Value Investing in a Changing World with Aswath Damodaran

[00:00:00] [SPEAKER_02]: Welcome to Excess Returns where we focus on what works over the long term in the markets.

[00:00:04] [SPEAKER_02]: Join us as we talk about the strategies and tactics that can help you become a better,

[00:00:08] [SPEAKER_00]: long-term investor. Jack Forehand is a Principal at Vellidia Capital Management.

[00:00:13] [SPEAKER_00]: Matt Ziegler is Managing Director at Sunpoint Investments.

[00:00:17] [SPEAKER_00]: The opinions expressed in this podcast do not necessarily reflect the opinions of Vellidia

[00:00:22] [SPEAKER_00]: Capital or Sunpoint Investments. No information on this podcast should be construed as investment

[00:00:28] [SPEAKER_00]: advice. Securities discussed in the podcast may be holdings of clients of Vellidia Capital

[00:00:34] [SPEAKER_01]: or Sunpoint Investments. Hey guys, this is Jack. In this episode of Excess Returns,

[00:00:38] [SPEAKER_01]: Matt and I sit down with NYU Professor Aswath Damodaran. Aswath needs no introduction and

[00:00:43] [SPEAKER_01]: his work on valuation and his willingness to freely share it has had a huge impact on many

[00:00:46] [SPEAKER_01]: investors, including us. Aswath has just released a new book, The Corporate Life Cycle,

[00:00:51] [SPEAKER_01]: Business Investment and Management Implications, and we dig into that concept and what it means

[00:00:55] [SPEAKER_01]: for the valuation of companies. We also wanted to get Aswath's take on some issues he isn't often

[00:00:58] [SPEAKER_01]: asked about that many investors are thinking about today. We discussed his views on factor

[00:01:02] [SPEAKER_01]: investing, market concentration, the rise of passive investing and a lot more. He also

[00:01:07] [SPEAKER_01]: explains why despite making trips to Omaha, he's never stepped foot into the Berkshire

[00:01:10] [SPEAKER_01]: Hathaway Annual Meeting. Aswath had so many great insights that we went a little longer

[00:01:13] [SPEAKER_01]: than usual, but we promise you'll find a ton of value right up until the end when he

[00:01:16] [SPEAKER_01]: explains the one lesson he would teach the average investor. Thank you for listening. Please

[00:01:20] [SPEAKER_01]: enjoy this discussion with Aswath Damodaran.

[00:01:50] [SPEAKER_04]: And does anybody want to publish it? And somebody usually does. This is a book on the

[00:01:56] [SPEAKER_04]: corporate life cycle. It reflects two things. One is we're all aging, and as we age, we

[00:02:02] [SPEAKER_04]: understand that aging brings with it some privileges. We no longer have to ask our

[00:02:07] [SPEAKER_04]: parents whether we can go out for the evening or whether they can borrow the car. We get

[00:02:12] [SPEAKER_04]: financial independence, but it comes with limits. In fact, most people think about the

[00:02:17] [SPEAKER_04]: rather than the benefits, but the reality is aging comes with privileges and limits.

[00:02:23] [SPEAKER_04]: It's that recognition that I brought into business because I feel businesses go through

[00:02:28] [SPEAKER_04]: this similar process. They age, good stuff happens, bad stuff happens. And just like

[00:02:35] [SPEAKER_04]: human beings, companies and businesses fight aging. Nobody wants to get old. One of my

[00:02:46] [SPEAKER_04]: but growing old is mandatory, and companies refuse to accept that reality. And there's

[00:02:53] [SPEAKER_04]: an ecosystem that tells them they don't have to be old. They can be young again. Just like

[00:02:58] [SPEAKER_04]: there's an ecosystem around human beings. That ecosystem, consequences of plastic surgeons

[00:03:04] [SPEAKER_04]: and physical trainers saying you can be young again. They're lying, but we buy into it because

[00:03:08] [SPEAKER_04]: we so want to be young again. With companies, it's consultants and bankers telling them they

[00:03:14] [SPEAKER_04]: can be young again. Just do this. I remember about five years ago when Walmart bought Flipkart,

[00:03:21] [SPEAKER_04]: the Indian online retailer. And Walmart by 2019 was a middle-aged company. Nothing wrong with it.

[00:03:28] [SPEAKER_04]: They made it to middle-age. That's already an accomplishment. We talk about the mortality

[00:03:32] [SPEAKER_04]: rates, but they don't want to be middle-aged. They wanted to be young. They wanted to be a

[00:03:37] [SPEAKER_04]: growth company. And I called it the most expensive facelift in history because it

[00:03:41] [SPEAKER_04]: made $21 billion to buy an Indian online retailer. Did it make them young again? Not at all.

[00:03:48] [SPEAKER_04]: But will they stop trying now? So the reality is there is a great deal of commonality between

[00:03:54] [SPEAKER_04]: what we as human beings do as we age and what businesses do. And some of the most dysfunctional

[00:04:01] [SPEAKER_04]: actions in the part of businesses come about because they refuse to act their age. They want

[00:04:06] [SPEAKER_04]: to be young again. Old companies trying to be young, young companies trying to be old.

[00:04:10] [SPEAKER_04]: I don't do consulting, but if I were a consultant, I would be fired

[00:04:14] [SPEAKER_04]: 15 minutes in because my advice is just act your age. That's pretty much the advice I

[00:04:20] [SPEAKER_04]: would give to any company. The healthiest thing you could do as a company is to act your age.

[00:04:26] [SPEAKER_03]: So speaking of acting your age, and I hope you make it more than 15 minutes into this

[00:04:30] [SPEAKER_03]: consultation here today. I have a question. I love this book. This one is one of my

[00:04:35] [SPEAKER_03]: favorites that you wrote. And there's nothing age about this. I'm not saying you forgot

[00:04:40] [SPEAKER_03]: you wrote the chapter here on the corporate life cycle. But I take moderate issue because

[00:04:45] [SPEAKER_03]: I love this back part of this book so much. And I've had so many, what was this 2019, 2017?

[00:04:52] [SPEAKER_04]: 2017. And in fact, it reflects something else I started saying. I've taught valuation now for

[00:04:59] [SPEAKER_04]: close to 40 years. I did my first valuation in 1981. I did with an annual report and a

[00:05:06] [SPEAKER_04]: sheet, a paper and a calculator. That's how old I am. But one of the things I noticed as I kept

[00:05:13] [SPEAKER_04]: as I looked at appraisals and valuations is our access to data became much better.

[00:05:18] [SPEAKER_04]: And we could, you know, you couldn't go to S&P Capital IQ facts and download the last 25

[00:05:23] [SPEAKER_04]: years of data, not just in your company, but in every company in the sector. In seconds,

[00:05:29] [SPEAKER_04]: you have more powerful tools. I work with a calculator and a pencil.

[00:05:33] [SPEAKER_04]: You have Excel spreadsheets. You can build macros. If you're really sophisticated,

[00:05:37] [SPEAKER_04]: you can bring in Python. And I noticed a contradiction. We had more data,

[00:05:42] [SPEAKER_04]: more powerful tools and evaluations were actually became qualitatively worse.

[00:05:48] [SPEAKER_04]: The question I started asking is what's going on? Why is the data and the more powerful

[00:05:53] [SPEAKER_04]: tools not translating to better valuations? And my answer was, and I could be wrong,

[00:05:59] [SPEAKER_04]: is that we've forgotten that every valuation you're telling a story, whether you like it or not.

[00:06:05] [SPEAKER_04]: When you put numbers for a company, you're telling a story about the company.

[00:06:09] [SPEAKER_04]: And it's your job to make the story explicit and ask yourself, do I buy that story? We've

[00:06:16] [SPEAKER_04]: forgotten that art of storytelling because much evaluation has become financial modeling.

[00:06:21] [SPEAKER_04]: You're an Excel ninja. You know what buttons or what keys to hit to turn every other row

[00:06:26] [SPEAKER_04]: different color, but you've forgotten that every valuation is a story.

[00:06:31] [SPEAKER_04]: That book reflected the reality that we've forgotten the art of storytelling and that

[00:06:37] [SPEAKER_04]: without stories, valuations has become numbers on a spreadsheet.

[00:06:41] [SPEAKER_04]: That book actually reflected my desire to bring back stories to valuation.

[00:06:49] [SPEAKER_04]: Something that I've had a role in driving up because people looked at books like mine

[00:06:53] [SPEAKER_04]: thought equations and models would basically give the valuations.

[00:06:57] [SPEAKER_04]: And it was my response to saying, look, you might have learned all these tools from my books,

[00:07:04] [SPEAKER_04]: but they're not going to help you value companies unless you understand how to tell

[00:07:07] [SPEAKER_04]: a story about a company. And in fact, that book ties very well with the corporate

[00:07:12] [SPEAKER_04]: lifecycle, which is when you tell a story about a business, you're not a fiction writer.

[00:07:18] [SPEAKER_04]: You can't write fairy tales. We might want happy endings. Hey, you're writing a story about Bed,

[00:07:24] [SPEAKER_04]: Bath and Beyond. It's going to be a horror story whether you like it or not,

[00:07:28] [SPEAKER_04]: because the reality is there is no light at the end of the tunnel.

[00:07:32] [SPEAKER_04]: I call this bounded storytelling, which is you tell stories that reflect where your company is.

[00:07:38] [SPEAKER_04]: And I think that there are two, I'll throw out two companies and I want you to,

[00:07:41] [SPEAKER_04]: you know, your audience to think about where they would, you know, what they would do

[00:07:45] [SPEAKER_04]: as stories for these companies. Two companies that are in trouble right now, one is Intel

[00:07:51] [SPEAKER_04]: and the other is Starbucks. Two companies that used to be superstar companies at a point in time.

[00:07:57] [SPEAKER_04]: Clearly they've hit the skids. They both, I know, one of them has a new CEO brought in

[00:08:04] [SPEAKER_04]: from Chipotle. And that's again a question, can hiring a new CEO give you new life?

[00:08:09] [SPEAKER_04]: But the question is, what is the story you would tell for your,

[00:08:13] [SPEAKER_04]: for these companies that might lead them back to the promised land or at least to middle-aged?

[00:08:18] [SPEAKER_04]: Because clearly these companies are teetering on the edge of that worst phase of the life cycle

[00:08:24] [SPEAKER_04]: of decline. The market seems to have decided that Intel is not just middle-aged, it's old.

[00:08:31] [SPEAKER_04]: And I think the question is, is there a way back? And that's, I think, what you need

[00:08:36] [SPEAKER_04]: to think about when you think about valuing or investing in companies is where is this company

[00:08:40] [SPEAKER_04]: in the life cycle? What can it do realistically to keep going? And raise the question that I

[00:08:47] [SPEAKER_04]: think we know some business school professors might find sacrilegious. Should it keep going?

[00:08:54] [SPEAKER_04]: I think there is this, and I've argued against both ESG and sustainability as

[00:08:59] [SPEAKER_04]: bullshit concepts packaged very well by Harvard Business School professors

[00:09:04] [SPEAKER_04]: and marketed by consultants. Sustainability in particular, I've never quite understood.

[00:09:09] [SPEAKER_04]: I can understand wanting to make the planet more sustainable. We live on the planet, we want it to

[00:09:15] [SPEAKER_04]: be sustainable. But what does it mean to make a company more sustainable? Do you want Philip

[00:09:21] [SPEAKER_04]: Morris or Altria as they call them to be sustainable? Do you want people smoking

[00:09:27] [SPEAKER_04]: cigarettes for the rest of their time? Or do you want companies to go away when the time

[00:09:32] [SPEAKER_04]: for them is past? I believe there's a time for companies to fold. Now, the old Kenny

[00:09:38] [SPEAKER_04]: Rodgers song is time, well you need to know when to hold them. You need to know when to fold them.

[00:09:44] [SPEAKER_04]: And there are some companies where the best record, the healthiest thing you can do is say,

[00:09:49] [SPEAKER_04]: look we had a great run and it's time for us to go away. And I think that's something we

[00:09:55] [SPEAKER_04]: have to accept in business is business, a company in particular is a legal entity.

[00:09:59] [SPEAKER_04]: If the reason for its existence is gone, why should it stay on?

[00:10:06] [SPEAKER_03]: Something I love in this book that I think ties back to the old book that I wanted to reference

[00:10:10] [SPEAKER_03]: here in this is in those chapters in the story and kind of what you're just saying, you can tie

[00:10:15] [SPEAKER_03]: this back to an Intel or a Starbucks or any of the others. This idea of the story is first about

[00:10:20] [SPEAKER_03]: why is this a better mousetrap that the company has presented? The next layer, how do

[00:10:25] [SPEAKER_03]: we convince investors to give us the money? Where can the money come from? Either internally,

[00:10:30] [SPEAKER_03]: management saying allocate resources here or externally investors give us this money,

[00:10:34] [SPEAKER_03]: let us borrow this money, let us raise this capital. And then not just convincing customers

[00:10:38] [SPEAKER_03]: to buy it, but convincing the employees to build it too. And you point out that shifts.

[00:10:45] [SPEAKER_04]: Yeah. And I think that building a business model is a vastly underrated skill.

[00:10:51] [SPEAKER_04]: I think for two decades now we've celebrated entrepreneurs because they have great ideas.

[00:10:57] [SPEAKER_04]: You know what happens to most great ideas? They never make it to a product face.

[00:11:02] [SPEAKER_04]: And many companies that make it to a product to sell this don't make it as businesses

[00:11:06] [SPEAKER_04]: because it's a different skill set. The visionary who comes up with ideas might not want to sit

[00:11:13] [SPEAKER_04]: on a three hour supply chain meeting, but if you need supply chains for your product to get

[00:11:18] [SPEAKER_04]: to customers, you need to be interested in manufacturing and supply chains. It's a point

[00:11:24] [SPEAKER_04]: I make is we think about great business people, but the kinds of people you want running your

[00:11:29] [SPEAKER_04]: company are very different when you're an idea company than when you're a business building

[00:11:34] [SPEAKER_04]: company. And again, it shifts when you become a growth company, when you got to become an

[00:11:38] [SPEAKER_04]: opportunist, think about where. And then if you're a mature company, it's about playing

[00:11:42] [SPEAKER_04]: defense because everybody's coming after your market. That's why the notion of a great CEO

[00:11:48] [SPEAKER_04]: again marketed by the Harvard Business Review and McKinsey, it's very self-serving on the

[00:11:53] [SPEAKER_04]: part of business school professors and consultants to market the idea that there's

[00:11:57] [SPEAKER_04]: certain set of characteristics that make for a great CEO. It's absolute nonsense because you

[00:12:03] [SPEAKER_04]: look at the list of characteristics and then you look around you and say, hey, that guy is

[00:12:07] [SPEAKER_04]: a great CEO. He has none of these characteristics, but they want to market this package because if

[00:12:12] [SPEAKER_04]: they can convince you that there's a package, then they can charge you $250,000 for getting

[00:12:17] [SPEAKER_04]: an MBA where they will deliver the package to you or to hire McKinsey to come in and tell

[00:12:22] [SPEAKER_04]: you how to get the package. There is no one package. It's going to vary across the

[00:12:27] [SPEAKER_04]: life cycle, which means management tasks, that challenges are going to be different,

[00:12:32] [SPEAKER_04]: the kinds of people who want running the company are different. And I make this point

[00:12:37] [SPEAKER_04]: in the book and it's going to get only more difficult to deal with this in the 21st century

[00:12:42] [SPEAKER_04]: than the 20th century and here's why. Let's take the classic 20th century company, an amazingly

[00:12:48] [SPEAKER_04]: successful 20th century company, GE. It's actually a 19th century company in terms of when it was

[00:12:53] [SPEAKER_04]: founded, 1892 I think, but it lasted 120 plus years. It's now dead and gone, broken into

[00:13:02] [SPEAKER_04]: pieces and we can talk about why those pieces survived, but it lasted 130 years. You can take

[00:13:09] [SPEAKER_04]: Ford, you can take GM, you can take the companies of the 20th century were long-lived

[00:13:14] [SPEAKER_04]: enterprises, but it took them a long time to get from zero to being big companies. Think of when

[00:13:21] [SPEAKER_04]: Ford was founded, when Ford became a large company, 50, 60 years because scaling up was

[00:13:26] [SPEAKER_04]: difficult, capital intensive businesses, 130 years. So here's what happened. Henry Ford was

[00:13:35] [SPEAKER_04]: the perfect CEO for Ford in 1902. Visionary, but remember visionaries are kind of eccentric

[00:13:43] [SPEAKER_04]: and that's the reason the Model T came in one color, black, black or black. It's just like,

[00:13:49] [SPEAKER_04]: you know, Steve Jobs iteration one in Apple saying I'm going to make a computer where you

[00:13:53] [SPEAKER_04]: cannot expand, no new memory because I don't like that. But he was the perfect CEO for

[00:14:00] [SPEAKER_04]: Ford to break the mass market automobile business open. Towards the end of his tenure,

[00:14:06] [SPEAKER_04]: he was out living his welcome but time took care of the bra. He died, somebody else moved

[00:14:13] [SPEAKER_04]: in. Time took care of transitions for the 20th century company. In contrast, think of Yahoo

[00:14:20] [SPEAKER_04]: and Blackberry. Both founded in the 1990s, went from zero to a hundred billion,

[00:14:26] [SPEAKER_04]: in the case of Yahoo in eight years. Amazing. Lasted at the top by three to four years.

[00:14:33] [SPEAKER_04]: Then went into decline. The day Google went public, Yahoo was started its decline by 2015,

[00:14:40] [SPEAKER_04]: gone 23 years from start to finish. And that is more the 21st century company, you know,

[00:14:48] [SPEAKER_04]: much of what I do online, I do on Zoom. I like the technology but if you think Zoom's going

[00:14:53] [SPEAKER_04]: to be around for a hundred years, you're being delusional. This company, even if it's

[00:14:59] [SPEAKER_04]: successful, is going to have a 20 to 25 year run and the problem is the same people are

[00:15:05] [SPEAKER_04]: running the company while it's a young growth company as when it's a declining company. And

[00:15:09] [SPEAKER_04]: there are very few people of the skill sets to essentially match up to the company as it ages

[00:15:15] [SPEAKER_04]: under them. We're going to have a lot of issues with companies in the 21st century where

[00:15:20] [SPEAKER_04]: management that we thought were heroes just a few years ago are going to be zeros.

[00:15:27] [SPEAKER_04]: Here's the problem. While this is going on, we've decided as shareholders we don't need the

[00:15:33] [SPEAKER_04]: power to change management. We've gone along with companies, especially companies the 21st

[00:15:39] [SPEAKER_04]: century companies, with two classes of shares. And guess who owns the voting shares? The founder

[00:15:45] [SPEAKER_04]: CEOs. We've essentially created a calamity for ourselves. I mean, a couple of years ago you

[00:15:52] [SPEAKER_04]: saw this play out at Facebook where portfolio managers said, hey, how do we get Mark Zuckerberg

[00:15:57] [SPEAKER_04]: to listen to us? And my response was, now buying Facebook and complaining that Mark Zuckerberg

[00:16:03] [SPEAKER_04]: is not listening to you is like getting married to a Kardashian and complaining cameras

[00:16:08] [SPEAKER_04]: fall away all over the place. You gave up that power and we've given up the power to change

[00:16:14] [SPEAKER_04]: management at exactly the time where we need the power the most. So as you look across Google

[00:16:20] [SPEAKER_04]: and Facebook and all of these companies, two classes of shares, it's terrifying to think about

[00:16:25] [SPEAKER_04]: what do we do if the people running the company are not matched up to the company? How

[00:16:30] [SPEAKER_04]: do we get them out of the positions of running the company? How do you think about

[00:16:36] [SPEAKER_01]: the relationship between narrative and reality? I was thinking about your example with Intel,

[00:16:40] [SPEAKER_01]: and if I wanted to change their narrative, I probably would want to do something around AI.

[00:16:44] [SPEAKER_01]: But the problem is they can't really deliver on AI. And you can argue in different times in Tesla's

[00:16:48] [SPEAKER_01]: history, Elon Musk has maybe set the narrative very well, maybe with things that he couldn't

[00:16:53] [SPEAKER_01]: even deliver. So how do you think about that, like the role of a CEO in setting that narrative

[00:16:56] [SPEAKER_04]: relative to reality? It's got to be bounded storytelling. And that's why I described it as,

[00:17:01] [SPEAKER_04]: I mean, in fact, in Silicon Valley, they understood the importance of story,

[00:17:04] [SPEAKER_04]: but their storytelling was they taught founders how to tell big stories, bigger stories. I mean,

[00:17:10] [SPEAKER_04]: you see this play out when you look at the total addressable markets has become a feature

[00:17:16] [SPEAKER_04]: of almost every Silicon Valley company. When Uber went public, they claimed that total

[00:17:21] [SPEAKER_04]: addressable market was $5.2 trillion. You know how they came up with the $5.2 trillion?

[00:17:28] [SPEAKER_04]: They spent every dollar people spend not just on car service, but on buying cars

[00:17:35] [SPEAKER_04]: on public... They basically took everything anybody spent on transportation and said,

[00:17:39] [SPEAKER_04]: that's our total addressable market. You know why they liked the $5.2 trillion?

[00:17:44] [SPEAKER_04]: You hold a $5.2 trillion in front of investors' eyes. They said this company could become huge,

[00:17:49] [SPEAKER_04]: but it's a fairy tale. There is no way that car service is going to be a $5.2 trillion

[00:17:55] [SPEAKER_04]: business. One of the things I have is a problem with storytelling. And let's face it, Venture

[00:18:01] [SPEAKER_04]: Capital is all storytellers. Founders are storytellers. It's all stories, but they're

[00:18:06] [SPEAKER_04]: undisciplined storytelling where you don't kind of capture the bounds in that story based on

[00:18:13] [SPEAKER_04]: reality. In fact, I have what I call the 3P test. Is it possible? Is it plausible? Is

[00:18:18] [SPEAKER_04]: it probable? I created it in the process of writing the Narrative and Numbers book.

[00:18:23] [SPEAKER_04]: That's basically something I constantly come back to when I hear a story.

[00:18:28] [SPEAKER_04]: Now, it's going to be interesting. I'm waiting for the Starbucks CEO to stop

[00:18:32] [SPEAKER_04]: commuting to work in a commuter jet for two days a week from wherever he's living,

[00:18:39] [SPEAKER_04]: California to Seattle and tell us his story for Starbucks. I'm fascinated because I don't see

[00:18:46] [SPEAKER_04]: a bounded story you can tell for Starbucks that brings them back to growth. Maybe it can

[00:18:51] [SPEAKER_04]: stem the bleeding, but there's no growth story I can tell for Starbucks. Because let's face it,

[00:18:58] [SPEAKER_04]: the Chinese market, it can't compete because it's cost her two eyes. The Chinese coffee

[00:19:05] [SPEAKER_04]: companies can sell at half the price that Starbucks does. In the U.S., their market is

[00:19:10] [SPEAKER_04]: saturated and they've blown up their own story. The original story for Starbucks,

[00:19:15] [SPEAKER_04]: at least the Howard Schultz story was that you'd wander into this nicely decorated cafe,

[00:19:20] [SPEAKER_04]: you'd order a cappuccino, you'd sit at that table, you'd use the Wi-Fi and over the course

[00:19:27] [SPEAKER_04]: of the next three hours consume half of the universe while you were sitting there.

[00:19:32] [SPEAKER_04]: A scone, a sandwich, have another coffee. It was supposed to be a meeting place.

[00:19:39] [SPEAKER_04]: Then came COVID and Starbucks of course switched to online ordering.

[00:19:45] [SPEAKER_04]: With online ordering, their story blew up because their sales now have shifted

[00:19:49] [SPEAKER_04]: increasingly to online sales. You walk into a Starbucks, there's a stream of people who walk

[00:19:55] [SPEAKER_04]: in, pick up their coffee off there and it's entirely destroying not just their story but

[00:20:01] [SPEAKER_04]: their basic business model because the people who come in and order at the cash register now

[00:20:07] [SPEAKER_04]: find themselves waiting 20 minutes because they're online orders ahead of them. I'm not sure

[00:20:12] [SPEAKER_04]: how you walk that back. That's why I threw Starbucks and Intel into the picture is what

[00:20:21] [SPEAKER_04]: story can you tell? I think there is a glimmer of a story you can tell for Intel because

[00:20:26] [SPEAKER_04]: the hope comes from the AI market being a big one and Nvidia dominating it and Intel

[00:20:33] [SPEAKER_04]: maybe finding a way into that market. Maybe it's too late, I don't know but they have

[00:20:40] [SPEAKER_04]: the skill set. They have the R&D but I think that whether the lead time is too long and Nvidia

[00:20:48] [SPEAKER_04]: has run away from them, I don't know. But I could tell a plausible story for Intel to make

[00:20:54] [SPEAKER_04]: a comeback at least as a middle-aged company with AI providing. But what's giving it that

[00:21:00] [SPEAKER_04]: extra space is there's a big growing market AI that potentially they could be part of.

[00:21:06] [SPEAKER_04]: With Starbucks, there is no big potential market out there that I can see. Hey,

[00:21:11] [SPEAKER_04]: they can add that on and maybe go back to being middle-aged or even high growth.

[00:21:16] [SPEAKER_04]: So I think when you look at stories, I think the questions you need to ask are not

[00:21:21] [SPEAKER_04]: math questions, they're not data questions, they're common sense questions.

[00:21:25] [SPEAKER_04]: And when you hear these plans put out, my problem with the plans is the plans are often

[00:21:29] [SPEAKER_04]: stated in terms of numbers. We're going to grow 20% a year. Where? Doing what? Our margins

[00:21:35] [SPEAKER_04]: are going to improve by 5%. By cutting what? I mean, people think that coming up with a plan

[00:21:42] [SPEAKER_04]: and equity research analysts are just as much to blame for this is to map out numbers.

[00:21:48] [SPEAKER_04]: I need a story of where that extra growth is coming from. What's going to cause your

[00:21:53] [SPEAKER_04]: margins to improve? So this notion of storytelling will actually make you more

[00:21:57] [SPEAKER_04]: disciplined in your numbers because it forces you to ask, hey, where is that coming from?

[00:22:02] [SPEAKER_04]: What is this company going to be able to do? Is it plausible? Can they pull it off?

[00:22:07] [SPEAKER_04]: And I'm glad you brought up Tesla because Tesla in many ways is a fascinating company in terms of

[00:22:13] [SPEAKER_04]: where you put in the lifecycle. It's a company that I call my corporate teenager,

[00:22:18] [SPEAKER_04]: when I bought it for the first time in 2019. I know whether you have teenagers in your

[00:22:24] [SPEAKER_04]: house or you're familiar with teenagers, but you know what teenagers do. Every day they wake

[00:22:28] [SPEAKER_04]: up, they look in the mirror and they say, I have lots of potential. What can I do today

[00:22:33] [SPEAKER_04]: to screw it all up? It's the teenage tendency. And Tesla in many ways has a great storyline.

[00:22:41] [SPEAKER_04]: Let's face it, it's created the electric car market when people said it was not.

[00:22:47] [SPEAKER_04]: Go back to 2008, look at what the status quo, the legacy automakers were saying about

[00:22:52] [SPEAKER_04]: and look at how much the game has changed in electric cars. And Tesla is responsible for that,

[00:22:59] [SPEAKER_04]: Elon Musk. But at the same time, this is a company that constantly steps on its own storyline.

[00:23:07] [SPEAKER_04]: By doing what? By doing things that, the heck are you guys even thinking about?

[00:23:12] [SPEAKER_04]: Why would you want to bring Bitcoin into the picture? But that's the nature of corporate

[00:23:18] [SPEAKER_04]: teenagers is they don't have focus, but there's no point complaining about it. It's a package deal.

[00:23:23] [SPEAKER_04]: You get Elon Musk, you get his pluses, you get his minuses. I think he's a net plus for Tesla

[00:23:29] [SPEAKER_04]: still. I own Tesla. But I think this is a company where you're constantly going to be

[00:23:35] [SPEAKER_04]: searching for what's the storyline? What kind of company is it? Is it an automobile company,

[00:23:39] [SPEAKER_04]: an energy company, an automated driving company? It's a company where the story keeps

[00:23:44] [SPEAKER_04]: shifting and getting the bounds and the story gets really difficult to put.

[00:23:51] [SPEAKER_01]: I want to ask you about value, Vesti. So I guess we're going to go in a little more boring

[00:23:53] [SPEAKER_01]: world than Tesla here. But I want to start with Berkshire Hathaway's annual meeting

[00:23:56] [SPEAKER_01]: because I heard you talking in another podcast that you've been in Omaha.

[00:24:00] [SPEAKER_01]: And I believe you've been in Omaha during the annual meeting, but you've never stepped

[00:24:03] [SPEAKER_04]: foot inside it. Can you explain why? The place terrifies me. It's full of true believers

[00:24:10] [SPEAKER_04]: who think they've found... I mean, the three words that come to my mind when I think about

[00:24:15] [SPEAKER_04]: old time value investment. I'm not tarring Warren Buffett or Charlie Munger with this,

[00:24:22] [SPEAKER_04]: is it's rigid. It's ritualistic. There are certain things you're supposed to do as a

[00:24:31] [SPEAKER_04]: value investor, including going to Omaha, reading Ben Graham's security. And I'll wager

[00:24:36] [SPEAKER_04]: every hundred people who claim to have read Ben Graham's security analysis,

[00:24:40] [SPEAKER_04]: maybe one actually read the book. I've actually read the book. I've written hideously boring

[00:24:46] [SPEAKER_04]: books, but next to Ben Graham, my books are like Harry Potter to read. And you're supposed

[00:24:56] [SPEAKER_04]: to follow those... It's very ritualistic. It's very rigid and it's very righteous.

[00:25:02] [SPEAKER_04]: The righteous part really bothers me, which is they believe that they're the chosen ones.

[00:25:08] [SPEAKER_04]: You hang out with people and they'll come to Omaha. They've been coming for what,

[00:25:11] [SPEAKER_04]: 30, 35, 40 years. They think they've found the one pathway to successful investing.

[00:25:17] [SPEAKER_04]: And I have no problem with all of that. But then they look down at the rest of the world

[00:25:22] [SPEAKER_04]: as shallow and stupid and not quite there. And I think that's one of the most dangerous

[00:25:29] [SPEAKER_04]: things you can do in investing is to view the rest of the investment world with contempt

[00:25:35] [SPEAKER_04]: because you've done the right things. So I don't feel any joy in hanging out with a crowd

[00:25:43] [SPEAKER_04]: that's convinced that it's... It becomes almost a religion rather than... I have faith.

[00:25:50] [SPEAKER_04]: I tell people investing is about faith. I have faith, but I don't believe in dogma.

[00:25:56] [SPEAKER_04]: And a lot of old time value investing has become dogma. You cannot do this,

[00:26:00] [SPEAKER_04]: you should be doing this. You have to have a margin of safety. Says who?

[00:26:06] [SPEAKER_04]: So I think that that's what bothers me about old time value investing. And again,

[00:26:13] [SPEAKER_04]: I think that Warren Buffett is actually a much more flexible investor than many of the

[00:26:20] [SPEAKER_04]: people who claim to follow Warren Buffett. But I think old time value investing has created

[00:26:24] [SPEAKER_04]: these sets of rules that they believe everybody should follow. And to me, there is no one pathway

[00:26:31] [SPEAKER_04]: to success. I love Peter Lynch, I love Warren Buffett, I like what something that George Soros

[00:26:37] [SPEAKER_04]: does. I think there's something to be learned by looking at great investors in every

[00:26:44] [SPEAKER_04]: philosophy. And if you ask me what's the best philosophy for me, my advice is look inward.

[00:26:50] [SPEAKER_04]: Now figure out what makes you tick, because that's going to tell you what the right philosophy for you

[00:26:55] [SPEAKER_04]: is. It's not what worked for Warren Buffett, it's what's going to work for you.

[00:26:59] [SPEAKER_04]: Is there value in dogma? Is there an upside to dogma?

[00:27:03] [SPEAKER_04]: Yeah, you don't have to... There's no debate, right? The upside to dogma is you'll never buy

[00:27:08] [SPEAKER_04]: a stock of the P-E ratio greater than 10. That makes it very, very absolute. They have

[00:27:12] [SPEAKER_04]: less work to do. But your portfolio is not going to thank you for your dogma. So the

[00:27:21] [SPEAKER_04]: I tell people, when people say, do you feel uncertain about your valuations? My reaction is,

[00:27:26] [SPEAKER_04]: of course I feel uncertain. Why? Because I'm not God. I am playing God. I'm making these

[00:27:32] [SPEAKER_04]: judgments. I'm going to be wrong. And I think the problem with dogma is you're never wrong.

[00:27:37] [SPEAKER_04]: The rest of the world is wrong, but you're never wrong.

[00:27:41] [SPEAKER_01]: This gets into this overall idea too of combating confirmation bias. It's something

[00:27:45] [SPEAKER_01]: I struggle with all the time. Do you have any tips on that? Part of what I do with

[00:27:49] [SPEAKER_01]: podcasts helps me because I interview people all the time that have different opinions than me.

[00:27:52] [SPEAKER_01]: But is there anything you do if you have something you feel really strongly about

[00:27:56] [SPEAKER_01]: investing to try to challenge that from time to time? I just try to be honest with myself.

[00:28:00] [SPEAKER_04]: That's all you can do. You can't take bias go away. We're human beings.

[00:28:04] [SPEAKER_04]: We're predisposed to be biased. You buy something to put in your portfolio,

[00:28:09] [SPEAKER_04]: whether you like it or not, from that day on. You want to find that thing to be undervalued

[00:28:14] [SPEAKER_04]: because you want confirmation that you did the right thing.

[00:28:18] [SPEAKER_04]: There are two things I would do though. One is don't let confirmation bias make you double down.

[00:28:25] [SPEAKER_04]: That's one thing you should never do. Doubling down is you buy something, it halves in price.

[00:28:31] [SPEAKER_04]: You're saying, I am convinced I'm right. I'm going to go buy more of it. Don't double down.

[00:28:37] [SPEAKER_04]: Second, allow yourself doubt. That's why I use the word faith. The essence of faith

[00:28:44] [SPEAKER_04]: is your faith will be shaken. Accept it. So if you wake up, it's like, I bought that stock.

[00:28:50] [SPEAKER_04]: I bought Palantir. I thought it would go up more. It hasn't gone up. No.

[00:28:58] [SPEAKER_04]: Did I make a mistake? Yes, you could have made a mistake. The essence of faith is you

[00:29:03] [SPEAKER_04]: accept the fact that you might have missed something, that there could be... Now, I call

[00:29:08] [SPEAKER_04]: this keeping the feedback loop open. It's a fifth step in my storytelling where after I've

[00:29:13] [SPEAKER_04]: told a story and valued a company, I try to be open to people pushing back.

[00:29:19] [SPEAKER_04]: Rather than get defensive, I ask myself, is there something I can borrow from what

[00:29:24] [SPEAKER_04]: they're telling me to make my story better, to make my story different? It's tough to do.

[00:29:29] [SPEAKER_04]: We all want to be right. We all want to defend what we've done. But I think in the

[00:29:35] [SPEAKER_04]: process of doing it, you often make your biases worse. So I think that all you can do

[00:29:42] [SPEAKER_04]: is be honest with yourself. And maybe if you're honest with yourself for enough time,

[00:29:47] [SPEAKER_04]: it becomes easier. No. One of the things that's helped me is because I write a blog and I put

[00:29:54] [SPEAKER_04]: down pretty much everything I do on the blog, when I buy, when I sell, I try to tell people

[00:29:59] [SPEAKER_04]: when I screwed up. Now, I still remember one of my favorite posts was on Vale,

[00:30:04] [SPEAKER_04]: the Brazilian iron ore mining company, which I bought in 2012. When I bought it,

[00:30:09] [SPEAKER_04]: I called it my 3C better, better in a currency, a commodity in a country.

[00:30:15] [SPEAKER_04]: I bought it at $8 or $7, at $10 per share. And two years later was trading at $4 per share.

[00:30:22] [SPEAKER_04]: Why? Because there are things I missed about commodity businesses where there's a lagged

[00:30:26] [SPEAKER_04]: effect of commodity prices going down. I miss the fact that country risk can be bad

[00:30:31] [SPEAKER_04]: and can get worse before it gets better. And that when country risk goes from bad to worse,

[00:30:36] [SPEAKER_04]: currencies get dragged down. There's a correlation across the three.

[00:30:40] [SPEAKER_04]: And I wrote a piece, I sold my Vale and I wrote a piece again, no mas, no mas. I heard from my

[00:30:46] [SPEAKER_04]: Portuguese reader saying that's Spanish, not Portuguese. But I was borrowing from this

[00:30:51] [SPEAKER_04]: old Roberto Duran, I don't know whether you've heard of this fight where he was a boxer.

[00:30:57] [SPEAKER_04]: And at the end of the first round, he basically, he was one of the greatest

[00:31:01] [SPEAKER_04]: of all time against Sugar Ray Leonard. He said, no mas, no mas. Basically I've had enough.

[00:31:06] [SPEAKER_04]: And I said, I've had enough. And I talked about what I'd missed and why that translates into a

[00:31:12] [SPEAKER_04]: mistake. But I didn't say never. I said, I never said I will never buy Vale again. I said,

[00:31:18] [SPEAKER_04]: I'm leaving now, but I might be back in the future. And the minute I put that down on

[00:31:25] [SPEAKER_04]: paper, it was a release because it basically meant that I was free to come up with a new story

[00:31:32] [SPEAKER_04]: for Vale. So for me, and this is why I value Tesla every year. And I've admitted when I've

[00:31:38] [SPEAKER_04]: screwed up on Tesla and I said, I missed that on Tesla and I'm going to go back and put it in,

[00:31:43] [SPEAKER_04]: is being wrong is part of this game. And admitting you're wrong, three most

[00:31:48] [SPEAKER_04]: freeing words in investing are I was wrong. Because the minute you say that,

[00:31:53] [SPEAKER_04]: you can think about what can I do instead. If you refuse to say that, and there are active

[00:31:58] [SPEAKER_04]: portfolio managers who refused to say the word I was wrong, it's almost impossible to fix your

[00:32:04] [SPEAKER_01]: mistakes. What are your views? One of the things we talk about a lot on the podcast is

[00:32:08] [SPEAKER_01]: this idea of factor investing. And I can probably surmise reviews on value based on

[00:32:12] [SPEAKER_01]: what we've talked about so far. But what do you think about that in general? I mean,

[00:32:15] [SPEAKER_01]: there's tons of factor funds out there. There's momentum, quality, lots of people

[00:32:18] [SPEAKER_01]: following it. Do you have any views in general on factor investing? It's funny because

[00:32:22] [SPEAKER_04]: many active investors like to dump on academia, right? But factor investing

[00:32:28] [SPEAKER_04]: had its birthplace in academia. You can go back and write the history of factor

[00:32:34] [SPEAKER_04]: investing as starting with Ralph Buns looking at small cap stocks in the late 70s,

[00:32:38] [SPEAKER_04]: but most critically to the farmer French paper in 1990 where they looked at data over 60 years

[00:32:45] [SPEAKER_04]: and concluded that two factors explain difference in returns. One is market cap,

[00:32:51] [SPEAKER_04]: small market cap companies earned higher returns than large market cap companies,

[00:32:55] [SPEAKER_04]: and low price to book ratio companies earned higher returns. Those factors still are in

[00:33:00] [SPEAKER_04]: their size and price to book. But in the 1990s you had an explosion of more and more data,

[00:33:07] [SPEAKER_04]: data on a second by second basis trade. And when you have more data and you look for things

[00:33:13] [SPEAKER_04]: that explained returns, guess what? You're going to find them. I think it was Campbell Harvey,

[00:33:20] [SPEAKER_04]: who created the term factor zoo, which is you are going to find more and more things,

[00:33:27] [SPEAKER_04]: work in creating and using the title of your podcast, excess returns

[00:33:34] [SPEAKER_04]: historically. It's interesting though that the birthplace of factor investing was that

[00:33:40] [SPEAKER_04]: farmer French paper, but farmer and friends were actually very clear about what they thought

[00:33:46] [SPEAKER_04]: the factors. They did not describe them as a source of excess returns. The way they described

[00:33:51] [SPEAKER_04]: them was they missed risks that we in finance have somehow come up with a measure of risk

[00:33:56] [SPEAKER_04]: that doesn't capture risk, that small market cap and low price to book up proxies for risk.

[00:34:02] [SPEAKER_04]: Gene Farmer is a believer in efficient markets. Nothing he saw in that data led him

[00:34:07] [SPEAKER_04]: to do anything different than what he did before, which is buy an index fund, let it

[00:34:12] [SPEAKER_04]: ride. But it's amazing factor, active investors who built their entire careers around factors.

[00:34:21] [SPEAKER_04]: There are two things remember. One is it's very US centric. I mean, I know people have

[00:34:26] [SPEAKER_04]: tried the factors, but the data that has been used to get the bulk of the factors

[00:34:31] [SPEAKER_04]: is US centric. You're saying so what? The US was the most mean reverting successful equity

[00:34:38] [SPEAKER_04]: market of the 20th century. So that the factors work, maybe it was to do with the fact that you

[00:34:44] [SPEAKER_04]: had a mean reverting market. You buy low PE stocks and there's mean reversion. What are

[00:34:48] [SPEAKER_04]: you going to see over time? Low PE stocks are going to move towards the average and you're

[00:34:52] [SPEAKER_04]: going to make money. You take out the mean reversion, the harder factor investing disappears.

[00:34:59] [SPEAKER_04]: So the first is it's US centric. And second is a lot of those excess returns

[00:35:06] [SPEAKER_04]: are on paper. And people often say, well, how can you believe in efficient markets when you

[00:35:11] [SPEAKER_04]: all these things that make excess returns? I say it's easy. What percentage of active investors

[00:35:18] [SPEAKER_04]: beat the index? Take a look at SPIVA. You've heard of SPIVA, right? The S&P data service

[00:35:25] [SPEAKER_04]: where you can see what percentage of active investors in each class beat index funds

[00:35:31] [SPEAKER_04]: in that same class. Because if you compare active value investors to the S&P 500 over the last 50

[00:35:38] [SPEAKER_04]: years, they will beat the market. Why? Because they bought low price to book stocks and low

[00:35:42] [SPEAKER_04]: price to book stocks during that period delivered higher returns. The real test of active

[00:35:47] [SPEAKER_04]: investing is not whether you can beat the index or beat the market, but whether you can

[00:35:52] [SPEAKER_04]: beat an index fund built entirely around what you claim your philosophy is. And the SPIVA

[00:35:58] [SPEAKER_04]: statistics are just mind boggling. 85 to 90% of active investors underperform

[00:36:08] [SPEAKER_04]: their respective indices. That's my efficient market. An efficient market is one that it's

[00:36:14] [SPEAKER_04]: not one where markets don't make mistakes. That's the straw man that people like to use.

[00:36:18] [SPEAKER_04]: Markets make, of course they make mistake. They make some doozies. It's can you take

[00:36:23] [SPEAKER_04]: advantage of those mistakes to earn more than you would have on an index fund?

[00:36:27] [SPEAKER_04]: And the answer is it's really, really, really difficult. So when people talk about factor

[00:36:35] [SPEAKER_04]: investing, it is backward looking. It is mean reverting. And I think that they have to

[00:36:43] [SPEAKER_04]: factor in a reality that the tides may be shifting, that the market may be changing.

[00:36:49] [SPEAKER_04]: Now I'll give you an example, the small cap premium. Do you know there hasn't been a small

[00:36:53] [SPEAKER_04]: cap premium since 1981? I'm going to add that on as a data set mixed over. I'm going to let you

[00:36:59] [SPEAKER_04]: pick the starting point and the ending point for the data. And I'm going to put up the data from

[00:37:03] [SPEAKER_04]: 1927 to 2023. Over the entire period, small cap stocks have earned about 3.5% more than

[00:37:11] [SPEAKER_04]: large cap stocks, maybe even more, 4-5% more than large cap stocks. Think then, that's great.

[00:37:16] [SPEAKER_04]: I should buy small cap stocks. But then I'll let you change the starting point from 1927 to 1950 to

[00:37:23] [SPEAKER_04]: 1960. And you get to about 1977. Starting in 1977, there's been no small cap premium. It

[00:37:30] [SPEAKER_04]: doesn't mean that small cap stocks never do better. It's that they win some years, they lose

[00:37:35] [SPEAKER_04]: other years. So that's what I think we need to think about. What's changed about the market

[00:37:41] [SPEAKER_04]: is first, the global economy is not US centric anymore. 50 years ago, the US economy was the

[00:37:48] [SPEAKER_04]: center of the global economy. Now it is a big part of the global economy, but it is not

[00:37:53] [SPEAKER_04]: 50% of the global economy. Second, you've got disruption, technology and globalization,

[00:38:00] [SPEAKER_04]: all playing havoc with what used to be mean reversion. Mean reversion used to be that

[00:38:06] [SPEAKER_04]: a steel company and your margins drop, they would revert back to what they used to be.

[00:38:12] [SPEAKER_04]: Well, that might or might not be the case when you have disruption and globalization.

[00:38:16] [SPEAKER_04]: So I think we have to factor in the very real possibility that the world has shifted under us.

[00:38:21] [SPEAKER_04]: And if the world has shifted under us, many of the reasons these factors worked in the past

[00:38:27] [SPEAKER_04]: are no longer in place. So investing based on factors... I mean, I'll give you a very

[00:38:33] [SPEAKER_04]: honest reason why I think factor investing cannot deliver excess returns. I have a very simple

[00:38:38] [SPEAKER_04]: saying I use in my investment philosophies class. If you don't bring something to the table,

[00:38:45] [SPEAKER_04]: you should not expect to take something away. I mean, what are you doing in factor investing?

[00:38:50] [SPEAKER_04]: You're basically screening, right? You're screening for small cap stocks, low price

[00:38:54] [SPEAKER_04]: to book stocks, whatever your factor is. 50 years ago, that took a lot of work. You had

[00:38:59] [SPEAKER_04]: to go collect the raw data. You had to put in the screens, often run them by hand. Today,

[00:39:04] [SPEAKER_04]: I can run the screens on capital IQ. Across the global universe of stocks,

[00:39:09] [SPEAKER_04]: it takes me three minutes to do. What makes you think that screening for factors entitles

[00:39:14] [SPEAKER_04]: you to special status to earn excess returns? An index fund, an ETF can do exactly the same

[00:39:22] [SPEAKER_04]: thing. If you bring nothing to the table and many factor investors bring very little to the

[00:39:28] [SPEAKER_04]: table, I don't expect you to take anything away. That's why I'm not a great believer in pure factor

[00:39:34] [SPEAKER_04]: investing. I mean, you might add something to the mix that makes you different, makes you

[00:39:40] [SPEAKER_04]: unique. I know AQR had this quality small cap. They said we want small cap companies

[00:39:46] [SPEAKER_04]: with quality in addition to small capitalization. Maybe there's a qualitative component to that

[00:39:55] [SPEAKER_04]: quality. We look at management, look at what they're doing. Now I can see the reason why

[00:40:00] [SPEAKER_04]: you might be able to earn excess returns, but factor analysis by itself is just mechanical.

[00:40:05] [SPEAKER_04]: A machine can do it better than you can. Another thing we've been talking about on the

[00:40:09] [SPEAKER_01]: podcast is this idea of market concentration. We're not in the most concentrated market

[00:40:13] [SPEAKER_01]: we ever were, but we're certainly in the upper echelon of that. Is that something that

[00:40:16] [SPEAKER_01]: concerns you a lot? The fact that the biggest companies are such a high percentage of the

[00:40:20] [SPEAKER_04]: market right now? It's not that the biggest companies, I mean, it's always been true,

[00:40:24] [SPEAKER_04]: right? I mean, you might be familiar with the Hendrick Besson binder study, which went back

[00:40:29] [SPEAKER_04]: and looked at what would have happened if you missed the five best stocks, the 10 best stocks.

[00:40:33] [SPEAKER_04]: And it's horrifying if you look at the number. I think if you missed the top 50,

[00:40:39] [SPEAKER_04]: you weren't less than the treasury bond. Stocks collectively actually underperform

[00:40:43] [SPEAKER_04]: treasuries. So it's always been true that the biggest winners carry the market.

[00:40:48] [SPEAKER_04]: Markets are heavily skewed. What's different about the last 15 years, it's not just the

[00:40:54] [SPEAKER_04]: biggest winners each year account for a big chunk of the market. It's the same players every

[00:40:59] [SPEAKER_04]: year. Whereas we go back to the 20th century, the winners kept shifting. So if you look at

[00:41:04] [SPEAKER_04]: the last decade was the Fang Am stocks, Facebook, Amazon, Netflix, Google, Apple and

[00:41:09] [SPEAKER_04]: Microsoft. Now, of course, the Mag 7. And that's a little scarier because it's the same stocks

[00:41:15] [SPEAKER_04]: year after year carrying the market. And if they do it year after year, they're going to become

[00:41:20] [SPEAKER_04]: trillion dollar companies, two trillion dollar companies, three trillion dollar companies.

[00:41:25] [SPEAKER_04]: And the problem with companies that big is if they stop delivering the upside,

[00:41:32] [SPEAKER_04]: it's very difficult for the rest of the market to make up for it. It's not like

[00:41:37] [SPEAKER_04]: consumer product stocks can step in and if the Mag 7 are flat for the next year,

[00:41:42] [SPEAKER_04]: I don't see how the market is up 15 percent. Because that's how much value they bring to

[00:41:48] [SPEAKER_04]: the market. But there are two things that I see coming out of this. One is,

[00:41:55] [SPEAKER_04]: this is a reflection of an economic shift. Again, people think of this as a market

[00:42:00] [SPEAKER_04]: phenomenon. Markets reflect what's happened in the economy. We're increasingly a winner take

[00:42:07] [SPEAKER_04]: the whole economy. And I'll take two businesses, take the hospitality business 20 years ago.

[00:42:13] [SPEAKER_04]: Hospitality business 20 years ago had dozens of hotel companies. No single hotel company,

[00:42:19] [SPEAKER_04]: even the largest one was more than six or seven percent of the total market. Why? Because

[00:42:24] [SPEAKER_04]: you are restricted, locationally, I mean, you are constrained on how big you could get.

[00:42:29] [SPEAKER_04]: And then Airbnb came along. How big can Airbnb get? What's the upper limit?

[00:42:36] [SPEAKER_04]: Car service. 20 years ago, the biggest car service company is probably a 0.2 percent market share.

[00:42:41] [SPEAKER_04]: Largest taxicab company maybe in New York. And then along came Uber and DD and Lyft.

[00:42:50] [SPEAKER_04]: In business after business, we've created business models that can scale up to effectively

[00:42:57] [SPEAKER_04]: not just get bigger but have networking benefits as they get bigger, which effectively

[00:43:01] [SPEAKER_04]: means as they get bigger, it actually gets easier for them to get bigger because everybody wants to

[00:43:06] [SPEAKER_04]: be on those platforms. It's a natural consequence if you are winner take all economies that you're

[00:43:12] [SPEAKER_04]: going to get winner take all markets. I mean, think of how much of your day, and I remember

[00:43:17] [SPEAKER_04]: during the peak of COVID when at that time the Fang Am stocks were dominating the market.

[00:43:23] [SPEAKER_04]: They had accounted for 20 percent increase in market cap over the previous decade.

[00:43:26] [SPEAKER_04]: They carried the market and people said, this makes no sense. I asked them to map out in a typical day

[00:43:33] [SPEAKER_04]: how much time they spend on the platforms of different companies.

[00:43:39] [SPEAKER_04]: Wake up in the morning, what's the first thing you do? You check your Apple iPhone.

[00:43:42] [SPEAKER_04]: You're already in the Apple ecosystem. You ask Alexa what time it is as you're so old through

[00:43:47] [SPEAKER_04]: the day. And I said, think of how much of your day you spend in the ecosystem of one of

[00:43:54] [SPEAKER_04]: these Fang Am stocks. One or more sometimes you're watching Netflix in the evening and

[00:43:59] [SPEAKER_04]: you're checking out your iPhone, your Apple and Netflix at the same time. I said, should it be

[00:44:04] [SPEAKER_04]: any surprise that the companies that are essentially sucking up your time, those are

[00:44:10] [SPEAKER_04]: the companies you spend your time on, are the companies that end up dominating markets?

[00:44:15] [SPEAKER_04]: So I think what you're seeing is a reflection of how we live, how we work, how we interact,

[00:44:20] [SPEAKER_04]: playing hard in markets as well, is we're increasingly captive to these big platforms.

[00:44:28] [SPEAKER_04]: And that's what you see play out in markets as well.

[00:44:30] [SPEAKER_01]: This is something I think about all the time because if you look in the history of

[00:44:33] [SPEAKER_01]: the S&P 500 and you look at the top 10 companies by decade, there's usually significant

[00:44:36] [SPEAKER_01]: turnover in that. And I wonder, are we going to still see that? I mean, are these

[00:44:39] [SPEAKER_01]: companies so dominant now that that changes in the future?

[00:44:43] [SPEAKER_04]: You could see it but might be another platform that replaces this platform. I think in a sense,

[00:44:48] [SPEAKER_04]: no, I think in many ways Apple's iPhone appended the word in ways we still haven't figured out.

[00:44:59] [SPEAKER_04]: Let's face it, without the smartphone in your hand, think of how many businesses cease to exist.

[00:45:05] [SPEAKER_04]: How are you going to call your Uber or DoorDash? In fact, I would argue that each of these

[00:45:12] [SPEAKER_04]: companies should probably pay some kind of royalty to the smartphone business thing without

[00:45:17] [SPEAKER_04]: us, without you, we're nothing. So I think it's entirely possible but I don't see a

[00:45:24] [SPEAKER_04]: manufacturing company being on top of this pile anymore. I mean, you could get a Tesla and

[00:45:31] [SPEAKER_04]: Nvidia which are partly manufacturing but let's face it, Nvidia is a design company, right?

[00:45:36] [SPEAKER_04]: It designs chips. TSMC makes all the chips. Tesla is still perhaps the only

[00:45:42] [SPEAKER_04]: manufacturing company in the mix but if there's automated driving that's effectively in the car

[00:45:50] [SPEAKER_04]: somewhere, who knows what Tesla will look like. So I think that's why I said the 21st century

[00:45:56] [SPEAKER_04]: economy and markets is very different from the 20th century and that's one of the reasons

[00:46:01] [SPEAKER_04]: backward-looking investing where you're fighting the law. I mean, I still read the stories

[00:46:07] [SPEAKER_04]: about the French generals who learned from the First World War and built the Maginot Line

[00:46:14] [SPEAKER_04]: because they thought they could stop the Germans from invading them by having this line which

[00:46:19] [SPEAKER_04]: tanks could not cross because that's what they were used to. And then the Germans just

[00:46:24] [SPEAKER_04]: flew planes right over the wall and the whole thing crumbled in two weeks. A lot of active

[00:46:30] [SPEAKER_04]: investing is your fighting battles from the last century when, in fact, we should be thinking

[00:46:35] [SPEAKER_04]: how do we fight the battles of the century we're in. I'll tell you in general, I don't know what

[00:46:42] [SPEAKER_04]: the right way to play this game is but we need to be more adaptable, less rigid,

[00:46:48] [SPEAKER_04]: more accepting that there are a dozen different pathways to success, not right. In fact,

[00:46:54] [SPEAKER_04]: the exact opposite of all the things I said value investing became rigid, ritualistic,

[00:47:00] [SPEAKER_04]: right, because we need the exact opposite of those to succeed in the market we're in right now.

[00:47:07] [SPEAKER_01]: Just one more from me before I hand it back to Matt. I want to ask you about the rise of

[00:47:11] [SPEAKER_01]: passive investing because this is something we've talked about a lot in the podcast.

[00:47:14] [SPEAKER_01]: I mean, passive is rising and rising. Many people these days have their 401Ks,

[00:47:18] [SPEAKER_01]: they have regular deposits going in there. Those are typically going into index funds

[00:47:22] [SPEAKER_01]: and some people have argued that because maybe liquidity doesn't scale with size,

[00:47:26] [SPEAKER_01]: maybe that's having an influence on the market, maybe that's making the bigger companies bigger.

[00:47:31] [SPEAKER_04]: Do you think there's anything to that? I think there is something to the argument

[00:47:35] [SPEAKER_04]: that passive investing makes momentum strong because basically you blow wherever

[00:47:40] [SPEAKER_04]: the market cap is highest and you're going to see it. No, but there's a reason active

[00:47:45] [SPEAKER_04]: and passive investing has taken off, right. Let's face it, active investing has always

[00:47:50] [SPEAKER_04]: been crappy, always through its entire lifetime. But for much of its lifetime,

[00:47:54] [SPEAKER_04]: we didn't know how crappy it was. I tell people to imagine being in the 1960s,

[00:48:00] [SPEAKER_04]: right? There were only active mutual funds. You put your money in an active mutual fund.

[00:48:05] [SPEAKER_04]: You got one statement maybe for a year telling you what your investment was doing.

[00:48:12] [SPEAKER_04]: No comparisons, no idea what the rest of the world is doing.

[00:48:17] [SPEAKER_04]: And you said these guys are professionals. They know what they're doing. I've trusted,

[00:48:21] [SPEAKER_04]: no, trusted them. This is the right thing to do. Two things happened. One is

[00:48:28] [SPEAKER_04]: we started to get information about how badly active investing was doing on a continuous

[00:48:34] [SPEAKER_04]: basis. On your smartphone you could say, hey, my fund is up 7%. The S&P 500 is up 12%.

[00:48:41] [SPEAKER_04]: Second, we empowered investors to be able to move their money. Can you imagine moving

[00:48:46] [SPEAKER_04]: money in the late 60s from one brokerage house to another? First, you have to physically drive

[00:48:52] [SPEAKER_04]: to that brokerage house. You'd have to talk to the person at that desk who was going

[00:48:58] [SPEAKER_04]: to convince you that this is the worst decision you could ever make. I guess if you insisted,

[00:49:04] [SPEAKER_04]: he would still have to let you liquidate, but it would have been a long, drawn-out,

[00:49:09] [SPEAKER_04]: expensive process. Now you're sitting at lunch, you realize your mutual fund is

[00:49:13] [SPEAKER_04]: performing the S&P 500. Here's what you do. You sell your fund while you're at lunch,

[00:49:18] [SPEAKER_04]: while you're taking a bite of your tuna sandwich. You sell your fund, you move it into another fund.

[00:49:23] [SPEAKER_04]: Two things happened. One is information about how badly active investing was doing became

[00:49:29] [SPEAKER_04]: public information. We all knew second, it became easier for us to act on that information.

[00:49:36] [SPEAKER_04]: The rise of index funds and ETFs can very early be linked to investors waking up saying,

[00:49:42] [SPEAKER_04]: this isn't working for me. I'm paying somebody to deliver 2% less than I could have made by not

[00:49:49] [SPEAKER_04]: paying that person. I describe active investing as the equivalent of floods or as a plumbing

[00:49:54] [SPEAKER_04]: company that if you call into your house because there's a leak, leaves a flood,

[00:49:59] [SPEAKER_04]: and sends you a bill for it, you'd never pay the guy, right? Active investing's bad

[00:50:05] [SPEAKER_04]: performance is caught up with them. I do think though that as passive investing grows,

[00:50:10] [SPEAKER_04]: and it will continue to grow, this is inexorable. It'll hit a cap. The reason it'll hit a cap,

[00:50:18] [SPEAKER_04]: it's true that as passive investing grows, there are fewer and fewer people looking for

[00:50:23] [SPEAKER_04]: bargains, looking for mistakes. When we talked about efficient, the reason mistakes are so

[00:50:28] [SPEAKER_04]: difficult to exploit in markets is because other people are also looking for them.

[00:50:33] [SPEAKER_04]: There's a tipping point where if too few people are looking for mistakes, you could

[00:50:37] [SPEAKER_04]: argue that the magnitude of mistakes will get larger and that active investing is going to

[00:50:41] [SPEAKER_04]: pay off again. There's an ebb and a flow to this, and I think there will be a point

[00:50:47] [SPEAKER_04]: where passive investing overreaches and active investors will come back, but the steady state

[00:50:54] [SPEAKER_04]: is going to be about a lot fewer active investors than we see today. All those floors

[00:50:59] [SPEAKER_04]: in Boston that Fidelity has, two-thirds of them they don't need. It's not great if you're in the

[00:51:09] [SPEAKER_04]: active investing business because the business is going to get smaller. Remember we talked about

[00:51:14] [SPEAKER_04]: bringing something to the table. The active investors are going to be left with people

[00:51:18] [SPEAKER_04]: who are going to be people who bring something to the table, and it's not going to be

[00:51:22] [SPEAKER_04]: permanent. You've got to be adaptable because you bring something to the table.

[00:51:25] [SPEAKER_04]: There's an ETF already getting formed saying, let's replicate what this guy is doing. They

[00:51:30] [SPEAKER_04]: don't need to know what you're doing. They just need to know what you're buying and selling.

[00:51:33] [SPEAKER_04]: They can look at your actions and reverse engineer what you do. The next thing you

[00:51:38] [SPEAKER_04]: know there'll be an ETF doing exactly what you do, charging 10 basis points,

[00:51:43] [SPEAKER_04]: and you can't survive with 10 basis points. How do you think about the... If you just think

[00:51:49] [SPEAKER_03]: of... I'm not looking for any investments in the asset management industry, but it's

[00:51:55] [SPEAKER_03]: introducing the mutual fund and selling that thing in the 60s is one thing. In the same way,

[00:51:59] [SPEAKER_03]: introducing the index fund and selling passive is another thing. Is there almost just an entire

[00:52:04] [SPEAKER_03]: reconstitution of just the jobs and the ideas around this whole space?

[00:52:08] [SPEAKER_04]: Well, it's two different sales pitches, right? What's your sales pitch when you do an active

[00:52:10] [SPEAKER_04]: fund? I can beat the market, right? That's the only way you can sell an active fund. What's

[00:52:15] [SPEAKER_04]: an index fund? A sales pitch will match the market. It's an effortless pitch because they

[00:52:25] [SPEAKER_04]: That's why I'm not a great fan of tilted index funds or index funds that try to tilt you

[00:52:32] [SPEAKER_04]: towards small cap. They bring in factor investing into index funds. I don't want

[00:52:36] [SPEAKER_04]: to beat the index by 30 basis points or 20 basis points. I just want to match the index.

[00:52:43] [SPEAKER_04]: The advantage of being... of investing in an index fund is you're going to have the

[00:52:47] [SPEAKER_04]: seven in your portfolio always. You're going to have the FANGAM in your portfolio always

[00:52:55] [SPEAKER_04]: because you're just investing in the index. The problem with being an active investor is

[00:53:01] [SPEAKER_04]: if your active investing philosophy drives you there, you might not have owned any of the

[00:53:07] [SPEAKER_04]: FANGAM stocks over the last decade. In fact, many old time value investing strategies

[00:53:13] [SPEAKER_04]: would not have owned the FANGAM, would not have owned the MAC 7. They're still

[00:53:18] [SPEAKER_04]: wagging their finger saying, you guys are going to pay the price. Every day I read about

[00:53:22] [SPEAKER_04]: how terrible this is, how the... it's going to... correction is coming any day now.

[00:53:28] [SPEAKER_04]: When do you stop doing that? When do you accept the fact that

[00:53:33] [SPEAKER_04]: you missed out on the stocks that drove the market? So I think that the advantage of index

[00:53:39] [SPEAKER_04]: funds is you're never going to miss out the big winners. They're always going to be there

[00:53:43] [SPEAKER_04]: in your portfolio and that's a big plus because as you said, if we're in a world where

[00:53:47] [SPEAKER_04]: winner take all companies are going to dominate the market, you can't afford not to have them

[00:53:53] [SPEAKER_04]: in your portfolio at some point in time. It's interesting because that's the end of

[00:53:58] [SPEAKER_03]: another story. That's the end of another era for those things. I'm starting to feel like

[00:54:03] [SPEAKER_03]: passive investment management businesses and consulting companies are almost the only infinite

[00:54:08] [SPEAKER_03]: businesses left. Can those run in perpetuity? Let's just stop because these are exactly what

[00:54:13] [SPEAKER_04]: AI could replicate effortlessly, right? What exactly do you get as advice on passive investing?

[00:54:18] [SPEAKER_04]: You walk in and say I'm 57 years old. I have $2 million. You don't need a person across

[00:54:24] [SPEAKER_04]: looking at stuff. Creating what you need to do is costless and effortless. The Vanguard

[00:54:32] [SPEAKER_04]: index funds could probably be run with 20 people in the entire building, hundreds of

[00:54:37] [SPEAKER_04]: dollars. It's not even an exercise in running a business. Basically, you are a very low-cost

[00:54:46] [SPEAKER_04]: commodity provider and you can scale up and try to make enough money on it but you're never

[00:54:52] [SPEAKER_04]: going to be as wealthy as the wealthiest mutual fund, the Fidari's, the T-Row prices used to be

[00:54:59] [SPEAKER_03]: at the height of their powers. How do you think about this for yourself? How do you measure

[00:55:05] [SPEAKER_03]: or think about your own decisions, active, passive or otherwise in your own? I mean,

[00:55:09] [SPEAKER_03]: you document these publicly. How do you think about your own performance?

[00:55:12] [SPEAKER_04]: I'm an active investor and I say look, I invest actively because I enjoy investing.

[00:55:15] [SPEAKER_04]: I invest actively not because I want to beat the market

[00:55:19] [SPEAKER_04]: but because I enjoy investing which means that when I invest, the one thing I have to do is

[00:55:25] [SPEAKER_04]: remember the Hippocratic cult which is do no harm. Don't do things in your portfolio that

[00:55:31] [SPEAKER_04]: could cause you calamitous costs. For instance, I diversify. I hold 40 plus stocks in my portfolio.

[00:55:42] [SPEAKER_04]: That would be a no-no with old time value investing where you said concentrate.

[00:55:47] [SPEAKER_04]: Why not? People say don't you feel confident enough in your big winners? No, I don't.

[00:55:54] [SPEAKER_04]: You might. I don't because I know how many things I don't control. Imagine buying Marriott

[00:56:00] [SPEAKER_04]: in December of 2019 because you felt confident it was undervalued. You might have been right

[00:56:07] [SPEAKER_04]: but two months later COVID hit and there goes your rightness. There are too many things I

[00:56:13] [SPEAKER_04]: don't control. It's hubris to think that you pick the five best companies in the market

[00:56:20] [SPEAKER_04]: so I diversify. I try to buy undervalued companies but here's the bottom line though.

[00:56:28] [SPEAKER_04]: If I get to be 85 and you came to me on my deathbed and said you know what you could have

[00:56:34] [SPEAKER_04]: made 50 basis points more or 25 basis points more a year by investing in index funds

[00:56:40] [SPEAKER_04]: instead of doing what you did value companies and buy cheap companies. You asked me are you

[00:56:46] [SPEAKER_04]: okay with that? My answer is yes. I'm okay with not beating the market and that I think

[00:56:53] [SPEAKER_04]: is critical because if you keep telling yourself I did the right thing therefore I

[00:56:57] [SPEAKER_04]: beat the market. Therein lie the seeds for being righteous, for being indignant,

[00:57:02] [SPEAKER_04]: for getting angry. When you get angry at markets nothing good comes out of it and

[00:57:08] [SPEAKER_04]: if you think about it there are a lot of people out there very angry at markets,

[00:57:12] [SPEAKER_04]: they're very angry at other investors, they're very angry at what other people do.

[00:57:16] [SPEAKER_04]: My response is you're wasting your time and your energy and it's sucking up what

[00:57:22] [SPEAKER_04]: you should be doing on your own investments. So if I end up underperforming the market

[00:57:28] [SPEAKER_04]: I'm perfectly okay with that because I had a good time picking the stocks I did and

[00:57:33] [SPEAKER_04]: I didn't know where that I'm not going to underperform the market by five percent

[00:57:38] [SPEAKER_04]: because I'm spread out enough I'm going to underperform the market by 15 basis points.

[00:57:43] [SPEAKER_04]: Luckily I've been lucky, I've been on the right side of that divide but I'm also open

[00:57:48] [SPEAKER_04]: to the possibility that had nothing to do with my valuation skills and everything to do

[00:57:53] [SPEAKER_04]: which is I bought Nvidia in 2018 at $27 per share. I would love to tell you it's because

[00:57:59] [SPEAKER_04]: I saw AI coming. I didn't even have the remotest clue about AI, I just bought it because

[00:58:06] [SPEAKER_04]: it looked undervalued to me. I got incredibly lucky. I own all of the seven Mag 7 stocks.

[00:58:13] [SPEAKER_04]: Tesla, I re-bought this year because I bought and sold Tesla and it hit 180 and I had value to 180.

[00:58:19] [SPEAKER_04]: I bought it at like 171. Every other one of the Mag 7 stocks I bought at a different point in

[00:58:25] [SPEAKER_04]: time and every one of them in my valuations has been undervalued at least two or three times

[00:58:31] [SPEAKER_04]: in the last decade. These are the most successful companies in the market so when people say I

[00:58:35] [SPEAKER_04]: could never buy a Mag 7 stock it's never undervalued that's not true. I mean think of

[00:58:42] [SPEAKER_04]: Metaverse fiasco. You could have bought Facebook for five years of online advertising cash flows.

[00:58:49] [SPEAKER_04]: It's the closest I've come to the old Warren Buffett American Express investment in the

[00:58:56] [SPEAKER_04]: 1960s after the salad oil scandal. The legend is he computed the cash flows he could have

[00:59:01] [SPEAKER_04]: got from the card as a franchise and said five years of cash flows gets me to the price

[00:59:06] [SPEAKER_04]: I'm buying Amex. Metaverse was the American Express of this generation if you were willing

[00:59:14] [SPEAKER_04]: to look there but people said tech companies that always be expensive I'll never buy them.

[00:59:20] [SPEAKER_04]: Never is a dangerous word in investing. I'll buy any company at the right price. No. So a company

[00:59:27] [SPEAKER_04]: right now might be overvalued doesn't mean I will lose interest in it doesn't mean I won't

[00:59:31] [SPEAKER_04]: when you look at companies I think you need to keep an open mind.

[00:59:36] [SPEAKER_03]: When you think about this it feels like you're writing these books. What you're putting on

[00:59:44] [SPEAKER_03]: YouTube is the entire new book on YouTube. Are you trying to bring this joy in the act of doing

[00:59:49] [SPEAKER_03]: valuation work? Is this part of your broader vision? Everything I do is in the public domain.

[00:59:53] [SPEAKER_04]: In fact it's kind of terrifying because everything I've ever written everything I've

[00:59:58] [SPEAKER_04]: taught from the public domain it's terrifying because of you know and I've talked about this

[01:00:02] [SPEAKER_04]: in other domains but five weeks before the spring semester of 2024 classes ended I got a call

[01:00:10] [SPEAKER_04]: from a friend of mine. In fact I'm writing a blog post about this his name is Vasanthar. He

[01:00:15] [SPEAKER_04]: teaches machine learning. He knows more about artificial intelligence than I will ever learn

[01:00:20] [SPEAKER_04]: in my lifetime. He called me and he said I've created a demodaran bot and I said a what?

[01:00:26] [SPEAKER_04]: He said a demodaran bot and I said what is a demodaran bot? He said I've created this AI

[01:00:31] [SPEAKER_04]: entity that has read every single blog post you've ever written, watched every single YouTube

[01:00:37] [SPEAKER_04]: video that you've ever put on which means it's watched every class it's looked at every

[01:00:43] [SPEAKER_04]: valuation that you've ever done and it remembers everything that it has and it's ready to go and

[01:00:50] [SPEAKER_04]: I said ready to do go where? He said it's ready to value a company. Can you give me about

[01:00:54] [SPEAKER_04]: 20 students from your class so we can run a contest of the bot against it? I don't have

[01:01:00] [SPEAKER_04]: the final results in from that contest but I'm terrified either way because if the bot works

[01:01:05] [SPEAKER_04]: really well that's about as clear a signal as I can get that redundancy is around the corner

[01:01:12] [SPEAKER_04]: right? If the bot does really badly it means that everything I've done in my life is about

[01:01:17] [SPEAKER_04]: teaching how to be that that's not working because this bot has read everything I've done

[01:01:22] [SPEAKER_04]: and it's confused about valuing companies and clearly I'm not doing my job but you know the

[01:01:28] [SPEAKER_04]: piece I'm writing is act as if there's a bot with your name looking over your shoulder watching

[01:01:33] [SPEAKER_04]: what you're doing. Remember you don't have to be even in the public domain like I am,

[01:01:38] [SPEAKER_04]: it's watching what you're doing and ask yourself what can I do that a bot can't do better

[01:01:45] [SPEAKER_04]: and that I think is going to be the challenge for those people who think AI is going to

[01:01:51] [SPEAKER_04]: change the way we work and live is if your job is mechanical

[01:01:56] [SPEAKER_04]: and that's why factor investing completely mechanical if what you do is mechanical rule driven

[01:02:04] [SPEAKER_04]: bot can do it much better than you can because machines are better at mechanical stuff than you

[01:02:11] [SPEAKER_04]: and I are and they follow the rules they'll be absolutely fidelity to those rules so

[01:02:17] [SPEAKER_04]: whatever you do take a look at what you do and ask yourself what can I mean we talk about

[01:02:22] [SPEAKER_04]: modes right in investing my question is what's your mode against your bot

[01:02:28] [SPEAKER_04]: what is it that you do that you don't think you're and it's something that's

[01:02:32] [SPEAKER_04]: that's occupied my mind for the last few months my piece I suggest a few things we

[01:02:37] [SPEAKER_04]: can do no man I think that that's something that each of us has to think about what can I

[01:02:42] [SPEAKER_04]: keep my bot

[01:02:46] [SPEAKER_03]: underperforming what I can do as a person well keep your bot out of the Berkshire meeting for

[01:02:51] [SPEAKER_03]: starters absolutely but I also like to think that you know you you wove together I mean we

[01:02:56] [SPEAKER_03]: got uh what did we have we had Kenny Rogers we had the marginal line we had a boxing reference

[01:03:01] [SPEAKER_03]: there's a there's a unique ability to blend stories in a way that I'm not saying the AI

[01:03:05] [SPEAKER_04]: bot can't come up with novel I do think you're onto something I mean I think that

[01:03:09] [SPEAKER_04]: few things that human beings do that makes them difficult to replicate one is um we do

[01:03:20] [SPEAKER_04]: make connections out of things that look unconnected and come up with insights right

[01:03:25] [SPEAKER_04]: in Galileo was sitting I mean what is a Newton was sitting under an apple tree

[01:03:29] [SPEAKER_04]: an apple falls on his head instead of cursing the apple he thought of gravity

[01:03:36] [SPEAKER_04]: take that Newton bot exact Archimedes jumps out of a bathtub runs naked through the streets

[01:03:43] [SPEAKER_04]: because again massive insight right do that Nvidia but that's I think but that requires you

[01:03:50] [SPEAKER_04]: know I know through time we've invaded against you know an empty mind being a devil's workshop

[01:03:56] [SPEAKER_04]: but let's face it an empty mind is where those connections happen I caught I call those

[01:04:01] [SPEAKER_04]: moments where you connect unconnected things and you say aha that's what we get but I'll tell you

[01:04:09] [SPEAKER_04]: what worries me is we have fewer and fewer empty moments in our mind right I mean imagine 20 years

[01:04:16] [SPEAKER_04]: ago you were standing in line at the bank what did you do absolutely nothing you had an

[01:04:20] [SPEAKER_04]: empty mind because you had no choice now what do you do you got your phone you got checking

[01:04:24] [SPEAKER_04]: your email you're checking the news we are filling every moment with stuff because we think we're

[01:04:32] [SPEAKER_04]: being busy and being busy is productive and being not busy is not but I think that

[01:04:39] [SPEAKER_04]: unfortunately I think those are the times where you're going to make those connections

[01:04:44] [SPEAKER_04]: that a bot cannot make said exactly that so my suggestion I keep getting asked by people

[01:04:49] [SPEAKER_04]: should I read next and my advice is always throw some of us that read less

[01:04:55] [SPEAKER_04]: think more we read too much we live in a world where we can read what everybody has ever written

[01:05:00] [SPEAKER_04]: about everything we can watch what anybody know we don't even have give us our mind a chance

[01:05:07] [SPEAKER_04]: to think through things now and I think that might be our our hidden power as human beings

[01:05:14] [SPEAKER_04]: capacity to make connections across things and I think we need to nurture that because

[01:05:20] [SPEAKER_04]: evolution is a magical force a powerful force we don't use stuff we lose it and and I'm afraid

[01:05:27] [SPEAKER_04]: we're going to lose that power to make connections to reason because it's become so

[01:05:32] [SPEAKER_04]: easy to look up answers to things and to fill our minds up with other things this is why

[01:05:38] [SPEAKER_01]: I'm posting I'm hoping we never get to the point where AI Matt and AI Jack are interviewing

[01:05:41] [SPEAKER_01]: AI as well because there's so much value in this conversation I hope it never goes there

[01:05:46] [SPEAKER_04]: but hope alone is not a is not a strategy right we need to actively think about what do we do

[01:05:53] [SPEAKER_04]: as human beings that's going to be that's not mechanical that's going to be difficult for

[01:05:58] [SPEAKER_04]: a machine to replicate and that's why I said it's going to be different for each of us

[01:06:03] [SPEAKER_04]: so act like I have a bot with my name on it and everything I've ever done is in the

[01:06:09] [SPEAKER_04]: public domain so I'm probably a unique experiment but act like there's a bot coming for you which

[01:06:16] [SPEAKER_04]: knows everything that you do and then say hey no can I can I outwit my bot can I do something

[01:06:24] [SPEAKER_04]: that my bot cannot do and I think that's unless you actively go out there and create

[01:06:30] [SPEAKER_04]: modes they're not going to magically appear right so let's get one more question in for

[01:06:36] [SPEAKER_03]: you we'll go out on this one based on all this experience in markets and teaching students about

[01:06:41] [SPEAKER_03]: markets if you could teach one lesson to the average investor not just the students but the

[01:06:46] [SPEAKER_03]: average investor of the world what one lesson would you want to teach them I think it's a

[01:06:51] [SPEAKER_04]: lesson that increasingly is getting lost investing is about preserving and growing wealth it's

[01:06:56] [SPEAKER_04]: not about getting rich and I think it's some of these days of YouTube celebrities telling you

[01:07:02] [SPEAKER_04]: get rich again I was just watching a PBS documentary on crypto and how people want to

[01:07:07] [SPEAKER_04]: hit the jackpot I think that going for 10 baggers 100 baggers again think of how much

[01:07:15] [SPEAKER_04]: we go after those that's not the name of investing is about preserving and growing well

[01:07:20] [SPEAKER_04]: you know would I like to grow wealth at 50 percent a year yes would I like to have a

[01:07:25] [SPEAKER_04]: hundred bagger in my portfolio yes but I shouldn't be actively looking for those things

[01:07:30] [SPEAKER_04]: because if I look for those things I'm going to miss the core tenets of investing

[01:07:34] [SPEAKER_04]: so I know it's tough to follow when people around you are getting rich effortlessly the guy

[01:07:40] [SPEAKER_04]: who bought bitcoin at a hundred and sold it at five thousand you say I'm working so hard to

[01:07:46] [SPEAKER_04]: get a 15 return a year and there he made 50 times what he I think that's why looking at

[01:07:52] [SPEAKER_04]: other people getting you know letting envy drive what you should be doing as an investor can

[01:07:57] [SPEAKER_04]: be extremely dangerous so keep your focus on preserving and growing wealth which means you need

[01:08:02] [SPEAKER_04]: the income to create the world so if you're a doctor go back to being a doctor don't spend

[01:08:08] [SPEAKER_04]: your lunchtime looking at what stocks are doing what your portfolio is doing read up some

[01:08:14] [SPEAKER_04]: medical stuff if you're an engineer be an engineer first live the rest of your lives

[01:08:19] [SPEAKER_04]: don't let investing become the center of your universe because you need the income from

[01:08:24] [SPEAKER_04]: whatever you do to create the wealth which you can then preserve and grow but in a world where

[01:08:29] [SPEAKER_04]: markets and I I think that you know watching CNBC all day is a recipe for a terrible investing

[01:08:38] [SPEAKER_04]: philosophy you know so spend less time kind of tracking markets on a minute by minute basis

[01:08:44] [SPEAKER_04]: reading everything that's happening go back to living the rest of your lives and let investing

[01:08:49] [SPEAKER_04]: do what it's supposed to do which is take the wealth you accumulate from the rest of your life

[01:08:53] [SPEAKER_03]: and preserving and growing that wealth as with Dhammadurana thank you so much for your time

[01:08:58] [SPEAKER_03]: today you're watching excess returns like subscribe subscribe all the things below

[01:09:02] [SPEAKER_03]: we hope to talk to you again soon thank you I hope to be back thank you this is Justin again

[01:09:07] [SPEAKER_02]: thanks so much for tuning into this episode of excess returns you can follow Jack on Twitter

[01:09:12] [SPEAKER_02]: at practical quant and follow me on Twitter at JJ Carboneau if you found this discussion

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