WEBVTT - The World's Foremost Expert Explains How To Value Stock 0:00:08.840 --> 0:00:12.959 Hello, and welcome to another episode of the Odd Lots podcast. 0:00:13.080 --> 0:00:17.000 I'm Joe Wisenthal, and one of the things that I 0:00:17.040 --> 0:00:20.520 like about this podcast is is that we can ask 0:00:20.960 --> 0:00:23.599 the really dumb questions that you know, everyone sort of 0:00:23.640 --> 0:00:26.079 takes it for granted and we don't talk about them. 0:00:26.120 --> 0:00:28.280 But I feel like we can just ask the really 0:00:28.400 --> 0:00:31.040 simple questions of finance. I thought you were going to 0:00:31.120 --> 0:00:34.320 say you enjoy spending thirty minutes on the phone with 0:00:34.360 --> 0:00:37.760 me every week, but no, you you like asking dumb questions. 0:00:38.920 --> 0:00:41.080 I always thought that that what you said before kind 0:00:41.080 --> 0:00:44.879 of goes without saying because comes through all of our 0:00:44.880 --> 0:00:47.760 conversations that this is my favorite half an hour of 0:00:47.800 --> 0:00:50.040 the week. Because of course that's true. But you know 0:00:50.080 --> 0:00:52.600 what I'm saying, Like last week we're like we talked 0:00:52.640 --> 0:00:54.680 to a currency trader, or like how do you pick 0:00:54.720 --> 0:00:56.880 what currencies to buy ourselves? It's just like just the 0:00:57.000 --> 0:01:00.160 really basic stuff. Yeah, it's like a remedial course for 0:01:00.200 --> 0:01:02.880 people who are in the market to day in and 0:01:03.000 --> 0:01:06.080 day out. But it kind of gives us a chance 0:01:06.160 --> 0:01:09.120 to step back from the stuff that we take for granted, 0:01:09.280 --> 0:01:12.280 I guess, and actually dig into what exactly it is 0:01:12.319 --> 0:01:14.480 that we're talking about. It's kind of funny because I 0:01:14.560 --> 0:01:17.640 kind of like to think we're having a sophisticated conversation here, 0:01:18.120 --> 0:01:21.759 and yet you just described this as a remedial course. Sorry. Sorry, 0:01:22.360 --> 0:01:24.160 I think that's fair. I think like I think we 0:01:24.160 --> 0:01:26.679 can do both. Yeah, I think so. So okay, so 0:01:26.920 --> 0:01:30.480 what basic pillar of markets or finance are we going 0:01:30.520 --> 0:01:34.200 to learn about today? So today we're going to go 0:01:34.360 --> 0:01:38.560 to like the heart of investing, sort of the simplest, 0:01:38.640 --> 0:01:42.760 most basic thing that people will think about when they 0:01:42.800 --> 0:01:45.479 think about what investing is, and that is thinking about 0:01:45.720 --> 0:01:50.160 what stocks are worth. Now, Okay, so I guess this 0:01:50.360 --> 0:01:54.880 is kind of a simple topic, but it's definitely a 0:01:54.960 --> 0:01:57.440 really timely one because I'm pretty sure I just saw 0:01:57.520 --> 0:02:02.240 a headline go by about a record number of investors 0:02:02.240 --> 0:02:05.640 who think stocks are overvalued in the US market, And 0:02:05.680 --> 0:02:10.000 of course, the notion of things being overvalued, not just stocks, 0:02:10.120 --> 0:02:14.720 that's a pretty prominent theme in markets right now. It 0:02:14.800 --> 0:02:16.800 absolutely is. And of course, you know a few weeks 0:02:16.840 --> 0:02:19.480 ago that we had another episode with a pair of 0:02:19.520 --> 0:02:24.600 accounting professors talking about new ideas and stock market valuation. 0:02:24.960 --> 0:02:27.080 But like I think, when people learn about investing, they 0:02:27.120 --> 0:02:30.600 think about Warren Buffett, and they think about Benjamin Graham 0:02:30.600 --> 0:02:34.200 and dot and security analysis and reading income statements and 0:02:34.280 --> 0:02:36.680 just like trying to put a number on the stock 0:02:36.880 --> 0:02:38.760 and then looking the stock and saying, well should it 0:02:38.840 --> 0:02:41.320 go up or down from here? And that's simple. That 0:02:41.440 --> 0:02:46.000 simplicity there is, you know, just incredibly important thing. But 0:02:46.160 --> 0:02:47.799 we don't. But how do you do it? I don't, 0:02:48.160 --> 0:02:50.079 you know. I don't think most people really know how 0:02:50.080 --> 0:02:52.079 to even go about the process. No. I guess we 0:02:52.200 --> 0:02:55.760 throw around words like pe ratios and forward earnings and 0:02:55.800 --> 0:02:58.200 things like that. But let's dig into it a little 0:02:58.200 --> 0:03:00.400 bit more. So, who do we have so we have 0:03:00.800 --> 0:03:04.480 the best possible guest for the subject. He is considered 0:03:04.520 --> 0:03:08.160 to be the foremost expert on the subject of valuing stocks. 0:03:08.480 --> 0:03:11.840 He is Oswath Damodarin, a professor at the Stern School 0:03:11.840 --> 0:03:16.120 of Business at New York University. He teaches about the 0:03:16.160 --> 0:03:20.040 topics of corporate finance and equity valuation. He runs a 0:03:20.120 --> 0:03:24.840 great blog where he discusses how he values certain companies. 0:03:24.880 --> 0:03:27.920 He's come on TV on Bloomberg TV several times to 0:03:27.960 --> 0:03:31.480 discuss it. So Professor Damodarin, thank you very much for 0:03:31.560 --> 0:03:35.080 joining the Odd Loaves podcast. Thank you, Joe. I Before 0:03:35.120 --> 0:03:37.680 I start, I'm going to bash a few few groups 0:03:37.680 --> 0:03:41.360 that I always start to bash with. Soles. Don't ask 0:03:41.360 --> 0:03:43.360 the contents about value. I mean, I think it's the 0:03:43.360 --> 0:03:47.400 wrong group to ask, because realistically, I think accountants that 0:03:47.520 --> 0:03:51.360 the job to do invaluation is not one of those jobs. Second, 0:03:51.760 --> 0:03:54.920 anybody tells you there's something new, evaluation is lying. Everything 0:03:54.960 --> 0:03:59.080 invaluation is old and tested. Now it's all old wine 0:03:59.080 --> 0:04:01.920 in a new bottle. Third, and I think this is 0:04:02.000 --> 0:04:05.520 this will set the table for the entire discussion. Value 0:04:05.640 --> 0:04:08.320 and price are two different things. You can either value 0:04:08.360 --> 0:04:11.400 a stock or you can price the stock. Tracy mentioned 0:04:11.440 --> 0:04:16.080 price earnings ratios and forward earnings. That's a classic analyst technique. 0:04:16.080 --> 0:04:19.719 It's for pricing a stock. And here's the contrast. The 0:04:19.760 --> 0:04:22.200 price of the stock is determined by demand and supply, 0:04:22.360 --> 0:04:24.960 mood and momentum. And so when you use price earnings 0:04:25.040 --> 0:04:29.320 ratios and comparable firms and future earnings, you're pricing a company. 0:04:29.640 --> 0:04:31.880 To value a company, you've got to go back to basics. 0:04:32.400 --> 0:04:35.240 The value of company is built on three pillars. It's 0:04:35.279 --> 0:04:37.680 cash flows, it's growth, and its risk. We can dance 0:04:37.720 --> 0:04:40.520 around those three as much as we want, But those 0:04:40.560 --> 0:04:43.480 are the three driving forces that drive the value of 0:04:43.480 --> 0:04:47.320 a company. I love that how you just came out 0:04:47.400 --> 0:04:49.880 swinging at the top of our podcast. I think that's 0:04:49.920 --> 0:04:54.240 a very auspicious start. Start by bashing two of our 0:04:54.279 --> 0:04:57.840 previous guests. Start by bashing some of the way we 0:04:57.920 --> 0:05:01.360 talked about this. So now I'm very exciting about the conversation. 0:05:01.920 --> 0:05:05.159 So let's get right into it. When we talk about 0:05:05.400 --> 0:05:08.200 valuing a stock, how do you begin? You know, what 0:05:08.240 --> 0:05:11.320 do you tell your students on day one of classes 0:05:11.760 --> 0:05:14.839 about what they need to understand about this process. I 0:05:14.960 --> 0:05:17.479 take them back about seventy years and I talked about 0:05:17.480 --> 0:05:20.200 people buying stock seventy years ago, bought them for a 0:05:20.200 --> 0:05:23.080 cash for the cash flow is the dividend. Companies were 0:05:23.120 --> 0:05:26.240 mature companies, They paid out what they could afford to individends, 0:05:26.680 --> 0:05:29.120 and you essentially said, what I'm paying for stock is 0:05:29.120 --> 0:05:32.400 the present value of those dividends. That present value term 0:05:32.520 --> 0:05:34.440 might sound like a fancy tumb but what he's saying 0:05:34.560 --> 0:05:36.560 is dividends in the future have to be brought back 0:05:36.600 --> 0:05:38.560 to the president. To bring them back to the president, 0:05:38.800 --> 0:05:41.000 you've got a factor in two things. One is what 0:05:41.120 --> 0:05:44.920 can I make elsewhere with my money? Now what what 0:05:45.080 --> 0:05:47.320 our interest rates at? Where can I invest money? And 0:05:47.360 --> 0:05:49.679 the other is how much risk is there in that dividend. 0:05:50.279 --> 0:05:53.119 In a sense, it's good to start with a very 0:05:53.160 --> 0:05:57.320 simple dividend discount model because it it mores your entire analysis. 0:05:57.360 --> 0:06:00.400 It says, let's not get fancy. Ultimately, you buy stocks 0:06:00.480 --> 0:06:02.800 for the cash flow, and if the only cash flow 0:06:02.800 --> 0:06:04.800 you're going to get as a dividend, what you pay 0:06:04.839 --> 0:06:07.520 for a stock is the present value of those dividends. 0:06:07.560 --> 0:06:10.520 So think of that as the Ben Graham, the old 0:06:10.960 --> 0:06:14.919 value investing ideology would says, buy stocks with big and 0:06:15.000 --> 0:06:18.479 stable dividends, they're worth more than stocks that don't pay dividends. 0:06:19.400 --> 0:06:22.839 Do you think that purpose is still relevant, because nowadays, 0:06:23.000 --> 0:06:25.680 you know, the notion of buying stocks for dividends for 0:06:25.800 --> 0:06:28.040 a lot of people is going to sound almost coint 0:06:28.200 --> 0:06:30.359 like a lot of people are buying stocks just to 0:06:30.360 --> 0:06:33.479 see the appreciation in value in the market and then 0:06:33.520 --> 0:06:37.040 just sell them onwards at a later day. Three things 0:06:37.040 --> 0:06:41.200 have changed. One is, in the nineteen thirties, nineteen forties, 0:06:41.240 --> 0:06:43.960 even into the nineteen fifties, when you look at companies 0:06:43.960 --> 0:06:46.400 that were listed in the stock market, they tended to 0:06:46.400 --> 0:06:49.920 be mature companies. If you're a growth company, you stayed 0:06:49.960 --> 0:06:53.240 private and you were funded by venture capitalists, still very 0:06:53.320 --> 0:06:57.080 late in the process. The second is companies that had 0:06:57.320 --> 0:06:59.800 excess cash flows, cash flows that they did not have 0:07:00.080 --> 0:07:02.560 used for paid them out as dividends. There were no 0:07:02.640 --> 0:07:05.640 stock buybacks, so essentially dividends were the only way game 0:07:05.960 --> 0:07:09.880 in town. And the third investors in a sense, we're 0:07:10.000 --> 0:07:12.880 buying stocks for the long term. They were buying stocks 0:07:12.920 --> 0:07:15.600 to hold them for the next ten, fifteen, twenty five years. 0:07:15.840 --> 0:07:18.840 In fact, many of them have had no had no 0:07:18.960 --> 0:07:21.520 intention of even selling these stocks. They were holding them 0:07:21.520 --> 0:07:25.240 for the dividends. The world has changed today. Look at 0:07:25.240 --> 0:07:27.040 the market and you look at the top ten stocks, 0:07:27.080 --> 0:07:30.880 maybe seven eight are growth companies, not mature companies. And 0:07:30.960 --> 0:07:34.080 in fact, many companies are entering the market at stages 0:07:34.200 --> 0:07:37.160 they would never even have thought about entering the market 0:07:37.160 --> 0:07:40.200 even twenty five years ago. You take a couple like Snap, 0:07:40.360 --> 0:07:42.680 it's a startup. Pretty much it will been a company 0:07:42.720 --> 0:07:45.800 that will been invested in by venture capitalists for another 0:07:45.880 --> 0:07:48.440 five or six years before it was ready for the market. 0:07:48.960 --> 0:07:51.320 So the composition of the market has changed. So if 0:07:51.360 --> 0:07:55.640 you're trying to value a company like Facebook with dividends. 0:07:55.640 --> 0:07:58.680 Here's the problem'm gonna run into. The first is the company, 0:07:58.840 --> 0:08:01.679 even if it can afford to pay dividends, doesn't pay dividends. 0:08:01.720 --> 0:08:05.320 It accumulates the cash. Second, when it does decide to 0:08:05.360 --> 0:08:07.640 return to cash, it turn cash in the form of 0:08:07.680 --> 0:08:11.120 stock buy backs. So increasingly what we've had to move 0:08:11.160 --> 0:08:14.040 away from is not that we still want to you know, 0:08:14.120 --> 0:08:16.200 we still want cash flows, but the way we're getting 0:08:16.200 --> 0:08:19.080 the cash flows now are different. They take the form 0:08:19.160 --> 0:08:21.760 of buy backs more often than dividends, and you might 0:08:21.800 --> 0:08:24.160 have to wait to get your cash flows if you're 0:08:24.200 --> 0:08:26.280 buying a young growth company. So it's not that the 0:08:26.320 --> 0:08:29.800 focus of what we're doing changes, but the kinds of 0:08:29.880 --> 0:08:34.360 markets and companies were trying to value has become very different. So, 0:08:34.840 --> 0:08:37.560 you know, obviously in the beginning you said, anyone who 0:08:37.600 --> 0:08:41.160 tells you that there's something new in the world invaluation 0:08:41.440 --> 0:08:44.240 is lying. But of course, as you've just said, the 0:08:44.360 --> 0:08:48.720 nature of the companies has changed such that you know, 0:08:48.880 --> 0:08:52.679 strict dividend and LSS or even strict buy back analysis 0:08:53.120 --> 0:08:56.040 isn't going to be the right frame because they're not 0:08:56.080 --> 0:08:58.880 in that business right now. Is the idea then that 0:08:58.960 --> 0:09:03.000 you sort of reject forward what they could theoretically pay 0:09:03.000 --> 0:09:06.640 back in dividends or could theoretically do in buy backs 0:09:06.720 --> 0:09:09.080 or sort of how do you take this sort of 0:09:09.120 --> 0:09:12.400 Graham and Dot approach that everybody knows and apply it 0:09:12.440 --> 0:09:16.440 to a Facebook or a Snap you nailed down valuation. 0:09:16.480 --> 0:09:20.560 That's exactly what you do. Instead of taking the actual dividends, 0:09:20.720 --> 0:09:24.120 you try to estimate potential dividends. Sounds fancy, but if 0:09:24.120 --> 0:09:26.079 you run a business, think of the cash that you 0:09:26.120 --> 0:09:28.440 can take out of the business. The cash left over 0:09:29.000 --> 0:09:32.360 after you've met every conceivable need, which includes what you 0:09:32.440 --> 0:09:35.920 put in for future growth and you pay taxes. If 0:09:35.960 --> 0:09:38.199 there's any cash left in the till and you're the 0:09:38.240 --> 0:09:41.000 business owner, you can take it out of the business. 0:09:41.040 --> 0:09:44.079 That is your potential dividend. And it's easy to estimate 0:09:44.120 --> 0:09:45.719 that for a company because if you look at the 0:09:45.760 --> 0:09:48.760 statement of cash flows for a company, they tell you 0:09:48.880 --> 0:09:51.000 what they're putting back into the business. They tell you 0:09:51.040 --> 0:09:53.520 what they're using to make debt payments. So you can 0:09:53.559 --> 0:09:56.679 actually take a Facebook and estimate how much they could 0:09:56.679 --> 0:10:00.720 have paid in dividends last year. The that then becomes 0:10:00.720 --> 0:10:03.520 your basis. So It's essentially what we're doing is instead 0:10:03.559 --> 0:10:06.199 of using the actual dividends to value the stock, we're 0:10:06.280 --> 0:10:09.920 using potential dividends. That's really the innovation of the last 0:10:09.920 --> 0:10:12.199 seven years, if we can even call it that, because 0:10:12.240 --> 0:10:15.760 the rest of the process stays the same. You make 0:10:15.800 --> 0:10:20.880 it sound really easy, but you know, estimating um future 0:10:20.920 --> 0:10:24.520 cash flow versus cash needs, there are all sorts of 0:10:24.559 --> 0:10:27.920 things that must go into that forecast, right, So for 0:10:27.920 --> 0:10:33.000 for instance, do you attempt to assign probabilities to certain scenarios. 0:10:33.120 --> 0:10:36.120 Do you worry about one off, you know, sort of 0:10:36.200 --> 0:10:39.000 tail risk events. What are you actually looking at when 0:10:39.000 --> 0:10:42.160 you do that? The first thing to do in valuation 0:10:42.240 --> 0:10:45.040 is to adopt what I call the karmic post. The 0:10:45.120 --> 0:10:47.360 karmic post is basically, there are lots of things you 0:10:47.400 --> 0:10:50.360 don't control, so stop worrying about them. You're valuing an 0:10:50.360 --> 0:10:53.560 oil company. The oil press could change tomorrow. You could 0:10:53.559 --> 0:10:56.400 have a crisis in the Middle East. Those are things 0:10:56.520 --> 0:10:59.199 you You can worry about them, but there's nothing you 0:10:59.240 --> 0:11:01.400 can do about them. What you have to do is 0:11:01.400 --> 0:11:04.120 take the information you have and make your best estimates, 0:11:04.120 --> 0:11:08.040 and sometimes that requires using statistics, probabity distributions, you're having 0:11:08.040 --> 0:11:12.199 a bio technology company with a blockbuster drug working its 0:11:12.200 --> 0:11:15.120 way through the pipeline. You might not like to do it, 0:11:15.160 --> 0:11:18.160 but you have to assess a probability that that drug 0:11:18.200 --> 0:11:21.680 will make it through the pipeline. The process is easy, 0:11:21.800 --> 0:11:25.400 but estimation can be difficult for some companies. You asked 0:11:25.400 --> 0:11:29.280 me to value Snap, I'm making judgments based on very 0:11:29.320 --> 0:11:32.800 little historical data. And that's really the big difference when 0:11:32.800 --> 0:11:35.480 you have to value growth companies. It's not that the 0:11:35.559 --> 0:11:38.880 process is different, but we have a fewer crutches because 0:11:38.880 --> 0:11:40.920 when you have a lot of historical data that you 0:11:40.960 --> 0:11:44.080 can project off, you feel better. Even if you if 0:11:44.160 --> 0:11:48.000 that that that is completely misplaced, you just feel more comfortable. 0:11:48.559 --> 0:11:50.920 What you have is an absence of comfort. And for 0:11:51.040 --> 0:11:54.400 people valuing, especially the kinds of companies that are increasingly 0:11:54.480 --> 0:11:57.760 entering the market, you've got learned to live with being 0:11:57.840 --> 0:12:01.480 uncomfortable with making a as and it's in being hopelessly 0:12:01.559 --> 0:12:04.400 wrong and saying, you know what, that wasn't my fault. 0:12:04.440 --> 0:12:07.959 It really wasn't your fault. If you did not forecast 0:12:08.000 --> 0:12:11.680 cloud computing coming coming out of nowhere and essentially becoming 0:12:11.679 --> 0:12:15.280 a big part of Amazon's business, you can only estimate 0:12:15.360 --> 0:12:17.160 what you can, and then when you're done, you've got 0:12:17.160 --> 0:12:19.440 to step back and say, I've done what I can. 0:12:19.559 --> 0:12:22.520 I valued the company. I could be very wrong, but 0:12:22.720 --> 0:12:25.440 this is my best estimate of value. You know, in 0:12:25.480 --> 0:12:28.000 addition to the fact that you don't have a lot 0:12:28.040 --> 0:12:31.960 of historical data on these companies we live, it feels 0:12:32.000 --> 0:12:35.040 like we live in an age of novel business models. 0:12:35.080 --> 0:12:38.000 So I imagine that if you sort of value you know, 0:12:38.120 --> 0:12:41.000 if we were in the nineteen eighties and you wanted 0:12:41.000 --> 0:12:44.120 to value shares of the New York Times, that the 0:12:44.160 --> 0:12:46.880 business model of the New York Times was not that 0:12:47.080 --> 0:12:50.480 different from the business model of newspapers, you know, going 0:12:50.520 --> 0:12:54.480 back for decades before that. But you know, take a 0:12:54.520 --> 0:12:57.240 look at Snap today. You know you could is this 0:12:57.280 --> 0:12:59.520 a media company? Is a tech company? Is it a 0:12:59.600 --> 0:13:02.720 camera company? Is an apps company? You know, it seems 0:13:03.080 --> 0:13:06.360 how does that? Is it true that you're coming across 0:13:06.440 --> 0:13:10.040 more business models that don't have good historical analogs, And 0:13:10.080 --> 0:13:14.160 if so, how does that complicate the task of valuing 0:13:14.200 --> 0:13:17.080 a company. I'll give you an example of what I 0:13:17.160 --> 0:13:19.920 think is shift the most in business as I see it, 0:13:20.640 --> 0:13:23.880 when I look at companies like Facebook, and snap. What 0:13:24.040 --> 0:13:26.520 I see on what I called user based models, which 0:13:26.559 --> 0:13:29.080 is if you look at what they boast about the 0:13:29.080 --> 0:13:31.920 most is the number of users, the number of subscribers. 0:13:31.920 --> 0:13:34.240 I mean, take a look at Netflix's last annual report 0:13:34.280 --> 0:13:37.320 and look at how much they emphasize the number of 0:13:37.600 --> 0:13:42.200 subscribers going up. We've increasingly shifted from a top down 0:13:42.200 --> 0:13:45.720 approach where companies boast about their overall revenues growing, to 0:13:46.480 --> 0:13:48.800 a bottom up approach where they boast about how many 0:13:48.840 --> 0:13:51.840 customers users they have. And it's not just new companies. 0:13:51.880 --> 0:13:54.960 If you look at Microsoft in Adobe, the way they 0:13:55.080 --> 0:13:57.720 used to grow ten years ago, twenty years ago is 0:13:57.720 --> 0:14:00.320 they used to update their software and try to sell 0:14:00.360 --> 0:14:04.160 them more. Today, look at Microsoft Adobe, their crown jewels 0:14:04.280 --> 0:14:08.319 are actually their subscription based models. Offers three sixty Microsoft 0:14:08.840 --> 0:14:11.480 and Creative crowd for Adobe. Adobe, in fact doesn't even 0:14:11.520 --> 0:14:16.760 sell it software in regular channels anymore. So increasingly I've 0:14:16.800 --> 0:14:19.240 tried to think about what the value of a user is, 0:14:19.440 --> 0:14:22.080 value of a subscriber, and you know what, the basics 0:14:22.120 --> 0:14:24.960 of valuations still work. Tomorrow. Actually, I'm going to deliver 0:14:25.000 --> 0:14:27.960 the keynote speech at the c f A conference where 0:14:27.960 --> 0:14:30.560 I'm going to value a noble user. I'm going to 0:14:30.680 --> 0:14:33.200 value an Amazon Prime member, and I'm going to value 0:14:33.240 --> 0:14:37.480 Netflix subscriber because to me, that's become the way I 0:14:37.560 --> 0:14:40.400 think about the values of the companies is they essentially 0:14:40.440 --> 0:14:44.200 are trying to pump up their values of users, subscribers, members, 0:14:44.680 --> 0:14:47.320 and that then multiplies by a hundred million, in the 0:14:47.360 --> 0:14:50.200 case of Facebook one point seven billion, You've got these 0:14:50.240 --> 0:14:54.120 astronomically high values. So to me, that is that's one 0:14:54.160 --> 0:14:56.720 thing that shifted in the way I think about companies 0:14:56.800 --> 0:14:59.320 because rather than start with revenues and work down to 0:14:59.400 --> 0:15:02.880 cash flows the way I've always approached valuation with these 0:15:02.920 --> 0:15:07.359 companies have increasingly started thinking about those unit based valuations. 0:15:07.400 --> 0:15:10.680 And here's the problem. Right into the information you need 0:15:10.720 --> 0:15:14.640 to value a user is not being made available to 0:15:14.800 --> 0:15:17.320 us by the companies that boast about how many users 0:15:17.360 --> 0:15:21.160 they have if I were writing information disclosure laws. This 0:15:21.240 --> 0:15:23.720 is something that I think needs to be fixed as 0:15:23.760 --> 0:15:27.640 these companies increasingly shift to user based models. So I'd 0:15:27.680 --> 0:15:29.880 like to know what the renewal rates are, and much 0:15:29.920 --> 0:15:32.960 more specificity than they reveal it now. I'd like to 0:15:33.040 --> 0:15:37.520 know what the distribution is of revenues across users to 0:15:37.680 --> 0:15:40.320 ten percent of ooper users account for ninety percent of 0:15:40.360 --> 0:15:43.480 its revenues. That's the kind of information that companies have 0:15:43.680 --> 0:15:46.080 that they're not sharing with us. And if they're going 0:15:46.120 --> 0:15:47.720 to ask us to invest in them because they have 0:15:47.800 --> 0:15:50.720 tens of millions of users, it's their obligation, I think, 0:15:50.760 --> 0:15:53.600 and to provide the information that will allow us to 0:15:53.680 --> 0:16:06.920 value them better. But I have a potentially slightly weird question. 0:16:07.000 --> 0:16:10.800 But we're talking about a lot of high growth stocks, 0:16:10.880 --> 0:16:14.040 which you could also call story stocks, right, Like if 0:16:14.040 --> 0:16:17.880 you buy in to Tesla or Uber, you buy into 0:16:17.920 --> 0:16:20.360 this idea that both those companies are going to be 0:16:20.440 --> 0:16:24.880 revolutionary in various ways for the transport industry. When you 0:16:24.960 --> 0:16:28.680 attempt to value a company nowadays, do you give any 0:16:28.960 --> 0:16:33.160 credence to that sort of narrative? Do you buy into 0:16:33.920 --> 0:16:36.360 some of that hype um and you know, some of 0:16:36.360 --> 0:16:39.960 that hype It sounds silly, but we do see that reflected, 0:16:40.320 --> 0:16:44.120 you know, in intangible assets like brand value and things 0:16:44.160 --> 0:16:46.960 like that. So I'm just curious if you factor any 0:16:47.000 --> 0:16:51.320 of that in every valuation tells a story, right, I mean, 0:16:51.360 --> 0:16:54.160 any analysts who puts up a spreadsheet and says, this 0:16:54.240 --> 0:16:56.360 is my value for a company whether he likes it 0:16:56.480 --> 0:16:59.200 or not, is actually telling a story about a company. 0:16:59.200 --> 0:17:02.080 I'm a firm leaver that every good valuation is a 0:17:02.120 --> 0:17:05.160 story behind it. The question you're asking is a different one. 0:17:05.200 --> 0:17:07.560 Does that story you have to be the story that 0:17:07.640 --> 0:17:10.399 manages in the company of pushing for the company, And 0:17:10.440 --> 0:17:13.719 the answer is absolutely not. If you're an investor, you 0:17:13.720 --> 0:17:16.320 have to take ownership of your own story, which means 0:17:16.320 --> 0:17:19.000 you can listen to Elon Musk. You can admire Elon Musk, 0:17:19.080 --> 0:17:22.359 you can listen to his story about Tesla, but if 0:17:22.400 --> 0:17:25.720 you're valuing Tesla, you better have your own story about Tesla. 0:17:26.240 --> 0:17:29.000 So that's true every there is, These are stories, talks, 0:17:29.040 --> 0:17:32.919 but ultimately every company is a story. The g story 0:17:33.040 --> 0:17:35.480 is just a horror story right now. So basically, some 0:17:35.600 --> 0:17:39.119 stories are fun stories, some stories are uplifting stories. Some 0:17:39.240 --> 0:17:42.800 stories are not so in a sense, sometimes you have 0:17:42.920 --> 0:17:45.320 to look at the story, but then you've got to 0:17:45.359 --> 0:17:48.359 make that story your own and then convert that story 0:17:48.400 --> 0:17:51.160 into numbers and valuation. In fact, that's my latest book. 0:17:51.200 --> 0:17:54.159 It's called Narrative and Numbers, about how to both connect 0:17:54.200 --> 0:17:57.640 storage to numbers and how to detect when a story 0:17:58.240 --> 0:18:00.720 is not going to hold up because I see a 0:18:00.760 --> 0:18:04.760 lot of impossible stories being told, sometimes by CEOs of companies, 0:18:04.760 --> 0:18:08.000 are implausible stories, and my job is to say that's 0:18:08.040 --> 0:18:11.040 not going to work, that violates the laws of economics, 0:18:11.119 --> 0:18:13.760 and then adapt the story to make it my story 0:18:13.800 --> 0:18:17.200 and my valuation. I love that. I want to get 0:18:17.240 --> 0:18:19.840 to like a little speed round where we talk about 0:18:20.240 --> 0:18:22.560 some of these stories and Tesla and g E and 0:18:22.720 --> 0:18:25.240 Uber real quickly. But before we do, I have one 0:18:25.320 --> 0:18:28.280 last question, just sort of on a framework. At the 0:18:28.400 --> 0:18:32.399 very beginning, you talked about the importance of distinguishing between 0:18:32.520 --> 0:18:35.719 valuation and price, and price being a function of supply 0:18:35.760 --> 0:18:38.840 and demand. So how do you then as an investor, 0:18:38.880 --> 0:18:41.959 because ultimately what people want to do is pick stocks 0:18:42.000 --> 0:18:44.399 that are going to make them money. How do you 0:18:45.040 --> 0:18:48.879 sort of once you establish the valuation, then think about 0:18:49.040 --> 0:18:54.159 entering the market given various pricing factors. So first you've 0:18:54.160 --> 0:18:56.360 got to decide whether you want to be an investor 0:18:56.520 --> 0:19:00.280 or a trader. And this is my distinction. Investors buy 0:19:00.320 --> 0:19:02.720 stocks for less than the value that they adact to 0:19:02.720 --> 0:19:04.480 the stocks, and then they hope and pray that the 0:19:04.560 --> 0:19:07.919 price suggests to value. So investing requires faith, faith in 0:19:07.960 --> 0:19:12.000 your own valuation and faith that markets will correct that value. 0:19:12.040 --> 0:19:14.480 And you know what, most people don't have faith. And 0:19:14.520 --> 0:19:16.199 if you don't have faith, you can try to be 0:19:16.240 --> 0:19:18.240 an investor, but you're not going to hang in there. 0:19:18.440 --> 0:19:21.440 You're going to give up. So I tell people be realistic. 0:19:21.560 --> 0:19:24.440 If you have no faith in value, even though you 0:19:24.520 --> 0:19:27.040 might know how to mechanically how to value a company, 0:19:27.440 --> 0:19:29.280 you're not going to be able to invest. You're going 0:19:29.280 --> 0:19:30.800 to be a trader. And you're going to be a trader, 0:19:30.840 --> 0:19:33.760 might as well be honest about the fact that in trading, 0:19:33.800 --> 0:19:35.600 the game is to buy the low price sell at 0:19:35.640 --> 0:19:38.520 a high price. Why the price goes up is none 0:19:38.520 --> 0:19:40.600 of your business. You really don't even care. It's not 0:19:40.680 --> 0:19:44.480 an intellectual exercise. It's a money making exerciss So the 0:19:44.520 --> 0:19:46.840 first decision you've got to make is do you have 0:19:47.000 --> 0:19:50.399 enough faith to be an investor. If you do have faith, 0:19:50.720 --> 0:19:52.879 then here's what you need to do. Need to value 0:19:52.920 --> 0:19:55.439 companies and hopefully the value is higher than the price. 0:19:56.040 --> 0:19:58.439 And then you have to look for a catalyst, something 0:19:58.520 --> 0:20:00.680 that will cause the price to move to value. Because 0:20:00.680 --> 0:20:03.960 you can be right about value and go bankrupt being right. 0:20:04.680 --> 0:20:06.560 I mean, you've got the old saying the market can 0:20:06.560 --> 0:20:09.800 be rational longer than you can be liquid, so in 0:20:09.800 --> 0:20:13.200 a sense or solving, so, I think you have to 0:20:14.320 --> 0:20:16.679 when you look, when you look at an undervalued company, 0:20:16.720 --> 0:20:18.840 a company with the price is less than value, looking 0:20:18.880 --> 0:20:22.000 for some kind of catalyst. That catalyst might be a 0:20:22.040 --> 0:20:25.520 management changed, It might be an activist investor stepping in. 0:20:25.880 --> 0:20:28.479 It might be it might even be there, you know, 0:20:29.000 --> 0:20:32.760 it might even be something small, a competitor trying to 0:20:32.920 --> 0:20:36.080 essentially take over the company. But you're trying to look 0:20:36.119 --> 0:20:38.800 for something that will caused the market to shake up. 0:20:38.840 --> 0:20:41.480 Because there is nothing that shakes up the market. Nothing's 0:20:41.480 --> 0:20:44.359 going to change, and that effectively is one of the 0:20:44.400 --> 0:20:47.679 most frustrating things about being an investor is you can 0:20:47.760 --> 0:20:50.960 value a company, feel very convinced that you've got the 0:20:51.080 --> 0:20:53.960 right value, and see the price go in the opposite direction, 0:20:54.440 --> 0:20:57.280 not just for days, not just for weeks, but for years. 0:20:57.760 --> 0:20:59.360 And you've got to be okay with it. You've got 0:20:59.359 --> 0:21:02.200 to be if you get frustrated and you get angry 0:21:02.240 --> 0:21:04.439 about the fact that the market is not doing the 0:21:04.520 --> 0:21:07.359 right thing, then you set yourself up to do really 0:21:07.400 --> 0:21:12.440 stupid things. Okay, okay, speed round. Let's start with shall 0:21:12.520 --> 0:21:15.080 we do g E because this kind of gets some 0:21:15.200 --> 0:21:18.240 of the shake up stuff that you're talking about. So 0:21:18.320 --> 0:21:21.720 when you see a sharp repricing in the company's um 0:21:21.920 --> 0:21:25.359 market value, what you think, Well, the first thing I 0:21:25.400 --> 0:21:28.320