1 00:00:10,920 --> 00:00:14,920 Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast. 2 00:00:14,960 --> 00:00:20,360 Speaker 1: I'm Joe Eisenthal and I'm Tracy all Away. So, Tracy, obviously, 3 00:00:20,360 --> 00:00:25,599 Speaker 1: we've had this extraordinary stock market comeback this year, not 4 00:00:25,680 --> 00:00:29,600 Speaker 1: even really just a comeback, because, um, we've were so 5 00:00:29,640 --> 00:00:32,640 Speaker 1: far ahead of where we started the year despite the pandemic, 6 00:00:33,240 --> 00:00:35,680 Speaker 1: and a lot of different sectors have rallied. But there's 7 00:00:35,720 --> 00:00:41,040 Speaker 1: no question that tech sort of new economy type stuff, 8 00:00:41,840 --> 00:00:44,479 Speaker 1: however you define it, has really led the way. I mean, 9 00:00:44,520 --> 00:00:48,560 Speaker 1: the nasdack is just having a sort of ridiculous year. Yeah, 10 00:00:48,720 --> 00:00:51,159 Speaker 1: We've talked about this before, but to some extent, it 11 00:00:51,200 --> 00:00:55,240 Speaker 1: feels like the coronavirus crisis that we've seen this year 12 00:00:55,280 --> 00:00:59,360 Speaker 1: has accelerated long running trends in a bunch of things. 13 00:00:59,400 --> 00:01:03,080 Speaker 1: So you for instance, the dominance of online retail, but 14 00:01:03,240 --> 00:01:07,320 Speaker 1: also the out performance of the thing stocks UM and 15 00:01:07,360 --> 00:01:10,840 Speaker 1: tech in general. It feels like the big just get bigger. 16 00:01:11,360 --> 00:01:14,360 Speaker 1: Stocks that were considered expensive, you know, five years ago, 17 00:01:14,440 --> 00:01:17,560 Speaker 1: are even more expensive now. Yeah, and I'm glad to 18 00:01:17,640 --> 00:01:20,800 Speaker 1: use that word expensive because you know, it sort of 19 00:01:20,840 --> 00:01:26,959 Speaker 1: does have a um an implied judgment expensive like people 20 00:01:27,000 --> 00:01:30,480 Speaker 1: are overpaying and you know, people talk about value stocks, 21 00:01:30,520 --> 00:01:34,560 Speaker 1: which has had this implied idea that you're getting a 22 00:01:34,640 --> 00:01:36,760 Speaker 1: good value, you're getting a good deal, it's cheap. But 23 00:01:36,840 --> 00:01:40,440 Speaker 1: we have had this phenomenon where stocks with high multiples 24 00:01:40,600 --> 00:01:44,039 Speaker 1: continue to do extremely well, and the stocks that on 25 00:01:44,240 --> 00:01:47,680 Speaker 1: paper appear to be cheap just seemed to get cheaper 26 00:01:47,680 --> 00:01:50,960 Speaker 1: and cheaper, which is, you know, not great if you 27 00:01:51,000 --> 00:01:54,200 Speaker 1: own them. Yeah, and of course this goes back to 28 00:01:54,280 --> 00:01:59,280 Speaker 1: the whole value versus growth debate. Right, why has value 29 00:01:59,360 --> 00:02:03,920 Speaker 1: been under performing as a strategy for so long? Uh? 30 00:02:03,960 --> 00:02:06,320 Speaker 1: And there is an argument that a lot of this 31 00:02:06,480 --> 00:02:11,360 Speaker 1: comes down to accounting and the notion that maybe we 32 00:02:11,440 --> 00:02:15,400 Speaker 1: have outdated accounting rules that don't actually do a very 33 00:02:15,400 --> 00:02:18,080 Speaker 1: good job of reflecting the world as it is today. 34 00:02:18,160 --> 00:02:20,840 Speaker 1: And you know, we started out this conversation by talking 35 00:02:20,840 --> 00:02:25,440 Speaker 1: about twenty You could certainly argue that accounting rules that were, 36 00:02:25,480 --> 00:02:29,400 Speaker 1: you know, imposed back in the nineties seventies probably aren't 37 00:02:29,440 --> 00:02:33,080 Speaker 1: doing a very good job of reflecting what's going on 38 00:02:33,160 --> 00:02:37,760 Speaker 1: in in the midst of a global pandemic. Yeah, it 39 00:02:37,800 --> 00:02:40,960 Speaker 1: seems like if you're a value investor, if you if 40 00:02:41,000 --> 00:02:44,360 Speaker 1: you're self characterized value investor, there's corner. There's sort of 41 00:02:44,400 --> 00:02:48,880 Speaker 1: two approaches that you can take. One is to sort 42 00:02:48,919 --> 00:02:51,000 Speaker 1: of say, okay, we must be at some turning point. 43 00:02:51,080 --> 00:02:54,400 Speaker 1: There's gonna be some catalyst, maybe some economic regime change, 44 00:02:54,760 --> 00:02:57,200 Speaker 1: and then value stocks will do better. And then the 45 00:02:57,240 --> 00:03:01,440 Speaker 1: other approaches just to redefine value and say value has 46 00:03:01,480 --> 00:03:04,760 Speaker 1: done well if you define value this way and you 47 00:03:04,840 --> 00:03:07,760 Speaker 1: sort of change your screens so that you could sort 48 00:03:07,760 --> 00:03:12,160 Speaker 1: of fit more stocks into the value bucket. Yeah, there's 49 00:03:12,200 --> 00:03:14,560 Speaker 1: a really um there's a kind of funny article from 50 00:03:14,560 --> 00:03:17,280 Speaker 1: one of our Bloomberg colleagues out recently about a I 51 00:03:17,320 --> 00:03:21,120 Speaker 1: think it was a South Korean plant firm or asset 52 00:03:21,200 --> 00:03:26,040 Speaker 1: manager or something that created a new value driven e 53 00:03:26,280 --> 00:03:30,960 Speaker 1: t F. But it, as you said, redefined what value 54 00:03:30,960 --> 00:03:35,280 Speaker 1: actually was. And on that basis, I think it's base 55 00:03:35,360 --> 00:03:39,000 Speaker 1: holdings ended up being Amazon, Alphabet and Facebook. So yeah, 56 00:03:39,080 --> 00:03:42,640 Speaker 1: it's all about the definition, isn't it. Yeah, that's a 57 00:03:42,720 --> 00:03:45,280 Speaker 1: very easy way for value investing to do well, just 58 00:03:45,320 --> 00:03:49,840 Speaker 1: say we're allowed to buy Amazon and but but even 59 00:03:49,920 --> 00:03:52,760 Speaker 1: still like it does raise the question and you know, 60 00:03:52,800 --> 00:03:56,040 Speaker 1: one of the sort of classic screens, one of the 61 00:03:56,240 --> 00:03:59,200 Speaker 1: classic tests for what counts as of value stock is 62 00:03:59,240 --> 00:04:01,120 Speaker 1: to look at price to books, So how much you're 63 00:04:01,160 --> 00:04:04,040 Speaker 1: paying for the company relative to its assets. But if 64 00:04:04,040 --> 00:04:07,640 Speaker 1: you only have a conception of assets as being factories 65 00:04:07,680 --> 00:04:10,760 Speaker 1: and land and other things like that, you are missing 66 00:04:11,680 --> 00:04:16,440 Speaker 1: sort of, you know, other extremely valuable assets, such as, say, 67 00:04:16,560 --> 00:04:21,720 Speaker 1: the network of connections that Facebook has built that is 68 00:04:21,760 --> 00:04:24,919 Speaker 1: hard to replicate anywhere else. It's not an asset in 69 00:04:24,920 --> 00:04:28,080 Speaker 1: the traditional sense like a piece of equipment is, but 70 00:04:28,160 --> 00:04:32,279 Speaker 1: no one would actually dispute that it is an asset, right, 71 00:04:32,440 --> 00:04:35,200 Speaker 1: And this is where the accounting rules come in, Right, 72 00:04:35,760 --> 00:04:40,680 Speaker 1: why do we put certain things in certain places on 73 00:04:40,720 --> 00:04:43,760 Speaker 1: an income statement versus somewhere else? Like why does a 74 00:04:43,800 --> 00:04:50,480 Speaker 1: factory statement go here but research and development someplace else? Entirely, Yes, 75 00:04:51,080 --> 00:04:53,440 Speaker 1: so we we we've we've talked about this a couple 76 00:04:53,480 --> 00:04:56,120 Speaker 1: of times in the past, but it continues to sort 77 00:04:56,120 --> 00:04:59,000 Speaker 1: of gain urgency again, I think in light of what 78 00:04:59,040 --> 00:05:01,520 Speaker 1: we've seen in the market it um this year. So 79 00:05:01,800 --> 00:05:04,280 Speaker 1: we're gonna talk about this topic somewhere. I'm really excited 80 00:05:04,279 --> 00:05:06,240 Speaker 1: about our guests. We've had him on the show I 81 00:05:06,279 --> 00:05:10,320 Speaker 1: think at least once before. Michael Mobrison. He is a 82 00:05:10,400 --> 00:05:16,120 Speaker 1: managing director at Morgan Stanley, but a longtime career in finance, 83 00:05:16,160 --> 00:05:20,920 Speaker 1: having worked in Blue Mountain Capital, leg Mason and so forth. 84 00:05:21,600 --> 00:05:25,760 Speaker 1: His title, um at his current job is the head 85 00:05:25,839 --> 00:05:31,640 Speaker 1: of Concilient Research on Counterpoint Global at Morgan Stanley Investment Management. 86 00:05:32,000 --> 00:05:35,520 Speaker 1: So I'm going to uh introduce Michael, but first I'm 87 00:05:35,520 --> 00:05:39,000 Speaker 1: going to ask him what is U concilient Research at 88 00:05:39,040 --> 00:05:42,720 Speaker 1: Counterpoint Global. Man, Well, first of all, Joe and Tracy. 89 00:05:42,760 --> 00:05:44,920 Speaker 1: Great to be with you guys again, always lots of fun. 90 00:05:45,360 --> 00:05:47,559 Speaker 1: It is an unusual name. By the way, It's probably 91 00:05:47,560 --> 00:05:48,960 Speaker 1: not a good idea to have a title that people 92 00:05:48,960 --> 00:05:50,760 Speaker 1: have to look up in the dictionary, but that is 93 00:05:50,800 --> 00:05:53,479 Speaker 1: the case here. Um. There's a there's a book I 94 00:05:53,520 --> 00:05:57,920 Speaker 1: read in very influnch for me called Concilience by E. O. Wilson, 95 00:05:58,160 --> 00:06:01,880 Speaker 1: famous biologist, and the argument very simply was that while 96 00:06:01,960 --> 00:06:04,520 Speaker 1: science has made a major advances over over the last 97 00:06:04,560 --> 00:06:07,720 Speaker 1: few centuries by reductionism, he argued that many of the 98 00:06:07,839 --> 00:06:10,360 Speaker 1: vaccine important problems in our world were at the intersection 99 00:06:10,440 --> 00:06:13,680 Speaker 1: of discipline. Concealing itself is the idea of the unification 100 00:06:13,720 --> 00:06:16,479 Speaker 1: of knowledge and taking ideas from disparate areas and having 101 00:06:16,480 --> 00:06:19,200 Speaker 1: them using them to solve problems. So when I was 102 00:06:19,240 --> 00:06:21,880 Speaker 1: a credit SUI many years ago, I started newsletter called 103 00:06:21,880 --> 00:06:24,760 Speaker 1: The Concilient Observer, and it was the idea was right, 104 00:06:24,800 --> 00:06:27,880 Speaker 1: these short essays trying to bring ideas from various areas 105 00:06:27,920 --> 00:06:30,640 Speaker 1: together to try to shed some light on a particular topic. 106 00:06:31,160 --> 00:06:33,640 Speaker 1: Um So Dennis Lynch, who runs Counterpoint Global where I 107 00:06:33,680 --> 00:06:36,279 Speaker 1: am was, was a reader of that, and so when 108 00:06:36,600 --> 00:06:39,680 Speaker 1: when he invited me to join Counterpoint Global, which is 109 00:06:39,680 --> 00:06:41,359 Speaker 1: part of More Fails in Best Management, he said, hey, 110 00:06:41,360 --> 00:06:44,279 Speaker 1: why don't we call this concilient research? You know. So 111 00:06:44,279 --> 00:06:46,240 Speaker 1: so that's where we look back that. But is this 112 00:06:46,320 --> 00:06:48,320 Speaker 1: idea that we need to cast a wide net, by 113 00:06:48,360 --> 00:06:50,680 Speaker 1: the way, which is a really good even introduction to 114 00:06:50,720 --> 00:06:52,839 Speaker 1: the topic. As you guys were talking about as we 115 00:06:52,839 --> 00:06:55,600 Speaker 1: think about the world, Uh, you know, are we thinking 116 00:06:55,600 --> 00:06:58,120 Speaker 1: about things as expansively as we should to try to 117 00:06:58,200 --> 00:07:00,640 Speaker 1: understand to make sense of the world. And um, so 118 00:07:00,720 --> 00:07:04,039 Speaker 1: that that's where that comes from. Thank you for that explanation. 119 00:07:04,160 --> 00:07:06,920 Speaker 1: Um it is a very interesting job title, I gotta say, 120 00:07:07,000 --> 00:07:10,640 Speaker 1: but and it is quite wide ranging. Um I guess 121 00:07:11,000 --> 00:07:15,680 Speaker 1: just to begin with why, well, you recently published a 122 00:07:15,720 --> 00:07:19,400 Speaker 1: topic on intangible assets and Joe and I sort of 123 00:07:19,440 --> 00:07:22,200 Speaker 1: set the scene for why this comes up nowadays in 124 00:07:22,240 --> 00:07:25,800 Speaker 1: the debate between value versus growth, but maybe just to 125 00:07:25,840 --> 00:07:28,600 Speaker 1: give us a little bit much more color, how much 126 00:07:28,680 --> 00:07:33,400 Speaker 1: does this crop up in conversations with investors, how worrying 127 00:07:33,600 --> 00:07:39,120 Speaker 1: or how much of a debate is this at the moment? Well, Tracy, 128 00:07:39,280 --> 00:07:40,760 Speaker 1: I think it is a big one. And you know, 129 00:07:41,280 --> 00:07:43,760 Speaker 1: to state the obvious, this idea that intangible to become 130 00:07:43,800 --> 00:07:46,040 Speaker 1: more prominent is not new, and I think many people 131 00:07:46,040 --> 00:07:49,000 Speaker 1: have pointed this out over time. The reason, you know, 132 00:07:49,080 --> 00:07:50,680 Speaker 1: we try to rule up our sleeves a bit and 133 00:07:50,680 --> 00:07:53,920 Speaker 1: and discuss this was sort of three big reasons. One 134 00:07:54,000 --> 00:07:56,000 Speaker 1: is can we do a better job of measuring this? 135 00:07:56,840 --> 00:08:00,240 Speaker 1: And the I think to me the centerpiece of that 136 00:08:00,400 --> 00:08:02,400 Speaker 1: piece of research we can talk more about. It is 137 00:08:02,720 --> 00:08:05,240 Speaker 1: an attempt to bring some of the measurement issues up 138 00:08:05,280 --> 00:08:07,840 Speaker 1: to date and to get a really good sense of 139 00:08:07,920 --> 00:08:10,720 Speaker 1: how big these intangible investments are relative to things we 140 00:08:10,800 --> 00:08:12,880 Speaker 1: are more familiar with, like CAPAX and R and D 141 00:08:12,960 --> 00:08:16,480 Speaker 1: and so forth. The second is, and I think Joe 142 00:08:16,520 --> 00:08:18,480 Speaker 1: touched on I think you guys talked talked about this 143 00:08:18,480 --> 00:08:21,080 Speaker 1: in your intro is what are the characteristics of knowledge 144 00:08:21,120 --> 00:08:26,120 Speaker 1: goods versus intangible goods versus tangible goods? And just I 145 00:08:26,160 --> 00:08:29,560 Speaker 1: want to underscore very strongly that there's nothing Economists of 146 00:08:29,600 --> 00:08:32,760 Speaker 1: understood all these concepts for a very long time, but 147 00:08:33,280 --> 00:08:36,000 Speaker 1: it's probably take on taking on more prominence and understanding 148 00:08:36,080 --> 00:08:38,840 Speaker 1: of things like you know, scalability and so forth. And 149 00:08:38,880 --> 00:08:41,160 Speaker 1: then the last thing is exactly what you guys are 150 00:08:41,160 --> 00:08:43,720 Speaker 1: talking about, which is what is the implication? So you know, 151 00:08:43,760 --> 00:08:45,640 Speaker 1: if I look at a company and it loses money, 152 00:08:46,440 --> 00:08:49,320 Speaker 1: is that necessarily bad? Or how do I think about 153 00:08:49,360 --> 00:08:52,640 Speaker 1: that with more subtlety? So you know, again, that's why 154 00:08:52,640 --> 00:08:55,120 Speaker 1: I called the report. One job, which was your job 155 00:08:55,160 --> 00:08:58,520 Speaker 1: as an investors and analysts hasn't changed. It's figuring out 156 00:08:58,520 --> 00:09:00,839 Speaker 1: how much company is investing and what returns on the 157 00:09:00,880 --> 00:09:04,280 Speaker 1: investment being what that means for future cash flows. But 158 00:09:04,400 --> 00:09:06,960 Speaker 1: as you pointed out, Tracy, even in your observation about 159 00:09:06,960 --> 00:09:10,120 Speaker 1: where things are getting recorded, your your job's got a 160 00:09:10,160 --> 00:09:12,319 Speaker 1: little bit more challenging because you have to go you 161 00:09:12,360 --> 00:09:14,920 Speaker 1: have to track down where the investments are, and they're 162 00:09:14,960 --> 00:09:17,840 Speaker 1: not where they used to be. It talked to us 163 00:09:17,920 --> 00:09:20,000 Speaker 1: about that a little bit further. There's a line in 164 00:09:20,160 --> 00:09:23,240 Speaker 1: your in your report that caught my eye and I'll 165 00:09:23,240 --> 00:09:25,200 Speaker 1: just read it says it used to be that earnings 166 00:09:25,200 --> 00:09:28,959 Speaker 1: were on the income statement, and investments were recorded mostly 167 00:09:29,040 --> 00:09:32,680 Speaker 1: on the balance sheet. The rise of intangible investments means 168 00:09:32,720 --> 00:09:35,040 Speaker 1: that the bottom line is now a mix of earnings 169 00:09:35,160 --> 00:09:38,320 Speaker 1: and investment sort of like break that down. That really 170 00:09:38,400 --> 00:09:42,640 Speaker 1: jumped out at me. And this idea that looking that, uh, 171 00:09:42,720 --> 00:09:45,000 Speaker 1: sort of things that were on one part of the 172 00:09:45,320 --> 00:09:48,880 Speaker 1: income or financial statement moved to another. Why is this important? 173 00:09:48,920 --> 00:09:52,520 Speaker 1: Why is this interesting? Yeah? And so you know, I 174 00:09:52,559 --> 00:09:55,560 Speaker 1: think Joe. The answer is that historically, the kinds of 175 00:09:55,600 --> 00:09:58,839 Speaker 1: things we thought of as investments, so think about factories 176 00:09:58,880 --> 00:10:02,280 Speaker 1: and machines and inventory and so and so forth, those 177 00:10:02,320 --> 00:10:05,080 Speaker 1: were classically recorded on the balance sheet, so they didn't 178 00:10:05,080 --> 00:10:08,360 Speaker 1: show they showed up an income statement through things like depreciation, 179 00:10:08,440 --> 00:10:11,520 Speaker 1: but they were essentially recorded on the balance sheet and 180 00:10:11,559 --> 00:10:15,959 Speaker 1: had relatively modest influence on on the income statement. And 181 00:10:15,960 --> 00:10:18,640 Speaker 1: and again those rules were laid out, by the way, 182 00:10:18,640 --> 00:10:22,679 Speaker 1: incredibly valuable, right, Dual dual entry accounting very valuable, um, 183 00:10:22,800 --> 00:10:24,640 Speaker 1: but in a in an ear that was very different 184 00:10:24,679 --> 00:10:27,920 Speaker 1: than what we live in today. UM. So increasingly, the 185 00:10:28,000 --> 00:10:30,880 Speaker 1: kinds of investments the company makes that are valuable, things 186 00:10:30,920 --> 00:10:34,280 Speaker 1: like brand building or research and development or customer acquisition 187 00:10:34,320 --> 00:10:38,480 Speaker 1: costs these are all just classically defined. They are also investments, right, 188 00:10:38,559 --> 00:10:41,640 Speaker 1: These are things they're outlays today and the hope and 189 00:10:41,800 --> 00:10:45,040 Speaker 1: expectation for future cash flows, but now those are being 190 00:10:45,040 --> 00:10:48,679 Speaker 1: recorded on the income statement. And you know, I think 191 00:10:48,720 --> 00:10:51,679 Speaker 1: Tracy mentioned at the in the opening about sort of 192 00:10:51,720 --> 00:10:54,160 Speaker 1: these accounting rules. There's a very there's obviously a very 193 00:10:54,200 --> 00:10:58,320 Speaker 1: interesting one from nineteen seventy four where the Financial Accounting 194 00:10:58,320 --> 00:11:01,480 Speaker 1: Standards Boards was debate eating about how to treat research 195 00:11:01,520 --> 00:11:04,640 Speaker 1: and development, right, which is sort of this classic in 196 00:11:04,720 --> 00:11:07,200 Speaker 1: between thing, and you know, they actually looked at, you know, 197 00:11:07,200 --> 00:11:09,920 Speaker 1: should we capitalize this, should there be rules for how 198 00:11:09,960 --> 00:11:12,400 Speaker 1: to think about capitalizing it, or should we expense it? 199 00:11:12,440 --> 00:11:14,040 Speaker 1: So court and then they ended up saying we're going 200 00:11:14,080 --> 00:11:16,319 Speaker 1: to expend it, right, And the name it was in 201 00:11:16,360 --> 00:11:18,640 Speaker 1: the name of being conservative, which is, we just don't 202 00:11:18,679 --> 00:11:20,720 Speaker 1: know what the returns are gonna be, so we're just 203 00:11:20,720 --> 00:11:22,920 Speaker 1: gonna plunk it all in here. And as you know, 204 00:11:23,000 --> 00:11:25,200 Speaker 1: like you think about a young biotechnology company or even 205 00:11:25,280 --> 00:11:28,719 Speaker 1: historically pig pharmaceutical companies, companies spending substantial percentage of the 206 00:11:28,800 --> 00:11:31,480 Speaker 1: revenues on R and D to state the obvious, that's 207 00:11:31,480 --> 00:11:33,440 Speaker 1: an investment right there. Doing that in a in a 208 00:11:33,520 --> 00:11:37,240 Speaker 1: hope for future returns, but that's obviously wiping out sort of, 209 00:11:37,600 --> 00:11:40,680 Speaker 1: it's hitting their earnings, um you know, a hundred cents 210 00:11:40,720 --> 00:11:43,400 Speaker 1: on the dollar. So that that that's really the issue. 211 00:11:43,400 --> 00:11:46,160 Speaker 1: And so over time we've we've seen this morphing from 212 00:11:46,200 --> 00:11:49,840 Speaker 1: investments going from primarily balance sheet related to now income 213 00:11:49,880 --> 00:11:52,760 Speaker 1: statement related. And so now we have all these ideas 214 00:11:52,760 --> 00:11:56,120 Speaker 1: about capital life businesses and so forth. Well, in a 215 00:11:56,200 --> 00:11:57,839 Speaker 1: sense they're capital life because there's not a lot of 216 00:11:57,840 --> 00:12:00,679 Speaker 1: stuff recorded on the balance sheet. But it's not like 217 00:12:00,679 --> 00:12:03,599 Speaker 1: they're not investing. They are investing, um. So, so that 218 00:12:03,760 --> 00:12:07,600 Speaker 1: just where it shows up is different. Not the concepts 219 00:12:07,640 --> 00:12:10,360 Speaker 1: behind investing doesn't change, but where it shows up. It 220 00:12:10,520 --> 00:12:14,319 Speaker 1: is quite amazing that because of an accounting rule change, 221 00:12:14,400 --> 00:12:17,559 Speaker 1: the way investors can think about a whole bunch of 222 00:12:17,640 --> 00:12:22,040 Speaker 1: companies automatically changes because the investors are trying to gauge 223 00:12:22,559 --> 00:12:26,199 Speaker 1: future profitability, I guess, and all of that comes down 224 00:12:26,280 --> 00:12:30,120 Speaker 1: to the numbers that are presented on the earnings statement. 225 00:12:30,200 --> 00:12:33,000 Speaker 1: Can you maybe elaborate a little bit on on how 226 00:12:33,120 --> 00:12:39,720 Speaker 1: you see those accounting quirks changing or affecting investor behavior. 227 00:12:41,320 --> 00:12:43,240 Speaker 1: So it's a great question tracing. And the first thing, 228 00:12:43,440 --> 00:12:45,360 Speaker 1: and there's obviously a lot of chatter about this and 229 00:12:45,400 --> 00:12:47,640 Speaker 1: the accounting community and so forth. The first thing I'll 230 00:12:47,640 --> 00:12:49,440 Speaker 1: just say is just to keep our eye on the 231 00:12:49,480 --> 00:12:52,760 Speaker 1: ball here, is that, notwithstanding all the adjustments you want 232 00:12:52,800 --> 00:12:55,160 Speaker 1: to make, free cash flow, which is sort of the 233 00:12:55,200 --> 00:12:58,240 Speaker 1: lifeblood of corporate valuation, which is really ultimately the cash 234 00:12:58,240 --> 00:13:00,679 Speaker 1: in versus the cash out, free cash flows perturbed by 235 00:13:00,720 --> 00:13:03,640 Speaker 1: these adjustments, so that doesn't really make any difference. And 236 00:13:03,640 --> 00:13:05,240 Speaker 1: one of the reasons, you know, I opened the report 237 00:13:05,320 --> 00:13:08,600 Speaker 1: with sort of this uh, you know, choice between two 238 00:13:08,600 --> 00:13:11,080 Speaker 1: different investments. Of course it was the same company and 239 00:13:11,120 --> 00:13:13,719 Speaker 1: one it was Walmart. But one showed you know, sort 240 00:13:13,760 --> 00:13:16,640 Speaker 1: of the steady profitability and and and actually growing a 241 00:13:16,720 --> 00:13:18,600 Speaker 1: very nice clip and so forth, and the other showing 242 00:13:18,760 --> 00:13:21,959 Speaker 1: you know, rising dead and dwindling cash balances and so forth. 243 00:13:22,559 --> 00:13:25,120 Speaker 1: And the key to Walmart was that it was this 244 00:13:25,160 --> 00:13:27,319 Speaker 1: is from the early nineteen seventies through the mid nineteen 245 00:13:27,320 --> 00:13:31,120 Speaker 1: eighties at Walmart was profitable but had negative free cash 246 00:13:31,120 --> 00:13:33,240 Speaker 1: flow rights. And all that means is they were investing 247 00:13:33,280 --> 00:13:36,120 Speaker 1: more than they earned. And since their investments were really 248 00:13:36,200 --> 00:13:38,040 Speaker 1: high return, you know, you want them to do that 249 00:13:38,120 --> 00:13:41,680 Speaker 1: you knock yourself out. That's fantastic. So now you say, 250 00:13:41,760 --> 00:13:44,439 Speaker 1: a very similar company with also negative free cash flow, 251 00:13:44,720 --> 00:13:46,800 Speaker 1: but investing on the income state would show losses on 252 00:13:46,840 --> 00:13:48,679 Speaker 1: the right, they would show losses on the income statement, 253 00:13:48,679 --> 00:13:50,640 Speaker 1: and we all sudden say that that doesn't look good. 254 00:13:51,200 --> 00:13:53,640 Speaker 1: So um, so I think that there already there are 255 00:13:53,679 --> 00:13:56,360 Speaker 1: sort of all this ongoing discussion about are there things 256 00:13:56,400 --> 00:13:58,679 Speaker 1: we should do to change the nature of our accounting. 257 00:13:59,160 --> 00:14:02,080 Speaker 1: The one, you know, the obvious one is research and development. Um. 258 00:14:02,160 --> 00:14:04,760 Speaker 1: By the way, the other thing is interesting is this 259 00:14:04,840 --> 00:14:07,040 Speaker 1: does happen in mergers and acquisitions. Right, So if you 260 00:14:07,200 --> 00:14:09,520 Speaker 1: built a great company that has a wonderful brand and 261 00:14:09,559 --> 00:14:12,240 Speaker 1: a great customer list and so forth, and my company 262 00:14:12,240 --> 00:14:14,800 Speaker 1: acquires yours, all of a sudden those that there will 263 00:14:14,840 --> 00:14:17,160 Speaker 1: be some good will, but the intangibles will reflected on 264 00:14:17,200 --> 00:14:19,120 Speaker 1: my balance sheet and then I'm gonna admortise them over 265 00:14:19,160 --> 00:14:22,320 Speaker 1: some period time, so they get acknowledged, but only in 266 00:14:22,400 --> 00:14:24,680 Speaker 1: mergers and acquisitions, and they just don't get acknowledged and 267 00:14:24,760 --> 00:14:27,520 Speaker 1: sort of day to day. So that's the ongoing discussion. 268 00:14:27,560 --> 00:14:29,840 Speaker 1: Now I'm not going to wait around for accountants to 269 00:14:29,920 --> 00:14:32,480 Speaker 1: change the rules. There it's a very conservative bunch, and 270 00:14:32,480 --> 00:14:35,600 Speaker 1: I think I'm sympathetic to them being conservative. And my 271 00:14:35,680 --> 00:14:38,080 Speaker 1: argument is the that that investors need to get on 272 00:14:38,120 --> 00:14:41,400 Speaker 1: this without whether or without the accountants. The other thing 273 00:14:41,400 --> 00:14:43,720 Speaker 1: that and you guys mentioned this in the opening as well, 274 00:14:44,040 --> 00:14:47,840 Speaker 1: and I'm not going to sort of justified evaluations, but 275 00:14:48,080 --> 00:14:50,920 Speaker 1: I think that the market understands these things, so this 276 00:14:51,040 --> 00:14:53,800 Speaker 1: is not being lost on the market. So in a sense, 277 00:14:54,120 --> 00:14:56,960 Speaker 1: as an investor, making thinking about this whole issue in 278 00:14:57,000 --> 00:14:59,920 Speaker 1: a clearer fashion, I think get you more in step 279 00:15:00,000 --> 00:15:02,560 Speaker 1: with how the markets already operating versus you know, putting 280 00:15:02,560 --> 00:15:05,280 Speaker 1: you ahead of everybody else. Right, So, so the market 281 00:15:05,280 --> 00:15:07,840 Speaker 1: I think has already sniffed this out in a major way. 282 00:15:07,920 --> 00:15:09,960 Speaker 1: So you know, again there are things like you know, 283 00:15:10,080 --> 00:15:13,840 Speaker 1: customer lifetime value calculations and research and development and branding. 284 00:15:14,440 --> 00:15:17,560 Speaker 1: There's there have been for long decades discussions about how 285 00:15:17,560 --> 00:15:20,080 Speaker 1: to treat those from an accounting point of view. And 286 00:15:20,120 --> 00:15:22,920 Speaker 1: again this weird thing about if you're your own company 287 00:15:23,000 --> 00:15:25,080 Speaker 1: versus if you get acquired to get treated differently and 288 00:15:25,080 --> 00:15:27,840 Speaker 1: so forth. So um, yeah, it's an ongoing discussion, but 289 00:15:27,880 --> 00:15:29,640 Speaker 1: I'm saying, like, don't wait around for the accounts to 290 00:15:29,640 --> 00:15:32,880 Speaker 1: make your try to quotes, make your life easier, figure 291 00:15:32,920 --> 00:15:34,880 Speaker 1: it out yourself, right, And that's why I called it 292 00:15:34,920 --> 00:15:36,640 Speaker 1: one job. I'm like, look, this is what you have 293 00:15:36,680 --> 00:15:38,760 Speaker 1: to do. This is that these are the cards that 294 00:15:38,800 --> 00:15:41,000 Speaker 1: have been dealt and play them. So it's like, if 295 00:15:41,000 --> 00:15:44,640 Speaker 1: we look at some software company and it's trading at 296 00:15:44,720 --> 00:15:47,560 Speaker 1: thirty x revenue're like and they're like, that's crazy, it's 297 00:15:47,560 --> 00:15:51,360 Speaker 1: a bubble. And the idea of basically what you're saying 298 00:15:51,560 --> 00:15:55,520 Speaker 1: is not that this approach will necessarily tell you whether 299 00:15:55,640 --> 00:15:58,040 Speaker 1: the stock is a buyer or sell or over valued 300 00:15:58,160 --> 00:16:02,000 Speaker 1: or not, but that at least we can appreciate how 301 00:16:02,080 --> 00:16:04,920 Speaker 1: the market is valuing the company and then from there 302 00:16:05,320 --> 00:16:08,720 Speaker 1: make further do further analysis to say whether it's a 303 00:16:08,720 --> 00:16:12,240 Speaker 1: buyers though. That's right, Joe, and you know that. Um. 304 00:16:12,240 --> 00:16:14,960 Speaker 1: About twenty years ago I published a book called Expectations 305 00:16:14,960 --> 00:16:18,000 Speaker 1: Investing My call through our wrap Board, and the argument 306 00:16:18,040 --> 00:16:20,160 Speaker 1: we made there was, you know what you should do 307 00:16:20,200 --> 00:16:22,560 Speaker 1: is start start with a stock price and the market value, 308 00:16:22,640 --> 00:16:25,120 Speaker 1: and then reverse engineer what has to happen for that 309 00:16:25,200 --> 00:16:27,640 Speaker 1: to make sense. Right, So you might ask the question, 310 00:16:27,680 --> 00:16:29,880 Speaker 1: you know, if it's a software company with sales, be 311 00:16:29,960 --> 00:16:32,560 Speaker 1: in retention so on and so forth, and I still 312 00:16:32,560 --> 00:16:34,960 Speaker 1: think that's a very sensible way. So again, I'm not 313 00:16:35,000 --> 00:16:38,480 Speaker 1: here to defend any valuations for any company, but by 314 00:16:38,520 --> 00:16:40,760 Speaker 1: the same token, and this you're you're exactly right. You 315 00:16:40,920 --> 00:16:43,720 Speaker 1: you in other words, a very high percentage of companies 316 00:16:45,160 --> 00:16:48,200 Speaker 1: of companies listen, companies United States lose money. And if 317 00:16:48,200 --> 00:16:50,840 Speaker 1: you just said to yourself, ge, losing money is bad, 318 00:16:51,280 --> 00:16:54,600 Speaker 1: you maybe throw all those things out and you're not acknowledging, 319 00:16:55,040 --> 00:16:56,960 Speaker 1: And that would be like saying free cash flow negative, 320 00:16:56,960 --> 00:16:58,920 Speaker 1: free cash flow is bad. No, that's not true. It's 321 00:16:58,920 --> 00:17:00,960 Speaker 1: a much more subtle issue. You have to understand that 322 00:17:01,400 --> 00:17:04,320 Speaker 1: the magnitude and return on investments, and only with that 323 00:17:04,359 --> 00:17:06,360 Speaker 1: additional insight will you be able to make a sort 324 00:17:06,359 --> 00:17:20,800 Speaker 1: of measure judgment. I know you just you literally just 325 00:17:20,840 --> 00:17:23,440 Speaker 1: said that you're not here to um to make judgments 326 00:17:23,480 --> 00:17:27,800 Speaker 1: on any particular companies valuation, But could you could you 327 00:17:27,840 --> 00:17:30,280 Speaker 1: maybe give us your opinion on on one of the 328 00:17:30,359 --> 00:17:33,400 Speaker 1: thing stocks or what would the thing stocks look like 329 00:17:33,960 --> 00:17:38,400 Speaker 1: through the framework that you've just um explained to us, 330 00:17:38,440 --> 00:17:41,800 Speaker 1: Like how different does something like an Amazon or an 331 00:17:41,800 --> 00:17:45,280 Speaker 1: alphabet look once you start to factor in things like 332 00:17:45,320 --> 00:17:49,800 Speaker 1: intangibles and research and development. Um So, Tracy, I think 333 00:17:49,800 --> 00:17:52,200 Speaker 1: that the one I feel most comfortable with its Microsoft, 334 00:17:52,200 --> 00:17:54,720 Speaker 1: So that's in the same neighborhood probably, And that's the 335 00:17:54,760 --> 00:17:57,639 Speaker 1: example we used in the report. I'll just underscore again 336 00:17:57,640 --> 00:17:59,520 Speaker 1: this is not an investment. There's no one investment of 337 00:17:59,600 --> 00:18:02,040 Speaker 1: lolagent going on what to suggest. But what we did 338 00:18:02,080 --> 00:18:05,000 Speaker 1: is we went through and made these adjustments. And again 339 00:18:05,080 --> 00:18:08,200 Speaker 1: there's a lot of um A judgment as to how 340 00:18:08,200 --> 00:18:10,320 Speaker 1: to make these adjustments in terms of what items should 341 00:18:10,320 --> 00:18:14,240 Speaker 1: be intangible versus version of regular expense, and what is 342 00:18:14,280 --> 00:18:17,280 Speaker 1: the amortization period and so forth. But we there was 343 00:18:17,600 --> 00:18:19,639 Speaker 1: there's a professor named Charles Holton who had done a 344 00:18:19,640 --> 00:18:21,840 Speaker 1: paper on Microsoft who laid out of frameworks, and we 345 00:18:21,880 --> 00:18:24,320 Speaker 1: just said we're gonna follow the Holton framework. Um So, 346 00:18:24,400 --> 00:18:27,240 Speaker 1: to answer your question more directly, what happened was the 347 00:18:27,240 --> 00:18:30,600 Speaker 1: the UH. The technical term is net opcording profit after 348 00:18:30,600 --> 00:18:32,520 Speaker 1: two tax But basically, think the cash rings of the 349 00:18:32,560 --> 00:18:35,720 Speaker 1: company after these adjustments went up by about fifteen percent 350 00:18:36,720 --> 00:18:39,240 Speaker 1: and the invested capital, so the amount of money invested 351 00:18:39,240 --> 00:18:42,520 Speaker 1: in the business went up by about eight percent. Right. 352 00:18:42,600 --> 00:18:45,440 Speaker 1: So again, when you're make when you reverse these UH 353 00:18:45,720 --> 00:18:48,160 Speaker 1: expenses and put them on the bouncy Two things happen 354 00:18:48,680 --> 00:18:50,840 Speaker 1: to take The obvious one is at earnings go up, 355 00:18:51,480 --> 00:18:54,359 Speaker 1: and second is the amount of capital invested goes up. 356 00:18:54,800 --> 00:18:57,360 Speaker 1: So for my Microsoft, and again MICROSOFT'SFT is a very big, 357 00:18:57,480 --> 00:19:00,440 Speaker 1: very profitable, very successful company, and that was a fifteen 358 00:19:00,480 --> 00:19:03,879 Speaker 1: percent lift to their earnings and about it again, increase 359 00:19:03,920 --> 00:19:07,720 Speaker 1: in their capital. You might imagine quite easily that for 360 00:19:07,840 --> 00:19:11,360 Speaker 1: much smaller company and younger companies and earlier in their 361 00:19:11,560 --> 00:19:14,840 Speaker 1: in their development though, the impact would be even more profound. 362 00:19:15,160 --> 00:19:17,400 Speaker 1: So that gives you some sense. So automatically you start 363 00:19:17,440 --> 00:19:21,320 Speaker 1: to say, well people use historical pe multiples or so forth, 364 00:19:21,400 --> 00:19:24,360 Speaker 1: you know you're just getting you're comparing apples to oranges 365 00:19:24,600 --> 00:19:26,920 Speaker 1: if you start to do those kinds of things or 366 00:19:26,960 --> 00:19:31,359 Speaker 1: take them too seriously. So, just on the example of Microsoft, 367 00:19:31,400 --> 00:19:34,120 Speaker 1: and going back to research and development, you mentioned that, 368 00:19:34,359 --> 00:19:38,280 Speaker 1: you know, Fast by the US Accounting UM Standards Center 369 00:19:38,600 --> 00:19:42,640 Speaker 1: back in the ninet seventies made this decision to expense 370 00:19:42,960 --> 00:19:46,080 Speaker 1: R and D because they wanted to be conservative. When 371 00:19:46,160 --> 00:19:50,320 Speaker 1: you look at research and development today, is it all 372 00:19:50,359 --> 00:19:54,080 Speaker 1: about generating future profits or when it comes to a 373 00:19:54,080 --> 00:19:58,000 Speaker 1: company like Microsoft in a very competitive industry, is some 374 00:19:58,119 --> 00:20:03,120 Speaker 1: of it just about I guess like keeping up and 375 00:20:03,560 --> 00:20:07,840 Speaker 1: maintenance rather than betting on the future. Yeah, suddenly make 376 00:20:07,840 --> 00:20:09,520 Speaker 1: two points. First of all, we talked about this directly 377 00:20:09,520 --> 00:20:11,960 Speaker 1: in the report Tracy. It's a very good question. Um. 378 00:20:12,000 --> 00:20:13,680 Speaker 1: One way to think about if you just want to say, 379 00:20:13,720 --> 00:20:15,439 Speaker 1: I want a rough way to sort this in my 380 00:20:15,480 --> 00:20:17,919 Speaker 1: own mind is exactly what you said, which is like, 381 00:20:17,960 --> 00:20:20,040 Speaker 1: how do I think about what's an investment versus what 382 00:20:20,200 --> 00:20:23,760 Speaker 1: is necessary to run? It's precisely that, so say to yourself, 383 00:20:23,760 --> 00:20:25,120 Speaker 1: and you might you know, this would be a great 384 00:20:25,200 --> 00:20:28,240 Speaker 1: question for executives, right, you say, all right, what's spending 385 00:20:28,400 --> 00:20:32,359 Speaker 1: on our income statement and specifically selling general administrative costs? 386 00:20:32,640 --> 00:20:35,320 Speaker 1: What spending do we need just to keep this thing going? Right, 387 00:20:35,359 --> 00:20:39,280 Speaker 1: We'll call that maintenance. And then what spending is truly discretionary, 388 00:20:39,280 --> 00:20:41,439 Speaker 1: that is in pursuit of growth, and that we'll call 389 00:20:41,480 --> 00:20:44,280 Speaker 1: it value creating growth. Right, So that segregation is really 390 00:20:44,359 --> 00:20:47,240 Speaker 1: just a simple way to think about this. And um, 391 00:20:47,280 --> 00:20:49,600 Speaker 1: as I mentioned in the Holton and usually people talk 392 00:20:49,640 --> 00:20:51,560 Speaker 1: about this for R and D, they often will make 393 00:20:51,560 --> 00:20:55,760 Speaker 1: it intangible and you know, for like a young pharmaceutical 394 00:20:55,800 --> 00:20:59,199 Speaker 1: company or biotakers, and that's probably that's probably reasonable, but 395 00:20:59,359 --> 00:21:01,440 Speaker 1: very much to your point with the argument, and we 396 00:21:01,600 --> 00:21:04,480 Speaker 1: draw this out in the report. But for large, older, 397 00:21:04,840 --> 00:21:08,879 Speaker 1: more established digital companies, it makes sense that a chunk 398 00:21:09,000 --> 00:21:10,960 Speaker 1: and maybe even a meaningful chunk of R and D 399 00:21:11,160 --> 00:21:13,720 Speaker 1: is just in quotes maintenance, right. So you know, when 400 00:21:13,760 --> 00:21:18,000 Speaker 1: you get your automatic Windows updates on your computer, a 401 00:21:18,000 --> 00:21:20,240 Speaker 1: lot of that spending to support that was in R 402 00:21:20,320 --> 00:21:23,680 Speaker 1: and D. That's not that's not you know, discretionary, that's 403 00:21:23,680 --> 00:21:26,760 Speaker 1: something they have to do just to maintain the current business. 404 00:21:26,760 --> 00:21:30,080 Speaker 1: So so you're exactly right. So again lots of judgment 405 00:21:30,119 --> 00:21:33,199 Speaker 1: required here. Um, it's more relevant for older and more 406 00:21:33,280 --> 00:21:36,040 Speaker 1: established companies than the younger ones, but you're exactly right, 407 00:21:36,080 --> 00:21:37,840 Speaker 1: that's that you have to And so that the big 408 00:21:37,880 --> 00:21:41,160 Speaker 1: broad defining differential is probably this what do I need 409 00:21:41,200 --> 00:21:43,639 Speaker 1: to spend to maintain versus what am I spending that 410 00:21:43,800 --> 00:21:47,080 Speaker 1: discretionary to grow in the future. So I want to 411 00:21:47,080 --> 00:21:49,919 Speaker 1: just get back to for people who maybe aren't as 412 00:21:49,960 --> 00:21:53,159 Speaker 1: familiar with accounting terminology, just some of the words and 413 00:21:53,240 --> 00:21:56,840 Speaker 1: ideas that we're discussing, including the idea of expensing investments. 414 00:21:56,880 --> 00:21:59,880 Speaker 1: So just to help people can acceptualize it, let's say 415 00:22:00,080 --> 00:22:04,840 Speaker 1: company builds one billion dollar factory, uh, and it's expected 416 00:22:04,960 --> 00:22:08,719 Speaker 1: to be in production for twenty or thirty years. And 417 00:22:08,800 --> 00:22:11,879 Speaker 1: so they spend a billion dollars, but that becomes a 418 00:22:11,920 --> 00:22:15,840 Speaker 1: one billion dollar asset that they have on their balance sheet, 419 00:22:15,840 --> 00:22:19,800 Speaker 1: and then over time that depreciates and they get some 420 00:22:19,840 --> 00:22:23,520 Speaker 1: sort of that affects their income and taxes and so forth. 421 00:22:24,119 --> 00:22:27,359 Speaker 1: Two questions that come to mind, So, hey, just is 422 00:22:27,400 --> 00:22:29,920 Speaker 1: that the right framework? B How is it different? Um 423 00:22:29,960 --> 00:22:33,040 Speaker 1: if they if a company, say, spends one billion dollars 424 00:22:33,040 --> 00:22:36,040 Speaker 1: on building a brand, how does that look? And how 425 00:22:36,080 --> 00:22:39,320 Speaker 1: in the accounting framework do you adjust for the fact that, Look, 426 00:22:39,359 --> 00:22:42,240 Speaker 1: if you build a one billion dollar factory, that factory 427 00:22:42,280 --> 00:22:45,400 Speaker 1: is probably never gonna be worth more than one billion too. 428 00:22:45,760 --> 00:22:47,920 Speaker 1: But if you spend a billion dollars over time, say 429 00:22:47,920 --> 00:22:50,719 Speaker 1: building up a brand, that could become a ten billion 430 00:22:50,720 --> 00:22:54,639 Speaker 1: dollar brand over time if it catches fire. Let's just 431 00:22:54,680 --> 00:22:57,080 Speaker 1: be methodical about this. So the factory, as you said, 432 00:22:57,119 --> 00:22:58,960 Speaker 1: you spend a billion dollars, that goes on your your 433 00:22:58,960 --> 00:23:02,120 Speaker 1: balance sheet it and it's gonna be net property, plant equipment, 434 00:23:02,160 --> 00:23:03,960 Speaker 1: and then you're going to depreciate that over time and 435 00:23:04,000 --> 00:23:06,040 Speaker 1: so usually and that would be twenty years and what 436 00:23:06,600 --> 00:23:09,920 Speaker 1: investors would see a straight lined appreciation, so literally it 437 00:23:09,960 --> 00:23:13,440 Speaker 1: would then be reflected as an expense on the income statements. 438 00:23:13,440 --> 00:23:15,560 Speaker 1: A would flow through the income statement, but again a 439 00:23:15,600 --> 00:23:18,240 Speaker 1: relatively small five percent, right, it's a twenty years of 440 00:23:18,320 --> 00:23:20,440 Speaker 1: life five percent shows up on your concert each year 441 00:23:20,720 --> 00:23:22,439 Speaker 1: and predominantly shows up the bounty. And by the way, 442 00:23:22,480 --> 00:23:24,359 Speaker 1: in the bounty, you're also reducing the value by that 443 00:23:24,400 --> 00:23:28,200 Speaker 1: appreciate depreciation amount. Now that value that asset could be 444 00:23:28,240 --> 00:23:30,680 Speaker 1: worth more. I mean, presumably if you build this billion 445 00:23:30,680 --> 00:23:33,800 Speaker 1: dollar asset and does INCREDI incredibly profitable, and you sold 446 00:23:33,800 --> 00:23:36,320 Speaker 1: it to somebody else, they would they would pay for 447 00:23:36,359 --> 00:23:38,280 Speaker 1: that profitability. So it could be worth more than a 448 00:23:38,280 --> 00:23:40,640 Speaker 1: billion dollars. But as you point out, you know, it's 449 00:23:40,640 --> 00:23:42,760 Speaker 1: hard to it's often not gonna be five or ten 450 00:23:42,800 --> 00:23:45,920 Speaker 1: times that amount. Um. If you're building a brand and 451 00:23:45,960 --> 00:23:48,040 Speaker 1: you're spending a billion dollars, and usually you wouldn't do 452 00:23:48,080 --> 00:23:49,720 Speaker 1: it all in one fell swoop, right, you do it 453 00:23:49,720 --> 00:23:53,200 Speaker 1: over time. But those let's just use things like marketing, 454 00:23:53,320 --> 00:23:56,320 Speaker 1: right or advertising, those are going to be expensed, and 455 00:23:56,359 --> 00:24:01,040 Speaker 1: so the of the cost of that that particular period 456 00:24:01,600 --> 00:24:04,639 Speaker 1: well bill reflected on the income statement and it just 457 00:24:04,680 --> 00:24:07,280 Speaker 1: goes away, right, you never see, there's no recorded value 458 00:24:07,320 --> 00:24:10,000 Speaker 1: for it, and so you might imagine, you know, like crazy, 459 00:24:10,040 --> 00:24:12,600 Speaker 1: you know, you spend your your young company to spend 460 00:24:12,800 --> 00:24:15,399 Speaker 1: you blow your whole advertising budget on December thirty one 461 00:24:15,560 --> 00:24:18,160 Speaker 1: of a year, right, and what the accounts that say 462 00:24:18,160 --> 00:24:20,240 Speaker 1: is that value that things worth nothing? But of course 463 00:24:20,400 --> 00:24:23,159 Speaker 1: the next day hopefully you get some positive benefits from that. 464 00:24:23,200 --> 00:24:25,520 Speaker 1: So just you can see the absurdity of it from 465 00:24:25,560 --> 00:24:28,760 Speaker 1: that from that particular point of view. And as you said, 466 00:24:28,760 --> 00:24:31,240 Speaker 1: as you now again where you know, sort of the 467 00:24:31,240 --> 00:24:34,119 Speaker 1: litmus test for the virtues of doing this is in 468 00:24:34,160 --> 00:24:38,000 Speaker 1: mergers and acquisitions. So if you build you know, Joe Ink, 469 00:24:38,119 --> 00:24:40,640 Speaker 1: and you build this great brand, and my company tries 470 00:24:40,680 --> 00:24:42,639 Speaker 1: to take over your company, I'm gonna pay you for 471 00:24:42,680 --> 00:24:45,960 Speaker 1: those benefits that you've built where you've accrued, and that 472 00:24:45,960 --> 00:24:47,840 Speaker 1: will show up then on my balance sheet. Right, so 473 00:24:47,880 --> 00:24:51,160 Speaker 1: in the sense if there's a transaction, it will show up. 474 00:24:51,200 --> 00:24:53,639 Speaker 1: But in the normal course of business, in terms of 475 00:24:53,640 --> 00:24:55,800 Speaker 1: how you built the business, it would not. So that's 476 00:24:56,760 --> 00:24:58,720 Speaker 1: and again you know, if we keep our eyes on 477 00:24:58,760 --> 00:25:01,000 Speaker 1: the cash flows, we're gonna be fine. But this these 478 00:25:01,040 --> 00:25:03,520 Speaker 1: are really these can be very significant. And obviously the 479 00:25:03,560 --> 00:25:07,199 Speaker 1: reason we're having this conversation today is because you go 480 00:25:07,240 --> 00:25:09,640 Speaker 1: back in time. I mean in nine in nine seventies, 481 00:25:09,640 --> 00:25:13,840 Speaker 1: for example, tangible investments were doubled those of intangible investments, 482 00:25:14,200 --> 00:25:17,560 Speaker 1: and today intangible investments are one and a half times 483 00:25:18,400 --> 00:25:21,280 Speaker 1: tangible investments. So we've seen in a couple of generations 484 00:25:22,040 --> 00:25:24,960 Speaker 1: a real flip in the significance of these particular items, 485 00:25:25,080 --> 00:25:28,720 Speaker 1: and that and that distortion again is has to be 486 00:25:28,840 --> 00:25:32,320 Speaker 1: reversed essentially as we think about things as investors. So 487 00:25:32,600 --> 00:25:37,480 Speaker 1: here's something that I'm curious about in this conversation more broadly, 488 00:25:37,520 --> 00:25:39,920 Speaker 1: which is that is there any way to think about 489 00:25:39,960 --> 00:25:44,119 Speaker 1: the value of intangible assets x anti. I mean, we 490 00:25:44,160 --> 00:25:47,680 Speaker 1: can obviously see that a great brand like say Lululemon 491 00:25:47,840 --> 00:25:50,800 Speaker 1: or Adidas or something that's a brand that's an those 492 00:25:50,840 --> 00:25:55,200 Speaker 1: assets throw off incredible amounts of money. Is there any 493 00:25:55,200 --> 00:25:58,000 Speaker 1: way to not just sort of figure out the value 494 00:25:58,040 --> 00:26:01,560 Speaker 1: of intangible assets and red prospect or is it inherently 495 00:26:01,720 --> 00:26:05,280 Speaker 1: something that has to be done only once we sort 496 00:26:05,280 --> 00:26:08,760 Speaker 1: of get a feel for how profitable they are. Well, 497 00:26:08,800 --> 00:26:10,920 Speaker 1: I mean, Joe, I'll try to go to a kind 498 00:26:10,920 --> 00:26:13,680 Speaker 1: of convenient example of this um, but it's it's a 499 00:26:13,720 --> 00:26:16,960 Speaker 1: big one, which is things like um uh, subscription based 500 00:26:16,960 --> 00:26:20,320 Speaker 1: business godnesses. Right, so you think about you know, whatever 501 00:26:20,320 --> 00:26:23,119 Speaker 1: it is, your Netflix subscription or your Verizon or whatever 502 00:26:23,160 --> 00:26:25,480 Speaker 1: it is. Right, And so the classic model to understand 503 00:26:25,480 --> 00:26:28,400 Speaker 1: that is the company has uh they call customer acquisition costs, 504 00:26:28,440 --> 00:26:30,520 Speaker 1: but an acquisition costs today, say we want Joe as 505 00:26:30,560 --> 00:26:33,080 Speaker 1: one of our customers, and we're gonna spend to get 506 00:26:33,160 --> 00:26:36,400 Speaker 1: him more tracy, and we're gonna, you know, to advertising 507 00:26:36,480 --> 00:26:38,560 Speaker 1: or marketing or some sort of promotion, right, so that 508 00:26:38,640 --> 00:26:41,320 Speaker 1: they're gonna absorb an expense to get you onto their 509 00:26:41,800 --> 00:26:45,119 Speaker 1: get you and then over time, you're gonna spend x 510 00:26:45,160 --> 00:26:47,800 Speaker 1: per month and you'll stick around for a period of time. 511 00:26:47,840 --> 00:26:50,240 Speaker 1: And there's right, So that that that's a class example 512 00:26:50,240 --> 00:26:52,600 Speaker 1: is that there are there are big frameworks thinking about 513 00:26:53,080 --> 00:26:56,600 Speaker 1: customer acquisition and lifetime customer lifetime value and companies are 514 00:26:56,600 --> 00:27:00,679 Speaker 1: obviously making estimates of those values as a think about 515 00:27:00,840 --> 00:27:02,919 Speaker 1: how much they're willing to spend to acquire new customers. 516 00:27:02,960 --> 00:27:05,840 Speaker 1: So there's a there's a fairly concrete example where again 517 00:27:05,880 --> 00:27:08,320 Speaker 1: it's still a judgment. You don't really know the answer, 518 00:27:08,920 --> 00:27:11,280 Speaker 1: but people are making those kinds of calls, and so 519 00:27:11,480 --> 00:27:13,000 Speaker 1: I mean that, and you just go right down the 520 00:27:13,000 --> 00:27:14,760 Speaker 1: line of some of the stock today, they're you know, 521 00:27:14,840 --> 00:27:17,200 Speaker 1: things like the Pelotons the World, the Netflix is of 522 00:27:17,240 --> 00:27:18,960 Speaker 1: the world. These are these are really sort of the 523 00:27:19,000 --> 00:27:21,439 Speaker 1: hot issues as investors look at these things is to 524 00:27:21,480 --> 00:27:23,920 Speaker 1: think about how many customers can they sign up with? 525 00:27:23,960 --> 00:27:26,639 Speaker 1: The economics for customer and so forth. That's all this 526 00:27:26,760 --> 00:27:42,879 Speaker 1: kind of stuff that we're talking about. I have a 527 00:27:42,880 --> 00:27:45,640 Speaker 1: slightly weird question, but just going back to the different 528 00:27:45,800 --> 00:27:49,639 Speaker 1: treatment of intangibles when a company does M and A 529 00:27:49,840 --> 00:27:54,280 Speaker 1: versus when it develops them itself. Do you think that 530 00:27:54,280 --> 00:28:00,159 Speaker 1: that that different treatment encourages companies to do more A 531 00:28:00,359 --> 00:28:04,880 Speaker 1: or to to grow via acquisition nowadays given the importance 532 00:28:04,880 --> 00:28:10,520 Speaker 1: of intangibles on to many companies. Um, it's an intriging question, Tracy. 533 00:28:10,560 --> 00:28:13,160 Speaker 1: I actually don't think so. It was not they don't 534 00:28:13,160 --> 00:28:15,080 Speaker 1: think about it at all, But I don't think so. 535 00:28:15,240 --> 00:28:17,280 Speaker 1: I do think that probably most of the M and 536 00:28:17,320 --> 00:28:20,440 Speaker 1: A that relates to these kinds of things is to acquire, 537 00:28:20,560 --> 00:28:26,520 Speaker 1: whether you know, capabilities or particular business lines, um, rather 538 00:28:26,600 --> 00:28:30,280 Speaker 1: than than thinking about the accounting treatment per se. But 539 00:28:31,080 --> 00:28:33,120 Speaker 1: sort of an add on thought though, is that one 540 00:28:33,160 --> 00:28:36,000 Speaker 1: of the the arguments that accountants make as to why 541 00:28:36,040 --> 00:28:39,120 Speaker 1: they can't or shouldn't be thinking about these intangible assets 542 00:28:39,720 --> 00:28:42,959 Speaker 1: differently than they are today expensing them is that they 543 00:28:43,000 --> 00:28:44,760 Speaker 1: don't really know how to treat them. As that I mentioned. 544 00:28:44,760 --> 00:28:46,800 Speaker 1: Even in my little Microsoft example, there's a lot of 545 00:28:46,840 --> 00:28:49,240 Speaker 1: debate as to what Even in your question about r D, 546 00:28:49,400 --> 00:28:51,000 Speaker 1: there's a lot of debate about how much should be 547 00:28:51,000 --> 00:28:54,840 Speaker 1: considered intangible versus investment, versus maintenance and so forth, and 548 00:28:54,880 --> 00:28:57,760 Speaker 1: then hamortization periods. These are all up debate. But it 549 00:28:57,800 --> 00:28:59,800 Speaker 1: turns out that when there's an M and a deal, 550 00:29:00,080 --> 00:29:03,360 Speaker 1: those things happen. Right There are intangible assets that are 551 00:29:03,400 --> 00:29:05,840 Speaker 1: put onto the balance sheet of the acquirers and those 552 00:29:05,880 --> 00:29:08,680 Speaker 1: are amortized over some period of time. So those judgments 553 00:29:08,720 --> 00:29:11,800 Speaker 1: are being carried out by somebody now. So that's the 554 00:29:11,840 --> 00:29:13,600 Speaker 1: other instring point. But I don't I don't think it's 555 00:29:13,600 --> 00:29:15,840 Speaker 1: a motivator for him and a per se. There are 556 00:29:15,840 --> 00:29:17,600 Speaker 1: a lot of other things that are interesting that would 557 00:29:17,600 --> 00:29:20,440 Speaker 1: be that that that come into play there. But um, 558 00:29:20,440 --> 00:29:23,440 Speaker 1: but it does show you that at least uh in 559 00:29:23,480 --> 00:29:27,520 Speaker 1: that setting, those judgments are being made by accountants right now. 560 00:29:29,120 --> 00:29:32,440 Speaker 1: So in the in the intro, we talked about this 561 00:29:32,520 --> 00:29:37,440 Speaker 1: idea of can a rethinking of accounting sort of rescue 562 00:29:37,520 --> 00:29:40,520 Speaker 1: value investing And so in other words, instead of value 563 00:29:40,560 --> 00:29:44,000 Speaker 1: investors sort of waiting around for maybe bank stocks or 564 00:29:44,080 --> 00:29:47,040 Speaker 1: energy stocks to catch fire, that the sort of the 565 00:29:47,080 --> 00:29:50,320 Speaker 1: whole field can sort of be salvage by just rethinking 566 00:29:51,320 --> 00:29:55,560 Speaker 1: the screens. What counts is value? Where do you stand 567 00:29:55,800 --> 00:29:59,600 Speaker 1: on that? And is that cheating? Is that a legitimate thing? Like? 568 00:30:00,120 --> 00:30:03,280 Speaker 1: How significant is this? And if sort of more people 569 00:30:03,280 --> 00:30:06,560 Speaker 1: appreciated this point, would sort of would there be a 570 00:30:06,680 --> 00:30:09,880 Speaker 1: role for people who come at investing from a quote 571 00:30:09,960 --> 00:30:14,160 Speaker 1: value mentality to thrive even in this environment? You know, 572 00:30:14,200 --> 00:30:16,240 Speaker 1: And Joe, you put your finger on just another very 573 00:30:16,280 --> 00:30:18,840 Speaker 1: hot topic. Um I should mention one of you know, 574 00:30:18,880 --> 00:30:21,800 Speaker 1: one of my UH side things is I'm an adjunct 575 00:30:21,840 --> 00:30:23,960 Speaker 1: professor at Columbia Business School and I'm part of the 576 00:30:23,960 --> 00:30:27,240 Speaker 1: power and Center for Grandma Dot Investing, so very much 577 00:30:27,320 --> 00:30:30,160 Speaker 1: part of that value investing tradition. And I think that 578 00:30:30,200 --> 00:30:31,800 Speaker 1: one of the things just to keep our eye on 579 00:30:33,240 --> 00:30:35,480 Speaker 1: is to think about is to pose the question what 580 00:30:35,640 --> 00:30:37,680 Speaker 1: is value investing? And I think you said this even 581 00:30:37,760 --> 00:30:39,600 Speaker 1: Joe in the introduction there are two ways to think 582 00:30:39,640 --> 00:30:41,680 Speaker 1: about it. One is buying something for less than what 583 00:30:41,760 --> 00:30:44,880 Speaker 1: it's worked, and then the second is um and this 584 00:30:45,000 --> 00:30:48,560 Speaker 1: was I think very much popularized in with with Gene 585 00:30:48,560 --> 00:30:53,360 Speaker 1: Common and con French paper. Is a statistical factor, that's right, 586 00:30:53,440 --> 00:30:55,560 Speaker 1: so the low price to book, low price to hurtings 587 00:30:55,600 --> 00:30:58,880 Speaker 1: and so forth. So the first definition of value investing 588 00:30:58,880 --> 00:31:01,120 Speaker 1: hasn't gone away at all. Find something for listening to 589 00:31:01,160 --> 00:31:02,960 Speaker 1: worth that you know, and we could have a conversation 590 00:31:03,040 --> 00:31:05,040 Speaker 1: ten years from our hundred years from now, and and 591 00:31:05,080 --> 00:31:07,720 Speaker 1: I'm hopeful that we still have the same definition. The 592 00:31:07,760 --> 00:31:10,200 Speaker 1: statistical factors, though, is the one I think that's been 593 00:31:10,280 --> 00:31:13,200 Speaker 1: under prunture to some degree, and so there has been 594 00:31:13,240 --> 00:31:15,440 Speaker 1: a slew of research. By the way, there are people 595 00:31:15,640 --> 00:31:17,560 Speaker 1: counter this, but there's been I think the balance of 596 00:31:17,600 --> 00:31:21,600 Speaker 1: the research would suggest that with adjustments as we've described, 597 00:31:21,640 --> 00:31:24,560 Speaker 1: and obviously when you're talking about lots and lots of companies, 598 00:31:24,600 --> 00:31:27,200 Speaker 1: you have to use fairly blunt instruments. But even with 599 00:31:27,240 --> 00:31:30,960 Speaker 1: those blunt instruments, those adjustments allow you to get better signals. 600 00:31:30,960 --> 00:31:33,680 Speaker 1: So I will draw your attention to a very astream 601 00:31:33,720 --> 00:31:38,440 Speaker 1: paper about value investing by Brooke lev and a Nucro 602 00:31:38,520 --> 00:31:41,120 Speaker 1: Bostava and it made the rounds, you know, came on 603 00:31:41,240 --> 00:31:43,840 Speaker 1: the fall last year, and they revised in the spring 604 00:31:43,880 --> 00:31:45,440 Speaker 1: of this year, and they made a couple of points 605 00:31:45,480 --> 00:31:48,520 Speaker 1: that we're really interesting. One is, if you make these adjustments, 606 00:31:49,360 --> 00:31:52,280 Speaker 1: the companies that fall into those categories of glamour, which 607 00:31:52,320 --> 00:31:55,520 Speaker 1: is high high valuation versus value, which is low valuation, 608 00:31:55,880 --> 00:31:58,560 Speaker 1: the companies in those categories shuffle all around, right, so 609 00:31:58,680 --> 00:32:02,000 Speaker 1: like a substantial percentage fall out of those those bins. 610 00:32:02,600 --> 00:32:05,720 Speaker 1: And the second is the signal you get from this 611 00:32:05,840 --> 00:32:09,720 Speaker 1: value factor buying cheap things actually improves, they believe improved 612 00:32:09,760 --> 00:32:13,080 Speaker 1: quite markedly when you introduce these kinds of adjustment. So 613 00:32:13,160 --> 00:32:15,440 Speaker 1: this this debate, and again again there may be there's 614 00:32:15,560 --> 00:32:18,959 Speaker 1: there may be a more overarching themes about value that 615 00:32:19,680 --> 00:32:22,480 Speaker 1: the value factor, as we know, all factors, by the way, 616 00:32:22,720 --> 00:32:27,200 Speaker 1: tend to be epistodic. Can value investing coexist with the 617 00:32:27,280 --> 00:32:30,880 Speaker 1: efficient market hypothesis? This is something I've always wondered. But 618 00:32:31,080 --> 00:32:33,760 Speaker 1: if you assume that the market does a reasonably good 619 00:32:33,840 --> 00:32:39,720 Speaker 1: job of allocating capital to um companies that show good potential, 620 00:32:40,120 --> 00:32:43,520 Speaker 1: then like, what is value investing actually doing? Isn't it 621 00:32:43,560 --> 00:32:46,600 Speaker 1: just cast like basically saying that the market is wrong 622 00:32:47,160 --> 00:32:51,040 Speaker 1: at any point in time. Well, definitely, um, you know, 623 00:32:51,160 --> 00:32:54,200 Speaker 1: so just to take a step back, there's no you know, 624 00:32:54,320 --> 00:32:57,320 Speaker 1: the markets can't be perfectly efficient, right, because there's a 625 00:32:57,400 --> 00:33:00,480 Speaker 1: cost of gathering information every flec. The crisis is a consequence. 626 00:33:00,480 --> 00:33:02,560 Speaker 1: There always has to be some sort of access return. 627 00:33:02,800 --> 00:33:06,200 Speaker 1: Las Peterson calls this. You know, markets are efficiently inefficient, right, 628 00:33:06,240 --> 00:33:07,960 Speaker 1: so there has to be enough to keep people trying 629 00:33:07,960 --> 00:33:10,920 Speaker 1: to do this thing now, value investing. If you go 630 00:33:11,000 --> 00:33:13,440 Speaker 1: to sort of the academic community, there's a debate about 631 00:33:13,440 --> 00:33:15,240 Speaker 1: what is at the court here, and there's sort of 632 00:33:15,280 --> 00:33:17,840 Speaker 1: two different camps. The first camp is ge this is 633 00:33:17,880 --> 00:33:20,720 Speaker 1: just you know, value. The value factor is just compensation 634 00:33:20,800 --> 00:33:24,240 Speaker 1: for risk. So our traditional models for measuring risk, which 635 00:33:24,240 --> 00:33:26,680 Speaker 1: is usually based on the capitalistic pricing models, the measure 636 00:33:26,680 --> 00:33:29,920 Speaker 1: of volatility, we're just not capturing something that's important, and 637 00:33:29,960 --> 00:33:33,640 Speaker 1: by introducing the value factor, we're now more completely capturing risk. 638 00:33:34,240 --> 00:33:36,040 Speaker 1: The second camp, where I think the balance of the 639 00:33:36,120 --> 00:33:38,440 Speaker 1: evidence lies by the way I think it's here, is 640 00:33:38,480 --> 00:33:41,360 Speaker 1: that there are behavioral factors and so as human beings, 641 00:33:41,400 --> 00:33:44,120 Speaker 1: we tend to go to we over extrapolate, and we 642 00:33:44,120 --> 00:33:46,040 Speaker 1: tend to go to accesses, both on the greed and 643 00:33:46,080 --> 00:33:48,840 Speaker 1: fear side. There's a consequence from time to time things 644 00:33:48,920 --> 00:33:52,120 Speaker 1: become inefficiently priced in the sense that they're you know, 645 00:33:52,160 --> 00:33:55,840 Speaker 1: they're they're fundamentals are not as strong as are off 646 00:33:56,000 --> 00:33:58,600 Speaker 1: versus of their expectations. So that, I mean, I'm not 647 00:33:58,640 --> 00:34:02,239 Speaker 1: sure that that debate has resolve, but the premise of 648 00:34:02,240 --> 00:34:04,000 Speaker 1: that at least. So so you have to put yourself 649 00:34:04,000 --> 00:34:05,520 Speaker 1: in one of those two camps. And maybe it's a 650 00:34:05,520 --> 00:34:07,120 Speaker 1: blend of the two. But if you believe in the 651 00:34:07,160 --> 00:34:09,799 Speaker 1: behavioral thing. Now I'll just say my own personal view 652 00:34:09,920 --> 00:34:12,799 Speaker 1: is of that, Uh, you know, one thing that has 653 00:34:12,840 --> 00:34:14,680 Speaker 1: not changed, we could, of all the accounting stuff, we 654 00:34:14,719 --> 00:34:16,560 Speaker 1: want one thing that has not changed, just the nature 655 00:34:16,600 --> 00:34:18,680 Speaker 1: of human behavior, right, So, and I think that's a 656 00:34:18,760 --> 00:34:20,840 Speaker 1: very hard thing for us to change. And so I 657 00:34:20,920 --> 00:34:23,760 Speaker 1: suspect many of the kinds of patterns we've seen in markets, 658 00:34:23,800 --> 00:34:25,520 Speaker 1: and which by the way, are not novel today. They've 659 00:34:25,520 --> 00:34:29,160 Speaker 1: been around for literary centuries. Um I would anticipate would 660 00:34:29,160 --> 00:34:31,120 Speaker 1: continue to be the kinds of patterns we see, at 661 00:34:31,160 --> 00:34:33,839 Speaker 1: least for the foreseeable future. No one serious has ever 662 00:34:33,840 --> 00:34:36,520 Speaker 1: claimed that they have are perfectly efficient because they can't 663 00:34:36,520 --> 00:34:39,600 Speaker 1: be um. But but I think that would be how 664 00:34:39,640 --> 00:34:41,759 Speaker 1: I would think about value, the value piece of that. 665 00:34:42,719 --> 00:34:45,719 Speaker 1: I have one more questions. So I know we've been 666 00:34:45,719 --> 00:34:50,240 Speaker 1: thinking a lot about the big text stocks in this conversation, 667 00:34:50,400 --> 00:34:54,080 Speaker 1: but I guess I have two questions actually, So one 668 00:34:54,800 --> 00:34:59,840 Speaker 1: does the emphasis on intangible assets, you know, things that 669 00:35:00,040 --> 00:35:04,719 Speaker 1: we can't see or feel, things like brand value where 670 00:35:04,760 --> 00:35:07,319 Speaker 1: you really have to put a lot of forecasting and 671 00:35:07,480 --> 00:35:10,640 Speaker 1: estimates into figuring out how much something like that is worth. 672 00:35:11,160 --> 00:35:14,960 Speaker 1: Does that make it even trickier to value a company nowadays? 673 00:35:15,080 --> 00:35:17,680 Speaker 1: Is there is there a likely more of a likelihood 674 00:35:17,719 --> 00:35:20,400 Speaker 1: that we get it wrong? And secondly, when it comes 675 00:35:20,400 --> 00:35:25,200 Speaker 1: to something like the textocks, what should investors be looking 676 00:35:25,320 --> 00:35:29,920 Speaker 1: out for to see whether or not prices have truly 677 00:35:30,200 --> 00:35:34,840 Speaker 1: overshot the future value of the company, even when including 678 00:35:35,040 --> 00:35:38,799 Speaker 1: things like intangibles? Right, so on the on the first 679 00:35:38,840 --> 00:35:41,000 Speaker 1: discussion is you know, is it trickier to do this 680 00:35:41,520 --> 00:35:43,399 Speaker 1: what I always like to do as an investors break 681 00:35:43,400 --> 00:35:45,080 Speaker 1: things down to what I would call the basic unit 682 00:35:45,080 --> 00:35:48,560 Speaker 1: of analysis, which is how does this company basically make money? 683 00:35:48,680 --> 00:35:52,000 Speaker 1: And thinking about that as carefully as possible. Now, you know, 684 00:35:52,160 --> 00:35:53,799 Speaker 1: you sort of mentioned some of these things seem like 685 00:35:53,800 --> 00:35:57,040 Speaker 1: they're more abstract to some degree, but look, a lot 686 00:35:57,040 --> 00:35:59,680 Speaker 1: of intangibles. You know, your pharma super company develop a 687 00:35:59,680 --> 00:36:01,960 Speaker 1: new uh, it's not you know, that's and it's got 688 00:36:01,960 --> 00:36:04,759 Speaker 1: a patent for example, that's not that's not abstract, Like 689 00:36:04,840 --> 00:36:06,880 Speaker 1: that's pretty clear and that's got value and that you 690 00:36:06,880 --> 00:36:11,919 Speaker 1: can model those things pretty accurately, or customer lifetime value calculations. 691 00:36:11,960 --> 00:36:13,759 Speaker 1: You know, we can debate about the details, but the 692 00:36:13,760 --> 00:36:16,080 Speaker 1: basic framework seems to make a lot of sense. So 693 00:36:17,120 --> 00:36:20,160 Speaker 1: can they be more difficult? Perhaps? Um? I think the 694 00:36:20,200 --> 00:36:23,600 Speaker 1: bigger issue that comes up is this idea and Nen 695 00:36:23,640 --> 00:36:25,840 Speaker 1: do me. They call it sunkenness, which is if you 696 00:36:25,920 --> 00:36:29,160 Speaker 1: develop intangible assets for your own company, they may be 697 00:36:29,280 --> 00:36:32,120 Speaker 1: less transferable, so the harder value in that way. But no, 698 00:36:32,239 --> 00:36:34,680 Speaker 1: for the most part, I think that it's the same 699 00:36:34,680 --> 00:36:37,600 Speaker 1: basic story. And then on the tech stocks or you know, 700 00:36:37,680 --> 00:36:40,360 Speaker 1: just in general, like how do we know that we're overpaying? 701 00:36:40,480 --> 00:36:42,880 Speaker 1: That's where I would go back to this expectations approach. 702 00:36:42,920 --> 00:36:45,600 Speaker 1: And again I have no answers about a specific company 703 00:36:45,800 --> 00:36:47,760 Speaker 1: or even the market today, but I would just say 704 00:36:48,040 --> 00:36:50,360 Speaker 1: that it is important to say what has what what 705 00:36:50,440 --> 00:36:55,120 Speaker 1: do I have to believe for this thing to makes sense, right, Michael, 706 00:36:55,160 --> 00:36:57,719 Speaker 1: that was that was great. I really appreciate you joining us. 707 00:36:57,760 --> 00:37:01,920 Speaker 1: Always a pleasure and fascinating stuff. Really helpful to sort 708 00:37:01,960 --> 00:37:05,080 Speaker 1: of think through what these things mean in a concrete way. 709 00:37:05,800 --> 00:37:08,279 Speaker 1: My pleasure guy thinks as always loved the questions and 710 00:37:08,360 --> 00:37:34,760 Speaker 1: I love the conversation. Thanks, Michael. I found that really helpful, Tracy. 711 00:37:34,840 --> 00:37:38,720 Speaker 1: I mean, you know, I I this idea that intangible 712 00:37:39,320 --> 00:37:44,760 Speaker 1: assets has grown in importance. It's sort of obvious. Everyone 713 00:37:44,760 --> 00:37:46,360 Speaker 1: can figure it out. You look at, you know, the 714 00:37:46,400 --> 00:37:48,960 Speaker 1: companies that are really valuable, and you sort of recognize 715 00:37:49,000 --> 00:37:52,040 Speaker 1: that they're not the sort of factory heavy companies of 716 00:37:52,200 --> 00:37:55,520 Speaker 1: your But how that actually fits into a sort of 717 00:37:55,600 --> 00:37:59,920 Speaker 1: valuations framework, I thought Michael explained really well. Yeah. I 718 00:38:00,120 --> 00:38:03,720 Speaker 1: also liked his idea of looking at a basic unit 719 00:38:03,760 --> 00:38:07,360 Speaker 1: of analysis, so how does the company actually make money 720 00:38:07,440 --> 00:38:12,040 Speaker 1: and sort of zero in all that um to determine 721 00:38:12,080 --> 00:38:15,719 Speaker 1: how important or how much of a return you would 722 00:38:15,760 --> 00:38:18,799 Speaker 1: get on investment for a particular company. So, you know, 723 00:38:19,800 --> 00:38:22,720 Speaker 1: I guess if you're if you're operating like a retailer, 724 00:38:22,760 --> 00:38:26,600 Speaker 1: then your investment from creating a new store is going 725 00:38:26,640 --> 00:38:29,600 Speaker 1: to be very different from if you're operating a big 726 00:38:29,680 --> 00:38:32,759 Speaker 1: tech company, for instance, and you develop new software, and 727 00:38:32,880 --> 00:38:36,319 Speaker 1: what your investment is, what your return on that particular 728 00:38:36,360 --> 00:38:38,840 Speaker 1: investment is. Yeah, you know, one of the things that 729 00:38:38,960 --> 00:38:42,680 Speaker 1: I sort of as a journalist and thinking about markets 730 00:38:42,800 --> 00:38:47,040 Speaker 1: is obviously markets can be wrong, assets can be overpriced 731 00:38:47,120 --> 00:38:51,280 Speaker 1: or underpriced, and our bubbles and manias and peaks of pessimism. 732 00:38:51,360 --> 00:38:55,640 Speaker 1: But by and large, I think it's a valuable, valuable 733 00:38:55,760 --> 00:38:59,680 Speaker 1: practice to get into the habit of at least trying 734 00:38:59,680 --> 00:39:02,879 Speaker 1: to justify a market value for anything at any given points. 735 00:39:02,920 --> 00:39:05,279 Speaker 1: So you look at something like the pricing on Netflix 736 00:39:05,920 --> 00:39:10,439 Speaker 1: or Tesla or some of these crazy names, and it's 737 00:39:10,600 --> 00:39:14,439 Speaker 1: very easy to just say, like, that's a bubble that's overvalued. 738 00:39:14,880 --> 00:39:17,080 Speaker 1: And they may be, and you know, it's like bubbles 739 00:39:17,120 --> 00:39:20,640 Speaker 1: really do happen. But I really do think that you 740 00:39:20,680 --> 00:39:23,200 Speaker 1: should one should always sort of attempt to sort of 741 00:39:23,360 --> 00:39:25,800 Speaker 1: I guess I would say, see it from the market's perspective, 742 00:39:25,840 --> 00:39:28,120 Speaker 1: even though the market is not a person. And I 743 00:39:28,160 --> 00:39:31,080 Speaker 1: do think that this is a way to get there, 744 00:39:31,719 --> 00:39:34,760 Speaker 1: at least to some extent. With some of these names. Again, 745 00:39:34,800 --> 00:39:36,680 Speaker 1: it's it's not to say that the markets priced or 746 00:39:36,760 --> 00:39:38,759 Speaker 1: Riot or that they're not overvalued, that they're not going 747 00:39:38,840 --> 00:39:41,400 Speaker 1: to fall, but at least it can sort of you 748 00:39:41,400 --> 00:39:43,640 Speaker 1: can start building a framework of your in your head 749 00:39:43,680 --> 00:39:47,279 Speaker 1: about how some of these valuations might make sense. Now, 750 00:39:47,360 --> 00:39:50,640 Speaker 1: I agree, and I think it's sort of that aspect 751 00:39:50,640 --> 00:39:55,120 Speaker 1: of it is even more important for the undervalued companies 752 00:39:55,280 --> 00:39:57,480 Speaker 1: or you know, this is where I start to think 753 00:39:57,520 --> 00:40:00,400 Speaker 1: that value investing is actually quite arrogant, because is you 754 00:40:00,440 --> 00:40:02,719 Speaker 1: basically think you're smarter than the market and you're sort 755 00:40:02,760 --> 00:40:08,200 Speaker 1: of rooting out companies that the markets view of is wrong. Um, 756 00:40:09,160 --> 00:40:11,279 Speaker 1: I don't know, Like I just I don't want to 757 00:40:11,280 --> 00:40:13,600 Speaker 1: say the market is always right, but like it does 758 00:40:13,640 --> 00:40:17,719 Speaker 1: seem like you're setting yourself up for disappointment if you're 759 00:40:17,800 --> 00:40:22,440 Speaker 1: just sort of like running counter to it all the time. Yeah. No, 760 00:40:22,600 --> 00:40:24,960 Speaker 1: I mean I agree that. You know, another thing I 761 00:40:25,000 --> 00:40:27,560 Speaker 1: was wondering about is like, Okay, so as we established 762 00:40:27,560 --> 00:40:30,280 Speaker 1: that there's sort of two ways to think about value investing, 763 00:40:30,840 --> 00:40:34,480 Speaker 1: there's like the sort of statistical factor, um, which is 764 00:40:34,640 --> 00:40:37,359 Speaker 1: the sort of part that hasn't done so well in 765 00:40:37,440 --> 00:40:40,400 Speaker 1: recent years because if you just look at traditional metrics 766 00:40:40,400 --> 00:40:43,279 Speaker 1: like price to earnings or price to book, companies with 767 00:40:43,360 --> 00:40:46,120 Speaker 1: low multiples they haven't really done well, and I just 768 00:40:46,200 --> 00:40:48,759 Speaker 1: like wonder if, like there will ever be a day 769 00:40:48,800 --> 00:40:51,160 Speaker 1: where everyone sort of froze in the towel, where no 770 00:40:51,200 --> 00:40:54,760 Speaker 1: one's sort of left arguing that it's a good idea 771 00:40:54,800 --> 00:40:57,000 Speaker 1: to buy a stock because it's sort of cheap on 772 00:40:57,080 --> 00:41:00,359 Speaker 1: the traditional metrics, and everyone who considers themselves a value 773 00:41:00,400 --> 00:41:05,160 Speaker 1: investor eventually capitulate and starts coming up with reasons why 774 00:41:05,640 --> 00:41:10,880 Speaker 1: actually Facebook and Netflix and Alphabet are actually value stocks. 775 00:41:11,040 --> 00:41:13,399 Speaker 1: I feel like at some point that's gonna happen. Maybe 776 00:41:13,400 --> 00:41:15,839 Speaker 1: that'll be a major turning point in the market. Yeah, 777 00:41:15,880 --> 00:41:18,400 Speaker 1: I think you're right. I keep thinking the last value 778 00:41:18,400 --> 00:41:21,480 Speaker 1: Investors Standing would be a really good title for a 779 00:41:21,520 --> 00:41:24,760 Speaker 1: book or or some sort of like short fiction story 780 00:41:24,880 --> 00:41:28,280 Speaker 1: or something like that. We should write it. Basically, everyone 781 00:41:28,360 --> 00:41:30,840 Speaker 1: is just going to own software and one person is 782 00:41:30,840 --> 00:41:32,960 Speaker 1: going to own all the banks in oil companies that 783 00:41:33,040 --> 00:41:35,200 Speaker 1: there's a last one to do it, they'll probably do well, 784 00:41:36,000 --> 00:41:41,600 Speaker 1: that's right, and they're like camping out on a hill somewhere. Um, alright, yeah, 785 00:41:41,640 --> 00:41:44,840 Speaker 1: I like that. We should make a short film about it. Okay, 786 00:41:45,360 --> 00:41:49,280 Speaker 1: so we leave it there, Yeah, I say it there. Alright. 787 00:41:49,400 --> 00:41:52,160 Speaker 1: This has been another episode of The All Thoughts Podcast. 788 00:41:52,280 --> 00:41:54,759 Speaker 1: I'm Tracy Alloway. You can follow me on Twitter at 789 00:41:54,760 --> 00:41:58,000 Speaker 1: Tracy Alloway, and I'm Joe Why Isn't Thal? You can 790 00:41:58,080 --> 00:42:00,800 Speaker 1: follow me on Twitter at the All work and you 791 00:42:00,800 --> 00:42:04,320 Speaker 1: should follow our guest Michael Mobison on Twitter. His handle 792 00:42:04,640 --> 00:42:09,600 Speaker 1: is m J Mobison. Follow our producer Laura Carlson. She's 793 00:42:09,640 --> 00:42:12,880 Speaker 1: at Laura M. Carlson. Follow the Bloomberg head of podcast, 794 00:42:12,920 --> 00:42:16,440 Speaker 1: Francesca Levi at Francesca Today, and check out all of 795 00:42:16,440 --> 00:42:20,120 Speaker 1: our podcasts at Bloomberg under the handle at podcast. Thanks 796 00:42:20,160 --> 00:42:20,640 Speaker 1: for listening.