to go back to basics. 81 00:04:32,400 --> 00:04:35,240 Speaker 1: The value of company is built on three pillars. It's 82 00:04:35,279 --> 00:04:37,680 Speaker 1: cash flows, it's growth, and its risk. We can dance 83 00:04:37,720 --> 00:04:40,520 Speaker 1: around those three as much as we want, But those 84 00:04:40,560 --> 00:04:43,480 Speaker 1: are the three driving forces that drive the value of 85 00:04:43,480 --> 00:04:47,320 Speaker 1: a company. I love that how you just came out 86 00:04:47,400 --> 00:04:49,880 Speaker 1: swinging at the top of our podcast. I think that's 87 00:04:49,920 --> 00:04:54,240 Speaker 1: a very auspicious start. Start by bashing two of our 88 00:04:54,279 --> 00:04:57,840 Speaker 1: previous guests. Start by bashing some of the way we 89 00:04:57,920 --> 00:05:01,360 Speaker 1: talked about this. So now I'm very exciting about the conversation. 90 00:05:01,920 --> 00:05:05,159 Speaker 1: So let's get right into it. When we talk about 91 00:05:05,400 --> 00:05:08,200 Speaker 1: valuing a stock, how do you begin? You know, what 92 00:05:08,240 --> 00:05:11,320 Speaker 1: do you tell your students on day one of classes 93 00:05:11,760 --> 00:05:14,839 Speaker 1: about what they need to understand about this process. I 94 00:05:14,960 --> 00:05:17,479 Speaker 1: take them back about seventy years and I talked about 95 00:05:17,480 --> 00:05:20,200 Speaker 1: people buying stock seventy years ago, bought them for a 96 00:05:20,200 --> 00:05:23,080 Speaker 1: cash for the cash flow is the dividend. Companies were 97 00:05:23,120 --> 00:05:26,240 Speaker 1: mature companies, They paid out what they could afford to individends, 98 00:05:26,680 --> 00:05:29,120 Speaker 1: and you essentially said, what I'm paying for stock is 99 00:05:29,120 --> 00:05:32,400 Speaker 1: the present value of those dividends. That present value term 100 00:05:32,520 --> 00:05:34,440 Speaker 1: might sound like a fancy tumb but what he's saying 101 00:05:34,560 --> 00:05:36,560 Speaker 1: is dividends in the future have to be brought back 102 00:05:36,600 --> 00:05:38,560 Speaker 1: to the president. To bring them back to the president, 103 00:05:38,800 --> 00:05:41,000 Speaker 1: you've got a factor in two things. One is what 104 00:05:41,120 --> 00:05:44,920 Speaker 1: can I make elsewhere with my money? Now what what 105 00:05:45,080 --> 00:05:47,320 Speaker 1: our interest rates at? Where can I invest money? And 106 00:05:47,360 --> 00:05:49,679 Speaker 1: the other is how much risk is there in that dividend. 107 00:05:50,279 --> 00:05:53,119 Speaker 1: In a sense, it's good to start with a very 108 00:05:53,160 --> 00:05:57,320 Speaker 1: simple dividend discount model because it it mores your entire analysis. 109 00:05:57,360 --> 00:06:00,400 Speaker 1: It says, let's not get fancy. Ultimately, you buy stocks 110 00:06:00,480 --> 00:06:02,800 Speaker 1: for the cash flow, and if the only cash flow 111 00:06:02,800 --> 00:06:04,800 Speaker 1: you're going to get as a dividend, what you pay 112 00:06:04,839 --> 00:06:07,520 Speaker 1: for a stock is the present value of those dividends. 113 00:06:07,560 --> 00:06:10,520 Speaker 1: So think of that as the Ben Graham, the old 114 00:06:10,960 --> 00:06:14,919 Speaker 1: value investing ideology would says, buy stocks with big and 115 00:06:15,000 --> 00:06:18,479 Speaker 1: stable dividends, they're worth more than stocks that don't pay dividends. 116 00:06:19,400 --> 00:06:22,839 Speaker 1: Do you think that purpose is still relevant, because nowadays, 117 00:06:23,000 --> 00:06:25,680 Speaker 1: you know, the notion of buying stocks for dividends for 118 00:06:25,800 --> 00:06:28,040 Speaker 1: a lot of people is going to sound almost coint 119 00:06:28,200 --> 00:06:30,359 Speaker 1: like a lot of people are buying stocks just to 120 00:06:30,360 --> 00:06:33,479 Speaker 1: see the appreciation in value in the market and then 121 00:06:33,520 --> 00:06:37,040 Speaker 1: just sell them onwards at a later day. Three things 122 00:06:37,040 --> 00:06:41,200 Speaker 1: have changed. One is, in the nineteen thirties, nineteen forties, 123 00:06:41,240 --> 00:06:43,960 Speaker 1: even into the nineteen fifties, when you look at companies 124 00:06:43,960 --> 00:06:46,400 Speaker 1: that were listed in the stock market, they tended to 125 00:06:46,400 --> 00:06:49,920 Speaker 1: be mature companies. If you're a growth company, you stayed 126 00:06:49,960 --> 00:06:53,240 Speaker 1: private and you were funded by venture capitalists, still very 127 00:06:53,320 --> 00:06:57,080 Speaker 1: late in the process. The second is companies that had 128 00:06:57,320 --> 00:06:59,800 Speaker 1: excess cash flows, cash flows that they did not have 129 00:07:00,080 --> 00:07:02,560 Speaker 1: used for paid them out as dividends. There were no 130 00:07:02,640 --> 00:07:05,640 Speaker 1: stock buybacks, so essentially dividends were the only way game 131 00:07:05,960 --> 00:07:09,880 Speaker 1: in town. And the third investors in a sense, we're 132 00:07:10,000 --> 00:07:12,880 Speaker 1: buying stocks for the long term. They were buying stocks 133 00:07:12,920 --> 00:07:15,600 Speaker 1: to hold them for the next ten, fifteen, twenty five years. 134 00:07:15,840 --> 00:07:18,840 Speaker 1: In fact, many of them have had no had no 135 00:07:18,960 --> 00:07:21,520 Speaker 1: intention of even selling these stocks. They were holding them 136 00:07:21,520 --> 00:07:25,240 Speaker 1: for the dividends. The world has changed today. Look at 137 00:07:25,240 --> 00:07:27,040 Speaker 1: the market and you look at the top ten stocks, 138 00:07:27,080 --> 00:07:30,880 Speaker 1: maybe seven eight are growth companies, not mature companies. And 139 00:07:30,960 --> 00:07:34,080 Speaker 1: in fact, many companies are entering the market at stages 140 00:07:34,200 --> 00:07:37,160 Speaker 1: they would never even have thought about entering the market 141 00:07:37,160 --> 00:07:40,200 Speaker 1: even twenty five years ago. You take a couple like Snap, 142 00:07:40,360 --> 00:07:42,680 Speaker 1: it's a startup. Pretty much it will been a company 143 00:07:42,720 --> 00:07:45,800 Speaker 1: that will been invested in by venture capitalists for another 144 00:07:45,880 --> 00:07:48,440 Speaker 1: five or six years before it was ready for the market. 145 00:07:48,960 --> 00:07:51,320 Speaker 1: So the composition of the market has changed. So if 146 00:07:51,360 --> 00:07:55,640 Speaker 1: you're trying to value a company like Facebook with dividends. 147 00:07:55,640 --> 00:07:58,680 Speaker 1: Here's the problem'm gonna run into. The first is the company, 148 00:07:58,840 --> 00:08:01,679 Speaker 1: even if it can afford to pay dividends, doesn't pay dividends. 149 00:08:01,720 --> 00:08:05,320 Speaker 1: It accumulates the cash. Second, when it does decide to 150 00:08:05,360 --> 00:08:07,640 Speaker 1: return to cash, it turn cash in the form of 151 00:08:07,680 --> 00:08:11,120 Speaker 1: stock buy backs. So increasingly what we've had to move 152 00:08:11,160 --> 00:08:14,040 Speaker 1: away from is not that we still want to you know, 153 00:08:14,120 --> 00:08:16,200 Speaker 1: we still want cash flows, but the way we're getting 154 00:08:16,200 --> 00:08:19,080 Speaker 1: the cash flows now are different. They take the form 155 00:08:19,160 --> 00:08:21,760 Speaker 1: of buy backs more often than dividends, and you might 156 00:08:21,800 --> 00:08:24,160 Speaker 1: have to wait to get your cash flows if you're 157 00:08:24,200 --> 00:08:26,280 Speaker 1: buying a young growth company. So it's not that the 158 00:08:26,320 --> 00:08:29,800 Speaker 1: focus of what we're doing changes, but the kinds of 159 00:08:29,880 --> 00:08:34,360 Speaker 1: markets and companies were trying to value has become very different. So, 160 00:08:34,840 --> 00:08:37,560 Speaker 1: you know, obviously in the beginning you said, anyone who 161 00:08:37,600 --> 00:08:41,160 Speaker 1: tells you that there's something new in the world invaluation 162 00:08:41,440 --> 00:08:44,240 Speaker 1: is lying. But of course, as you've just said, the 163 00:08:44,360 --> 00:08:48,720 Speaker 1: nature of the companies has changed such that you know, 164 00:08:48,880 --> 00:08:52,679 Speaker 1: strict dividend and LSS or even strict buy back analysis 165 00:08:53,120 --> 00:08:56,040 Speaker 1: isn't going to be the right frame because they're not 166 00:08:56,080 --> 00:08:58,880 Speaker 1: in that business right now. Is the idea then that 167 00:08:58,960 --> 00:09:03,000 Speaker 1: you sort of reject forward what they could theoretically pay 168 00:09:03,000 --> 00:09:06,640 Speaker 1: back in dividends or could theoretically do in buy backs 169 00:09:06,720 --> 00:09:09,080 Speaker 1: or sort of how do you take this sort of 170 00:09:09,120 --> 00:09:12,400 Speaker 1: Graham and Dot approach that everybody knows and apply it 171 00:09:12,440 --> 00:09:16,440 Speaker 1: to a Facebook or a Snap you nailed down valuation. 172 00:09:16,480 --> 00:09:20,560 Speaker 1: That's exactly what you do. Instead of taking the actual dividends, 173 00:09:20,720 --> 00:09:24,120 Speaker 1: you try to estimate potential dividends. Sounds fancy, but if 174 00:09:24,120 --> 00:09:26,079 Speaker 1: you run a business, think of the cash that you 175 00:09:26,120 --> 00:09:28,440 Speaker 1: can take out of the business. The cash left over 176 00:09:29,000 --> 00:09:32,360 Speaker 1: after you've met every conceivable need, which includes what you 177 00:09:32,440 --> 00:09:35,920 Speaker 1: put in for future growth and you pay taxes. If 178 00:09:35,960 --> 00:09:38,199 Speaker 1: there's any cash left in the till and you're the 179 00:09:38,240 --> 00:09:41,000 Speaker 1: business owner, you can take it out of the business. 180 00:09:41,040 --> 00:09:44,079 Speaker 1: That is your potential dividend. And it's easy to estimate 181 00:09:44,120 --> 00:09:45,719 Speaker 1: that for a company because if you look at the 182 00:09:45,760 --> 00:09:48,760 Speaker 1: statement of cash flows for a company, they tell you 183 00:09:48,880 --> 00:09:51,000 Speaker 1: what they're putting back into the business. They tell you 184 00:09:51,040 --> 00:09:53,520 Speaker 1: what they're using to make debt payments. So you can 185 00:09:53,559 --> 00:09:56,679 Speaker 1: actually take a Facebook and estimate how much they could 186 00:09:56,679 --> 00:10:00,720 Speaker 1: have paid in dividends last year. The that then becomes 187 00:10:00,720 --> 00:10:03,520 Speaker 1: your basis. So It's essentially what we're doing is instead 188 00:10:03,559 --> 00:10:06,199 Speaker 1: of using the actual dividends to value the stock, we're 189 00:10:06,280 --> 00:10:09,920 Speaker 1: using potential dividends. That's really the innovation of the last 190 00:10:09,920 --> 00:10:12,199 Speaker 1: seven years, if we can even call it that, because 191 00:10:12,240 --> 00:10:15,760 Speaker 1: the rest of the process stays the same. You make 192 00:10:15,800 --> 00:10:20,880 Speaker 1: it sound really easy, but you know, estimating um future 193 00:10:20,920 --> 00:10:24,520 Speaker 1: cash flow versus cash needs, there are all sorts of 194 00:10:24,559 --> 00:10:27,920 Speaker 1: things that must go into that forecast, right, So for 195 00:10:27,920 --> 00:10:33,000 Speaker 1: for instance, do you attempt to assign probabilities to certain scenarios. 196 00:10:33,120 --> 00:10:36,120 Speaker 1: Do you worry about one off, you know, sort of 197 00:10:36,200 --> 00:10:39,000 Speaker 1: tail risk events. What are you actually looking at when 198 00:10:39,000 --> 00:10:42,160 Speaker 1: you do that? The first thing to do in valuation 199 00:10:42,240 --> 00:10:45,040 Speaker 1: is to adopt what I call the karmic post. The 200 00:10:45,120 --> 00:10:47,360 Speaker 1: karmic post is basically, there are lots of things you 201 00:10:47,400 --> 00:10:50,360 Speaker 1: don't control, so stop worrying about them. You're valuing an 202 00:10:50,360 --> 00:10:53,560 Speaker 1: oil company. The oil press could change tomorrow. You could 203 00:10:53,559 --> 00:10:56,400 Speaker 1: have a crisis in the Middle East. Those are things 204 00:10:56,520 --> 00:10:59,199 Speaker 1: you You can worry about them, but there's nothing you 205 00:10:59,240 --> 00:11:01,400 Speaker 1: can do about them. What you have to do is 206 00:11:01,400 --> 00:11:04,120 Speaker 1: take the information you have and make your best estimates, 207 00:11:04,120 --> 00:11:08,040 Speaker 1: and sometimes that requires using statistics, probabity distributions, you're having 208 00:11:08,040 --> 00:11:12,199 Speaker 1: a bio technology company with a blockbuster drug working its 209 00:11:12,200 --> 00:11:15,120 Speaker 1: way through the pipeline. You might not like to do it, 210 00:11:15,160 --> 00:11:18,160 Speaker 1: but you have to assess a probability that that drug 211 00:11:18,200 --> 00:11:21,680 Speaker 1: will make it through the pipeline. The process is easy, 212 00:11:21,800 --> 00:11:25,400 Speaker 1: but estimation can be difficult for some companies. You asked 213 00:11:25,400 --> 00:11:29,280 Speaker 1: me to value Snap, I'm making judgments based on very 214 00:11:29,320 --> 00:11:32,800 Speaker 1: little historical data. And that's really the big difference when 215 00:11:32,800 --> 00:11:35,480 Speaker 1: you have to value growth companies. It's not that the 216 00:11:35,559 --> 00:11:38,880 Speaker 1: process is different, but we have a fewer crutches because 217 00:11:38,880 --> 00:11:40,920 Speaker 1: when you have a lot of historical data that you 218 00:11:40,960 --> 00:11:44,080 Speaker 1: can project off, you feel better. Even if you if 219 00:11:44,160 --> 00:11:48,000 Speaker 1: that that that is completely misplaced, you just feel more comfortable. 220 00:11:48,559 --> 00:11:50,920 Speaker 1: What you have is an absence of comfort. And for 221 00:11:51,040 --> 00:11:54,400 Speaker 1: people valuing, especially the kinds of companies that are increasingly 222 00:11:54,480 --> 00:11:57,760 Speaker 1: entering the market, you've got learned to live with being 223 00:11:57,840 --> 00:12:01,480 Speaker 1: uncomfortable with making a as and it's in being hopelessly 224 00:12:01,559 --> 00:12:04,400 Speaker 1: wrong and saying, you know what, that wasn't my fault. 225 00:12:04,440 --> 00:12:07,959 Speaker 1: It really wasn't your fault. If you did not forecast 226 00:12:08,000 --> 00:12:11,680 Speaker 1: cloud computing coming coming out of nowhere and essentially becoming 227 00:12:11,679 --> 00:12:15,280 Speaker 1: a big part of Amazon's business, you can only estimate 228 00:12:15,360 --> 00:12:17,160 Speaker 1: what you can, and then when you're done, you've got 229 00:12:17,160 --> 00:12:19,440 Speaker 1: to step back and say, I've done what I can. 230 00:12:19,559 --> 00:12:22,520 Speaker 1: I valued the company. I could be very wrong, but 231 00:12:22,720 --> 00:12:25,440 Speaker 1: this is my best estimate of value. You know, in 232 00:12:25,480 --> 00:12:28,000 Speaker 1: addition to the fact that you don't have a lot 233 00:12:28,040 --> 00:12:31,960 Speaker 1: of historical data on these companies we live, it feels 234 00:12:32,000 --> 00:12:35,040 Speaker 1: like we live in an age of novel business models. 235 00:12:35,080 --> 00:12:38,000 Speaker 1: So I imagine that if you sort of value you know, 236 00:12:38,120 --> 00:12:41,000 Speaker 1: if we were in the nineteen eighties and you wanted 237 00:12:41,000 --> 00:12:44,120 Speaker 1: to value shares of the New York Times, that the 238 00:12:44,160 --> 00:12:46,880 Speaker 1: business model of the New York Times was not that 239 00:12:47,080 --> 00:12:50,480 Speaker 1: different from the business model of newspapers, you know, going 240 00:12:50,520 --> 00:12:54,480 Speaker 1: back for decades before that. But you know, take a 241 00:12:54,520 --> 00:12:57,240 Speaker 1: look at Snap today. You know you could is this 242 00:12:57,280 --> 00:12:59,520 Speaker 1: a media company? Is a tech company? Is it a 243 00:12:59,600 --> 00:13:02,720 Speaker 1: camera company? Is an apps company? You know, it seems 244 00:13:03,080 --> 00:13:06,360 Speaker 1: how does that? Is it true that you're coming across 245 00:13:06,440 --> 00:13:10,040 Speaker 1: more business models that don't have good historical analogs, And 246 00:13:10,080 --> 00:13:14,160 Speaker 1: if so, how does that complicate the task of valuing 247 00:13:14,200 --> 00:13:17,080 Speaker 1: a company. I'll give you an example of what I 248 00:13:17,160 --> 00:13:19,920 Speaker 1: think is shift the most in business as I see it, 249 00:13:20,640 --> 00:13:23,880 Speaker 1: when I look at companies like Facebook, and snap. What 250 00:13:24,040 --> 00:13:26,520 Speaker 1: I see on what I called user based models, which 251 00:13:26,559 --> 00:13:29,080 Speaker 1: is if you look at what they boast about the 252 00:13:29,080 --> 00:13:31,920 Speaker 1: most is the number of users, the number of subscribers. 253 00:13:31,920 --> 00:13:34,240 Speaker 1: I mean, take a look at Netflix's last annual report 254 00:13:34,280 --> 00:13:37,320 Speaker 1: and look at how much they emphasize the number of 255 00:13:37,600 --> 00:13:42,200 Speaker 1: subscribers going up. We've increasingly shifted from a top down 256 00:13:42,200 --> 00:13:45,720 Speaker 1: approach where companies boast about their overall revenues growing, to 257 00:13:46,480 --> 00:13:48,800 Speaker 1: a bottom up approach where they boast about how many 258 00:13:48,840 --> 00:13:51,840 Speaker 1: customers users they have. And it's not just new companies. 259 00:13:51,880 --> 00:13:54,960 Speaker 1: If you look at Microsoft in Adobe, the way they 260 00:13:55,080 --> 00:13:57,720 Speaker 1: used to grow ten years ago, twenty years ago is 261 00:13:57,720 --> 00:14:00,320 Speaker 1: they used to update their software and try to sell 262 00:14:00,360 --> 00:14:04,160 Speaker 1: them more. Today, look at Microsoft Adobe, their crown jewels 263 00:14:04,280 --> 00:14:08,319 Speaker 1: are actually their subscription based models. Offers three sixty Microsoft 264 00:14:08,840 --> 00:14:11,480 Speaker 1: and Creative crowd for Adobe. Adobe, in fact doesn't even 265 00:14:11,520 --> 00:14:16,760 Speaker 1: sell it software in regular channels anymore. So increasingly I've 266 00:14:16,800 --> 00:14:19,240 Speaker 1: tried to think about what the value of a user is, 267 00:14:19,440 --> 00:14:22,080 Speaker 1: value of a subscriber, and you know what, the basics 268 00:14:22,120 --> 00:14:24,960 Speaker 1: of valuations still work. Tomorrow. Actually, I'm going to deliver 269 00:14:25,000 --> 00:14:27,960 Speaker 1: the keynote speech at the c f A conference where 270 00:14:27,960 --> 00:14:30,560 Speaker 1: I'm going to value a noble user. I'm going to 271 00:14:30,680 --> 00:14:33,200 Speaker 1: value an Amazon Prime member, and I'm going to value 272 00:14:33,240 --> 00:14:37,480 Speaker 1: Netflix subscriber because to me, that's become the way I 273 00:14:37,560 --> 00:14:40,400 Speaker 1: think about the values of the companies is they essentially 274 00:14:40,440 --> 00:14:44,200 Speaker 1: are trying to pump up their values of users, subscribers, members, 275 00:14:44,680 --> 00:14:47,320 Speaker 1: and that then multiplies by a hundred million, in the 276 00:14:47,360 --> 00:14:50,200 Speaker 1: case of Facebook one point seven billion, You've got these 277 00:14:50,240 --> 00:14:54,120 Speaker 1: astronomically high values. So to me, that is that's one 278 00:14:54,160 --> 00:14:56,720 Speaker 1: thing that shifted in the way I think about companies 279 00:14:56,800 --> 00:14:59,320 Speaker 1: because rather than start with revenues and work down to 280 00:14:59,400 --> 00:15:02,880 Speaker 1: cash flows the way I've always approached valuation with these 281 00:15:02,920 --> 00:15:07,359 Speaker 1: companies have increasingly started thinking about those unit based valuations. 282 00:15:07,400 --> 00:15:10,680 Speaker 1: And here's the problem. Right into the information you need 283 00:15:10,720 --> 00:15:14,640 Speaker 1: to value a user is not being made available to 284 00:15:14,800 --> 00:15:17,320 Speaker 1: us by the companies that boast about how many users 285 00:15:17,360 --> 00:15:21,160 Speaker 1: they have if I were writing information disclosure laws. This 286 00:15:21,240 --> 00:15:23,720 Speaker 1: is something that I think needs to be fixed as 287 00:15:23,760 --> 00:15:27,640 Speaker 1: these companies increasingly shift to user based models. So I'd 288 00:15:27,680 --> 00:15:29,880 Speaker 1: like to know what the renewal rates are, and much 289 00:15:29,920 --> 00:15:32,960 Speaker 1: more specificity than they reveal it now. I'd like to 290 00:15:33,040 --> 00:15:37,520 Speaker 1: know what the distribution is of revenues across users to 291 00:15:37,680 --> 00:15:40,320 Speaker 1: ten percent of ooper users account for ninety percent of 292 00:15:40,360 --> 00:15:43,480 Speaker 1: its revenues. That's the kind of information that companies have 293 00:15:43,680 --> 00:15:46,080 Speaker 1: that they're not sharing with us. And if they're going 294 00:15:46,120 --> 00:15:47,720 Speaker 1: to ask us to invest in them because they have 295 00:15:47,800 --> 00:15:50,720 Speaker 1: tens of millions of users, it's their obligation, I think, 296 00:15:50,760 --> 00:15:53,600 Speaker 1: and to provide the information that will allow us to 297 00:15:53,680 --> 00:16:06,920 Speaker 1: value them better. But I have a potentially slightly weird question. 298 00:16:07,000 --> 00:16:10,800 Speaker 1: But we're talking about a lot of high growth stocks, 299 00:16:10,880 --> 00:16:14,040 Speaker 1: which you could also call story stocks, right, Like if 300 00:16:14,040 --> 00:16:17,880 Speaker 1: you buy in to Tesla or Uber, you buy into 301 00:16:17,920 --> 00:16:20,360 Speaker 1: this idea that both those companies are going to be 302 00:16:20,440 --> 00:16:24,880 Speaker 1: revolutionary in various ways for the transport industry. When you 303 00:16:24,960 --> 00:16:28,680 Speaker 1: attempt to value a company nowadays, do you give any 304 00:16:28,960 --> 00:16:33,160 Speaker 1: credence to that sort of narrative? Do you buy into 305 00:16:33,920 --> 00:16:36,360 Speaker 1: some of that hype um and you know, some of 306 00:16:36,360 --> 00:16:39,960 Speaker 1: that hype It sounds silly, but we do see that reflected, 307 00:16:40,320 --> 00:16:44,120 Speaker 1: you know, in intangible assets like brand value and things 308 00:16:44,160 --> 00:16:46,960 Speaker 1: like that. So I'm just curious if you factor any 309 00:16:47,000 --> 00:16:51,320 Speaker 1: of that in every valuation tells a story, right, I mean, 310 00:16:51,360 --> 00:16:54,160 Speaker 1: any analysts who puts up a spreadsheet and says, this 311 00:16:54,240 --> 00:16:56,360 Speaker 1: is my value for a company whether he likes it 312 00:16:56,480 --> 00:16:59,200 Speaker 1: or not, is actually telling a story about a company. 313 00:16:59,200 --> 00:17:02,080 Speaker 1: I'm a firm leaver that every good valuation is a 314 00:17:02,120 --> 00:17:05,160 Speaker 1: story behind it. The question you're asking is a different one. 315 00:17:05,200 --> 00:17:07,560 Speaker 1: Does that story you have to be the story that 316 00:17:07,640 --> 00:17:10,399 Speaker 1: manages in the company of pushing for the company, And 317 00:17:10,440 --> 00:17:13,719 Speaker 1: the answer is absolutely not. If you're an investor, you 318 00:17:13,720 --> 00:17:16,320 Speaker 1: have to take ownership of your own story, which means 319 00:17:16,320 --> 00:17:19,000 Speaker 1: you can listen to Elon Musk. You can admire Elon Musk, 320 00:17:19,080 --> 00:17:22,359 Speaker 1: you can listen to his story about Tesla, but if 321 00:17:22,400 --> 00:17:25,720 Speaker 1: you're valuing Tesla, you better have your own story about Tesla. 322 00:17:26,240 --> 00:17:29,000 Speaker 1: So that's true every there is, These are stories, talks, 323 00:17:29,040 --> 00:17:32,919 Speaker 1: but ultimately every company is a story. The g story 324 00:17:33,040 --> 00:17:35,480 Speaker 1: is just a horror story right now. So basically, some 325 00:17:35,600 --> 00:17:39,119 Speaker 1: stories are fun stories, some stories are uplifting stories. Some 326 00:17:39,240 --> 00:17:42,800 Speaker 1: stories are not so in a sense, sometimes you have 327 00:17:42,920 --> 00:17:45,320 Speaker 1: to look at the story, but then you've got to 328 00:17:45,359 --> 00:17:48,359 Speaker 1: make that story your own and then convert that story 329 00:17:48,400 --> 00:17:51,160 Speaker 1: into numbers and valuation. In fact, that's my latest book. 330 00:17:51,200 --> 00:17:54,159 Speaker 1: It's called Narrative and Numbers, about how to both connect 331 00:17:54,200 --> 00:17:57,640 Speaker 1: storage to numbers and how to detect when a story 332 00:17:58,240 --> 00:18:00,720 Speaker 1: is not going to hold up because I see a 333 00:18:00,760 --> 00:18:04,760 Speaker 1: lot of impossible stories being told, sometimes by CEOs of companies, 334 00:18:04,760 --> 00:18:08,000 Speaker 1: are implausible stories, and my job is to say that's 335 00:18:08,040 --> 00:18:11,040 Speaker 1: not going to work, that violates the laws of economics, 336 00:18:11,119 --> 00:18:13,760 Speaker 1: and then adapt the story to make it my story 337 00:18:13,800 --> 00:18:17,200 Speaker 1: and my valuation. I love that. I want to get 338 00:18:17,240 --> 00:18:19,840 Speaker 1: to like a little speed round where we talk about 339 00:18:20,240 --> 00:18:22,560 Speaker 1: some of these stories and Tesla and g E and 340 00:18:22,720 --> 00:18:25,240 Speaker 1: Uber real quickly. But before we do, I have one 341 00:18:25,320 --> 00:18:28,280 Speaker 1: last question, just sort of on a framework. At the 342 00:18:28,400 --> 00:18:32,399 Speaker 1: very beginning, you talked about the importance of distinguishing between 343 00:18:32,520 --> 00:18:35,719 Speaker 1: valuation and price, and price being a function of supply 344 00:18:35,760 --> 00:18:38,840 Speaker 1: and demand. So how do you then as an investor, 345 00:18:38,880 --> 00:18:41,959 Speaker 1: because ultimately what people want to do is pick stocks 346 00:18:42,000 --> 00:18:44,399 Speaker 1: that are going to make them money. How do you 347 00:18:45,040 --> 00:18:48,879 Speaker 1: sort of once you establish the valuation, then think about 348 00:18:49,040 --> 00:18:54,159 Speaker 1: entering the market given various pricing factors. So first you've 349 00:18:54,160 --> 00:18:56,360 Speaker 1: got to decide whether you want to be an investor 350 00:18:56,520 --> 00:19:00,280 Speaker 1: or a trader. And this is my distinction. Investors buy 351 00:19:00,320 --> 00:19:02,720 Speaker 1: stocks for less than the value that they adact to 352 00:19:02,720 --> 00:19:04,480 Speaker 1: the stocks, and then they hope and pray that the 353 00:19:04,560 --> 00:19:07,919 Speaker 1: price suggests to value. So investing requires faith, faith in 354 00:19:07,960 --> 00:19:12,000 Speaker 1: your own valuation and faith that markets will correct that value. 355 00:19:12,040 --> 00:19:14,480 Speaker 1: And you know what, most people don't have faith. And 356 00:19:14,520 --> 00:19:16,199 Speaker 1: if you don't have faith, you can try to be 357 00:19:16,240 --> 00:19:18,240 Speaker 1: an investor, but you're not going to hang in there. 358 00:19:18,440 --> 00:19:21,440 Speaker 1: You're going to give up. So I tell people be realistic. 359 00:19:21,560 --> 00:19:24,440 Speaker 1: If you have no faith in value, even though you 360 00:19:24,520 --> 00:19:27,040 Speaker 1: might know how to mechanically how to value a company, 361 00:19:27,440 --> 00:19:29,280 Speaker 1: you're not going to be able to invest. You're going 362 00:19:29,280 --> 00:19:30,800 Speaker 1: to be a trader. And you're going to be a trader, 363 00:19:30,840 --> 00:19:33,760 Speaker 1: might as well be honest about the fact that in trading, 364 00:19:33,800 --> 00:19:35,600 Speaker 1: the game is to buy the low price sell at 365 00:19:35,640 --> 00:19:38,520 Speaker 1: a high price. Why the price goes up is none 366 00:19:38,520 --> 00:19:40,600 Speaker 1: of your business. You really don't even care. It's not 367 00:19:40,680 --> 00:19:44,480 Speaker 1: an intellectual exercise. It's a money making exerciss So the 368 00:19:44,520 --> 00:19:46,840 Speaker 1: first decision you've got to make is do you have 369 00:19:47,000 --> 00:19:50,399 Speaker 1: enough faith to be an investor. If you do have faith, 370 00:19:50,720 --> 00:19:52,879 Speaker 1: then here's what you need to do. Need to value 371 00:19:52,920 --> 00:19:55,439 Speaker 1: companies and hopefully the value is higher than the price. 372 00:19:56,040 --> 00:19:58,439 Speaker 1: And then you have to look for a catalyst, something 373 00:19:58,520 --> 00:20:00,680 Speaker 1: that will cause the price to move to value. Because 374 00:20:00,680 --> 00:20:03,960 Speaker 1: you can be right about value and go bankrupt being right. 375 00:20:04,680 --> 00:20:06,560 Speaker 1: I mean, you've got the old saying the market can 376 00:20:06,560 --> 00:20:09,800 Speaker 1: be rational longer than you can be liquid, so in 377 00:20:09,800 --> 00:20:13,200 Speaker 1: a sense or solving, so, I think you have to 378 00:20:14,320 --> 00:20:16,679 Speaker 1: when you look, when you look at an undervalued company, 379 00:20:16,720 --> 00:20:18,840 Speaker 1: a company with the price is less than value, looking 380 00:20:18,880 --> 00:20:22,000 Speaker 1: for some kind of catalyst. That catalyst might be a 381 00:20:22,040 --> 00:20:25,520 Speaker 1: management changed, It might be an activist investor stepping in. 382 00:20:25,880 --> 00:20:28,479 Speaker 1: It might be it might even be there, you know, 383 00:20:29,000 --> 00:20:32,760 Speaker 1: it might even be something small, a competitor trying to 384 00:20:32,920 --> 00:20:36,080 Speaker 1: essentially take over the company. But you're trying to look 385 00:20:36,119 --> 00:20:38,800 Speaker 1: for something that will caused the market to shake up. 386 00:20:38,840 --> 00:20:41,480 Speaker 1: Because there is nothing that shakes up the market. Nothing's 387 00:20:41,480 --> 00:20:44,359 Speaker 1: going to change, and that effectively is one of the 388 00:20:44,400 --> 00:20:47,679 Speaker 1: most frustrating things about being an investor is you can 389 00:20:47,760 --> 00:20:50,960 Speaker 1: value a company, feel very convinced that you've got the 390 00:20:51,080 --> 00:20:53,960 Speaker 1: right value, and see the price go in the opposite direction, 391 00:20:54,440 --> 00:20:57,280 Speaker 1: not just for days, not just for weeks, but for years. 392 00:20:57,760 --> 00:20:59,360 Speaker 1: And you've got to be okay with it. You've got 393 00:20:59,359 --> 00:21:02,200 Speaker 1: to be if you get frustrated and you get angry 394 00:21:02,240 --> 00:21:04,439 Speaker 1: about the fact that the market is not doing the 395 00:21:04,520 --> 00:21:07,359 Speaker 1: right thing, then you set yourself up to do really 396 00:21:07,400 --> 00:21:12,440 Speaker 1: stupid things. Okay, okay, speed round. Let's start with shall 397 00:21:12,520 --> 00:21:15,080 Speaker 1: we do g E because this kind of gets some 398 00:21:15,200 --> 00:21:18,240 Speaker 1: of the shake up stuff that you're talking about. So 399 00:21:18,320 --> 00:21:21,720 Speaker 1: when you see a sharp repricing in the company's um 400 00:21:21,920 --> 00:21:25,359 Speaker 1: market value, what you think, Well, the first thing I 401 00:21:25,400 --> 00:21:28,320 Speaker 1: think is the story change. Sometimes the repricing comes about 402 00:21:28,359 --> 00:21:33,120 Speaker 1: because people were buying into an unrealistic story before and 403 00:21:33,200 --> 00:21:35,520 Speaker 1: some things kicked them in the face saying that story 404 00:21:35,600 --> 00:21:38,560 Speaker 1: is not going to happen. The classic example is you 405 00:21:38,640 --> 00:21:41,120 Speaker 1: buy a stock with with with with what you think 406 00:21:41,200 --> 00:21:42,800 Speaker 1: is a high growth three. You give it a price 407 00:21:42,880 --> 00:21:45,720 Speaker 1: on its ratio of thirty five. The learnings report comes 408 00:21:45,720 --> 00:21:48,680 Speaker 1: out with the revenues are flat, and the company comes 409 00:21:48,720 --> 00:21:50,880 Speaker 1: up with all kinds of excuses, but it's very clear 410 00:21:50,880 --> 00:21:54,320 Speaker 1: that revenues and not growing. That's the world kicking you 411 00:21:54,359 --> 00:21:56,399 Speaker 1: in the face. Thing you thought about a growth stop 412 00:21:56,640 --> 00:21:59,920 Speaker 1: now readthing. So the first thing that happens we reprice 413 00:22:00,040 --> 00:22:03,320 Speaker 1: thing is the story could have changed. The story changes, 414 00:22:03,320 --> 00:22:05,080 Speaker 1: then your value has to change. So it's not that 415 00:22:05,119 --> 00:22:07,840 Speaker 1: the market is making a mistake before, is that that 416 00:22:07,880 --> 00:22:11,520 Speaker 1: the value is reflecting a different story. The second is 417 00:22:11,520 --> 00:22:13,879 Speaker 1: when you have a pure pricing stock and there are 418 00:22:13,920 --> 00:22:16,600 Speaker 1: lots of companies there where there are no investors in 419 00:22:16,680 --> 00:22:19,720 Speaker 1: that market, it's all traders buying and selling from each other. 420 00:22:20,320 --> 00:22:23,520 Speaker 1: It's based on mood and momentum, and momentum and mood 421 00:22:23,560 --> 00:22:26,480 Speaker 1: can shift in a moment. Look at how quickly bitcoin 422 00:22:26,560 --> 00:22:29,200 Speaker 1: goes from being you know seven, now everything is great 423 00:22:29,240 --> 00:22:33,560 Speaker 1: to everything's awful. That's the nature of pure pricing stocks. 424 00:22:33,800 --> 00:22:35,680 Speaker 1: And there are some stocks out that there are pure 425 00:22:35,720 --> 00:22:39,919 Speaker 1: pricing stocks. As a value investors, an investor cares about value, 426 00:22:40,040 --> 00:22:44,600 Speaker 1: I avoid those stocks like the Play because things happen 427 00:22:44,640 --> 00:22:46,439 Speaker 1: on those docks, and there's really no good reason why 428 00:22:46,480 --> 00:22:49,400 Speaker 1: it happens. Is the mood shifted. So sometimes we try 429 00:22:49,440 --> 00:22:53,479 Speaker 1: to attach really strong economic reasons to things, but use 430 00:22:53,480 --> 00:22:55,960 Speaker 1: there are no good reasons, and sometimes it's better to 431 00:22:55,960 --> 00:22:58,359 Speaker 1: look and said, thank god, I wasn't in that stock 432 00:22:58,400 --> 00:23:02,760 Speaker 1: when that happened. So Tracy asked about Ge, So what 433 00:23:02,920 --> 00:23:06,760 Speaker 1: is your thirty second take on what on the story there? Well? Gee, 434 00:23:06,800 --> 00:23:09,040 Speaker 1: as a problem, it's an old I mean, this is 435 00:23:09,240 --> 00:23:11,960 Speaker 1: one of my favorite devices in my classes is to 436 00:23:12,040 --> 00:23:14,280 Speaker 1: call it is to talk about what's called the corporate 437 00:23:14,320 --> 00:23:17,520 Speaker 1: life cycle, the corporate life cycle of startups that became 438 00:23:17,600 --> 00:23:20,440 Speaker 1: teenage companies think oh, but then growth companies the peak 439 00:23:20,480 --> 00:23:23,119 Speaker 1: of your life and become mature companies, and then you 440 00:23:23,200 --> 00:23:26,880 Speaker 1: go into decline. G has been a company and decline 441 00:23:26,880 --> 00:23:30,720 Speaker 1: now for fifteen years. The prompt GY is it's an 442 00:23:30,760 --> 00:23:33,919 Speaker 1: old company with lots of old businesses. There is no 443 00:23:34,080 --> 00:23:36,560 Speaker 1: good story you can tell that will allow you to 444 00:23:36,640 --> 00:23:39,320 Speaker 1: come out of this as a growth company. The best 445 00:23:39,359 --> 00:23:42,600 Speaker 1: they can hope for is that they don't become decrepit. 446 00:23:43,080 --> 00:23:46,480 Speaker 1: So in a sense, I would not envy the top 447 00:23:46,560 --> 00:23:49,440 Speaker 1: management of Genie right now. They're trying to get rid 448 00:23:49,480 --> 00:23:52,480 Speaker 1: of old businesses which others are not going to pay 449 00:23:52,560 --> 00:23:55,560 Speaker 1: a high price for. They're trying to kind of set 450 00:23:55,640 --> 00:23:58,280 Speaker 1: up investors to accept the fact that this is the 451 00:23:58,280 --> 00:23:59,919 Speaker 1: way it's going to be, that things are not going 452 00:23:59,920 --> 00:24:02,399 Speaker 1: to change. So they're doing the right thing in a 453 00:24:02,480 --> 00:24:05,200 Speaker 1: sense by being open about it. But that doesn't mean 454 00:24:05,200 --> 00:24:08,320 Speaker 1: it's going to be any less painful. Now. Growing old 455 00:24:08,440 --> 00:24:12,960 Speaker 1: is hard to do, and watching G you realize how 456 00:24:13,000 --> 00:24:15,959 Speaker 1: how difficult it is for a company that was an 457 00:24:15,960 --> 00:24:20,080 Speaker 1: American institution to accept that, you know what, the best 458 00:24:20,160 --> 00:24:23,080 Speaker 1: days away behind them, and now it's a question of 459 00:24:23,200 --> 00:24:26,760 Speaker 1: winding down. I mean I only half jokingly say that 460 00:24:26,840 --> 00:24:29,840 Speaker 1: you know the right CEO for a company depends on 461 00:24:29,880 --> 00:24:32,600 Speaker 1: where it is in the life cycle. If you're a startup, 462 00:24:32,600 --> 00:24:34,840 Speaker 1: it's got to be Steve the visionary who's running you. 463 00:24:34,960 --> 00:24:37,959 Speaker 1: But if you're a declining company, you need Larry the liquidator. 464 00:24:38,400 --> 00:24:40,760 Speaker 1: So maybe Danny DeVito might want to come and play 465 00:24:40,800 --> 00:24:45,080 Speaker 1: one last role here, g very bleak. All right, real quickly. 466 00:24:45,280 --> 00:24:48,600 Speaker 1: Tesla one of the most controversial stocks in the world 467 00:24:48,720 --> 00:24:51,520 Speaker 1: right now, how do you think about that one? You 468 00:24:51,560 --> 00:24:53,560 Speaker 1: know what I said? I remember I said that every 469 00:24:53,600 --> 00:24:56,800 Speaker 1: company is driven by the story that that you see 470 00:24:56,800 --> 00:24:59,920 Speaker 1: in the company. The promin test lavel is you know, Musk. 471 00:25:00,520 --> 00:25:03,600 Speaker 1: The advantage in Tesla is Elon Muks, this guy. I 472 00:25:03,680 --> 00:25:08,080 Speaker 1: mean when companies wish for a visionary CEO, their visions 473 00:25:08,080 --> 00:25:11,640 Speaker 1: of Elon Musk, because this guy is not just visionary, 474 00:25:11,800 --> 00:25:14,520 Speaker 1: he's over visionary. And what I mean by that is 475 00:25:14,560 --> 00:25:17,479 Speaker 1: every day he wakes up with a bigger vision. And 476 00:25:17,600 --> 00:25:21,200 Speaker 1: sometimes you've got to stop and say, you know, slow 477 00:25:21,240 --> 00:25:25,800 Speaker 1: down now. I think that my real Concernaty is not 478 00:25:25,880 --> 00:25:29,040 Speaker 1: that they're not I think they're an incredible company. And 479 00:25:29,080 --> 00:25:31,800 Speaker 1: if you've talked to anybody with a Tesla, you know 480 00:25:32,000 --> 00:25:34,600 Speaker 1: that they love their cards. Then this is this is 481 00:25:34,640 --> 00:25:38,639 Speaker 1: a company that as super oil customers. My problem Tesla 482 00:25:38,880 --> 00:25:42,919 Speaker 1: is that they have a supply chain problem. They have 483 00:25:43,040 --> 00:25:46,520 Speaker 1: a problem of execution. They've always had an execution problems. 484 00:25:46,880 --> 00:25:49,320 Speaker 1: You can go back and look at every quarters earnings 485 00:25:49,359 --> 00:25:52,560 Speaker 1: announcements of Tesla and the court and it's almost like 486 00:25:52,680 --> 00:25:55,560 Speaker 1: reading the same script over and over again. Promised to 487 00:25:55,560 --> 00:25:58,960 Speaker 1: deliver forty cards, deliver thirty two, promised to deliver a 488 00:25:59,040 --> 00:26:02,679 Speaker 1: sixty deliver at But as long as they were a 489 00:26:02,720 --> 00:26:07,679 Speaker 1: small company with lots of potential, people overlooked that execution problem. 490 00:26:07,720 --> 00:26:11,560 Speaker 1: I think we're approaching a serious moment for Tesla now 491 00:26:11,600 --> 00:26:14,439 Speaker 1: because the middle I think with June of two thousand 492 00:26:14,520 --> 00:26:17,080 Speaker 1: and eighteen, they've promised to deliver about half a million 493 00:26:17,160 --> 00:26:20,800 Speaker 1: Tesla threes. This is a big moment and they need 494 00:26:20,840 --> 00:26:24,720 Speaker 1: to get their execution done. And my concern is that 495 00:26:25,520 --> 00:26:27,640 Speaker 1: that this is a problem from the top down. It's 496 00:26:27,680 --> 00:26:30,760 Speaker 1: not an execution problem, that's just the factory floor. It 497 00:26:30,880 --> 00:26:33,320 Speaker 1: comes from the fact that Elon Musk is not that 498 00:26:33,440 --> 00:26:37,880 Speaker 1: interested in supply chains and inventory and assembly lines. He's 499 00:26:37,960 --> 00:26:41,000 Speaker 1: much more interested in making a big vision and telling 500 00:26:41,000 --> 00:26:44,919 Speaker 1: a story. What he what he needs is what Steve 501 00:26:45,000 --> 00:26:48,240 Speaker 1: Jobs had in his second round as a visionary CEO. 502 00:26:48,320 --> 00:26:51,440 Speaker 1: The first round he almost destroyed Apple. In his second round, 503 00:26:51,960 --> 00:26:55,120 Speaker 1: he had Tim Cook at his side. What Elon Musk 504 00:26:55,240 --> 00:26:58,560 Speaker 1: needs is his own Tim Cook, a chief operating officer 505 00:26:58,600 --> 00:27:01,159 Speaker 1: who makes the trains round on time, who gets the 506 00:27:01,200 --> 00:27:04,600 Speaker 1: supply chain going. Because I think of tests, I can 507 00:27:04,640 --> 00:27:09,040 Speaker 1: get its execution problems behind it. I think I I 508 00:27:09,080 --> 00:27:11,960 Speaker 1: don't have a problem with the value that's attached the company, 509 00:27:12,400 --> 00:27:15,320 Speaker 1: but with those execution problems, I wouldn't pay the price 510 00:27:15,359 --> 00:27:17,760 Speaker 1: that they're paying for Tesla right now. Okay, this is 511 00:27:17,800 --> 00:27:21,280 Speaker 1: the important one. The entire stock market. Is it over 512 00:27:21,400 --> 00:27:27,119 Speaker 1: valued given where risk free rates are right now? No, 513 00:27:27,240 --> 00:27:29,960 Speaker 1: I didn't think it's over value. But you're one leg 514 00:27:30,040 --> 00:27:33,119 Speaker 1: of that table falling off before the whole thing collapses. 515 00:27:33,160 --> 00:27:36,840 Speaker 1: So earnings protest to stay high, the tax reform package 516 00:27:36,880 --> 00:27:40,080 Speaker 1: has to pass, and interest rates have to still stay low. 517 00:27:40,640 --> 00:27:44,000 Speaker 1: And if you can keep that that trifecta going, then 518 00:27:44,080 --> 00:27:47,840 Speaker 1: I don't see this market as being overvalued. As walked Alma, 519 00:27:47,920 --> 00:27:52,800 Speaker 1: darn fascinating conversation. I absolutely loved it. Really appreciate you 520 00:27:52,960 --> 00:27:55,600 Speaker 1: coming on. We could talk forever, but that was great. 521 00:27:55,680 --> 00:28:09,760 Speaker 1: Thanks for joining the out launched podcast. Thank you so, Tracy. 522 00:28:10,080 --> 00:28:12,960 Speaker 1: I really enjoyed that one. I think I've mentioned on 523 00:28:13,040 --> 00:28:16,119 Speaker 1: a few episodes in the past. Um, you know that 524 00:28:16,200 --> 00:28:18,439 Speaker 1: when I first got into finance that it was actually 525 00:28:18,480 --> 00:28:22,080 Speaker 1: kind of this stuff looking at stocks by side research 526 00:28:22,160 --> 00:28:24,920 Speaker 1: on equities, And it's kind of nice just that someone 527 00:28:25,040 --> 00:28:27,080 Speaker 1: makes the case that, you know what you have, the 528 00:28:27,080 --> 00:28:30,000 Speaker 1: economy is changing. Yeah, there's all this stuff, but the 529 00:28:30,080 --> 00:28:33,200 Speaker 1: old ideas basically still apply. You just have to think 530 00:28:33,200 --> 00:28:36,160 Speaker 1: about how to correctly use them. Yeah, it is nice 531 00:28:36,200 --> 00:28:38,160 Speaker 1: to see that bit of continuity. But I have to 532 00:28:38,160 --> 00:28:40,480 Speaker 1: say I kind of I wish we could have done 533 00:28:40,480 --> 00:28:44,000 Speaker 1: the speed round for another sixty minutes or something, because 534 00:28:44,000 --> 00:28:46,600 Speaker 1: I just wanted to throw out all these companies, you know, 535 00:28:46,640 --> 00:28:50,680 Speaker 1: not just Tesla, but he could have done Bitcoin, uber, Amazon. 536 00:28:50,840 --> 00:28:53,880 Speaker 1: I would love to know his opinion on something like 537 00:28:53,920 --> 00:28:57,280 Speaker 1: Saudi Aramco, which is kind of an old company but 538 00:28:57,440 --> 00:28:59,440 Speaker 1: it's new in the sense that it's coming to the 539 00:28:59,480 --> 00:29:01,160 Speaker 1: market for the first time and we don't have a 540 00:29:01,200 --> 00:29:04,520 Speaker 1: lot of historical data about it. I just I love 541 00:29:04,600 --> 00:29:08,680 Speaker 1: to see his ideas actually translated to real life examples. Racy, 542 00:29:08,760 --> 00:29:11,840 Speaker 1: you should have him on your show on Bloomberg TV. 543 00:29:12,000 --> 00:29:15,520 Speaker 1: For a Saudia Aroundcode blog. Oh, we totally should. I'm 544 00:29:15,560 --> 00:29:17,360 Speaker 1: glad you thought of that because I would very much 545 00:29:17,400 --> 00:29:21,880 Speaker 1: like to see that that that segment. Yeah. That. In 546 00:29:21,920 --> 00:29:26,680 Speaker 1: the meantime, I recommend if you're curious about Oswald stuff, 547 00:29:26,720 --> 00:29:30,240 Speaker 1: you should check out his blog Oswave Domadaran dot blogspot 548 00:29:30,320 --> 00:29:33,760 Speaker 1: dot com. Just a great resource where he really dives 549 00:29:33,800 --> 00:29:36,840 Speaker 1: deep into this stuff and really shows his work on 550 00:29:37,240 --> 00:29:41,600 Speaker 1: all these companies that you mentioned, Amazon, test Uber, all 551 00:29:41,680 --> 00:29:45,400 Speaker 1: this coin, Bitcoin. His latest post is even about bitcoin, 552 00:29:45,560 --> 00:29:48,920 Speaker 1: So great stuff there. All right, son, we leave it there, 553 00:29:49,000 --> 00:29:52,840 Speaker 1: Let's leave it there. This has been another edition of 554 00:29:52,920 --> 00:29:55,800 Speaker 1: the Thoughts Podcast. I'm Tracy Alloway. You can follow me 555 00:29:55,880 --> 00:29:59,160 Speaker 1: on Twitter at Tracy Alloway, and I'm Joe Wisn't Thought. 556 00:29:59,160 --> 00:30:02,080 Speaker 1: You can follow me on Twitter at the Stalwart. And 557 00:30:02,160 --> 00:30:06,080 Speaker 1: you can follow Oswath on Twitter at Aswath Damodarin And 558 00:30:06,120 --> 00:30:09,720 Speaker 1: you should definitely check out his blog Musings on Markets, 559 00:30:10,040 --> 00:30:14,120 Speaker 1: And don't forget to follow our producer, Sarah Patterson at 560 00:30:14,240 --> 00:30:16,959 Speaker 1: Sarah patt with Two Teas. Thanks for listening.