Prof. Damodaran Reveals His Magnificent Seven Investment Approach

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my favorite Professor ozat deodoran he's Professor NYU he teaches Corporate Finance Equity valuation I'm excited to have him back on the show we got to talk about markets and his new book Professor welcome back to the show thank you and prep for this show I was interested to hear you say you own all the mag 7 is that still true all seven of these dudes I own all mag seven but bought at very different times I mean The oldest player in there is Microsoft I bought it in 2014 when satin Nadella became CEO and it

looked like there was a possibility of change I bought Nvidia in 2018 and I have that position about a year ago but I still own half that position I bought Tesla this year just a few months ago 172 or whatever it's worth talking about because often when people look at something like the mag 7 the reaction is I would never have been Able to buy any of these companies because they all have been so expensive and that is not true each of these companies at least once probably two three four times in the last 15

years have been Bargains Bargains from a value investing standpoint I mean I bought meta I bought meta when people said this is the end for meta remember after the meta was Fiasco the stock collapsed it was trading at about six times earnings from just its advertising business it Was like the equivalent of remember the AMX story that we he about Warren Buffett in the early 60s he bought AMX because what you could make on the card alone was enough to cover what he paid for the company five years of earnings and meta traded at that

price so each of these companies I found to be bargained some point in time did I time it perfectly of course not know but I think that the key thing to remember here is Never Say Never Never look at a stock I Would never be able to buy the stock because the right price every one of these companies would have been a bargain how do you think about exiting these companies a lot of investors they want to think in binary terms I got to be all in I got to be out but how do you

think about the position sizing on on exiting eventually that's an interesting question because if you look at books on investing they're almost all about when to buy right I mean it's all about Getting in at the right moment there's very little on when to sell and I think that's a mistake because I think that to invest you got to figure out timing when to buy when to sell and it's always been a point that I've had against the traditional argument in value investing just buy and hold know you get a great company you buy it

and hold which strikes me as internally inconsistent with the notion of value investing because you're buying something because It's undervalued should be selling the same thing that it's overvalued but here psychology and behavioral Finance plays a role in both directions you buy a stock and it goes down we know and studies conclusively show that we hold on to losers for too long even though we know it's a loser for lots of reasons the act of selling a stock is an admission to the world that you screwed up we're talking about the World Series and I

know talked about being a Yankee Fan and sometimes you see a player on the Yankees who's well past their due date they continue to play and so why don't they just cut the player and the argument the answer is if the Brian Cashman who is the GM for the Yankees was the one who signed that player he's not going to let that player go because that is an admission I screwed up same thing happens in investing you hold on to losers for too long with winners you have a different problem you fall in Love with

the winners you don't want them to go because delivered so much for you so for me the key is to separate myself from the psychology of the process and say what do I do and I can't completely do it with invid as you pointed out there is this internal inconsistency if something is overvalued why didn't you sell the whole shebang why sell just half and I gave the answer in the post I said it's because the one thing I find most dangerous in investing Is Regret is when you look back and say I wish I

had bought that or sold this and regret is in is because it's eats into your decision making it leads you to bad decision so I said look I want to make a decision where either way I can look back and say I'm okay with that so I sold half my Nidia this way if Nvidia continues to go up I can point to the half that I hold on to say I did the right thing and if Nvidia goes down I can point to the half that I sold it's Completely playing mind games with myself but

I need to do that to be comfortable as an investor well it's smart you know the technical highly sophisticated phrase we use is going havies so many times particularly retail investors come to us and they say should I buy this should I sell this and I say look if you're stressing about it just sell half now no one likes to do that because they like to gamble they like to cheer for example Yankees Dodgers like No one says other than my wife maybe I'm going to cheer for both teams like that's no fun you want

to pick a side and so you want to be able to say oh I pick the top in Nvidia I sold it or man I was so smart not to have sold that when it went down and I think one key to doing that is framing framing in terms of thinking about what you compare the price to because you compare the price today to the highest price it hit in the last six months or a year you're going To look back and say I wish I'd sold that but if you compare it to what you

originally paid for the stock which for me is $5.40 per share which is what the price was when I bought it I'm a winner no matter what happens as long as I frame it right Framing and investing is key to behaving sensibly and I think investors need to think about what their framing looks like and how to reframe things so they make the sensible decisions and even then one of my my Favorite quotes from you look listeners we got the the dean evaluation on the podcast been doing this longer and in- depth than almost anybody

listening but there's a great quote and I'll summarize it where you said look I'm not righteous expecting to be rewarded for doing my homework or trusting and value in fact I made peace with the possibility that at the end of my investing life I could look back at the returns I've made and conclude could have done as well or Better investing in index funds if that happens I'll not view the time I spent analyzing picking stocks as wasted since I gained so much joy from the process I think it's such a very Zen wellth thought

out quote because how many investors come to this with the absolute confidence the righteousness that I'm smarter than the market I'm going to beat everyone else and when they don't it's like a psychological break you get angry and you double down that's Basically what you tend to do is when you you feel rightous you feel the Market's wrong and you're right you're on a pathway to disaster because then you going to double down in the market and no one no one not even Warren Buffett can basically double down on their mistakes and expect to get

away with it because the old Kenny Rogers song you have to know when to hold him and know when to fold him because otherwise you're going to be fighting These fights where you cannot really emerge as a winner in poker the phrase they love to say is going on tilt and getting getting your emotions involved and starting to behave is usually a quick recipe for all the chips going into someone else's pocket for sure let's get started you got a new book the corporate life cycle listeners it doubles is something you could definitely whack a

burglar with it's got lots of great chapters if you can see This if you're watching this on YouTube I've got about a 100 different pages dog geared because there's a lot of really great charts in this and we'll kind of walk through the life CC I had a few comments you have a chart in here that shows startups by country and us had this a couple years ago but had something like 75,000 startups and listeners number two is India by the way but why is this it's an Interesting question because one of the things I've

taken to doing as I go across countries and one of I'm a teacher and I spend my time in a lot of different countries is I take their index of the biggest company in that country and I look at where they fall in the life cycle cuz the Temptation you often have is if you're an Emerging Market you'll have a lot of startups that's why India has a lot of startups I was in Brazil just a few months ago and I took the bovespa which is the largest Brazilian companies and I looked at where they

fill in the life cycle there are almost all middle-age mature companies big Banks big companies you don't have any young companies in there and it's not just Brazil you go to Europe you look at every European market the big companies in that market tend to be middle age or Beyond middle age which tells me there's something in the process there that makes it Difficult for young companies to make it through not just through survival to become big and successful clearly in the US that process is open because you look at the 10 largest companies in

the US none of them are middle-aged companies or manufacturing companies you know Facebook is just what 12 years old 14 years old 15 years old it's up there so you have young companies making it through and you can't just put it to American Ingenuity it's just that There's something in the process here that encourages young companies that allows them to not just survive but grow so one of the things you look at when you look at a countryes that says look we want young companies we want entrepreneurship it's easy to say that but you got

to create a process where that gets paid off that gets a reward and I think when you look across countries that is what separates the countries with lots of startups from the Countries with very few Europe consistently punches well below its weight given the size of Europe as an economy you should expect to see a lot more startups you don't China this is the Contra between China and India is India is a lot more startups than China which tells me that there's something in the Chinese structure which makes it more difficult for young companies to

make it through the process something to think about as you think about Entrepreneurship and where the AI winners are going to be I can make my guesses and my my guess is they're not going to come from Europe they're not going to come from China they're probably going to come from the US and perhaps from India because that's where you see these young companies most likely to start up and Thrive I think everyone assumes startups is to 20 year olds in their garage but you were looking at like age of startup Founders And I think

it went 40s 30s 50s then below 30s so most people are actually older more mature our age people think of startups as vision and Technology that's only a piece of the puzzle right because most people with vision are incapable of building businesses so you need that experience of taking an idea being pragmatic about that idea because purists never survive as business people now being pragmatic and saying this is My vision but these are the compromise I'm willing to make and then building a business around it that's hard look one of the things we always love

about startups and entrepreneurs is they kind of understand most businesses fail in their head and yet they have this naive optimism but that's not going to be me I was saying if you have a world run by actuaries would still be in caves because if we did things only because the expected value is positive we did Probabilities right most of the Innovation we've seen in the world would never have happened put simply we need overconfident people reaching for the moon for the World to Change so when you look at entrepreneurs there's a self- selection bias

you look at entrepreneurs and VCS they tend to be overconfident people they tend to overreach they tend to think they can do things they cannot and thank God for them because even though it might lead to overpricing and Bubbles and Corrections and we wag our fingers saying how terrible it is every bubble that's in history has left behind an imprint that changes the way we live that com bubble changes the way we lived right the social media bubble changes the way we live so I think in a sense this is part of what makes for

an entrepreneur being overconfident overreaching it does create this overpricing across companies I will safely assume that AI companies Collectively right now are overpriced because each of them is an overconfident entrepreneur with overconfident VCS feeding into it that doesn't make me want to shut them down I want to encourage the overconfidence and there will be a correction when it happens people ring their hands and say I wish I hadn't invested in it but it'll change the way we live as companies mature I feel like you sort of start to see some of the metrics you would

expect by age Give us a little overview of how things look as these companies get older so let's say you make it through that mortality test which is a pretty tough one right two-thirds of startups don't make it to year two then you have a business model again a lot of startups fall off you're now a successful business most successful businesses can't SC scale up scaling up is tough to do for them so when you see a scaled up successful business you're already Looking at the exception rather than the rues so when you look at

these big tech companies they're the ones who not just survived and built a business model they were able to scale those business models up and what allows those business models to scale is they built a business model right from the start that allows for scaling up without giving up on profitability so I think that that's where you start to see the great company separate from the good there's nothing Wrong with being a successful small company but you're never going to see them at the top of the market cap tables you start to see the separation

and in hindsight we look back at the great companies I too want to be an apple or Microsoft but the reality is you're looking at the exception rather than the rule for most companies scaling up is deadly it kills them as companies these companies manage to scale up while still being profitable and successful once These companies get to be bigger they start to do different things I mean that's a very basic statement but in terms of like cast distribution you love talking about dividends and BuyBacks they tend to think about it differently give us some

broad overview of some of these ideas as companies age and they succeed they go from money losing to money making as their growth levels off they don't have to reinvest as much so cash becomes Available that cash can be used to pay dividends they can be used to buy back stock or they can just be held in the company as a cash balance the company's capacity to borrow money also goes up so if you tell me where you're in the life cycle I can pretty much guess what kind of debt mix you should have and

how much you should be returning but in practice companies fight aging they don't want to get older they want to be young growth companies so this is what tends to Happen you age you become a middle-aged company but you still behave like a young company you refuse to return cash you keep trying to make investments even though the Investments are not there you're pushing the limits I mean that's why I think if you know I'm not a Management Consultant but if I were a Management Consultant nobody would pay me because my advice to any company

that I'm called in in would be just act your age just act your age it's amazing how Much healthier companies become if they accept where they are in the life cycle and behave accordingly now just on on that on that topic you know many of you are listen might be aware that this year both meta and alphabet or Google and Facebook because I prefer to call them still did something that I think sent a signal to the world of where they think they are in the life cycle they both started paying dividends paying dividends for

a company is like waking Up one day and throwing out your cut off jeans and wearing khakis it's basically hey I'm a grownup I have a job to go to I can't do what I used to do that's a signal they s in saying guys if you're investing in us don't do it because you think we're 25% growth companies we can't do that anymore we're great companies we're growing but we're probably going to grow 8 % a year deliver great profits and here's our signal to you that we are grown up we're Paying dividends that's

a healthy thing to do because it sets up expectations that you can deliver on one of my main number one questions when I read this book is can you think of any good examples as companies have successfully kind of passed through where they've gone in Reverse I call it reincarnation rebirth it's happened the company's a legendary Microsoft in 2013 was a middle-age company with two great products windows and offices cash Cows but both were aging both were aging and Microsoft could see that and investors were pricing Microsoft to be a middle-aged company it would deliver

great cash flows but not much in growth but Microsoft in many ways surprise markets by going into the cloud business and there's a story there why they succeeded but today Microsoft gets more revenues and profits from the cloud business than it does from Windows and office put together that's Reincarnation people don't know too young to remember what when Apple was a disaster waiting to happen when Steve Jobs came back to Apple in 1998 and 1999 it was a company on the verge of disaster reincarnation there built around a new set of devices all running the

Apple operating system that kind of rediscovered growth for apple G even in 1981 when Jack Welch came in was a mature company been around a century so when you look at these companies there Are companies they become legendary they become case studies and there's a danger there because these case studies get taught at Business Schools like mine and they get used as examples of you to can be the next Microsoft you two can be the next apple you two can be the next G and I think it's a terrible message because we're using the exception

to drive the rule Consultants love it because they can use these exceptions to get you to try to be young Again so is there a pathway to at least staying middle AG or perhaps finding yes but it's got to be reflective of the business you're in it's got to start with the acceptance that your existing business is aging it's got to build around your strengths both apple and Microsoft built around what they already had as strengths and you got to have a heavy dose of luck along the way otherwise you know you can do everything

that Microsoft did in 2014 but won't work for you I can't tell you how many times I've heard an investor say I don't want a company that's paying dividends or buying back stock because it shows they're out of ideas they don't know what else to do with the money and often my response is maybe they don't have any ideas it's a very very competitive world we live in and we tried to give an example once on Twitter we were talking about a company that makes brooms and They have very good broom business lowcost operator consistent

margins but they're trying to invent flying brooms and then they waste all their money on flying brooms so the capital discipline just because you have the money doesn't mean you have good ideas doesn't necessarily translate into a great idea Eli Lily was another one I was thinking is that like hey you got all of a sudden you got this amazing yeah they found incredible success with anti they Garden At the right place and again they built and that I think is the key here it's organic rather than an acquisition that drives this process you know

Microsoft's Activision acquisition I think was a terrible idea its Cloud business was an incredibly good one so one of the first rules when you try to reincarnate is don't listen that Banker who says just go out and do an acquisition because it's almost never the pathway so one more area I thought we would dive into Circling back to sort of the beginning of the discussion is like the us being different you have a chart on dividends and BuyBacks by global region and not surprising the US has long had a culture of stock BuyBacks number two

you can look at this two different ways you can look at it as a percentage or you can look at it in aggregate but at a percentage no one's even close to the US it's worth examining why the US has that culture Because it's not always been there started in the 1980s and what triggered it was not management being altruistic saying we need to get cash back to the shareholders it was pressure from investors I mean we like to dump on activist investors I mean I tell people look I don't want to have dinner with

car I can I'm afraid he lead me but I want car I can around in the market because they're the investors who do the Dirty Work of prompting managers to give Cash back you talked about bad ideas and people throwing money into bad ideas the only people who can stop them are big investors who have the weight to do it so what triggered the shift to Buybacks in the US was in the 1980s the start of private Equity activist investing and it's not that the US is different anymore just leading the pack 30 years ago

if I had showed you that table only the US was buying back stock was actually illegal in many European Countries for companies to buy back stock and Asian Latin America Family Group companies did not do it at all so when you look at those numbers for Canada the UK you're starting to see this practice kind of extend outside the US in my view it's healthy it's healthy because I've never understood why dividends have the centrality that they do from the perspective of what they're supposed to be they're supposed to be residual cash Flows cash flows

left over after you met every need but if you look at practice dividends tend to be very stable if you tell me what you paid as dividends last year it's a pretty good guess that that's what you're going to pay this year I've never understood how Dividends are so stable and predictable in a world where aidable cash flows are all over the place which is one reason companies that pay big dividends can dig themselves into a hole because they're Almost stuck with those dividends in good times and in bad times I think of BuyBacks is

just flexible dividends and flexible dividence make more sense in the world we live in where everything is more uncertain so I will wage at that 10 years from now when you look at that table you're going to see the rest of the world starting to catch up to the US in terms of residual cash flows being returned in BuyBacks rather than dividends we'll see but that's my Prediction we'll do this podcast again in 2034 we'll see if it came true or not but there's a few charts in here that I've never seen before one here

figure 8.9 which is the market value of a dollar in cash balance at us companies any summary on this cuz to me is super interesting I think when you see a company accumulate a big cash balance people's concern is well is that a good thing or a bad thing so when you see a 50 billion many companies have hundred billion cash balances now and as a personal market value it can be 10 15 20% of the value I think the answer to the question is it depends it depends on whether investors trust that company with

the cash put simply if you're a company that has a good track record that has a history of doing good things with my cash of being prudent I'm okay with your holding 150 billion I'm a shareholder in apple and apple to me It's the most amazing thing about Apple is they've never done a big acquisition you imagine how many Bankers are lined up outside one infinity loop with companies that Apple can buy with 180 billion in cash it's a company that has incredible discipline so when I see that $180 billion cash balance I act like

I've invested in t-s because that's effectively what I is doing for me if I saw HP hold any of my cash I'd be running for the Hills this a company That I cannot trust with a dollar of my cash let alone 10 million 10 billion of my cash trust becomes part of the game and the reason you see different companies treated differently is trust varies across companies and it varies across time for a while I think meta was not trusted with cash because people said you put a 100 billion into the metaverse with no idea

what the metav Wass how you're making money I don't trust you and to give Facebook credit They've responded accordingly which is not to tell the market to trust them but to say look we'll act in a more sensible way and over the last 5 years I think investors have learned to trust meta more with the cash because they see that Mark cleberg is trying trying to be more responsive to their needs 15 years from the bottom of 2009 we've had this romping stomping Market it's been a 10 bagger almost most for the S&P since the

bottom but it feels like The Narrative Of the IPO window they always say there's a window I don't know why but they tend to come in clumps are we going to start to see some of these late stage private companies or is this just now The New Normal it's an interesting Trend that's developed I mean you go back 40 years you had two ways of raising Capital you had Venture Capital as a private company and public markets if you became a public company over the last 20 years though there's been a gray Market that has

developed in the Middle where Venture capitals have become big enough that some of them can invest in public companies but more often public investors have started becoming investors in private companies we remember Uber in 2016 got investments from Fidelity and T press traditional public Equity investors what does that do it allows companies to get much bigger in the private space because now you have access to the Saudi Sovereign Fund you have access to Fidelity you can raise capital and continue to grow without having to go public and if you can do that why would you

ever want to go public but there's a downside to this which is these companies can get really big with bad business models and then they go public as hundred billion doll companies and we're trapped with these bad business models Uber and right sharing in general been a terrible business model it's great in Terms of scaling up but it's very difficult to make money on a consistent basis because there's no stickiness in the business model and we allowed it to get really big by letting them stay in that gray space and keep getting Capital while they

scaled up I think there are lots of things that happened the last decade that we will live to regret because we supplied so much risk Capital to companies that were not deserving of that risk Capital that they Got big they disrupted existing businesses but I don't think they can stand on their own because their business models just don't work as a consumer it was nice for a little while to get those $5 Uber rides they start creeping up you leave LAX now and they're 60 bucks again one of the defining trends of this past cycle

has been sort of this well-known value underperformance how do you think about valuation today one of My concerns with so much of what we take as conventional wisdom in investing is much of it comes from the US in the 20th centur that price to book study price earnings you look at the former French studies and you're saying so what the US in the 20th century was the most successful mean reverting Market of all time and both those words are key the success basically means you're going to see the rise in your money no matter which

Segment of the market mean reversion basically means low PE stocks are going to outperform high PE stocks because there's mean reversion the question is whether you can then invest in 2024 using the lessons you learned from looking at the last century because much of that reflects the 20th century mean reverting US economy and I have concerns about that I don't think that this value underperformance is temporary because Many value investors hold out hope for this two shell pass will return back to the good old days I don't think it will for two reasons one is

the US is not going to be the economy that dominates the 21st or we don't know we can't assume it's going to be the second I think is Book value which is at the core of so much of what we do in traditional value investing has kind of lost its meaning it's lost its meaning because the largest companies in the market are Technology companies pharmaceutical companies where accountants have no idea what to call Book value they expense your big R&D and your capex so Book value means very little for technology companies and farmer companies and

the second is the BuyBacks we talked about have done horrendous damage Dage to book value cuz you do a buyback your book equity for Home Depot is negative what does that mean nothing you really can't draw conclusions from that book value But use Price to Book ratios it's going to lead you to not just old companies but into value traps and then you're going to ring your hand say why it isn't working anymore because the book value metric has kind of lost its meaning how do you feel about the different regimes I imagine the valuation

work you do on a one-off basis leads you to certain areas I'm not Kathy Wood I'm very bad at forecasting macros shifts and making a bet because I Think so many things are out of your control but one of my advantages is I don't value companies because I'm interested in investing in them per se value companies because I'm just interested I mean if you've read some of my posts in the last couple of months I've been focusing on the losers right Nike Starbucks Walgreens the companies that have gotten into trouble with the market because I'm

curious is this trouble is it legitimate and I think in Walgreens a case is clearly to be made that the business has turned bad the pharmacy business is broken it's not just Walgreens it's CVS and everybody else in the space because disruption is coming but the case of Starbucks it's a storyline that broke story line that you know Howard Schulz used to make Starbucks the company that it was was he we'll all Gather in these neat little coffee shops and drink not just coffee but buy all that Starbucks stuff and Hang around that was broken

by what happened after covid where online ordering became the rule rather than the exception so now when you walk into a Starbucks there are 25 people waiting at the online section for their coffees to come out and two people sitting in a for laor corner of that store drinking coffee the story is broken so one of the reasons I kind of turned my attention to companies where things have shifted is I want to see Whether the shift is real in which case the price drop might be legitimate or the shift is perception in which case

you might say look this is the time to invest in the company as I look across the world and I look at where the big macro Trends are going to lead me I look at a market like India and I think there's a legitimate story about India getting more prosperous and wealthier and we can make bets on that but one of the things we know from looking at Markets as they get wealthier and more prosperous is the demand for certain kinds of service increases Healthcare half of all India probably have never gone to a doctor

forget about getting Healthcare on a regular base they've never gone to a doctor because they can't afford it you get a billion people going to the doctor there's going to be a huge demand for healthcare in India and right now there aren't that many companies built around that space Because there aren't business models at work right now I'm keeping my eyes open for a company I can enter early in the process that will benefit from that macro growth so you want to make macro bets look around you look at things that you think are underserved

on a big macro basis and say what can I do as an investor to get on the ground floor as ASW started to develop a AI version are you incorporating this into any of your work today no I actually don't develop My own AI version but there are at least six people that I know are developing AI versions of me and I view my job as staying ahead of my a versions because one of the things I've done over my lifetime is as a teacher you want to share and everything I do is in the

public domain there isn't a single thing that I've held back right my Excel spreadsheets my valuations every class which makes me right for an AI disruption because you take a computer You can feed in every single blog post I've written that's 2,000 plus pages every single valuation I've done hundreds and hundreds of companies across the globe every single session I've taught in class and the thing about machines about AI that makes it different from the Watson of Yer year is it's almost a sentient being it's not the old computer crunching through it can take what

you do and kind of sense how your mind works it's kind of a scary Thought I'm not sure whether it'll ever come into practice but I have to act as if it will exist out there and ask myself what can I do to kind of stay ahead of that bot of my bot I and I tell people every one of you has a bot looking over your shoulder Act like it is going to show up and then ask yourself what you can do to make you separate yourself from the B it's something I think about

all the time now because if all I do is mechanical stuff I feed things into a spreadsheet I do the same thing over and over again I'm just begging to be outsourced and I deserve to be outsourced might not be so bad well tell me for someone who does spend a lot of time in the spreadsheets what's been one of the more interesting or could be challenging either way you want to take it valuate ation Securities you've looked at over the past couple years to me the darkest Parts valuation is where politics and Business intercept

I'll give you an example A couple of years ago company called the adani group it's an Indian infrastructure company which was targeted by you know short sellers because they argued that it was cutting it close on the rules perhaps breaking laws and because it's one of India's bigger companies fifth or sixth largest market cap company again I was drawn by as there something here you know Hindenburg was a group that targeted and Hindenberg is famous for targeting companies recently they targeted car Ians group for a short sell so I looked at the adani group and

I'll give you the story for the adani group because every one of my valuations a story it's an infrastructure company and if you've ever been to India India is a country desperately need of infrastructure airports highways it's a pretty decent infrastructure company but much of infrastructure in India is controlled by Governments basically they are the wants to hand out the contracts and adani has political connections I'll leave it there they're connected to the people who essentially are in power in India so when I valued n it was almost a joint assessment of what I thought

about the company and what I thought would happen to that political connections it's big competitive advantage over time which meant that my entire valuation would ride on who won the 2024 Indian Elections as much would ride on hey Will the infrastructure Advantage the company I am not a political prognosticator I hate valuing companies where politics is issue and it's kind of Spilled Out into the one part of the world where I don't have very much invested in which is China and I'll talk about why this political connection story plays in China now I said every

valuation you're telling a story and with every Chinese company every Chinese company of any Size as part of your story Beijing is a player it doesn't matter what you do cuz this is country which still is driven by what Beijing will allow or disallow you saw this play out about 5 years ago with 10 cent and Alibaba and JD the biggest Chinese tech companies where the Chinese government one day woke up and we talk about why they woke up and woke up and said you guys are too big we're going to cut you down to

size it had nothing to do with protecting consumers or worrying About Monopoly power the Chinese government was just worried that these platforms were so big that they would threaten the power that Beijing had which means you have to Value Alibaba you can bring in all the usual stuff about it being an online advertising company the market the margins but then you got a big bra Bing into the room and that it's completely unpredictable how they will behave which makes me terrified as an investor as you know Charlie M really loved Alibaba before he passed he

was a company bought and lots of value investors have piled into Alibaba and five years later they don't have much to show for it and part of the reason for that is the political effect in these companies is so enormous that you can go get every economic argument right and be wrong as an investor because that political component got out of your control for someone who who spends a lot of time Thinking about structures and corporations there's been a sort of a Oddball situation recently with open AI Sam Alman you had this non-for-profit for profit

have you ever seen anything quite like this it's terrifying that you can have what was effectively a nonprofit structure until a few weeks ago with a corporate governance know set up born in hell I mean I can't even mean if you remember last year the Sam Alman is out Sam Alin is back in the board Resigned if you saw this at a company youd say these guys are insane and you attach a $150 billion value say how the heck do you make this a business it's not just putting an Corp at the end of your

name and saying I'm a for-profit I just don't see the transition that open AI makes from being this owner of perhaps a very very valuable idea which is AI and components of it to becoming a business Maybe I'm Wrong maybe they'll find a way to transition but there's Going to be so much friction along the way because they've hired people who are really building something else right that's why you see so many departures from the company saying this is not what I signed up for so it's going to be interesting to see how it plays

out it's interesting that the biggest beneficiary from this has been Microsoft they're the only company it's trying to figure out a way to take what open AI has and convert it into Cash flows and subscription models and revenues and you got to give sadella credit he's played this almost perfectly as a CEO of a big tech company so I think that from that perspective I would not invest in if open AI gave me a chance I'm not touching that company with a 10 foot pull well that sort of leads to this topic of governance you've

written about ESG a lot and the different Cycles tend to have the behaviors stretch on this tug-of war Between maybe seite Founders management shareholders investors you start to see things like dual share class and it's hard to just say ESG because often you're lumping in a number of different topics what's the sort of state of how you're thinking about that world today in 2024 and you can feel free to take that in any direction you want before I dump on Esa and I will dump on Esa let's start with governance when I think about governance

I don't think about it from The check box of do you have a independent board how many directors my focus on on governance is how much power do shareholders in this company have to change the way the companies run if it's not to their satisfaction that's really what governance is about which is why why voting shares and non- voting shares screw up governance right 87% of the shareholders in Facebook can decide that Mark Zuckerberg is not doing a good job But the 13% that he owns gives him 57% of voting rights so governance matters because

good managers can become bad managers and if you don't get a chance to change them you get locked into the bad management so let's accept that governance matters it's been around for 40 years we've talked about it and often we've made it about you know if you do this this and this we'll give you a high governance score rather than asking the question how much power do people have Now let's turn to ESG the governance in ESG is nothing to do with the governance that I just talked about in fact um the governance in ESG

is managers are accountable not just to shareholders but to stakeholders you're saying who are stakeholders pretty much everybody shareholders Bond holders governments consumers suppliers society and you're accountable to everybody you're accountable to No One it sounds weird because you can then use the excuse so You go in front of your shareholders your stock price is down 15% you know what your excus is but it take care of society this year you go in front of your unions you say why wages down to give the shareholders their cash effectively it allows you to pass the bu

and I've always wondered why G showed up in ESG and I'm convinced it's for the same reason that East Germany called itself the German Democratic Republic most of your audience don't remember but There was a time when Germany was two two halves and East Germany called itself the German Democratic Republic there was nothing Democratic or Republic about East Germany it was an authoritarian regime that was run by an autopilot by the Soviet Union because they knew that attaching a name sometimes it's orellan makes people think that you're doing something that you're not ESC has never

been about governance in fact it's the exact Opposite of the governance we want where managers are accountable it makes them unaccountable saying what about the E and the S now when I wrote my first piece on ESC in 2019 I started out by saying by the time you finish reading this piece you're going to call me a moral trog di cuz it looks like I don't care about Society CU it started with you know from a position of curiosity what's in there and when I looked at What's in there the answer was nobody seemed to

know by nobody I include the services that measured ESG scores they were not clear about what they were measuring were they measuring goodness and that's why you can have the same company on five different Services end up with very different ESU scores so you're starting with a fuzzy measure you're not sure what you're measuring and then you extrapolate from that actions you want companies to take to Improve that measure you created a gaming model where you know exactly what's going to happen people complain about green washing but that's exactly what you can expect to see

if you have a scoring system or a ranking system I'm going to gain the system Business Schools do it all the time when they look at the rankings of Business Schools they know how us news of business week what they factor in for their rankings and guess what within every business School there's not one person there's actually a group of people whose job it is to gain the system so they measure higher on the ranking system doesn't make them good or bad that's the nature of ranking systems the problem with the isue is it's never

been quite clear what it measures and they keep changing their mind and it creates a gaming system where essentially companies will do what's necessary to get a higher ESC score even though it means nothing for Society take every one of the big problems that ESG claims to be aimed to solving right whatever it is whether it's climate change or whether it's racism or whatever it is 16 years after ESG came into play ask yourself on any of those problems are we better off now than we were 16 years ago and the answer is absolutely not

so where are all these tens of billions of dollars going that supposedly are creating change but you don't see the change Showing up in fact I wrote a piece on impact investing which is often an offshoot of ESG you know how many trillions of dollars we've invested in climate change and then you look at the percentage of our energy in 2024 that we get from fossil fuels and you compare it to what we did in 1992 the needle has not moved it's amazing we talk about green energy the amazing Investments we made but we are

just as dependent on fossil fuels now than 32 years ago so if The end game here is we want to make the world a better place we all share that goal ESG doesn't just not move you towards it it might actually move you away from it because it allows us to let companies use the surface metric to get away from accountability and lets us all off the hook as consumers and investors from having to do what we need to do to make the world a better place so you drive a big SUV to work you

create enough of a climate footprint to bury an Entire planet you come back home and then you buy an ESG fund say I feel good again I've made things even but this is not the kind of change that you would want if you want to make the world a better place so my problem with the SG is just doesn't deliver what it's set out to for someone who's kind of been a participant in media so you've written books you do videos you teach at uh University how's the landscape changing from a Participant and as you

look into the future and also kind of like what are the kids saying these days are they all just into AI is that their like main interest when you're talking to these classes what are your thoughts the business side of media is broken right both entertainment and regular news media it's broken because the traditional conduits for entertainment and news have been displaced by social media you see this when you look at Where people get their news they get it on Twitter they get it on some social media site they don't go to what's the 6:30

news does anybody watch the 6:30 p.m news on the networks anymore somebody must but they probably all own flip phones and are 75 years old so I think that that's happened in the news business in the entertainment business Netflix broke the business for them it displays this historic model of making movies getting it through a theater Collecting gate receipts and then doing the Stag it was almost like clockwork Disney had mastered it then Netflix broke that business both businesses are broken and right now in both businesses nobody's quite sure how you put it back together

again eventually I think we're going to find successful business models but right now everybody's just throwing stuff at the wall and hoping something sticks in fact on the final aspect of media I have 12 books for a variety of Publishers and I'm convinced that Publishers never left the 20th century they still think that they can have a Canadian edition of a book that sells at half the price of an exactly equivalent book which is a US edition it's almost like they can't think of people ordering online so it's amazing how slowly the core businesses have

changed in reaction to the world changing around them but the business side is broken on the consumption side what I notice is the Way we get our news is in much smaller bites attention spans have gotten much shorter now when I create my YouTube videos they're insanely long 30 minutes is a lifetime for a YouTube video I can see where the number of people speaks it's about 6 to 7 Minutes the age of Tik Tok it might be 2 to three minutes that's a challenge in terms of how we deliver our material I can complain

about the fact that the world is not the way it used to be but I'm a teacher I have to live in the world I'm in so I've learned that I need to do stuff in smaller bites and except that that's the way people get their information doesn't mean I'm going to give up on substance but that substance has to be broken up into smaller pieces and delivered over a longer period I've heard you say before read less than think more what are you thinking about now you put this book to bed as you look

into 2025 what's on your brain what are you excited about what are you confused about I'm a dabbler and every week I think about something different is whatever grabs my attention this week this week I'm actually thinking about sugar daddies and already you can accuse me of being sexist but I'm talking about the phenomenon where you are dependent on somebody with a lot more wealth supplying you with funds and as a consequence you stop thinking about Getting ready for life because somebody's giving you money and I was thinking about in the context of when I

was looking at alphabet how small the bets in alphabet are 10 years after the company renamed itself if you remember 2016 when Google renamed itself alphabet one reason they did the renaming was to tell the world we're not just a search box anymore we have all these other businesses were in we want you to pay attention now I'm sure they wish they Hadn't done that because we did pay attention you look at every annual report that Al that Google has had since or alphabet has had they show you what the bets do and it's almost

humiliating forget about not making any money they're just cash drains and this is part of a broader issue of corporate Venture Capital where big tech companies have become these Venture capitalists and they very little to show for it so one of the questions asking is how come A company with the resources with the brain power of Google is unable to make these bets pay off off and that then led me and this is how my brain unfortunately works is to Sovereign wealth funds Sovereign wealth funds are an increasing proportion of total money invested insane amounts

of money there are more than a 100 Sovereign wealth funds investing trillions of dollars they punch well below their weight their Alphas are negative they don't deliver the corporate governance changes says how come Sovereign wealth funds with all the money they have available how come they're not able to create the change which led me back to green energy which is these hund and what I think they share in common is in all three of these cases you have a capital provider who doesn't hold them accountable if way more were a traditional startup it would have

been Shut down by now after the billions of dollars invested in it if a sovereign wealth fund were a traditional active investment fund 90% of sovereign wealth funds wouldn't make it past the cut and green energy yesterday I downloaded every publicly traded green energy in the company because I wanted to see if I could find one Healthy Green Energy company one out of the 313 Global green energy companies not one passes the test for being a Healthy money-making company with an established business model I think the fact that they can go back and get Capital

with no questions asked has actually led to very flabby Enterprises and investment strategies so I'm going to write a piece on it and then I'm going to forget because I'll come up with something else next week that catches my attention now I think that one of the things I've learned over the last four years is Trying to be a macro forecaster Market is almost an impossible task there are so many things outside of your control that I take the karmic view which is if it happens it happens I've got to adapt to it my my

job is to stay with the companies I'm valuing and try to find something that looks like a bargain today I might change my mind a week or a month from now but I've got to be in the moment and that requires not getting too forward-looking in my macro Focus you're A Yankees fan what's your prediction by the time this comes out series might be over already what's your prediction for the series I can't predict but I'm hoping for Yankees and six Yankees and six you write about sports or at least you were recent and sports

is interesting because a lot of people are starting to get interested there's been announcements private Equity wants to get its Talons into Pro Sports what's your thoughts on the Sports world because talking about sugar daddies it's almost like a whole world where valuations in the spreadsheet may just get chucked out the window there was a time when people bought sports franchises businesses the roonies bought the Steelers as a business they ran it as a business they created cash flows coming usually from gate receipts at the stadiums two things happened one is the sports business became

a media business for most major franchises 80 to 85% of Your revenues come from media contracts TV contracts and the second thing that happened and this has changed the economics of the sport is they became expensive toys for billionaires if you buy a sports franchise now as a business you're making a horrifically bad mistake I I don't care how great the franchise is you will not collect enough cash flows from the Cowboys as a franchise to cover the 10 billion that you have to pay a front so why would you want to buy To Cowboys

in any other Universe would Jerry Jones be the well-known person that he is the reality is without the Cowboys You' just be another business person somewhere who's really wealthy in many of these cases and I think the NBA it's almost unanimous almost every NBA team is now owned by a billionaire and that billionaire made his money or her money elsewhere and this has become their most expensive toy it's going to have two consequences one Is you're going to see the prices for these franchises can you look at and said really you're paying $6 billion for

the Washington commanders what possesses you to do it it's because you want an expensive toy it also means that the choices that these franchises make on who to sign or how to run the sport is going to be driven by what is good for the eagle of the owner what makes that owner happier and so you're going to see that sports stars with bigger social Media followings going to get bigger contracts than sports stars with much smaller following a mik trout even at its peak would never command the kind of contract that Shani gets so

I think that you're going to see the way Sports get run and that could be the downside of it is since you're not running it as a business you're going to see these very strange decisions made buy sports franchises from an economic perspective please step back and say it's an Expensive toy does that make sense and the answer will be absolutely one more question for you my favorite quote you're so quotable we do a lot of quotes of the day with you one of my favorites we love to hear you expand upon it just a

little bit before we let you go near the end of the book page 525 you have a bunch of fun lessons but one is says if you do your homework and find good Investments do so on the expectation of Rewards but don't feel entitled to those Rewards can you explain what you mean by that no it goes back to that righteousness righteousness comes about because you you think if you've done your homework you've read the books you've done the valuation you invest based on that you expect to get more than your entitled Awards you expect

to get extra Awards some and you should be making more than your Neighbor Next Door buys an index fund and you do all this work and I think that what I'm trying to Argue is you can do everything right you can come up with the value and you might make the same amount of money as a person next door even though you did the work that's okay because I think if you enjoy the process of understanding companies and you invest on that basis you take ownership of your decision I think far too few investors take

ownership of their decisions they want to blame somebody else they want to blame you as a as a fund manager they Want to blame Goldman Sachs because it was an equity research report or Jim Kramer because he yelled out the name of the company ultimately when you buy there's nobody to blame but yourself so I think this is part of taking ownership and ownership effectively means you did your homework you bought the company if you make money great if you don't make the extra money you did you're still okay because the process is what led

you to this final choice you got to be a Good loser to be a good investor listeners that's one of my favorite quotes too is every trade makes you richer or wiser but never both listeners check out the corporate life cycle it's out now on Amazon awat thanks so much for joining us today thank you m podcast listeners will post show notes to today's conversation at mefa.org podcast if you love the show if you hate it shoot us feedback at the mebf show.com we love to read the reviews Please review us on iTunes and subscribe

the show anywhere good podcasts are found thanks for listening friends and good investing