Speaker 1: Hello, and welcome to another episode of the Odd Lots podcast.
Speaker 1: I'm Joe Wisenthal, and one of the things that I
Speaker 1: like about this podcast is is that we can ask
Speaker 1: the really dumb questions that you know, everyone sort of
Speaker 1: takes it for granted and we don't talk about them.
Speaker 1: But I feel like we can just ask the really
Speaker 1: simple questions of finance. I thought you were going to
Speaker 1: say you enjoy spending thirty minutes on the phone with
Speaker 1: me every week, but no, you you like asking dumb questions.
Speaker 1: I always thought that that what you said before kind
Speaker 1: of goes without saying because comes through all of our
Speaker 1: conversations that this is my favorite half an hour of
Speaker 1: the week. Because of course that's true. But you know
Speaker 1: what I'm saying, Like last week we're like we talked
Speaker 1: to a currency trader, or like how do you pick
Speaker 1: what currencies to buy ourselves? It's just like just the
Speaker 1: really basic stuff. Yeah, it's like a remedial course for
Speaker 1: people who are in the market to day in and
Speaker 1: day out. But it kind of gives us a chance
Speaker 1: to step back from the stuff that we take for granted,
Speaker 1: I guess, and actually dig into what exactly it is
Speaker 1: that we're talking about. It's kind of funny because I
Speaker 1: kind of like to think we're having a sophisticated conversation here,
Speaker 1: and yet you just described this as a remedial course. Sorry. Sorry,
Speaker 1: I think that's fair. I think like I think we
Speaker 1: can do both. Yeah, I think so. So okay, so
Speaker 1: what basic pillar of markets or finance are we going
Speaker 1: to learn about today? So today we're going to go
Speaker 1: to like the heart of investing, sort of the simplest,
Speaker 1: most basic thing that people will think about when they
Speaker 1: think about what investing is, and that is thinking about
Speaker 1: what stocks are worth. Now, Okay, so I guess this
Speaker 1: is kind of a simple topic, but it's definitely a
Speaker 1: really timely one because I'm pretty sure I just saw
Speaker 1: a headline go by about a record number of investors
Speaker 1: who think stocks are overvalued in the US market, And
Speaker 1: of course, the notion of things being overvalued, not just stocks,
Speaker 1: that's a pretty prominent theme in markets right now. It
Speaker 1: absolutely is. And of course, you know a few weeks
Speaker 1: ago that we had another episode with a pair of
Speaker 1: accounting professors talking about new ideas and stock market valuation.
Speaker 1: But like I think, when people learn about investing, they
Speaker 1: think about Warren Buffett, and they think about Benjamin Graham
Speaker 1: and dot and security analysis and reading income statements and
Speaker 1: just like trying to put a number on the stock
Speaker 1: and then looking the stock and saying, well should it
Speaker 1: go up or down from here? And that's simple. That
Speaker 1: simplicity there is, you know, just incredibly important thing. But
Speaker 1: we don't. But how do you do it? I don't,
Speaker 1: you know. I don't think most people really know how
Speaker 1: to even go about the process. No. I guess we
Speaker 1: throw around words like pe ratios and forward earnings and
Speaker 1: things like that. But let's dig into it a little
Speaker 1: bit more. So, who do we have so we have
Speaker 1: the best possible guest for the subject. He is considered
Speaker 1: to be the foremost expert on the subject of valuing stocks.
Speaker 1: He is Oswath Damodarin, a professor at the Stern School
Speaker 1: of Business at New York University. He teaches about the
Speaker 1: topics of corporate finance and equity valuation. He runs a
Speaker 1: great blog where he discusses how he values certain companies.
Speaker 1: He's come on TV on Bloomberg TV several times to
Speaker 1: discuss it. So Professor Damodarin, thank you very much for
Speaker 1: joining the Odd Loaves podcast. Thank you, Joe. I Before
Speaker 1: I start, I'm going to bash a few few groups
Speaker 1: that I always start to bash with. Soles. Don't ask
Speaker 1: the contents about value. I mean, I think it's the
Speaker 1: wrong group to ask, because realistically, I think accountants that
Speaker 1: the job to do invaluation is not one of those jobs. Second,
Speaker 1: anybody tells you there's something new, evaluation is lying. Everything
Speaker 1: invaluation is old and tested. Now it's all old wine
Speaker 1: in a new bottle. Third, and I think this is
Speaker 1: this will set the table for the entire discussion. Value
Speaker 1: and price are two different things. You can either value
Speaker 1: a stock or you can price the stock. Tracy mentioned
Speaker 1: price earnings ratios and forward earnings. That's a classic analyst technique.
Speaker 1: It's for pricing a stock. And here's the contrast. The
Speaker 1: price of the stock is determined by demand and supply,
Speaker 1: mood and momentum. And so when you use price earnings
Speaker 1: ratios and comparable firms and future earnings, you're pricing a company.
Speaker 1: To value a company, you've got to go back to basics.
Speaker 1: The value of company is built on three pillars. It's
Speaker 1: cash flows, it's growth, and its risk. We can dance
Speaker 1: around those three as much as we want, But those
Speaker 1: are the three driving forces that drive the value of
Speaker 1: a company. I love that how you just came out
Speaker 1: swinging at the top of our podcast. I think that's
Speaker 1: a very auspicious start. Start by bashing two of our
Speaker 1: previous guests. Start by bashing some of the way we
Speaker 1: talked about this. So now I'm very exciting about the conversation.
Speaker 1: So let's get right into it. When we talk about
Speaker 1: valuing a stock, how do you begin? You know, what
Speaker 1: do you tell your students on day one of classes
Speaker 1: about what they need to understand about this process. I
Speaker 1: take them back about seventy years and I talked about
Speaker 1: people buying stock seventy years ago, bought them for a
Speaker 1: cash for the cash flow is the dividend. Companies were
Speaker 1: mature companies, They paid out what they could afford to individends,
Speaker 1: and you essentially said, what I'm paying for stock is
Speaker 1: the present value of those dividends. That present value term
Speaker 1: might sound like a fancy tumb but what he's saying
Speaker 1: is dividends in the future have to be brought back
Speaker 1: to the president. To bring them back to the president,
Speaker 1: you've got a factor in two things. One is what
Speaker 1: can I make elsewhere with my money? Now what what
Speaker 1: our interest rates at? Where can I invest money? And
Speaker 1: the other is how much risk is there in that dividend.
Speaker 1: In a sense, it's good to start with a very
Speaker 1: simple dividend discount model because it it mores your entire analysis.
Speaker 1: It says, let's not get fancy. Ultimately, you buy stocks
Speaker 1: for the cash flow, and if the only cash flow
Speaker 1: you're going to get as a dividend, what you pay
Speaker 1: for a stock is the present value of those dividends.
Speaker 1: So think of that as the Ben Graham, the old
Speaker 1: value investing ideology would says, buy stocks with big and
Speaker 1: stable dividends, they're worth more than stocks that don't pay dividends.
Speaker 1: Do you think that purpose is still relevant, because nowadays,
Speaker 1: you know, the notion of buying stocks for dividends for
Speaker 1: a lot of people is going to sound almost coint
Speaker 1: like a lot of people are buying stocks just to
Speaker 1: see the appreciation in value in the market and then
Speaker 1: just sell them onwards at a later day. Three things
Speaker 1: have changed. One is, in the nineteen thirties, nineteen forties,
Speaker 1: even into the nineteen fifties, when you look at companies
Speaker 1: that were listed in the stock market, they tended to
Speaker 1: be mature companies. If you're a growth company, you stayed
Speaker 1: private and you were funded by venture capitalists, still very
Speaker 1: late in the process. The second is companies that had
Speaker 1: excess cash flows, cash flows that they did not have
Speaker 1: used for paid them out as dividends. There were no
Speaker 1: stock buybacks, so essentially dividends were the only way game
Speaker 1: in town. And the third investors in a sense, we're
Speaker 1: buying stocks for the long term. They were buying stocks
Speaker 1: to hold them for the next ten, fifteen, twenty five years.
Speaker 1: In fact, many of them have had no had no
Speaker 1: intention of even selling these stocks. They were holding them
Speaker 1: for the dividends. The world has changed today. Look at
Speaker 1: the market and you look at the top ten stocks,
Speaker 1: maybe seven eight are growth companies, not mature companies. And
Speaker 1: in fact, many companies are entering the market at stages
Speaker 1: they would never even have thought about entering the market
Speaker 1: even twenty five years ago. You take a couple like Snap,
Speaker 1: it's a startup. Pretty much it will been a company
Speaker 1: that will been invested in by venture capitalists for another
Speaker 1: five or six years before it was ready for the market.
Speaker 1: So the composition of the market has changed. So if
Speaker 1: you're trying to value a company like Facebook with dividends.
Speaker 1: Here's the problem'm gonna run into. The first is the company,
Speaker 1: even if it can afford to pay dividends, doesn't pay dividends.
Speaker 1: It accumulates the cash. Second, when it does decide to
Speaker 1: return to cash, it turn cash in the form of
Speaker 1: stock buy backs. So increasingly what we've had to move
Speaker 1: away from is not that we still want to you know,
Speaker 1: we still want cash flows, but the way we're getting
Speaker 1: the cash flows now are different. They take the form
Speaker 1: of buy backs more often than dividends, and you might
Speaker 1: have to wait to get your cash flows if you're
Speaker 1: buying a young growth company. So it's not that the
Speaker 1: focus of what we're doing changes, but the kinds of
Speaker 1: markets and companies were trying to value has become very different. So,
Speaker 1: you know, obviously in the beginning you said, anyone who
Speaker 1: tells you that there's something new in the world invaluation
Speaker 1: is lying. But of course, as you've just said, the
Speaker 1: nature of the companies has changed such that you know,
Speaker 1: strict dividend and LSS or even strict buy back analysis
Speaker 1: isn't going to be the right frame because they're not
Speaker 1: in that business right now. Is the idea then that
Speaker 1: you sort of reject forward what they could theoretically pay
Speaker 1: back in dividends or could theoretically do in buy backs
Speaker 1: or sort of how do you take this sort of
Speaker 1: Graham and Dot approach that everybody knows and apply it
Speaker 1: to a Facebook or a Snap you nailed down valuation.
Speaker 1: That's exactly what you do. Instead of taking the actual dividends,
Speaker 1: you try to estimate potential dividends. Sounds fancy, but if
Speaker 1: you run a business, think of the cash that you
Speaker 1: can take out of the business. The cash left over
Speaker 1: after you've met every conceivable need, which includes what you
Speaker 1: put in for future growth and you pay taxes. If
Speaker 1: there's any cash left in the till and you're the
Speaker 1: business owner, you can take it out of the business.
Speaker 1: That is your potential dividend. And it's easy to estimate
Speaker 1: that for a company because if you look at the
Speaker 1: statement of cash flows for a company, they tell you
Speaker 1: what they're putting back into the business. They tell you
Speaker 1: what they're using to make debt payments. So you can
Speaker 1: actually take a Facebook and estimate how much they could
Speaker 1: have paid in dividends last year. The that then becomes
Speaker 1: your basis. So It's essentially what we're doing is instead
Speaker 1: of using the actual dividends to value the stock, we're
Speaker 1: using potential dividends. That's really the innovation of the last
Speaker 1: seven years, if we can even call it that, because
Speaker 1: the rest of the process stays the same. You make
Speaker 1: it sound really easy, but you know, estimating um future
Speaker 1: cash flow versus cash needs, there are all sorts of
Speaker 1: things that must go into that forecast, right, So for
Speaker 1: for instance, do you attempt to assign probabilities to certain scenarios.
Speaker 1: Do you worry about one off, you know, sort of
Speaker 1: tail risk events. What are you actually looking at when
Speaker 1: you do that? The first thing to do in valuation
Speaker 1: is to adopt what I call the karmic post. The
Speaker 1: karmic post is basically, there are lots of things you
Speaker 1: don't control, so stop worrying about them. You're valuing an
Speaker 1: oil company. The oil press could change tomorrow. You could
Speaker 1: have a crisis in the Middle East. Those are things
Speaker 1: you You can worry about them, but there's nothing you
Speaker 1: can do about them. What you have to do is
Speaker 1: take the information you have and make your best estimates,
Speaker 1: and sometimes that requires using statistics, probabity distributions, you're having
Speaker 1: a bio technology company with a blockbuster drug working its
Speaker 1: way through the pipeline. You might not like to do it,
Speaker 1: but you have to assess a probability that that drug
Speaker 1: will make it through the pipeline. The process is easy,
Speaker 1: but estimation can be difficult for some companies. You asked
Speaker 1: me to value Snap, I'm making judgments based on very
Speaker 1: little historical data. And that's really the big difference when
Speaker 1: you have to value growth companies. It's not that the
Speaker 1: process is different, but we have a fewer crutches because
Speaker 1: when you have a lot of historical data that you
Speaker 1: can project off, you feel better. Even if you if
Speaker 1: that that that is completely misplaced, you just feel more comfortable.
Speaker 1: What you have is an absence of comfort. And for
Speaker 1: people valuing, especially the kinds of companies that are increasingly
Speaker 1: entering the market, you've got learned to live with being
Speaker 1: uncomfortable with making a as and it's in being hopelessly
Speaker 1: wrong and saying, you know what, that wasn't my fault.
Speaker 1: It really wasn't your fault. If you did not forecast
Speaker 1: cloud computing coming coming out of nowhere and essentially becoming
Speaker 1: a big part of Amazon's business, you can only estimate
Speaker 1: what you can, and then when you're done, you've got
Speaker 1: to step back and say, I've done what I can.
Speaker 1: I valued the company. I could be very wrong, but
Speaker 1: this is my best estimate of value. You know, in
Speaker 1: addition to the fact that you don't have a lot
Speaker 1: of historical data on these companies we live, it feels
Speaker 1: like we live in an age of novel business models.
Speaker 1: So I imagine that if you sort of value you know,
Speaker 1: if we were in the nineteen eighties and you wanted
Speaker 1: to value shares of the New York Times, that the
Speaker 1: business model of the New York Times was not that
Speaker 1: different from the business model of newspapers, you know, going
Speaker 1: back for decades before that. But you know, take a
Speaker 1: look at Snap today. You know you could is this
Speaker 1: a media company? Is a tech company? Is it a
Speaker 1: camera company? Is an apps company? You know, it seems
Speaker 1: how does that? Is it true that you're coming across
Speaker 1: more business models that don't have good historical analogs, And
Speaker 1: if so, how does that complicate the task of valuing
Speaker 1: a company. I'll give you an example of what I
Speaker 1: think is shift the most in business as I see it,
Speaker 1: when I look at companies like Facebook, and snap. What
Speaker 1: I see on what I called user based models, which
Speaker 1: is if you look at what they boast about the
Speaker 1: most is the number of users, the number of subscribers.
Speaker 1: I mean, take a look at Netflix's last annual report
Speaker 1: and look at how much they emphasize the number of
Speaker 1: subscribers going up. We've increasingly shifted from a top down
Speaker 1: approach where companies boast about their overall revenues growing, to
Speaker 1: a bottom up approach where they boast about how many
Speaker 1: customers users they have. And it's not just new companies.
Speaker 1: If you look at Microsoft in Adobe, the way they
Speaker 1: used to grow ten years ago, twenty years ago is
Speaker 1: they used to update their software and try to sell
Speaker 1: them more. Today, look at Microsoft Adobe, their crown jewels
Speaker 1: are actually their subscription based models. Offers three sixty Microsoft
Speaker 1: and Creative crowd for Adobe. Adobe, in fact doesn't even
Speaker 1: sell it software in regular channels anymore. So increasingly I've
Speaker 1: tried to think about what the value of a user is,
Speaker 1: value of a subscriber, and you know what, the basics
Speaker 1: of valuations still work. Tomorrow. Actually, I'm going to deliver
Speaker 1: the keynote speech at the c f A conference where
Speaker 1: I'm going to value a noble user. I'm going to
Speaker 1: value an Amazon Prime member, and I'm going to value
Speaker 1: Netflix subscriber because to me, that's become the way I
Speaker 1: think about the values of the companies is they essentially
Speaker 1: are trying to pump up their values of users, subscribers, members,
Speaker 1: and that then multiplies by a hundred million, in the
Speaker 1: case of Facebook one point seven billion, You've got these
Speaker 1: astronomically high values. So to me, that is that's one
Speaker 1: thing that shifted in the way I think about companies
Speaker 1: because rather than start with revenues and work down to
Speaker 1: cash flows the way I've always approached valuation with these
Speaker 1: companies have increasingly started thinking about those unit based valuations.
Speaker 1: And here's the problem. Right into the information you need
Speaker 1: to value a user is not being made available to
Speaker 1: us by the companies that boast about how many users
Speaker 1: they have if I were writing information disclosure laws. This
Speaker 1: is something that I think needs to be fixed as
Speaker 1: these companies increasingly shift to user based models. So I'd
Speaker 1: like to know what the renewal rates are, and much
Speaker 1: more specificity than they reveal it now. I'd like to
Speaker 1: know what the distribution is of revenues across users to
Speaker 1: ten percent of ooper users account for ninety percent of
Speaker 1: its revenues. That's the kind of information that companies have
Speaker 1: that they're not sharing with us. And if they're going
Speaker 1: to ask us to invest in them because they have
Speaker 1: tens of millions of users, it's their obligation, I think,
Speaker 1: and to provide the information that will allow us to
Speaker 1: value them better. But I have a potentially slightly weird question.
Speaker 1: But we're talking about a lot of high growth stocks,
Speaker 1: which you could also call story stocks, right, Like if
Speaker 1: you buy in to Tesla or Uber, you buy into
Speaker 1: this idea that both those companies are going to be
Speaker 1: revolutionary in various ways for the transport industry. When you
Speaker 1: attempt to value a company nowadays, do you give any
Speaker 1: credence to that sort of narrative? Do you buy into
Speaker 1: some of that hype um and you know, some of
Speaker 1: that hype It sounds silly, but we do see that reflected,
Speaker 1: you know, in intangible assets like brand value and things
Speaker 1: like that. So I'm just curious if you factor any
Speaker 1: of that in every valuation tells a story, right, I mean,
Speaker 1: any analysts who puts up a spreadsheet and says, this
Speaker 1: is my value for a company whether he likes it
Speaker 1: or not, is actually telling a story about a company.
Speaker 1: I'm a firm leaver that every good valuation is a
Speaker 1: story behind it. The question you're asking is a different one.
Speaker 1: Does that story you have to be the story that
Speaker 1: manages in the company of pushing for the company, And
Speaker 1: the answer is absolutely not. If you're an investor, you
Speaker 1: have to take ownership of your own story, which means
Speaker 1: you can listen to Elon Musk. You can admire Elon Musk,
Speaker 1: you can listen to his story about Tesla, but if
Speaker 1: you're valuing Tesla, you better have your own story about Tesla.
Speaker 1: So that's true every there is, These are stories, talks,
Speaker 1: but ultimately every company is a story. The g story
Speaker 1: is just a horror story right now. So basically, some
Speaker 1: stories are fun stories, some stories are uplifting stories. Some
Speaker 1: stories are not so in a sense, sometimes you have
Speaker 1: to look at the story, but then you've got to
Speaker 1: make that story your own and then convert that story
Speaker 1: into numbers and valuation. In fact, that's my latest book.
Speaker 1: It's called Narrative and Numbers, about how to both connect
Speaker 1: storage to numbers and how to detect when a story
Speaker 1: is not going to hold up because I see a
Speaker 1: lot of impossible stories being told, sometimes by CEOs of companies,
Speaker 1: are implausible stories, and my job is to say that's
Speaker 1: not going to work, that violates the laws of economics,
Speaker 1: and then adapt the story to make it my story
Speaker 1: and my valuation. I love that. I want to get
Speaker 1: to like a little speed round where we talk about
Speaker 1: some of these stories and Tesla and g E and
Speaker 1: Uber real quickly. But before we do, I have one
Speaker 1: last question, just sort of on a framework. At the
Speaker 1: very beginning, you talked about the importance of distinguishing between
Speaker 1: valuation and price, and price being a function of supply
Speaker 1: and demand. So how do you then as an investor,
Speaker 1: because ultimately what people want to do is pick stocks
Speaker 1: that are going to make them money. How do you
Speaker 1: sort of once you establish the valuation, then think about
Speaker 1: entering the market given various pricing factors. So first you've
Speaker 1: got to decide whether you want to be an investor
Speaker 1: or a trader. And this is my distinction. Investors buy
Speaker 1: stocks for less than the value that they adact to
Speaker 1: the stocks, and then they hope and pray that the
Speaker 1: price suggests to value. So investing requires faith, faith in
Speaker 1: your own valuation and faith that markets will correct that value.
Speaker 1: And you know what, most people don't have faith. And
Speaker 1: if you don't have faith, you can try to be
Speaker 1: an investor, but you're not going to hang in there.
Speaker 1: You're going to give up. So I tell people be realistic.
Speaker 1: If you have no faith in value, even though you
Speaker 1: might know how to mechanically how to value a company,
Speaker 1: you're not going to be able to invest. You're going
Speaker 1: to be a trader. And you're going to be a trader,
Speaker 1: might as well be honest about the fact that in trading,
Speaker 1: the game is to buy the low price sell at
Speaker 1: a high price. Why the price goes up is none
Speaker 1: of your business. You really don't even care. It's not
Speaker 1: an intellectual exercise. It's a money making exerciss So the
Speaker 1: first decision you've got to make is do you have
Speaker 1: enough faith to be an investor. If you do have faith,
Speaker 1: then here's what you need to do. Need to value
Speaker 1: companies and hopefully the value is higher than the price.
Speaker 1: And then you have to look for a catalyst, something
Speaker 1: that will cause the price to move to value. Because
Speaker 1: you can be right about value and go bankrupt being right.
Speaker 1: I mean, you've got the old saying the market can
Speaker 1: be rational longer than you can be liquid, so in
Speaker 1: a sense or solving, so, I think you have to
Speaker 1: when you look, when you look at an undervalued company,
Speaker 1: a company with the price is less than value, looking
Speaker 1: for some kind of catalyst. That catalyst might be a
Speaker 1: management changed, It might be an activist investor stepping in.
Speaker 1: It might be it might even be there, you know,
Speaker 1: it might even be something small, a competitor trying to
Speaker 1: essentially take over the company. But you're trying to look
Speaker 1: for something that will caused the market to shake up.
Speaker 1: Because there is nothing that shakes up the market. Nothing's
Speaker 1: going to change, and that effectively is one of the
Speaker 1: most frustrating things about being an investor is you can
Speaker 1: value a company, feel very convinced that you've got the
Speaker 1: right value, and see the price go in the opposite direction,
Speaker 1: not just for days, not just for weeks, but for years.
Speaker 1: And you've got to be okay with it. You've got
Speaker 1: to be if you get frustrated and you get angry
Speaker 1: about the fact that the market is not doing the
Speaker 1: right thing, then you set yourself up to do really
Speaker 1: stupid things. Okay, okay, speed round. Let's start with shall
Speaker 1: we do g E because this kind of gets some
Speaker 1: of the shake up stuff that you're talking about. So
Speaker 1: when you see a sharp repricing in the company's um
Speaker 1: market value, what you think, Well, the first thing I
Speaker 1: think is the story change. Sometimes the repricing comes about
Speaker 1: because people were buying into an unrealistic story before and
Speaker 1: some things kicked them in the face saying that story
Speaker 1: is not going to happen. The classic example is you
Speaker 1: buy a stock with with with with what you think
Speaker 1: is a high growth three. You give it a price
Speaker 1: on its ratio of thirty five. The learnings report comes
Speaker 1: out with the revenues are flat, and the company comes
Speaker 1: up with all kinds of excuses, but it's very clear
Speaker 1: that revenues and not growing. That's the world kicking you
Speaker 1: in the face. Thing you thought about a growth stop
Speaker 1: now readthing. So the first thing that happens we reprice
Speaker 1: thing is the story could have changed. The story changes,
Speaker 1: then your value has to change. So it's not that
Speaker 1: the market is making a mistake before, is that that
Speaker 1: the value is reflecting a different story. The second is
Speaker 1: when you have a pure pricing stock and there are
Speaker 1: lots of companies there where there are no investors in
Speaker 1: that market, it's all traders buying and selling from each other.
Speaker 1: It's based on mood and momentum, and momentum and mood
Speaker 1: can shift in a moment. Look at how quickly bitcoin
Speaker 1: goes from being you know seven, now everything is great
Speaker 1: to everything's awful. That's the nature of pure pricing stocks.
Speaker 1: And there are some stocks out that there are pure
Speaker 1: pricing stocks. As a value investors, an investor cares about value,
Speaker 1: I avoid those stocks like the Play because things happen
Speaker 1: on those docks, and there's really no good reason why
Speaker 1: it happens. Is the mood shifted. So sometimes we try
Speaker 1: to attach really strong economic reasons to things, but use
Speaker 1: there are no good reasons, and sometimes it's better to
Speaker 1: look and said, thank god, I wasn't in that stock
Speaker 1: when that happened. So Tracy asked about Ge, So what
Speaker 1: is your thirty second take on what on the story there? Well? Gee,
Speaker 1: as a problem, it's an old I mean, this is
Speaker 1: one of my favorite devices in my classes is to
Speaker 1: call it is to talk about what's called the corporate
Speaker 1: life cycle, the corporate life cycle of startups that became
Speaker 1: teenage companies think oh, but then growth companies the peak
Speaker 1: of your life and become mature companies, and then you
Speaker 1: go into decline. G has been a company and decline
Speaker 1: now for fifteen years. The prompt GY is it's an
Speaker 1: old company with lots of old businesses. There is no
Speaker 1: good story you can tell that will allow you to
Speaker 1: come out of this as a growth company. The best
Speaker 1: they can hope for is that they don't become decrepit.
Speaker 1: So in a sense, I would not envy the top
Speaker 1: management of Genie right now. They're trying to get rid
Speaker 1: of old businesses which others are not going to pay
Speaker 1: a high price for. They're trying to kind of set
Speaker 1: up investors to accept the fact that this is the
Speaker 1: way it's going to be, that things are not going
Speaker 1: to change. So they're doing the right thing in a
Speaker 1: sense by being open about it. But that doesn't mean
Speaker 1: it's going to be any less painful. Now. Growing old
Speaker 1: is hard to do, and watching G you realize how
Speaker 1: how difficult it is for a company that was an
Speaker 1: American institution to accept that, you know what, the best
Speaker 1: days away behind them, and now it's a question of
Speaker 1: winding down. I mean I only half jokingly say that
Speaker 1: you know the right CEO for a company depends on
Speaker 1: where it is in the life cycle. If you're a startup,
Speaker 1: it's got to be Steve the visionary who's running you.
Speaker 1: But if you're a declining company, you need Larry the liquidator.
Speaker 1: So maybe Danny DeVito might want to come and play
Speaker 1: one last role here, g very bleak. All right, real quickly.
Speaker 1: Tesla one of the most controversial stocks in the world
Speaker 1: right now, how do you think about that one? You
Speaker 1: know what I said? I remember I said that every
Speaker 1: company is driven by the story that that you see
Speaker 1: in the company. The promin test lavel is you know, Musk.
Speaker 1: The advantage in Tesla is Elon Muks, this guy. I
Speaker 1: mean when companies wish for a visionary CEO, their visions
Speaker 1: of Elon Musk, because this guy is not just visionary,
Speaker 1: he's over visionary. And what I mean by that is
Speaker 1: every day he wakes up with a bigger vision. And
Speaker 1: sometimes you've got to stop and say, you know, slow
Speaker 1: down now. I think that my real Concernaty is not
Speaker 1: that they're not I think they're an incredible company. And
Speaker 1: if you've talked to anybody with a Tesla, you know
Speaker 1: that they love their cards. Then this is this is
Speaker 1: a company that as super oil customers. My problem Tesla
Speaker 1: is that they have a supply chain problem. They have
Speaker 1: a problem of execution. They've always had an execution problems.
Speaker 1: You can go back and look at every quarters earnings
Speaker 1: announcements of Tesla and the court and it's almost like
Speaker 1: reading the same script over and over again. Promised to
Speaker 1: deliver forty cards, deliver thirty two, promised to deliver a
Speaker 1: sixty deliver at But as long as they were a
Speaker 1: small company with lots of potential, people overlooked that execution problem.
Speaker 1: I think we're approaching a serious moment for Tesla now
Speaker 1: because the middle I think with June of two thousand
Speaker 1: and eighteen, they've promised to deliver about half a million
Speaker 1: Tesla threes. This is a big moment and they need
Speaker 1: to get their execution done. And my concern is that
Speaker 1: that this is a problem from the top down. It's
Speaker 1: not an execution problem, that's just the factory floor. It
Speaker 1: comes from the fact that Elon Musk is not that
Speaker 1: interested in supply chains and inventory and assembly lines. He's
Speaker 1: much more interested in making a big vision and telling
Speaker 1: a story. What he what he needs is what Steve
Speaker 1: Jobs had in his second round as a visionary CEO.
Speaker 1: The first round he almost destroyed Apple. In his second round,
Speaker 1: he had Tim Cook at his side. What Elon Musk
Speaker 1: needs is his own Tim Cook, a chief operating officer
Speaker 1: who makes the trains round on time, who gets the
Speaker 1: supply chain going. Because I think of tests, I can
Speaker 1: get its execution problems behind it. I think I I
Speaker 1: don't have a problem with the value that's attached the company,
Speaker 1: but with those execution problems, I wouldn't pay the price
Speaker 1: that they're paying for Tesla right now. Okay, this is
Speaker 1: the important one. The entire stock market. Is it over
Speaker 1: valued given where risk free rates are right now? No,
Speaker 1: I didn't think it's over value. But you're one leg
Speaker 1: of that table falling off before the whole thing collapses.
Speaker 1: So earnings protest to stay high, the tax reform package
Speaker 1: has to pass, and interest rates have to still stay low.
Speaker 1: And if you can keep that that trifecta going, then
Speaker 1: I don't see this market as being overvalued. As walked Alma,
Speaker 1: darn fascinating conversation. I absolutely loved it. Really appreciate you
Speaker 1: coming on. We could talk forever, but that was great.
Speaker 1: Thanks for joining the out launched podcast. Thank you so, Tracy.
Speaker 1: I really enjoyed that one. I think I've mentioned on
Speaker 1: a few episodes in the past. Um, you know that
Speaker 1: when I first got into finance that it was actually
Speaker 1: kind of this stuff looking at stocks by side research
Speaker 1: on equities, And it's kind of nice just that someone
Speaker 1: makes the case that, you know what you have, the
Speaker 1: economy is changing. Yeah, there's all this stuff, but the
Speaker 1: old ideas basically still apply. You just have to think
Speaker 1: about how to correctly use them. Yeah, it is nice
Speaker 1: to see that bit of continuity. But I have to
Speaker 1: say I kind of I wish we could have done
Speaker 1: the speed round for another sixty minutes or something, because
Speaker 1: I just wanted to throw out all these companies, you know,
Speaker 1: not just Tesla, but he could have done Bitcoin, uber, Amazon.
Speaker 1: I would love to know his opinion on something like
Speaker 1: Saudi Aramco, which is kind of an old company but
Speaker 1: it's new in the sense that it's coming to the
Speaker 1: market for the first time and we don't have a
Speaker 1: lot of historical data about it. I just I love
Speaker 1: to see his ideas actually translated to real life examples. Racy,
Speaker 1: you should have him on your show on Bloomberg TV.
Speaker 1: For a Saudia Aroundcode blog. Oh, we totally should. I'm
Speaker 1: glad you thought of that because I would very much
Speaker 1: like to see that that that segment. Yeah. That. In
Speaker 1: the meantime, I recommend if you're curious about Oswald stuff,
Speaker 1: you should check out his blog Oswave Domadaran dot blogspot
Speaker 1: dot com. Just a great resource where he really dives
Speaker 1: deep into this stuff and really shows his work on
Speaker 1: all these companies that you mentioned, Amazon, test Uber, all
Speaker 1: this coin, Bitcoin. His latest post is even about bitcoin,
Speaker 1: So great stuff there. All right, son, we leave it there,
Speaker 1: Let's leave it there. This has been another edition of
Speaker 1: the Thoughts Podcast. I'm Tracy Alloway. You can follow me
Speaker 1: on Twitter at Tracy Alloway, and I'm Joe Wisn't Thought.
Speaker 1: You can follow me on Twitter at the Stalwart. And
Speaker 1: you can follow Oswath on Twitter at Aswath Damodarin And
Speaker 1: you should definitely check out his blog Musings on Markets,
Speaker 1: And don't forget to follow our producer, Sarah Patterson at
Speaker 1: Sarah patt with Two Teas. Thanks for listening.