Forensic Account Anthony Scilipoti: The Bubble No One is Talking About

Anthony Scilipoti is one of the sharpest minds in investing. He's the President and CEO of Veritas Group of Companies. He called the collapses of both Valeant Pharmaceuticals and Nortel before they happened, and now he has some thoughts on AI. We talk about asking better questions, reading the fine print, the role of short selling, and what it means to be wrong. We explore why AI gives you information but not insight, why cheap risk is often the most expensive, and why nothing matters until it does. It's a conversation about the difference between seeing and understanding and the discipline to notice what everyone else ignores. This episode is not investment advice. It’s time to listen and learn. ----- About Anthony Anthony Scilipoti is one of the sharpest minds in investing. He's the President and CEO of Veritas Group of Companies. ----- Approximate Chapters: (00:00) Introduction (01:26) Early Career (02:53) The Enron Scandal (05:48) Lessons on Auditing (16:12) The AI 'Bubble' and the State of the Market (18:46) Ad Break (20:50) The AI 'Bubble' and the State of the Market (Cont.) (28:12) Parallels Between the Fall of Nortel Networks and the Current AI Economy (35:15) Ad Break (36:10) Parallels Between the Fall of Nortel Networks and the Current AI Economy (Cont.) (39:14) Investing Rules for Better Investments (42:14) Red Flags to Look Out for When Investing? (45:56) The Rise and Fall of Valeant Pharmaceuticals (53:04) Is a Complicated Corporate Structure Bad? (55:54) Companies Don't Start Out Being Crooked (57:53) Why is EBITDA a Disastrous Measurement? (1:00:47) How Should Investors See Stock Options / How to Account for Stock Options (1:06:30) What Incentives to Look for in a Company When Investing? (1:11:31) The Rise of Index Investing (1:15:41) Buybacks and Share Count (1:21:21) What Makes Warren Buffett a Unique Investor? (1:26:58) The Power of the Retail Investor (1:32:30) What Is Success for You? ----- Thank you to the sponsors for this episode: Basecamp: Stop struggling, start making progress. Get somewhere with Basecamp. Sign up free at http://basecamp.com/knowledgeproject reMarkable: Get your paper tablet at https://www.reMarkable.com today .tech domains: Nothing says tech like being on .tech https://get.tech/ ----- Upgrade: Get a hand edited transcripts and ad free experiences along with my thoughts and reflections at the end of every conversation. Learn more @ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠fs.blog/membership⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠------Newsletter: The Brain Food newsletter delivers actionable insights and thoughtful ideas every Sunday. It takes 5 minutes to read, and it’s completely free. Learn more and sign up at ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠fs.blog/newsletter⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠------Follow Shane ParrishX ⁠⁠⁠⁠⁠@ShaneAParrish⁠⁠⁠⁠⁠ Insta ⁠@farnamstreet⁠ LinkedIn ⁠Shane Parrish Learn more about your ad choices. Visit megaphone.fm/adchoices

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  I hate calling things bubbles, but I think we're in a period of extreme euphoria, where you read and speak to investors and they say that the numbers don't matter and the financial statements no longer matter because this is changing the world. I say, well, I've seen this before. You know, I saw that Nortel was changing the world and Lucent and Cisco and 360 Networks. They were building out the infrastructure of the internet that we're using today. But those companies don't exist anymore.

• 0:34Speaker 01

  Anthony Shilapati is a forensic accountant who saw what others missed, predicting the collapse of both Valeant Pharmaceuticals and Nortel long before it happened. He spent decades reading what companies don't want you to see, the footnotes. Now he's spotting familiar warning signs in today's AI boom.

• 0:50Shane Parrish?

  What are the red flags you look for?

• 0:51Speaker 00

  It's not red flags. We call them flammable items. It's a three-stage process. The first stage is.

• 1:03Speaker 01

  This episode of The Knowledge Project is for informational purposes only. The views and opinions expressed by Shane Parrish or our guests are solely their own. Nothing in this conversation should be considered investment advice, financial guidance, or a recommendation to buy or sell any security. Always do your own due diligence or consult with a qualified financial advisor before making investment decisions. It's time to listen and learn.

• 1:26Shane Parrish?

  I want to start with how you got into forensic accounting.

• 1:30Speaker 00

  I was an accountant and I was working at Arthur Andersen, doing the normal audit sort of preparatory work. And I found it unfulfilling because the work I would do, I would find interesting or concerns with the accounting or otherwise. And the clients, it didn't end up ending anywhere. So what ended up happening was there were some due diligence work to do, where we could do, actually look at transactions, companies calling us to say, you know, we want to spin out this business or we want to make this acquisition. And then I asked, put my hand up, said, listen, can I do that sort of work? And then I started doing it and I loved it. Huge fulfillment. And then it's all about people you meet.

• 2:13Speaker 00

  I met a gentleman named Al Rosen and he was head of accounting at York University. And he was a forensic accountant. He had his own practice. He taught, uh, taught us to pass the, the, the U F I at the exam or the CPA exam at the time. And, um, I said, you know, I'd like to work with you. And he said, well, you get your C A work done and then we'll think about it. And that's what I did. And so then I tutelage under him for some four years. And, uh, that, that really, uh, made it happen. You weren't on the Enron file, were you? I was not on the Enron file. I left Arthur Andersen in nineteen ninety seven. Couldn't even spell Enron at the time. And, uh, it's a very sad thing what happened. What did happen at Enron?

• 2:55Speaker 00

  They essentially had a number of off balance sheet exposures. So they would enter into derivative type contracts. Where, that were tied to an energy price, for example, or even the company's own stock price. And it'd be like, this debt only comes due if the stock price falls to X. This debt only comes due, or this derivative transaction we'd entered into. Enron was an energy trader. Um, you know, so if the price of electricity in kilowatt hours rises to a certain amount. Well, then their, this debt is no longer due. If it falls to this level, then there, they have to pay, uh, some counterparty.

• 3:38Speaker 00

  And so those were, those, those risks were essentially off balance sheet. So those were not sitting on the company's liabilities. They were all contingent. And at the time, the accounting rules were such that the, this, these numbers were not included on the liabilities. They were just in the notes. And so all of a sudden, so people weren't paying attention because nobody read, that reads the notes. And so then all of a sudden, things started to happen. There was a change in movement in commodity prices. Okay, this is now we're dealing with the dot com. There was a lot of, a lot of changes that happened in the economy. We, we had a, we had a, a recession in the early two thousands, right? And so that led to a lot of movements in commodity prices.

• 4:22Speaker 00

  That triggered the derivatives. Surprise, surprise, they can't make the payments. It's done.

• 4:29Shane Parrish?

  And they weren't required to reserve or put away in reserves any amount of?

• 4:34Speaker 00

  Well, if it wasn't on the balance sheet, then investors and wouldn't wouldn't have noticed that that there was not enough assets per perhaps to cover. And and why the implication to Arthur Andersen, which I think is important, and then it's near and dear to my heart, is, you know, the auditors at Arthur Andersen that were working on the file, they ended up signing off on all these things. Well, when essentially the proverbial hit the fan, all of a sudden, they were asking questions and the regulator asked for the working papers of the auditor, that the papers of which they would support the audit work. And they knew perhaps that they didn't do enough work, so they shredded the documents.

• 5:16Speaker 00

  So all of a sudden, they became guilty because of their actions. And so it was found in the courts upon appeal that Arthur Andersen was not guilty. But that was way after the fact because Arthur Andersen was already was brought to its knees and it was over. It became a scapegoat for everything wrong with with with accounting at the time. And look, change needed to happen. Arthur Andersen was around the world, all the partners were folded into the other firms.

• 5:48Shane Parrish?

  What are the limitations on audits?

• 5:51Speaker 00

  The limitations?

• 5:51Shane Parrish?

  Yeah.

• 5:52Speaker 00

  The limitations are you're hired to be a independent, to give your independent opinion and attest that the financial statements present fairly in all material respects in accordance with some set of accounting standards and or standards that's associated with a contract, for example. And the challenge is time, because you have to do this quickly, pressures on costs. And essentially, think about it this way, it's like, I tell you, look, I just prepared my report card, I got an A. I now hand it to you and say, look, it's an A. And if you say that it's an A, I'll pay you X amount of money. So look at your situation.

• 6:37Speaker 00

  You come back and say, well, it's actually not an A, it's kind of a B plus. Uh, how much am I paying you again?

• 6:44Shane Parrish?

  Yeah.

• 6:45Speaker 00

  What do you mean it's a B plus? You think that question, that the way I answered that question couldn't have been this way or the other way? You know, and this is, it ties into so many things, you know, AI and so forth. Business is judgment. People run companies, they don't run themselves. The decisions associated with a business transaction end up being reflected on those financial statements. But when the group that's making the decision in the business to do something, well, then they come back to the office and show up in the, in the accounting department and say, hey, we just did this. You know, can you guys figure out how to account for it? And all of a sudden the accountants are like, oh, what do I do now? How do I do this? Cause then they, and by the way, when you do this, I want it presented as, as, you know, as bright as possible

• 7:30Speaker 00

  so that our investors and all our stakeholders are really excited by the results. Like, don't present it badly.

• 7:36Shane Parrish?

  You, you said a lot of people don't read the footnotes or the financial statements. Is that changing in a world of AI where you can sort of like download the financial statement, pop it into AI and say, what do I need to know?

• 7:48Speaker 00

  I think it's actually exacerbating the situation.

• 7:53Shane Parrish?

  Oh, spend a few beats on that.

• 7:54Speaker 00

  Because now, read the financial statements, Anthony. I just put it into AI. I asked ChatGPT to tell me, what about this? Look for that, look for that. And there's, there's all the instances of those things. And then I just read it and it's all there. Well, did the AI miss it? Did the AI understand the linkages between each of those sightings? If I'm, if I'm looking at, for example, I was looking at a company recently and I was looking at, it was capitalizing costs. Okay, this is a REIT. And if it capitalizes costs versus putting them through the income statement, if it goes through the income statement, it makes their operating earnings look poorer, lower, and their net EPS ultimately.

• 8:38Speaker 00

  But if they put it on the balance sheet, well, you know, that's an investment in the future and everything looks okay. Right? And so there's a gray area. Was it an operating expense? Or was it a capital item? And so I was, first thing I looked for was capitalized interest. And so it gave me all the quotes and then capitalized costs and gave me all the quotes. So then you think that that's enough, but you have to then, and I, and I was showing one of my guys this. I said, so then let's go to the income, let's actually pull up the statements where it told us to go. Cause AI made it faster. I now no, no longer needed to flip the 300 pages, but it, it gave me where to go. So now I went there and now I could say, well, that means if that is what's happened,

• 9:22Speaker 00

  then we need to look at this other note to see where, you know, the implications of that. And then we got to look at the cash flow statement to see how it's actually impacting what ends up being reported as, as cash flow. And so those linkages come, it, the AI makes me get to the answer perhaps more quickly. But it's my, if I don't already know where I want to go, then AI just gives me information. But that information doesn't help my decision if I didn't start with where I want to get to.

• 9:53Shane Parrish?

  And it sounds like that information doesn't help your decision if you don't know the second, third, fourth order consequences.

• 9:59Speaker 00

  Hundred percent. This is, I love it. If that's where investors go and that's where they're going, everything's going to AI. The, the bottom level of being an analyst, the junior analyst is, is going to be replaced by an AI. The one that said, find me all the references of, you know, where the company capitalized costs. That the AI can do. I get it. But you need someone with experience to know what, which of those references matter and to what that means to the business. And this brings about a number of challenges because well, if that junior person doesn't learn.

• 10:36Speaker 00

  Doesn't get on the in on the ground floor. They'll never learn to be able to make all those connections.

• 10:41Shane Parrish?

  And the only way to learn is sort of like being in the weeds and not being in.

• 10:45Speaker 00

  Yes. In fact, it ties to so many things. I with my own children, I've seen growing up. When we went to school and we were in elementary school, we would be, you know, we'd have to do the math tables and recite them.

• 10:59Shane Parrish?

  Yeah.

• 11:00Speaker 00

  Two times two is four and so on. I remember I was struggled with my with my nine times table and then my 12 times table. And so I had to memorize them and get them going. But then my children came along and they were using a calculator. And apparently that was okay. I went bananas. I said, you're not going to use the calculator. You need to learn it without the calculator and then you can use the calculator, which is the same with AI. You need to understand how the financial statements are prepared, understand the linkages, developmental models so that when the AI gives you information, you can you can digest it and make decisions.

• 11:37Shane Parrish?

  Reminds me of this funny story. When I started university, I ended up in first year calculus. And for whatever reason, the professor who was supposed to teach that class couldn't teach it. So the dean of the math department.

• 11:50Speaker 00

  Wow.

• 11:51Shane Parrish?

  Took over. And on the first class, in the first like minute, he said, there'll be no calculators in this class.

• 11:58Speaker 00

  Oh.

• 11:59Shane Parrish?

  Nobody, of course, listened to him because graphing calculator, you're like, oh, my God, this makes my life so much easier. We show up to the final exam, which is like, I think 80% of your final mark.

• 12:10Speaker 00

  Yeah.

• 12:11Shane Parrish?

  And on the front page, it's no calculators. And he did not grade that on a curve. And it was not pretty for most students.

• 12:20Speaker 00

  I taught at university for about 14 years at York and truly one of a very fulfilling time in my life. And I still love doing guest lectures. I remember I would always start to, you know, I would go over the outline and I and I would tell the students, I said, so assignments are due at the beginning of class. If they're handed in after the 8:30 start time, it's a zero. It's a zero. And invariably, at some, whether it was the first and usually the first or second assignment, somebody would show up and hand it in late and I would say it's a zero.

• 13:00Shane Parrish?

  Yeah.

• 13:00Speaker 00

  And they would whine and say it's, how can you do that? And you're so draconian. And I said, well, you think in the real world, when an RFP is required and you've signed with the contract with a client, that they demand the report by nine AM on Monday and you show up at nine oh five? How's that look?

• 13:22Speaker 00

  And somehow it's okay. So it wasn't okay in my class. And, and ultimately, I think you, you build respect because people see there, there's a rule and it's followed. And then people have respect for the rule.

• 13:33Shane Parrish?

  There's this sort of like weird dichotomy, I think with students right now, and dichotomy is probably not the right word. There's this weird path where students are coming out and they're more powerful and capable than ever because they use AI by default. And so they can get more output than somebody who's maybe been in their career 15, 20 years. And I, I use my 14 year old as an example, you know, in a world where he never had to show up to work, he's a mid-level employee at most companies based on output. If you never saw him, he can give you the, the exact same output than a mid-level employee is going to give you if everything goes right.

• 14:12Shane Parrish?

  But the minute something goes wrong, he doesn't quite understand all the nuances and all the, and AI, the, I guess the race for him is like, will AI catch up quicker, you know, because he uses AI by default. And I sort of think about this as like making a recipe, right? Like if I pull out a cookbook and I make a recipe and I do everything perfectly, you wouldn't be able to tell the difference between me and the chef. Like the food, maybe it's not plated as well, but it's going to taste great. It's going to taste the same. You'd be like, this is amazing. But if something goes wrong, if the oven's too hot, if I don't stir enough, I don't put enough salt in, I don't know why it didn't go right. But the minute a chef, the chef who created that recipe, who's got all the experience, who did the, you know,

• 14:56Shane Parrish?

  who's made it hundreds of times, they taste it and they're like. Oh, your oven said three seventy five, but it's actually three fifty. You stirred this too much. You let this boil you. They instantly know what went wrong. And I wonder if in a world of AI, that's the nuance. And I was talking to Steve Schwarzman about this in a different context. But he basically said, you know, a lot of the analysts coming up, they know the numbers, but they don't know what the numbers mean.

• 15:26Speaker 00

  Correct. Experience teaches you judgment and you talk about this in your book. It's all about the mental models. I believe that strongly. The experience teaches you what the numbers mean, as we've spoken about. And when you have experience, you say, I've seen that before. And a lot of the things I see happening today, link back to things I've seen when I started my career over the last thirty years. And I think that's something that the AI can't quite do, unless you tell it where to look, because it doesn't know the link to that I'm thinking about.

• 16:00Shane Parrish?

  Right.

• 16:00Speaker 00

  But if I, if I can make the initial stage, it can help me get there quicker and more accurately. But if I don't, if I don't already have a model of what I'm looking for, it's not going to get there.

• 16:12Shane Parrish?

  What are you seeing today?

• 16:14Speaker 00

  We're talking now equity markets, is that?

• 16:16Shane Parrish?

  Yeah.

• 16:17Speaker 00

  I think we're in what seems to be, you know, and I hate calling things bubbles, but I think we're in a period of extreme euphoria, where the numbers, the fundamentals and fundamentals is thrown around in the investment industry, like the word love is thrown around among humans. You know, the fundamentals, well, someone looks at the chart and sees that, you know, it did a double bottom. Well, that's the fundamentals. And someone else says, you know, that they're looking at RSI or some other things, or someone else says they're just looking at cash flow, or someone's looking at the multiple related to earnings, and those are the fundamentals. Well, at the, you know, historically, and if we follow what Buffett says,

• 17:02Speaker 00

  the company is the present value of its future cash flows. And how do you develop those cash flows? Well, you need to do a forecast on what it's, what it's going to drive the business. And so that's what I think the fundamentals are. And so when a company today is not generating much in free cash, impact negative, and yet the market wants to trade it at a multiple of its revenues.

• 17:27Speaker 00

  Well, then the company's valuations is extracted from its current fundamentals and trading based on some future expectations. I've been asked, you know, if you could have anything, what would it be? And I'd say tomorrow's newspaper because then I'd know what was going to happen and I would be able to invest on that. And so we're all trying to do the most impossible, figure out what's going to happen tomorrow. And all I know is I've seen that when you read and speak to investors and they say that the numbers don't matter and the financial statements no longer matter because this is changing the world. I say, well, I've seen this before.

• 18:10Speaker 00

  You know, I saw that Nortel was changing the world and Lucent and Cisco and 360 Networks. They were building out the infrastructure of the internet that we're using today. But those companies don't exist anymore. They built what they built and that still exists, but they no longer exist. Either bankrupt or folded into other companies. Cisco still exists today, but has never traded at its historical valuation. And yet it's a it's a multiples bigger than it was back then and by earnings and by revenue.

• 18:44Shane Parrish?

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• 19:30Shane Parrish?

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• 19:39Shane Parrish?

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• 20:22Shane Parrish?

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• 20:50Shane Parrish?

  I guess what you're saying is the same as, we know this is the future, but it's also the same in that we don't know who the winners are going to be.

• 20:57Speaker 00

  That's right. And I think right now, the reason why I think we're in a very high-risk situation is because the cost of the risk is priced very low. And that's when the risk is highest. And so, how do we look at that? We look at the high-yield bond spread, the spread between the 10-year bond and the high-yield bond in the US. Okay? That's the non-investment-grade bonds. Well, that's the tightest, near the tightest it's ever been. Which means that... Investors are willing to lend money to non-investment grade companies at a spread over what a government bond is at a rate which is the tightest it's been practically

• 21:42Speaker 00

  in history. So there's no risk priced into the bond market. And then in the equity markets, we use VIX, which is a measure of volatility of the of the S and P 500, and that is trading at a benign level. It's not the lowest it's ever been, but it's at a benign level. So in essence, what investors are saying is there's no risk. Everything's fine.

• 22:03Shane Parrish?

  Isn't that the age old wisdom of like, don't fight the Fed, though?

• 22:07Speaker 00

  For sure.

• 22:08Shane Parrish?

  Their future is is pretty clear, at least in the short term. But the implications of that are, I don't proclaim to know, but interest rates are coming down. I mean, all the governments want interest rates down.

• 22:19Speaker 00

  Right. They want interest rates down because because debts have continued to balloon in a period which has been relatively buoyant by historical standards. And interest rates, they perceive interest rates are going to go down. That's going to keep on the buoyancy. Well, the central bank, and if you followed Powell, despite all the pressures coming from Trump to cut rates, I mean, Powell is going to cut rates because he's concerned about either the employment situation, right, or the economic situation more broadly.

• 22:54Shane Parrish?

  Or political pressure.

• 22:55Speaker 00

  There's supposed to be a separation. It's seem, you're right, but it seems like he's actually noticing that because now, all of a sudden, we've seen some some more strain in the in the employment market. And that, I think, is what's leading him to believe, okay, now it's time probably to start cutting rates.

• 23:12Shane Parrish?

  What happens when we cut rates and markets are at all time highs?

• 23:16Speaker 00

  It could become a situation of where you sell the news, because everybody was moving the market up in anticipation of it happening, because the belief is, as we, when we cut rates, we provide more lower cost capital to companies, they put that capital to work, and it generates return. Every company is only as good or as stable or as strong as its customer base. And if we're seeing that the customer base of, you know, let's call it the average Joe, and I call that Joe Sixpack, he's a buddy of mine, we all have a buddy, Joe Sixpack. And so if Joe Sixpack is struggling.

• 23:53Speaker 00

  Then ultimately, how is everything going to trickle down and create growth?

• 23:58Shane Parrish?

  You know, I have a hard time reconciling this, right? Because the the the territory, the boots on the ground is a lot of people are struggling. Seems like more people than at least in my adult lifetime. With the exception of maybe the 2008 financial crisis. And we have markets at all time highs.

• 24:18Speaker 00

  Yep.

• 24:19Shane Parrish?

  And we have inflation, core inflation actually going up. And we also have governments with high unemployment pushing interest rates down. And we have this this really, I don't make macro predictions, but we have this really interesting setup. And then on top of that, like just from my, like how I sort of approach things. You have the greatest investor of all time, who has built up, I don't know.

• 24:44Speaker 00

  Largest cash.

• 24:45Shane Parrish?

  What's the, yeah, 400 billion by now, or 350 billion. His largest cash holding as a percentage of market cap, I think, ever. I struggle to reconcile all of these things into some coherent view of like.

• 24:59Speaker 00

  The the thing about the markets and companies is they'll continue longer than you and I will be alive. And so when you're investing, it just depends on your horizon. And I think what's happening today is investors have learned, and rightly so, that every time the market falls, it rallies back.

• 25:24Shane Parrish?

  Hmm.

• 25:25Speaker 00

  And I like the comment you made, Shane. I'm not here to predict markets. It's a fool's game. I don't know, you know, I wish I knew, then I'd just buy futures and make tons of money or short them. But what instead I know is I'm looking at the underlying companies. And except for some of the mag seven that are growing their earnings, the smaller and mid caps are not. When Walmart is telling you that there's a problem with its sales forecast and Target is struggling and Blue Lemon can't sell the same number of pants and Starbucks is considering to. Changing some of its pricing and some of its its business model.

• 26:06Speaker 00

  You know, this is Joe Sixpack and and Stevie Winebox that stepped up from Joe Sixpack. You have Stevie Winebox in the middle. And I think they're the ones that are struggling. And so it tells me that this can continue and and markets can continue going up for for any number of amount of time because it's a function of how much liquidity is in the market as well. People have or if investors have lots of cash, they'll continue to invest. The people that you're seeing that are making the most money today are not those that historically, in general, I'm speaking, the ones that you hear about that have made money historically. We talk Ray Dalio, you talk about, you mentioned, of course, Warren Buffett.

• 26:49Speaker 00

  And there was a, there's a quote that was that I that I learned over time. And it says, during raging bull markets, knowledge is superfluous and experience is a handicap. Because if you have the the benefit of knowing what happened in all the other blowups, you know how painful it could be. But if you've never experienced it and every time something went wrong, it just rallied back like nothing happened. Well, you think it's going to continue.

• 27:19Shane Parrish?

  I guess the argument against that is this time it's different, which is what we always.

• 27:22Speaker 00

  Which is the most dangerous words in in life and in finance. One day, want to write a book that's that that marries finance with life because it's it's it's one and the same.

• 27:34Shane Parrish?

  I remember this interview Alice Schroeder did, and she hasn't done many interviews. And one of the most illuminating things that I remember from that interview is that Buffett, when he was looking at patterns, he wasn't trying to identify what's different this time. He's trying to focus on what's the same.

• 27:52Speaker 00

  Yes.

• 27:53Shane Parrish?

  Talk to me about that.

• 27:54Speaker 00

  And so. What I see is the same. We actually put, you know, I transitioned the forensic accounting knowledge and skill set into what is today Veritas. And so that's an independent equity research firm. And then later into also an asset management arm. And all of that started because we wrote a cell report on Nortel in 2000. And people thought we were crazy. And, you know, at the time I was 29 years old. So I didn't realize what I was actually doing. It's amazing when we're young, but. You didn't realize the impact of what you were doing. I didn't like. You knew the accounting.

• 28:34Speaker 00

  I knew what I was looking at, but didn't realize that if you drop said pebble into the water, what happens? And then when John Roth gets quoted in the newspaper that we're hurting his ability to raise capital and clients are canceling and, you know, employees are contacting us upset because of the things we're saying. And it's like, I didn't mean to hurt anybody. I'm just saying the truth, hence the name Veritas. So let's link to what I think some of the linkages from the past. So at the time you had Nortel and you had Cisco and you had Lucent. And they were building out various components, parts of the internet. And what they would do was they needed customers.

• 29:19Speaker 00

  Well, the customers needed to raise money because if you're going to build infrastructure, you're not going to generate cash flow for some time. So they would raise money from equity holders and eventually get some debt. But the powers that be at Lucent and Nortel would also offer them. So they would say, buy this $10 million worth of product. And why don't you pay me over some extended period of time? Oh, and by the way, we'll give you a line of credit so that. You need 10 million from us of of cable. Uh, but well, you can also, you need to buy some routers from Cisco. You know what? We'll give you some line of credit so you could do that. Because Nortel could borrow money, could could had a great balance sheet, could raise money, whatever.

• 30:03Speaker 00

  And so that's what was happening. Well, ultimately, when the equity market started to wobble and there was no one left to continue to make sales to, right? Well, then now all of a sudden, Nor- Nortel didn't get paid on its debts. And the wheels came off. And then the 360 Networks and JDS Uniforms and etcetera, that were the customers of the big three that I just mentioned. They went by the wayside. And so what ended up sort of now, let's take that and think about what's happening today. So you have the likes of the Nvidia's of the world and let's say Microsoft. And you have OpenAI and such.

• 30:47Speaker 00

  And Nvidia is investing in OpenAI. And Microsoft is an investor in OpenAI. Microsoft offers cloud services to OpenAI. So it's a customer. So OpenAI becomes a customer of Microsoft, but Microsoft gave it the money so they could actually pay it back. Nvidia invests in OpenAI and Nvidia is a a supplier of chips to OpenAI. So it's all circular, what's going on here? There's a new company that just went public earlier this year, CoreWeave. Who is its largest customer? CoreWeave provides data transaction like analysis of on chips, right?

• 31:32Speaker 00

  It's a data farm for the large AI users like Microsoft. Its largest customer is Microsoft. Microsoft hasn't invested in it. But Nvidia supplies pretty much all its chips. Well, Nvidia is a large or is a meaningful investor in CoreWeave. CoreWeave goes public. It's trying to close its equity, its financing on the last moment. Nvidia buys $250 million worth of shares of CoreWeave. So that it could close the deal. These are, you know, JP Morgan gives them a loan so that they could, just before they go public and then they go public and repay the loan to JP Morgan. Who's the one of the lead underwriters, JP Morgan?

• 32:15Speaker 00

  No one's doing anything bad. No one's cheating. It's just these are all the same type of symptoms of things that were going on way back some 25 years ago. All these things don't mean anything. Nothing means anything until it means something. I say, you know, the things that we're talking about right now, these little things, if you will. You know, in the time of 2000s, just like we talked about Enron that didn't have the disclosure. So the key wrinkle to everything I brought up, and that's why now I want to take it to the accounting, is the financial statements of Nortel didn't show that long-term loan as a part of current assets. It showed it as part of long-term assets.

• 32:58Speaker 00

  So when the simple calculation of current ratios, they would only take well current assets. And so this long-term asset, that wouldn't show up as part of the liquidity calculation. It also wouldn't show up as part of operating cash flow. And if it's not part of operating cash flow, then operating cash flow looks better. And no one would look at long-term receivables. And what they would, because they're taught in their CFA, how do you calculate free cash flow? Operating cash flow less CapEx. But this is the problem with when you just create the ratio and invest by ratio. The ratio needs to be adapted to the company. The life cycle, the industry, the business model.

• 33:42Speaker 00

  If the company's selling things at a long-term receiver for over a period of extending beyond one operating cycle, but it's part of its normal operations, that should be part of operating cash flow. And in fact, after, after Nortel, FASB changed the rules. And then long-term receivables became part of operating and short and, and, and current assets. And that's something we wrote about. We said, this is wrong. You need to, the free cash flow is actually negative. Because this number needs to be shown. So they're extremely vulnerable to something going wrong if the customer can't make payments. And today, now let's look at the accounting today. Nvidia would make that investment in in CoreWeave.

• 34:23Speaker 00

  It's such a small meaningless dollar amount to the balance sheet of Nvidia. Hmm. That the number amount of disclosure is irrelevant. It'd be it's a it's a related party. Now, we only own 5%, so that's not material to to Nvidia. And the dollar amount to Nvidia's total balance sheet is also immaterial. So it doesn't matter. But if this is happening over hundreds of transactions, where it's making investments like this in its own customers, then what ends up happening if all of a sudden it runs out of the ability to get cash or the customers end up having problems selling services with the chips

• 35:09Speaker 00

  that it buys, then kind of things start to fall, uh, fall apart.

• 35:13Shane Parrish?

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• 35:56Shane Parrish?

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• 36:11Speaker 04

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• 36:40Shane Parrish?

  Don't we always invest in our customers' businesses, though? You give them payment terms, you allow them to extend. You know, that's an investment in your customers.

• 36:48Speaker 00

  Again, it is fantastic business savvy. You want, if I'm trying to create a new paradigm, which is AI, then I, in order to foster that paradigm, I need to invest in it as a, as the key player in it. And what ends up happening? If you see that my name as a key investor and a leader in this industry is making an investment in this company, well, then what does everybody else do? Warren Buffett tells you he's buying something. What does everybody do? They go buy it. Well, if Nvidia is buying something, what do all the private equity firms do looking around? Well, that's a good one.

• 37:29Shane Parrish?

  There's another one. It's on Corey Tenser, we, like AMD equivalent, which is private now.

• 37:34Speaker 00

  Yeah.

• 37:34Shane Parrish?

  So I'd imagine they would all.

• 37:35Speaker 00

  Exactly.

• 37:36Shane Parrish?

  Pile into that.

• 37:37Speaker 00

  You got it.

• 37:38Shane Parrish?

  Yeah. This Nortel report, I want to come back to this first. I see you dropped this report and you happen to be correct. What responsibility, you know, remember the Superman quote, with great power comes great responsibility?

• 37:52Speaker 00

  I tell you, and Spiderman.

• 37:54Shane Parrish?

  Spiderman, Spiderman, yeah.

• 37:55Speaker 00

  I love that quote.

• 37:56Shane Parrish?

  And I wonder about these things, like when you're right, it's great. But what about when you're wrong?

• 38:01Speaker 00

  And that's one of the things, you know, we're celebrating our 25th anniversary this year. And I developed 10 rules, investing rules. They relate to life as well. But one of them is being negative.

• 38:17Speaker 00

  Sounds intelligent. Hmm. Being negative typically is looking at facts. It's looking at numbers. It's presenting them to you in a way that says, wow, that seems really compelling. If I want to sell you something that is, you know, that so that's the negative side. If I want to sell you the positive side, well, then I gotta sell you the dream. AI is gonna change the world. People are gonna be no are no longer gonna need to work. We're it's gonna replace jobs. Margins are gonna go higher. There's gonna create, you know, it's it's gonna improve healthcare services. All in all the the phenomenal things that could potentially happen. And so you'd see that and then you're willing to invest. It's you're buying a dream.

• 39:02Speaker 00

  But if I tell you, yeah, but a lot of this is based on all these intricate transactions where there's no disclosure about. You go, ah, that doesn't matter, Anthony. Look, we're changing the world, buddy. I'd like to say none of these things matter until they matter. And then when they matter, they matter a lot. You know, with great power comes great responsibility. You're right. This should not be interpreted as I'm telling that something's gonna blow up. I'm just saying that there are some linkages, things we've seen in past euphoric times. Things could continue for any number of period. I don't I don't know. But we're getting to a point, as I said earlier, where there's very little cost to risk today. What are the ten investing rules?

• 39:46Speaker 00

  Oh, now you're gonna put me on the spot. I I don't I I don't remember all of them. Uh, why don't you give me some of them? The number one rule, and I borrow this from from Warren. And so if he ever, you know, he's not gonna pay attention to listen to me, but I did reach out to him. His number one rule is don't lose money. And my concern with don't lose money is any investment requires the absorption of risk.

• 40:13Speaker 00

  And so if you're not willing to take some level of risk, which means potentially to lose money, you won't make money either. So you don't want to invest with a, from a, from a position of fear. Hmm. You want to invest, I think, so my number one rule is avoid embarrassing loss. You want to avoid the loss of a company potentially blowing up. If the company might, you know, if it looks like it's a little bit expensive and it might, and it might go potentially go down five percent or something, or 10% or 20%, okay, you can deal with that. But if you're investing in a company where if something goes wrong, you could wake up one day and it's down 20 or 50%, that's the one you don't want to have in your portfolio because investors will never invest with you again.

• 40:55Speaker 00

  And you'll also be scarred because people make investments. This is why it's so difficult to be, to be a long-term, sound investor. Because emotions get in the way, which is one of my rules. Emotion has no place in investing. Another rule is, uh, don't trust management. I'm sure there's many management teams and I run my, you know, we're a operating business, uh, private company. And it's not that they, that, you know, you, you shouldn't trust anything they say. But again, it's, it's a mindset. Uh, everything you do is, is about how you posit, you, you present your, your mindset going in.

• 41:37Speaker 00

  And so if you go in with the mindset of don't trust, then you'll be curious. Then you're going to ask questions. It's not that you, you think that they're bad people. I didn't say they're bad people. I said, just don't trust. Verify and then trust. And then another rule would be that you have to read the notes to the financial statements. First, before you actually read the statements, the notes to the financial statements tell you how the company modified the accounting because it changed, made accounting choices. We decided to account for this, these type of transactions in this way. So then when you look at the financial statements, once you know how they're prepared, you can better interpret them. Accounting is a language. If I said to you tomorrow, you're going to speak Spanish.

• 42:20Speaker 00

  Oh, you know, you could do AI and you figure it out and you're going to learn it. But the nuances of the language, an individual who did a PhD in that language, they're going to understand way more about the language than you are. The same like reading the financial statements. The more you understand of what went into them and how they're prepared, the better you're going to interpret them. What are the red flags you look for? I like the way you posed the question because it sets up what we've learned over time. The problem with red flags is it gets to your point that you started at before, where you don't want to be crying wolf. And so I've learned to temper because you could be wrong. Mm hmm. It's not red flags.

• 43:04Speaker 00

  We call them flammable items. Okay. So this goes to the pro- our process. It's a three-stage process that we use and we teach. Cause one of our, we have Veritas U. And so we teach investors how to make better investment decisions. And so the, the first stage is you understand the business and the control environment. Okay. Again, understand and understand the accounting that's being used. So that when you study the financial statements, everything else, they all make sense. And you understand sort of the, the, the structure. How is management compensated? What stage of their life cycle are they at? Because those are all sort of constraints and opportunities within the business. So then you look for a flammable item.

• 43:48Speaker 00

  For example, companies generating negative cash flow. That could be by itself a red flag in the normal way. This, this type of, I would call forensic analysis is taught. Unless you know, so if a company is generating negative cash, it may actually be a fantastic thing. They're investing in an AI startup that is going to be a huge opportunity. And they've shown over time that the return on invested capital is in excess of 20% or 50% or whatever it is. And so they're investing in something. Yes, it's negative cash flow today, but I'm not investing for the cash flow today. I'm investing for the cash flow tomorrow. So you see that as a red flag. You don't invest in it.

• 44:32Speaker 00

  And unless you understood the first part, which was the fact that where they are in their life cycle, type of business, et cetera, that is now not a red flag. It's just a flammable item. By itself, not a problem. It depends. And then you get to the third bucket, which is. The spark. And so you're always looking for a spark because let's use that same negative cash flow. Well, if all of a sudden, a new competitor comes into that company's operating space, okay, and is able to take market share. Hmm.

• 45:12Speaker 00

  Now, all of a sudden, that negative cash flow is a problem. If you notice in the financial statements, when you look at that negative cash flow, the company's taken on very expensive debt. Again, very expensive debt by itself doesn't mean anything because if the potential return on invested capital is higher than that cost of capital, it's all good. But if a new peer comes in play, now all of a sudden that model may not work. And now you have a blow up. In my podcast, The Fact Finders, I I interviewed an individual who we've used before, this private investigator, and he's the one that got me on to this this way of this mental

• 45:51Speaker 00

  model. And he says, you know, if the CEO beats his wife and runs stop signs, kicks his dog, doesn't get along with the neighbors, probably could be a problem. But that's not going to show up in the financial statements. That's not going to show up in any interviews. You got to kind of follow things that are going on. What does that organization stand for? How are they operating? What are their values? But not just what they write down. The culture and the values are not what you read on the financial statements and in their in their press releases. We wrote above Valiant. We said, sell Valiant. Okay, we're the only

• 46:30Speaker 00

  sell on on Valiant in 2012, 2013. The company didn't blow up until 2015. Okay, but they and they would talk about their integrity and their, you know, how they were changing the world with the with the drug reformulations they were doing and so forth. But if you look deeper, they were just manipulating the accounting and changing the pricing on on drugs and creating a fraudulent network of online pharmacies.

• 46:59Shane Parrish?

  Valiant's a good one because there's a lot of well-known investors in that.

• 47:04Speaker 00

  Yeah.

• 47:04Shane Parrish?

  How did so many well-known, well-respected investors go wrong? People who are known for their due diligence, people who are known for their legwork.

• 47:15Speaker 00

  I know. I sat with them, talked to them before the case, before. It's a situation where someone is such a masterful spinner of a story and is.

• 47:26Shane Parrish?

  Are you talking the CEO?

• 47:27Speaker 00

  Yes, the CEO and the management team. So you had Mike Pearson.

• 47:31Shane Parrish?

  Yeah.

• 47:31Speaker 00

  And was executing. And, you know, he comes where he came from a great pedigree. He was not taking a salary and everything was tied to the stock price. You know, he was, you know, tire tirelessly working in the company. And he'd proven, because what ends up happening is price creates narrative. So all of a sudden, you don't believe it day one. But then you see that they made an acquisition. It didn't seem like it was going to work, but then it works and the stock price goes higher. And then they do something else and it kind of seems a little bit strange. And then they changed their accounting and they changed the way they record, they they present their up their

• 48:13Speaker 00

  non-gap metrics, which is things we noticed like that's another huge flammable item. The company says, you know, they're reporting their, they use an adjusted EBITDA and they calculate it in a certain way. And then the following year, they calculated a different way. Well, that's a non-audited number. It's a, it's whatever management wants and, you know, the markets just believe it. And so that's something that Valiant was notorious about, but didn't matter because the stock price just kept going higher. And as the stock price keeps going higher, it's very difficult. Okay? In the money management industry, when you're underperforming, it is so difficult to stay the course.

• 48:59Speaker 00

  You saw this, you know, in the financial crisis, that movie about, you know, The Big Short. Like, those individuals became clients of ours. Like, I know Porter Collins, if he ever listens here, and Danny and so forth. Like, we befriended each other during this time of madness. And afterwards, it was like they were crazy. Like, you end up looking at yourself going, I'm crazy. I'm seeing this and nobody cares. It becomes so difficult when you're on the other side. Now, you're trying to make money and raise money from clients because investors now are saying, well, wait a minute. You're up five or you're down five. Market's up 20. You don't know what you're doing. What are you doing? And, you know, it's hard because that's how you earn your living.

• 49:44Speaker 00

  That, I think, becomes the problem. And with Valiant, it just went on for so long. And you need to look at the market conditions at the time. Because the people are running a business, but the business is operating in a certain economic environment. Well, you had brand-new bond market activity. QE. No one ever heard of QE before the early 2010s. The bank, the central banks, were buying long-dated bonds to keep interest rates low. Well, now, all of a sudden, what does that do to a company like Valiant that's making, that's growing through acquisition and needs capital?

• 50:28Speaker 00

  Well, they could borrow money at very low rates. And if that's the case, then their IRR, cost of capital, et cetera, the hurdle rate is very low. So they look really great. All these transactions that may not have made any sense in other time periods when risk-free rates were not, you know, in the 1% or 2% range, all of a sudden, they make sense. If I had to go back in time, we should have said, buy Valiant. At the beginning, because we had studied BioVale. So Bio, Valiant bought BioVale. BioVale was a Canadian company that was run by Eugene Malnick. And we wrote a cell report on, on that company in, in the early two thousands.

• 51:13Speaker 00

  And, and the company ended up being a, a figment of its former self. And, but it had something. It had some formulations for, of drugs, which were long dated in their, uh, release. So they, they would buy a drug and then repurpose the, the formulation. So there'll be slow release, et cetera. And then they, and they also had phenomenal tax structure where they were set up in Barbados. And Barbados is like heaven. So the more money you make as income, you pay a lower percentage tax. Imagine that? So what Valiant did was they bought that structure when they bought BioVale. And so that allowed them to extract all the cost of tax.

• 51:58Speaker 00

  So many interesting things they did. They set up their head office in Quebec, province in Canada, French speaking. Well, the case, which is the largest, one of the largest pension plans in Canada, right? Their mandate is not just to make money for its pensioners. Okay. And there, this is the Civil Pension Fund, one of, and I think second largest in Canada behind CPP. And one of their mandates is to invest in Quebec-based companies and foster growth. It's a phenomenon. I used to think it was a problem, but actually I've changed my way. I think CPP should do the same. CPP should be encouraged to invest in Canada. The US pension plan should buy US companies, encouraged to do that.

• 52:43Speaker 00

  Anyway, so in this case, you set up in Quebec. You know, you've got a set flow of capital that's going to come from this Quebec-based pension plan. And I remember meeting with, with the leaders at the case at the time, talking about this. And they're like, we don't want to own it. We're, we, we agree with you, Anthony. We're worried about all this stuff. But these are the subtleties that you need, like every, again, when you see it's a flammable, you didn't even know that was a flammable item, unless you know from the first page, oh, they're set up in Quebec and you go, but why did that happen? Which is part of the mental model of being curious to say, nothing happens without a reason. If you notice something and you go, that seems really weird. No one else does that.

• 53:28Speaker 00

  And most people just say, well, it's okay. Doesn't matter. Well, actually, that's what matters.

• 53:34Shane Parrish?

  Is complicated, just in general, like a red flag for you. I remember Buffett and Munger getting tailed with something with the SEC in the early seventies. I think it was.

• 53:43Speaker 00

  Yeah.

• 53:43Shane Parrish?

  Their structure was just, it was legal. It was rational. It was not transparent. If I recall correctly, it was incredibly complicated. And they ended up simplifying it, but they weren't doing anything wrong.

• 53:59Speaker 00

  So again, I've, you know, sat with management teams and you go through their 10K. And then you see a list of all their operating subsidiaries. And you see the different places that they're operating. Again, the thing about investing today is there's so much pressure on the analysts to cover more stocks. The money management fees today are a fraction of what they were even a decade ago.

• 54:28Shane Parrish?

  Right.

• 54:29Speaker 00

  So the companies that are doing the investing, the fixed cost of doing investing, like paying the audit, doing the back office, all that stuff. Yes, it's come down a bit, but it's still there.

• 54:41Shane Parrish?

  Yeah.

• 54:42Speaker 00

  All that's been squeezed is the, the, the cost of the money management. So they're having to look for shortcuts. And that means, just give me the number, Anthony. Just give me that one number. I just want that one number. And then you get the one number that management gives them. And then they just accept that and move on.

• 54:59Shane Parrish?

  I was talking, and I'm not going to mention here, I was talking to a well-known CFO once about earnings management.

• 55:05Speaker 00

  Yes.

• 55:06Shane Parrish?

  And they said, you know, we would call analysts after the earnings call. And we would, you know, legally, but we would definitely lead them to what numbers to expect for the next quarter, even if we weren't. And we would sometimes manipulate that if we wanted to. And I always thought that that was a bit nefarious. But I mean, this is how people work and how the world works and.

• 55:30Speaker 00

  So just being caught, you know, to you, I think you asked the question is being complicated. A a problem. Well, it's just, why is it happening? And you go back to nothing happens without a reason, then you point to some company operating in the British Virgin Islands. That's listed on the list and go, what does this company do?

• 55:49Shane Parrish?

  Yeah.

• 55:49Speaker 00

  And management starts sweating. And so why are you asking that? I don't know. You have your answer before you ask a question.

• 55:57Shane Parrish?

  Do you get to a point where things are like too complicated? People don't even know what's going on like it always starts with like this one thing makes sense and but over, you know, thirty, forty years, you end up with this structure that nobody even internally probably understands.

• 56:10Speaker 00

  You know, they they interviewed Fast Andrew Fastow, who was the CFO of of Enron. And he's done many an interview on this. Also, I I have, because when we do our training, we have a few of these interviews that we that we quote. And it's companies don't start out as being crooked. They have to convince someone to buy a product. Okay, or a service. So money comes in to the company in some fashion or time. And then gets converted into something that adds value. The problem becomes outside stakeholders come in and say, well, I need you to make X. Because you want my money. Well, I'll give you my money so long as you give me this return.

• 56:53Speaker 00

  Well, that works until there's a problem. And now there's no CEO that wants to disappoint. So it's very simple. The CFO comes to talk to me. I'm the CEO. And he says, look, I know, Anthony, we were gonna make a dollar, but we're coming in at ninety five cents. And I say to him, you get back to your room and find me five cents.

• 57:13Shane Parrish?

  Yeah.

• 57:14Speaker 00

  You like your job. You like your kids going to private school. You like your stock options and much they're worth. You see all these employees we have, they we give them stock as a part of their compensation every quarter. Like, that's a problem. We can't disappoint. And then it starts.

• 57:31Shane Parrish?

  And it starts slowly.

• 57:32Speaker 00

  It always starts slowly. And look.

• 57:34Shane Parrish?

  That was what Andy said in the, I think, of those interviews. Like, you know, it started with a little bit, and I figured next quarter I could bring it back.

• 57:42Speaker 00

  And it's just, you know, that's the thing. Life is a dangerous thing this way, whether we've pushed something even in life, right? You know, well, look, if I smoke a bit or drink a bit or tell this little lie, you know, no one notices and I'm, I'm okay. Well, then maybe I do a little bit more of each one of those things and no one notices. And then it's all good, right? But then.

• 58:08Shane Parrish?

  Switching gears a little bit, do companies that report free cash flow on their press releases or in their financial statements tend to outperform?

• 58:15Speaker 00

  I don't have that data.

• 58:16Shane Parrish?

  What would be your guess? It's not a common metric to report.

• 58:19Speaker 00

  My guess is I would say not necessarily. No, I would say no.

• 58:23Shane Parrish?

  What do you think of EBITDA?

• 58:25Speaker 00

  EBITDA is the mother of all disastrous measures.

• 58:31Shane Parrish?

  Why?

• 58:32Speaker 00

  Because of what investors want to believe that it is. And that it's something that is cash flow, that it's something that can be compared to debt, total debt. And it is not. It is purely a operating performance metric,

• 58:52Speaker 00

  calculated before interest, tax, depreciation, and amortization. That's it. Now, what runs into a problem is, well, what do I do with stock options? What do I do with joint venture gains? What do I do with gains on investments that I made that I happened to sell this year? What do I do with the charges that I took on that acquisition that I bought this year that I included in my EBITDA, the profits? But at the cost that associated with that, that transaction, should I include that in EBITDA?

• 59:24Shane Parrish?

  Aren't those one-time costs?

• 59:25Speaker 00

  If making acquisitions is part of my business model, they're no longer one-time costs. This gets us back to, we have a course called The Secrets of Free Cash Flow. And that's been our most watched and taught course. And that's because it started, we said it earlier, we said free cash flow is operating cash flow less CapEx. But it's not. It depends. Every, every answer that someone asks you, what is, what should it be? Well, it depends.

• 59:56Shane Parrish?

  Depends on the company.

• 59:57Speaker 00

  You got it. How should I calculate it? Well, it depends. What decision do you need to make? You always start with the facts before you think about a transaction and how you're going to account for it. It's all about the facts, the constraints and the objectives. Right? The facts determine what did I sell? What did I buy from who at what cost, under what terms, et cetera? So those are the facts broadly. Then I have the constraints. Well, I'm a private company. Who uses the statements? Well, just me and my partners. Who cares where I put it? It's less, less important. But if there's an outside onlooker on this, well, now it matters because they're looking at it. I now have outside investors. I have debt. I have a debt covenant. All of those things, I'm public.

• 1:00:42Speaker 00

  Now I have the S E C. Those are all constraints. I operate in the U S. I got FASB, P C A O B. I operate in Canada. I have I F R S. I have C P A B. And the last is the objectives. I want to sell my business this year and my business sells on EBITDA. Buddy, I'll tell you how I'm going to account for it. My business investors want free cash flow. I'll tell you how we're going to count for it. It's those three points. When I teach accounting, I teach those three things.

• 1:01:15Shane Parrish?

  That's fascinating. I want to talk stock options for a little bit. You brought that up. I want to come back to this, like, how should investors think about stock options today? And then how would you change accounting rules to better account for stock options? Two separate questions, but.

• 1:01:31Speaker 00

  Senior, good.

• 1:01:32Shane Parrish?

  I hate them personally in, in public companies. However, I, I understand why companies want to use them. I mean, my take is they're, you know, if you look at most buybacks, they're just covering up stock options.

• 1:01:45Speaker 00

  Correct. Very good.

• 1:01:47Shane Parrish?

  So that's an expense.

• 1:01:48Speaker 00

  I think that, uh, stock options, what they do, everybody, it, it comes down to human motivation. So if I am going to compensate you on the stock price, then you're going to make decisions that move the stock price. In my early classes, when I teach, um, I, I always say that economy and economics, reality is way over here. As far as I can see with my hand. And the accounting is way over there as far as I can go with my hand. Because if, for example, you know, I'm going to take a very simple manufacturing company because everybody understands that we make pens.

• 1:02:32Speaker 00

  We drive pens, we're making a thousand pens an hour. And I sell the pen, you sell, you know, today we made, you know, over eight hours, we made eight thousand pens. One of my salespeople sells a thousand pens. Well, how do I calculate the cost of that thousand pens? Do I just take the eight thousand pens that I do, divide, take one thousand over eight thousand? That's the total cost and then that's what I allocate, right? The reality is I sold them a thousand pens and it was the last thousand. Do I stop the press, figure out the cost of that last thousand? Do I average it? Do I, even though I sold them the last ones, do I calculate the cost of the first thousand?

• 1:03:15Speaker 00

  Which may be a little bit higher because there were some setup costs that changed my machine to make the thousand. Hmm. All of those three options, I gave you a business reality for what the accounting is, FIFO, LIFO, or average cost. So the reality is I sold them the last thousand. The accountant said, well, we want to show high margin. So we're going to use average and that's all good. That ties that point, but I want to get to your question because I don't think I, I, I got on a sidetrack and I want to answer your question about stock options. So I think stock options should be an expense. And if they're not an expense, I, I borrow from Buffett and even the chair of the accounting

• 1:03:58Speaker 00

  has said things like this, that, that if it's not an expense, then what is it? You can choose to pay someone in stock options or you can choose to pay them in cash. So if I pay all my employees, you pay, you have the same company or we're a competitor, you pay all your employees with stock options, I pay them in cash. I have a lower EBITDA, I have a lower EPS, your stock trades higher than mine. Stock price goes down, all of a sudden, all your employees leave. And they want to come work for me. And all my guys are pretty happy. They don't care. So you should include it as an expense. Taking this one step further to and why I brought up reality and accounting is that as an employee at any level,

• 1:04:40Speaker 00

  even the CEO and CFO, sure, the things they say, the things they do will affect markets perception of the company, perhaps in the near term, perhaps in the medium term. But in the in the longer term, in the in the fullness of time, the results will prove what's going to happen. But the management and and the guy on the shop floor, even the sales manager, may have no impact on what actually happens in the stock price. Yesterday, Powell cuts rates, so that moves the company's price. All of a sudden, as an employee, I'm better off or worse off, but I had no effect on that. I had no, nothing to do with that. A new peer enters the enters our business uh in in our in our as a new competitor. I have no effect on that. All of a sudden, GDP slows down.

• 1:05:22Speaker 00

  My business isn't even affected because the GDP is tied more to consumption problems. My business is a B two B business that's totally outside of being affected by current G GDP movements and my stock price price falls. I had no control over that. So I think it it incentivizes what I think the wrong thing is and makes people make potential decisions which can manipulate the stock price, which may or may not be good for the company.

• 1:05:49Shane Parrish?

  So do you adjust, I guess, for options? You just consider them an expense, do you? I I think that, you know, options are are super interesting because a lot of companies that report profits aren't actually profitable if you factor in the stock options. And I had a friend who actually put me on to this about 10 years ago. And I was visiting his factory. He doesn't give a stock options. I was like, well, how do you compete? He's like, well, I I mean, I hire the best people and, you know, they tell me they they have stock options at their company and it's a public company. I'll give you the options on their company.

• 1:06:23Speaker 00

  Oh, on their stock.

• 1:06:24Shane Parrish?

  On their stock, not my company or my stock. And I'll pay you in cash and I'll give you a cash bonus. And so this is how he recruited all the best people.

• 1:06:32Speaker 00

  Wow.

• 1:06:33Shane Parrish?

  And one of the interesting things about this was after that meeting, I was like, I wonder where if I went fishing, like you talk about fishing in a pond, right?

• 1:06:41Speaker 00

  Yeah.

• 1:06:42Shane Parrish?

  And if I could increase the ratio of what I'm looking at to be solid. And so I looked for companies that stopped stock options. And there's not many of them, but when you find one, it's usually like a good place to start looking for an investment.

• 1:06:58Speaker 00

  Yeah, that's a, that's a good point.

• 1:07:00Shane Parrish?

  What do you think of other incentives and inside companies?

• 1:07:04Speaker 00

  Such as?

• 1:07:06Shane Parrish?

  I don't know, like what else drives sort of like a lot of either good or bad incentives? Like, what do you, if you only had access to financial reporting, uh, management reporting and conference calls? Like, what are the things on the calls that you would look for? What are the things?

• 1:07:21Speaker 00

  I'm gonna look for, okay, so to answer your question is about what, what incentives do I think are, are make sense? Well, you look at what the key measures of success are for the company? And do those align with investors' interest? So investors are, are care about the company's longevity, its ability to generate cash, its ability to grow and sustain itself. And if the company's incentives aren't linked to that, so if they're not tied to, you know, cost control, if they're not tied to, uh, driving revenues from an organic standpoint, not just from acquisitions.

• 1:08:02Speaker 00

  If they're not, you know, if they're, if they're tied, if they're driven by acquisition, but with no care to what's going on on the balance sheet, that's a problem. I would say, you know, it's, it's not easy to say that just, I hate, I'm sorry, but one, here's the one thing and when it's gonna work. But I think it's, it's one where, is it consistent? Did it change? Did a company say, you know, we're gonna pay management on X performance metric? If they hit it, they get a hundred percent. If they don't, they get some graduated scale. Well, then management doesn't hit it and they change the, the metric and management still gets a bonus. I think that's a problem.

• 1:08:43Shane Parrish?

  Oh, totally.

• 1:08:44Speaker 00

  Because now what that does is it says that's, that everything's okay. And, you know, it's hard, again, now I'm a board. See, the, the more you learn and the more experience you have, you understand more about what you don't know. And that there's a lot of things to learn. Well, the board is making these decisions. And then everybody say, oh, the board's bad and boards are bad. It's like, well, no, the board wants to retain the CEO. And oftentimes, you know, that could be a very significant personality. And that personality may, you know, there's other companies that want that individual to work there. So they have to retain them. And oftentimes, money is retaining. That's something that becomes a problem.

• 1:09:26Shane Parrish?

  What is the role of the board?

• 1:09:28Speaker 00

  The role of the board is to embrace the position and the viewpoint of the shareholder and or the stakeholder. I, we always, always focus on the shareholder, but stakeholders, stakeholders, employees, customers, the communities the company works in, the competitors. And embrace each of those and ensure that the company is making decisions or that the executive is making decisions in the best interests of those stakeholders. Oftentimes, they just focus on, you know, shareholder value. Well, what is shareholder value? Is that just something that we can calculate on the financial statements or calculate into the stock price?

• 1:10:13Speaker 00

  Or is that that they've built a vibrant employee base that is growing and everyone has a great culture that regardless of what's going to happen in the stock price, they're going to get through it. Are they focused on, you know, in the, in the communities in which they operate and ensuring that they sustain themselves? Because if they're just milking that community or that environment, wherever they're working, well, then what happens when they've finished milking it? Are the, is that business going to be able to continue? And so it's something I've spoken on before this. And I, so I think it's more than just shareholder value calculated that way.

• 1:10:53Shane Parrish?

  How do you think most board members get selected?

• 1:10:55Speaker 00

  Oftentimes, by relationships.

• 1:10:59Shane Parrish?

  Going back to humans run companies.

• 1:11:01Speaker 00

  That's correct.

• 1:11:01Shane Parrish?

  I'm going to ask you to be on my board. If I like you, think you're going to agree with me.

• 1:11:06Speaker 00

  And, you know, look, we, we have a board. We also have a, a found a board in our foundation and I want to bring on people that are going to make us better. That might mean that some conversations are not always, yes, Anthony, yes, Anthony. I, I, I actually don't want that. I want even in my, my own partners and my own employees, I, I welcome, please come in, the doors open, tell me what I'm doing wrong. We're not going to get better. I'm not going to get better if someone doesn't tell me I'm, I'm, I'm doing something wrong.

• 1:11:34Shane Parrish?

  That is an uncommon view.

• 1:11:37Speaker 00

  But it's the only way to progress, I believe. I'm not saying that we're gonna decide what you said, but I wanna hear it. If you don't, and, and then, and the danger, they say, well, you listen to it and then don't do anything about it. Then it's like you disregarded it. I said, no, you listen to it and you go back to the person. Thanks for the input. Here's what we've decided to do as a result of what you've said.

• 1:11:59Shane Parrish?

  Yeah.

• 1:12:00Speaker 00

  And then they feel like they were part of it.

• 1:12:01Shane Parrish?

  What do you think of the rise of indexing? I think it's, what are they, I don't know the exact stat, but the huge percentage of money now is, is passively invested in ETFs of one form or another. And we've never seen this concentration invested in, say blindly, cause I mean indexing works though, and it works. It has worked over a long period of time.

• 1:12:24Speaker 00

  Again, you know, the price creates a narrative. And so if indexing works, then why not do it? The danger I think we're having of the index or investing, passive investing is that in essence, all that is, is momentum investing. Because it's a, you're buying index which is market cap weighted. So the money that you're investing is going to the largest market cap companies. Those companies continue to grow. They drag the index higher. You know, there's really two indexes. There's the Mag Seven and the Sloppy 493. And so if you look at the earnings expectations of the Sloppy 493 for this year, there's virtually no growth.

• 1:13:06Speaker 00

  But if you look at the growth of the Mag Seven, it continues to go higher. And so I think that, the, the danger is that if that reverses, I'm not saying it's gonna reverse, but if that slows, then all of a sudden, what's been dragging the index higher will drag the index lower in the same veracity.

• 1:13:32Shane Parrish?

  Hmm.

• 1:13:32Speaker 00

  Because they are the largest cap. So if, you know, if one of the large, if, if Microsoft were to miss, and I'm not saying they're gonna miss anything. But if they, if their earning growth slows.

• 1:13:43Shane Parrish?

  Right.

• 1:13:44Speaker 00

  All of a sudden, the stock falls.

• 1:13:46Shane Parrish?

  Well, we saw this in April, right? We saw this huge drawdown in a very short period of time.

• 1:13:51Speaker 00

  You know, the thing about those drawdowns, because each of the drawdowns, that drawdown occurred because Trump put together a tablet.

• 1:14:01Speaker 00

  He came down from Mount Olympus, brought down a tablet, right? I have a picture of it that I use in my presentations and showed how much the tariff he was gonna charge on all these countries. And that created immediate fear in the market, right? Costs of companies were gonna go up, transactions were gonna go down, revenues get hurt, margins get hurt, stock prices get hammered. But what the second, third level thinking on that is, well, wait a minute, these haven't been enacted.

• 1:14:32Shane Parrish?

  Yeah.

• 1:14:34Speaker 00

  There's still time. Maybe they don't happen. And if they don't happen, well, maybe all this drawdown doesn't mean anything.

• 1:14:41Shane Parrish?

  Yeah.

• 1:14:42Speaker 00

  So it's like an exogenous impact on the market. It wasn't something that the market fell on itself.

• 1:14:49Shane Parrish?

  Hmm.

• 1:14:50Speaker 00

  What I think would cause a more downturn, similar more like what happened in 08 or even even in the early 2000s. Like, people forget that in the early 2000s, they say, oh, the 2000 crash. Well, actually, the market was lower in 2003 than it was in 2000. But everyone thinks that it happened in 2000. It actually didn't. It began. It's like, that's when it started.

• 1:15:17Shane Parrish?

  Right.

• 1:15:17Speaker 00

  Kept going.

• 1:15:18Shane Parrish?

  For years.

• 1:15:19Speaker 00

  And the other ones have been relatively fast, even in the financial crisis. That one, that one, actually, the peak was in 07. In September 07, that was the peak. And the bottom was March 09. That's a lot of, that's a lot of pain. That's 18 months of pain. If you look at what what I think could make this one be a longer one, if it, if something were to occur, is it comes from earnings slowing down.

• 1:15:41Shane Parrish?

  Hmm.

• 1:15:42Speaker 00

  And earnings growth slowing down, that would be something that would take longer to repair, especially when a lot of the earnings are interconnected, as I talked about.

• 1:15:52Shane Parrish?

  Right.

• 1:15:53Speaker 00

  Because the companies are dealing with each other.

• 1:15:55Shane Parrish?

  It's not like one thing you can, you know, you have this Band-Aid, you rip it off, it's like the slow.

• 1:16:00Speaker 00

  Yes, yes.

• 1:16:02Shane Parrish?

  Reorient.

• 1:16:03Speaker 00

  You know, we've seen, there, there's meaningful changes that are going on here, right? Like, Lululemon is trading at a low, much lower price today than it was last year.

• 1:16:11Shane Parrish?

  Let's talk about stock buybacks. Share count doesn't necessarily go down, but buybacks are happening.

• 1:16:16Speaker 00

  It's the same as stock options.

• 1:16:20Speaker 00

  In a sense, and the disparity between reality, economic reality, and what's going on in the accounting. So when you buy back stock, the company is making a investment in a security. Which it partially has control over what it does. But it doesn't have full control over what happens to that investment, that value. Whereas if it takes its cash and buys an operating asset that expands its current production. And if it's already generating a meaningful return, then that return should continue and expand.

• 1:17:05Speaker 00

  So to me, it's a, it's a point that says, I have no other investments in my business. That would generate a return higher than my cost of capital. And so I'm going out and buying my stock. And I think that is very risky. How should investors look at that or account for that? I'm not so concerned about the accounting. Well, that's. Stock buybacks. So if you're saying it should investment, though. I understand. Yeah. So I, I think what they should do is they should look at earnings on a pre EPS. So look at the earnings that the company is generating before you divide it by the number of shares. Okay.

• 1:17:49Speaker 00

  To see is that number growing. Okay. Relative to the revenues. Right. Because now you're seeing, uh, uh, is it, or is it just coming from a reduction of stock price, number of shares outstanding? And if the company's taking on debt, here's the classic example. Company generates, uh, the company borrows money to buy back stock. Why? Because, because it's such an, a, a, a highly perceived value company and generates cash. It can buy, borrow money and at a very low price and invest it in, in its own stock. Which has historically generated a greater return than how much it has to pay in debt.

• 1:18:35Speaker 00

  Well, this works until it doesn't. Because if for some reason, the business changes or just slows its growth, which could be just a natural evolution, like part of this is the law of large numbers. Okay? And if this happens, then all of a sudden, that debt doesn't go away. And what looked like a very low cost is now a meaningful cost that doesn't leave. And I look at Apple, and this is what concerns me. Revenues aren't growing. Minimal. And yet, it generates meaningful cash because it has a brand.

• 1:19:19Speaker 00

  People are still willing to pay eight, two thousand dollars for a new phone. There's a lot of competitors. And I'm not sure that that will continue forever at the same rate. In fact, it's already slowing. And that debt that they've taken on to buy all back all those shares to generate that EPS growth, that could end up being a problem. If they instead took that money and went out and bought businesses, operating businesses within its network that would ensure its sustainability. And it's been doing some of that, but continually do that. Imagine if it, if it just kept the cash and all of a sudden, a business that it always wanted to buy suffered a bad quarter and it bought it.

• 1:20:05Speaker 00

  It's very difficult. When you have a lot of cash, cash is king. Cash is power. You know, we've been talking, and again, it goes to one of my rules about being negative sounds smart. When, if the market falls or suffers some kind of setback, you shouldn't be concerned. You shouldn't be, you shouldn't be scared. In fact, I did a trip to China, life changing practically earlier this year. I'd never been before. And when I went to China, if you go and I met with analysts there and taught them our training process.

• 1:20:45Speaker 00

  And if you, when they, when they look at their screen, stocks that are down are green. Stocks that are up are red. That's how you should rejig your screen. In fact, I called FactSet and Bloomberg and see if we can change that. Because if you look, wake up every day and everything's red and you like, we lived this in 08, right? It went lower and you thought, okay, I'll buy some now. And then it went lower to early 2000 and then it went lower. Until you don't know what that feels like until you go through it. But imagine if every day it was green. You go, oh, this is interesting. And if every day it was going up, it was red, you'd go, hmm, I'm not sure. Is this okay? Is everything okay? It might be, but it's just, everything's a mindset, right?

• 1:21:29Speaker 00

  They talk about, you know, the habits, right? Developing habits and that, and of course, that famous book, I love that. And, you know, you, you want to do small things, right? Develop, I put your shoes over there so you remember to put them on there. And then put beside the shoes, something that you need to shine the shoes right there. But that way you shine them before you leave.

• 1:21:51Shane Parrish?

  Why do you think so few people, like everybody talks like Buffett? And then a situation like 2008 comes along and people were paralyzed.

• 1:22:01Speaker 00

  He had cash.

• 1:22:02Shane Parrish?

  But he wasn't paralyzed. Why could he act and other people?

• 1:22:05Speaker 00

  To me, it's, it's, it's, it's goes back to something we've already touched on. And that is the natural agency issues related with money management industry. My investors give me their money so I can make a return that is hopefully better than they could make investing passively. If it doesn't end up being that, they decide to take it away from me.

• 1:22:30Shane Parrish?

  Hmm.

• 1:22:31Speaker 00

  And then I don't have any money. Buffett has built a business that generates cash. So he has operating businesses, GECO.

• 1:22:40Speaker 00

  For the loom, et cetera. These generate cash. He takes that cash and invests it when he wants to invest it. In the way that he wants to invest it. You know, the average portfolio manager can't do that because they're tied to, they have to, like today, in the investment management industry. Portfolio managers are measured like on a daily basis. If you're investing in my funds, you can look right now and see how we're doing versus the index. Every second.

• 1:23:09Shane Parrish?

  Yeah.

• 1:23:10Speaker 00

  Why are you down today? My, you know, my partner that started the business with me says, I don't know, because there was more sellers than buyers today. I don't know. Any number and, and someone that tells you they can know exactly why, unless there was some announcement. And even when there was an announcement, it was the interpretation of the announcement that led to the stock price falling, not the announcement itself.

• 1:23:32Shane Parrish?

  One of the things that we've sort of hit on here without naming it is how important structure is. To investing. Part of the reason that Berkshire was able to do that and Buffett was able to act is that. Or Buffett's able to do what he's doing today is he controls so much of the shares. So he's got the structure to enable the strategy to play out. Whereas if you think about it, you know, there's many times during Berkshire's. A long career where. An investor, an activist investor would have come in, demanded they return capital. Demanded they take on debt to buy back shares and the structure that's enabled so much success.

• 1:24:12Speaker 00

  Yes.

• 1:24:12Shane Parrish?

  Has also prevented that. I think about structure a lot in terms of not only being positioned, so having cash and. You know, being the master of your own fate, or what did Buffett say? I never want to rely on the kindness of strangers.

• 1:24:23Speaker 00

  Yes.

• 1:24:24Shane Parrish?

  Uh, especially when I need them.

• 1:24:26Speaker 00

  Yes.

• 1:24:26Shane Parrish?

  And so like I think about that and I think positioning, anybody looks like a genius when they're in a good position. And even a smart person looks like an idiot when they're in a bad position.

• 1:24:35Speaker 00

  Yeah.

• 1:24:35Shane Parrish?

  And then you think about structure and how that aligns with the companies. And what you're trying to do and you know, like it's similar to how I invest. I don't have a fund. I don't have outside investors. Why? Cause I don't like that structure. I don't want to answer to other people. I don't want to. And if I want to save up money for three years and do nothing, then I can do that. And if I want to chuck eighty percent of it into one investment, I can do that.

• 1:24:57Speaker 00

  Yes.

• 1:24:58Shane Parrish?

  So the structure enables my style of how I proceed with investing. And I think that those are very underrated when we think of public companies because you have a time, a structure mismatch.

• 1:25:08Speaker 00

  So that's the first thing you look at is the structure and the control environment.

• 1:25:11Shane Parrish?

  Yeah. And so you have shareholders who have increasingly, you know, it's gone from years to probably

• 1:25:18Speaker 00

  Seconds.

• 1:25:19Shane Parrish?

  Quarter seconds, whatever you want to call it now. The average CEO tenure is, is very short.

• 1:25:26Speaker 00

  Yeah.

• 1:25:27Shane Parrish?

  And I, I sort of like, maybe the analogy is bad, but I think about this in the context of sports, right? Like if I'm a head coach, I'm going into an oh and seventeen team in the NFL. I'm going to take risks and I'm going to do things that may or may not work out. But it's not going to be status quo. And I could leave the situation worse than I found it. But what I'm not going to do is just try to make it incrementally better.

• 1:25:53Speaker 00

  I, I, I think your analogy is fantastic and it's, and it's why, you know, I, I, I played hockey and football in, in, in my life. And I, I love hockey, I, you know, big hugely fan and watch, watch the games and so on. But I watch more NFL. I will watch teams that I have zero interest in watching. And not because of, not because of the betting, but because any, it's one game. They only play seven games. There is one semifinal game. And if they lose, they're done.

• 1:26:26Shane Parrish?

  Yeah.

• 1:26:26Speaker 00

  And their career could be over because the NFL career is so short.

• 1:26:31Shane Parrish?

  Yeah.

• 1:26:32Speaker 00

  And, and so whereas in hockey, you've got seven games. Like, okay, guys, you know, second period, we're down five. Okay, it's game two, we're good. Okay, like we got this. Settle down, let's get ready, we play in a couple of days.

• 1:26:47Shane Parrish?

  So what I see happening in these situations is like the new coach going into the bad team will overspend on free agents.

• 1:26:54Speaker 00

  Yep.

• 1:26:55Shane Parrish?

  They will leverage the future.

• 1:26:58Speaker 00

  Yep.

• 1:26:58Shane Parrish?

  Put themselves in a bad position salary cap was in five years.

• 1:27:02Speaker 00

  Yep.

• 1:27:02Shane Parrish?

  And it's almost under the assumption that I'm probably not going to be the coach in five years.

• 1:27:07Speaker 00

  Yep.

• 1:27:07Shane Parrish?

  But this will make us immediately better. I can show tangible progress and I have a hope of, but I've screwed myself from year five to.

• 1:27:15Speaker 00

  Hundred percent.

• 1:27:16Shane Parrish?

  You know, forward.

• 1:27:18Speaker 00

  We talked about the impact of passive investing. I would say that passive investing has always been there. Okay. What I think the more meaningful, important impact on investing today is the power of the retail. I watched that movie called Stupid Money. It was called with Hello Kitty.

• 1:27:39Shane Parrish?

  Oh, yeah, yeah. That was great.

• 1:27:41Speaker 00

  That is, you know, these are movies. They're fantastic.

• 1:27:45Shane Parrish?

  Yeah.

• 1:27:45Speaker 00

  Because, and I love the word fantastic. We haven't yet said it yet, but because it's something supernatural, something that is both good and bad and it changed something. And so what that really exposed is the power of the retail investor.

• 1:28:01Shane Parrish?

  Yeah.

• 1:28:02Speaker 00

  And today, the retail investor as a component of total investment is the largest it's ever been. And the other thing that's interesting is that the prevalence of all and how easy it is for the retail investor to have just the same information and maybe even better, I don't know, but to have access to both technical, technical, looking at charts, fundamental, looking at actual financial information, social media stuff, access to that in any way that I could get.

• 1:28:36Shane Parrish?

  Yeah.

• 1:28:36Speaker 00

  At very low cost. So when I started in the industry in nineteen ninety nine, okay? And this think of Buffett, he'll tell you the story of he used to read the financial statements and he used to get the chart, the old charts and look at them and no one was doing that. Yeah. They weren't paying attention, even even investor in in institutional investors. And the retail investor was hardly paying attention. We were just learning on dial up. Oh, I remember. And you could trade, but you'd you'd have to call in your trade, right? And wait in line for someone or and then it started online, but it was really slow. And you didn't get good information and you didn't get great fills. Now you have interactive brokers. That platform that you get is unbelievable.

• 1:29:19Speaker 00

  And all the other, all the other comparatives that are coming up that's empowering that retail investor. So this is creating a significant short term focus. There are day options, okay? Traded all the time. Someone told me that in Tesla, there is more transactions on options than there are in dollar value on the actual stock. Oh, interesting. The option market is, we could do a whole discussion on all the subtleties of the stock market that people don't know. When an option is sold, someone has to sell it to them. Well, that's typically the broker, the market maker sells that option.

• 1:30:04Speaker 00

  They try to sell it off to somebody else, but if they can't get the other side, well, then they stuck holding it. Now, most options expire worthless until they don't. If something actually happens and the price rises on the stock and you've bought calls. Now the broker needs to sell, like needs to act to make that money to pay you for that option. And typically they're gonna start acting on the stock itself. To hedge themselves.

• 1:30:34Shane Parrish?

  Hmm.

• 1:30:35Speaker 00

  They'll buy the stock because if your calls are going up and the stock, because the stock's going up, well, I want to buy the stock so that I'm hedged. As the calls go up, I'm also hedged with the stock price moving. Well, that just creates more momentum for the stock price to go higher. And so that is, that I think is also causing big swings. Like, you know, we're looking at on a daily basis during earnings season, stocks move like it used to be one or two percent. Now we're looking at 20% moves in a day. Oracle moved 20%. That was like on, I don't recall the exact number, but that move, those were valuations of entire companies.

• 1:31:13Shane Parrish?

  It was almost 40%.

• 1:31:15Speaker 00

  So you think about that and yet we're in a period of AI. We're in a period where there are drones. Now, for Oracle's business, drones might not help, but think about Little Lemon. Drones looking at, at what's being sold, what's being, where traffic is, you're, you have access and you can buy access to credit card data. You can get, you can talk to suppliers. There's all these expert networks that you can talk to like individuals working in the industry or used to work in the industry. They'll give you all this inside, but not inside type information. And so yet all of that is happening and Oracle's stock price moves 40% on news.

• 1:31:58Speaker 00

  And we have access to in better and closely better information than we've ever had. How does that make any sense? If we had better information, then you know what? Stock prices on news would hardly move. Everybody would already have known.

• 1:32:14Shane Parrish?

  It'd be fully priced in.

• 1:32:16Speaker 00

  Correct. So therein lies the interesting point where, you know, they think that AI is going to beat us as investors. I say bring it. It's all good. Bring it.

• 1:32:29Shane Parrish?

  It's just a tool. We're still human.

• 1:32:31Speaker 00

  It's a tool. It doesn't have judgment. It doesn't have the ability to, you know, make decisions on past links that unless it, unless that link that it drew, but you don't even know what link it drew.

• 1:32:43Shane Parrish?

  Well, as of today, I guess the, the potential is that it, it supersedes individual and collective intelligence. And so it gets to a point where it's able to do that. I guess that's the.

• 1:32:56Speaker 00

  Maybe.

• 1:32:57Shane Parrish?

  Yeah.

• 1:32:57Speaker 00

  We'll see.

• 1:32:58Shane Parrish?

  Yeah. That's a great place to end this. We always end with the same question, which is a life question for you and a personal question, but what is success for you?

• 1:33:07Speaker 00

  Success is achieving something that I can share with those that I love and care about, my family and my friends and my employees and my customers. I think that's the success, whether it's in sport, it's achieving something that I can share. Because if I can't share it, you know, I learned a quote long ago that happiness can only be shared from my late pastor, priest Paul Kuzak, we'll give him a shout out, he was awesome. And so if you can achieve something and share it, then it's real success. And I think winning has to be something that

• 1:33:47Speaker 00

  is everything. It has to, you have to be focused on achieving something, then nothing else can get in the way. Big shout out to that book, Winning. I'm sure you looked at that book from Tim Grover. That's such a pivotal study.

• 1:34:04Shane Parrish?

  This is a great way to end this conversation. Thank you so much, Anthony, for taking the time today.

• 1:34:09Speaker 00

  It's my pleasure, Shane.