#111 Joel Greenblatt: Investing Made Simple

Transcript from https://podmenti.com/t/0bdc1edab5ff935d

At the end of the day, I try to boil things down to s make it very simple. As Buffett would say, you know, you don't have to swing at every pitch. You can swing at at one of twenty pitches, but as long as you do a good job with that one, it doesn't matter that you missed out on them. So I knew what I was thinking. And I just waited for easy, simple
Pitches to him.
you know, something of my sweet spot. And then that's pretty easy to explain. And I just waited for the easy ones.
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Today I'm speaking with famed investor Joel Greenblatt.
Joel has one of the best track records in investing, and he's the author of a number of books about investing, including the little book that beats the market.
Well, we talk about investing.
Distinguishing between luck and skill, traits of successful management teams, stock options.
what he wish his management teams knew and so much more.
You don't need to be an investor to get a lot of value out of this conversation.
It's time to listen.

and learn.
I'm curious, uh, what have you learned in evaluating other investors? How do you distinguish between luck and skill?
Oh well, I only know my little corner of the universe.
And and I'm mostly looking at uh equities and how to value businesses and
uh actually started with one of my uh partners, John Petry, something called the Value Investors Club.
Back in nineteen ninety nine, which we have to evaluate.
Investors reading
uh applications actually for people to join the club.
Which is how you get into it.
And I also been teaching since nineteen ninety six, so I grade a lot of papers of investors.
I think it's a combination of a few things, but one it's really just a thought process.
Can they make it simple?
Can they really explain in a very simple way what it is about this particular idea or investment?
That makes sense to them, and you can see that very quickly.
after looking at a a lot of them.
What makes a good investor is a combination of being able to do that and passion.
you know, I've learned from teaching that, you know, some people are
And also just being in the business. Some people are in it for the money because you know, if you're
pretty decent at it, you get tend to get way overpaid for, you know, your contribution to society, let's put it that way.
Uh, and so some people are in it for the money.
And some people like solving puzzles.
and figuring things out.
And figuring what's gonna happen next.
And you can kind of tell the passion of those people that they're just in it for the combination of challenge and
Interest.
And those are the people long term that tend to be the most successful.
And you can see that too. So it's really simplicity of thought, being able to boil things down to a simple a few simple concepts of what s makes this attractive and also passion for
Figuring it out.
If you think of simplicity, there's simplicity before understanding complexity, and then there's simplicity after understanding complexity. How do you distinguish between the naive simplicity versus the mastery simplicity?
Oh, that's a great question. So
I guess uh the way I distinguish is I understand it right away.
I
know many people who are a lot smarter than I am. I know many people who can
you know, fill out a spreadsheet and do
Forty pages worth of research on a particular item.
better than I can. At the end of the day I try to boil things down to s
Make it very simple.
and obvious right it's uh as warren buffer would say
You know, if I have to get to page forty of a spreadsheet to figure out this is a good investment, that's not really where I find it. It's it's more like
You can drive a truck between what I think it's worth and where it's priced. And so it's so obvious if you think about it in the right way.
And I would say, you know, I started teaching at Columbia Business School in nineteen ninety six.
And I would say for the first two or three years at a minimum
I wasn't really very good.
At teaching.
But each class I would
come back and try to figure out, you know, what was I really trying to say? Why did I do something? And I kept uh when I wrote my first book in ninety seven, it really boiled down to what was I really thinking.
The great thing about writing that book, it was really just a series of war stories about, you know, what I had done at uh my firm Gotham Capital since uh uh with my partners uh since nineteen eighty five.
And I said, you know what, I'm not going to do a lot of research on each one of these things. I want to boil it down to what was I thinking at that time. And my thinking tends to be.
fairly simple because, you know, as Buffett would say, you know, you don't have to swing at every pitch. You can swing at at one of twenty pitches, but as long as you do a good job with that one.
It all works out. It doesn't mean you it doesn't matter that you missed out on that. So I knew what I was thinking. And I just waited for easy, simple pitches to hit.
you know, something of my sweet spot, and then that's pretty easy to explain. And I just waited for the easy ones.
And uh so then
when I wrote the book and when I teach, I just tried to boil down to it, what was the simple thought I had in my mind when I
When I did that rather than try to make a whole thesis about everything.
Just try to
be honest and straightforward as to what was I thinking.
you know, right or wrong and you know, when I was writing a book in particular or when you're teaching
Of course it's good to talk about your losers, but you sound really much better if uh you can explain some of the winners of why they worked out as well. You need both of those. You need to explain both of those. So you get to pick and choose and curate when you're teaching and writing and
and uh looking for lessons that were a little different. So that's that's one of the benefit. I'm not super fleet of tongue.
uh you know I'm not even a a good natural writer
Meaning
uh it doesn't come right out and it's you know I write twenty pages in a day.
It's more like I keep working on it until I say what I really meant.
So it sounds good to my ear.
And you get to work on it when you're speaking.
that's not what you get to do. It just comes out how it comes out. But when you're writing, you really get to take the time and when you're preparing a lesson plan, you get to really prepare everything you're gonna say. And so
That was the benefit of teaching and writing.
I find writing is the process by which you learn that you don't understand as much as you think you did.
I think that's uh true and also
for better or worse, figuring out really what you were thinking, trying to boil down to say what I was really
thinking at the time and you know, maybe in the midst of it it's more jumbled, but there's some elemental truth in what you did and why it worked out or why it didn't work out and think about what that was.
I guess when you're writing or teaching.
Well, individual investments sort of vary the themes in markets that have significantly been a source of
outsized returns in the past tend to be super competitive and advantages are often fleeting.
What do consistently great investors have in common?
You know, I always asked uh my students, you know, what do you do with a business uh where
The competition's really fierce, technology's always changing.
You know, you're always coming up with new products. You know, how do you predict what it you know, when you figure out a value of a business, you're trying to figure out what it's gonna earn over the next twenty or thirty years.
And uh what do you do when those things are really hard to figure out?
I always say skip that one and find one you can figure out.
So you you get to pick and choose is is is one thing.
And uh the other is it's not on page forty. It's really you're looking at things, you're tilt your head in a different way.
There are a lot of smart people out there.
Uh a lot smarter than me.
But if you look at things from forty thousand feet or from a different angle, or that's
Where I've tended to
to have my most success where I just
Yes, everyone is looking at it this way.
But I think that's not the right way to look at it. And when you recognize that you have this other way to look and that makes total sense to you and all the pieces fit, when you look at it that way, I think those are the great opportunities. Just you know, when I got started, you know, in uh
And I wrote You can be a stock market genius about it.
I opened up that book by talking about my in laws.
Who used to uh have uh
Uh
Weekend house.
In Connecticut.
And they would spend their weekends going to country auctions.
George say, I'll say.
Yeah.
Gallery soft the beaten path and
When they found a painting
That they liked.
Their question was not is this painter gonna be the next Picasso?
Their question
Wise.
Is there a painting by this same artist?
They just went up for auction at double or triple the price that I can buy it for here.
That's a lot easier to do. Their their genius or their their advantage came from finding it in a place that's off the beaten path.
At least when in in my career I've tried to look at things uh that were complicated or different or just not what everyone was looking for.
or the way people were looking at it. It didn't come from being better at analyzing businesses.
It came from finding the opportunities in places that other people were looking.
And and having
some ability, some ability to value it the way if everyone s found this opportunity, they would value it too.
So it's more like that rather than
deciding that this guy's gonna be the next Picasso or this business is gonna be the next big hit.
I like how you keep it simple. Simple but not easy, right? Is the but one of the things you said there, which is super interesting to me, is seeing things differently. So it's not an information advantage. It's not like you're having access to information that other people don't have, but you're seeing when you're correct a better version of reality. How is it that you
you come to see things in a way that's different than other people.
I think that
comes from trying to keep it simple.
Because I think I
Try to think simply anyway.
The best ideas are usually
Uh simple.
I remember back when I was getting started Gotham Capital, Ted Turner.
But
MGM.
And it was a little bit of a minnow swallowing a whale.
And he didn't have enough money.
to go by
M GM.
And uh there was this uh billionaire named Kirk Kakorian that owned MGM at the time.
So so what Turner did was he paid cash for part and then he gave away some funky preferred securities of which uh Kirk Corior was gonna have a big piece of because he owned a big chunk of MGM.
And that preferred if it didn't pay, uh was
gonna have Ted lose control of uh

And so I looked at that and said, I guess he's betting.
Ah
He's gonna be able to pay this
preferred off and how is he figuring that out?
And he was paying an astronomical amount at the time for MGM. Of course, he was one of the earliest I mean Ted Turner, when you hear him talk, I mean he bought the Atlanta Braves and said he looked at it like well
You know, that's
Game takes three hours, so that's three hours of broadcasting I get that I own that I can do that. He owned a very small UHF at the time, which was, you know, not even on the main dial of a T V set.
For those old enough to know what UHF was.
Uh so we have like a fourth or fifth biggest station in Atlanta.
So he bought all his programming, including the Atlanta Braves.
and figured out how to stick it up on a satellite.
But only paid for
you know, the Andy Griffith show or whatever it was, some old sitcom.
for broadcasting in Atlanta, but was able to beam it up across the country on a satellite across Spain, you know, and created TBS.
I figured out all these things that you know, uh baseball teams really software.
And uh it's creating three hours
you know, a hundred sixty two times a year of uh things that people can watch that I'll own.
And so he figured out that MGM was really a film library that he could use over and over again on his station. So he paid an astronomical amount according to the way most people were looking at it, but he was looking at it a different way. And he was giving away paper.
And I figured out he's gonna pay this uh paper. And I also figured out that look, he only paid fifty percent in cash. So as long as he didn't
Оверпай бай добл.
I was back by all the business that he had already.
And so it was just a big picture way of looking at that preferred, saying, Hey, this is covered six times over, and this guy's a genius, and everything else. And I bought this preferred at sixty cents on the dollar that
people figured it out a few months later and I got my dollar. So I I was kinda proud of that one because
People thought this guy's a nut, and I just went through the big picture and say even if he's a nut.
He's still not gonna go broke and
I'm gonna get.
fully paid. So that's a an example of a big picture way of looking at something that had nothing to do with, you know, sharpening my pencil and
running the numbers fifty ways from Sunday was really a big picture to see.
I'm gonna buy this because this is money good. What get you interested in investing? Like what how did you get started? What was that path?
Well, I would say Wharton, you know, because I'm from a typical Jewish family and my only choices were really doctor or lawyer.
I was uh applying
to law school study for my LSATs, I guess they are.
And I read an article in Forbes about Ben Graham, which is Warren Buffett's teacher.
And it was just a simple formula he had for picking stocks.
I was in business school and we were learning about stocks and what we were learning is
You know, market's kinda random and people are really smart and it's the market's efficient. So eventually stocks will be priced exactly. They didn't even say eventually, stocks are priced at the right price.
And that didn't make sense to me because I read the paper and I saw that uh
Well, at one time during the year a stock was at a hundred. They used to have something called the fifty two h week high low in the newspaper. And so they would show every single stock really the high for the year was a hundred, the low for the year was forty two.
And every year that happened for every stock.
And it didn't make sense to me that the value of the business was right in all those times, that in November it was one thing and February it was another thing, and they were both right. So just
Simple powers simple again.
Observation said
Gee.
They're teaching me doesn't make any sense at all to me.
And I read this one page article in Forbes about
Ben Graham stock picking formula.
And how simple it was.
And that it worked over long periods of time and he had used it to make money, and that made total sense to me. And he basically was saying
People are irrational, some and they're emotional.
And sometimes they're optimistic, sometimes they're pessimistic. That's reflected in the stock prices.
And I said, Yeah, that makes much more sense to me. And it was just that simple epiphany that said it that got me smitten, and I read everything I could about
Ben Graham and what he had written got me into Warren Buffett and so that's how I got. It was just that one little article that I read uh on my way to law school. It didn't stop me from going to law school. I went to law school for a year and then dropped out.
So I figured that out.
More.
I'm curious as to how you source ideas. In your first book, you talked about the Wall Street Journal and sort of letters and publications. How has that changed with the internet?
I read things that are interesting to me.
So I'm reading whole different publications. I'm reading things off the internet. Um
getting newsfeeds all day long and I'll just pick and choose things that are interesting.
I'm reading things that are interesting to me. I'm looking at developments of the world that are interesting to me.
And occasional
Occasionally I'll have a good idea.
from from doing that. And I just enjoy the process of learning about and trying to understand what's going on in the world.
outside and think more experience helps.
And being able to say, Hey, this thing reminds me of that thing.
And
This is how that thing played out and these are the ways it's different. These are the ways it's the same.
you know, one of the reasons I wrote is because I got to read, you know, Ben Graham and all the letters that Warren Buffett wrote and everything else and
It's true, it's great to learn from your own mistakes and
really don't learn unless you're really investing your own money and feeling how it feels to be wrong.
and lose a lot of money, so all those things are true.
But the more you can learn from other people's mistakes and the things that you don't learn from the past and reading
How smart people think.
it's it's only helpful. I'd rather not make those mistakes myself. I'd rather the made their mistakes.
And make different ones.
Do do you evaluate that kind of like how chess players play matches out in their head and they sort of think through the mistakes and the positioning of the other person and what went wrong?
Do you think about that from an investing point of view when it's other people's investments or just your own?
Well it's definitely not like chess. I'm a terrible chess player and uh not good at looking forward.
uh a lot of moves. Uh I I think it's simpler than that.
Awaiting.
To see something that's so simple and obvious.
To you.
Anyway, and it doesn't mean you don't miss a lot of things that should have been simple and obvious at the time and you always
I'm sure you're familiar with when you just say, Ah, why didn't I think of that? Or that was so clear after the fact.
And so it's fine to miss lots of those.
It's just
uh having the patience to wait till you do have that aha moment saying, Oh, I think this is the better way to look at it, and only pulling the trigger.
When you see that, it's almost
I should have swung at seven out of twenty pitches, but if I swing at one and it was a good pitch to swing at
That works out well too. So you wait for where it's pretty simple and straightforward to you. So it's it's a lot of patience. Some of that comes from experience too. Being able to say, Hey, I've been doing this for 10 years.
And this ranks up there in the top ten or twenty percent of things I've seen.
And if you have that ability to contextualize
uh with a little experience that's always helpful. So the good part about that is I've always felt
Uh investing is
Continual learning.
I never feel like I got it.
I never stop making mistakes.
I want it.
Be right more than I'm wrong?
I'm not even the most uh patient.
I just feel like I have enough patience that uh
The good things outweigh the bad things. So
I think it's a combination of all those things and knowing what you're good at is another one.
I'm good at simple things, you know, where I where I see that
simple idea makes total sense to me. You know, you can test it in a million complicated ways to see if you're simple.
Concept still holds up.
At the end of the day it ha has to be simple to me.
And that doesn't come around all that much, and you have to know that too, so
Don't get frustrated waiting.
Wanna double click on something you said there, which is being more right than wrong.
That
matters, but it also matters with position weighting. So I'm curious as to how you think about sizing positions.
That's really a great question, and I think
That's almost the most important question.
Because
If you have this great investment
unless it's, you know, Tesla last year that's gonna go ten X and you put two percent in.
Uh and it goes up fifty or hundred percent.
You could have blown it. That could have been your worst investment of all time because you had should have had a ten or twenty percent position.
you know, and really move the needle.
Position sizing is the most important thing.
Being too timid.
on the few good ideas that come your way is like the biggest mistake people make.
But of course, to take a large position, you have to be willing to be wrong and take big losses.
to wait for that big position to to know when it's there.
The biggest positions I've had are not my best ones, the ones that I think will go up five or ten times.
I'm really looking down, not up when I take a big position.
So in other words, I will size the position larger if I don't think I can lose much money.
It's not like the thing that's gonna pay ten or twenty times.
Obviously, if you have uh
a ten dollar stock that's sitting with nine dollars in cash and no debt.
And they have a little business attached.
You can buy a lot of that one.
As long as you don't think they'll dissipate the cash.
As long as there's a chance for a big upside, you're looking for asymmetric returns. One of the
One of the best things I think I ever wrote was in uh You Can Be a Stock Market Genius. I wrote
Uh if you don't lose money, most of the other alternatives are good.
I think people look at the size of their position, that's the wrong way to look at it. It's looking at how much can you lose
from that position. When I loo when I say lose
Crazy things happen, whether it's Covid or two thousand eight, you know, Lehman goes down or something like that. We are over a short period of time.
Stocks or other securities can trade at any price.
That's not what I'm talking about, how much I'm risking.
What I'm talking about is
If a reasonable person won't lose much money if they can
Pick their spot to sell it over the next couple of years.
That's what I'm viewing as how much I have at risk. If I can be patient, sell it when I want to sell it over the next couple of years, what's the worst I really think I'm gonna do? That's how much I'm at risk for. And then how much does the reward?
Pay off relative to that. So
If something I can lose a dollar or two in, I could
easily have a twenty percent position in because
I'm not risking that twenty percent. I'm risking it's it's almost like
Let's say you're buying uh and and I've given this advice to kids and friends and whatever, if you're buying a house, which is usually one of the
Biggest.
Purchases most people can make.
You know.
obviously gonna be a lot of money relative to your net worth most of the time and how much you earn and everything else.
better to look at, you know, how much do I think I could lose in this investment, rather than that big hairy number that's scary.
Because houses are expensive.
uh relative to almost any context.
of most people whether it's how much they're worth or their salaries, but
If you then can say, you know what, I think I'm only at risk for ten or twenty percent of whatever I pay.
For my house realistically.
that maybe makes it more sleepable. You know, you don't want to bed, you know, you want to be able to sleep well. So
If you contextualize it that way, most people can take that risk.
So it's same.
Thing with investing, I would say that.
it's how much it's at risk, not what the actual size is of all it's a ten or twenty percent position of our portfolio.
I appreciate that example. One of the things you said there was sort of markets can
remain irrational.
longer than you might be able to re remain rational.
I think that
But I I'm looking at the market now and it seems like there's a lot of two things going on. One
Uh I would
nearly unprecedented, at least from my point of view, Fed intervention in the markets.
And
Also, the other thing is it seems like there's lottery tickets now with a lot of these companies going public.
that don't generate
Cash for equity owners. It just seems to be a share price.
Where you have IPOs at a hundred billion.
Companies that don't
actually generate returns.
Or am I wrong to think that this is irrational and it just sort of doesn't make sense to me? How does it make sense?
It's very hard. You know, it's a market of stocks, not a stock market. So
uh most of the big indexes are driven by the Amazon, Google, Microsoft, Apple.
And those
Businesses don't seem very irrational to me. Those are some of the greatest businesses.
that man has ever created, uh partially due to the internet.
uh interconnectedness of the world, you can name it, the types of franchises they can create.
I don't think we've
S
The quality of
and the growth trajectory and sort of the unlimited growth trajectory of some of these businesses before. And so
Those crisis make sense to me.
They're not like wildly overvalued like the internet bubble. I think they're actually
perhaps reasonably valued and perhaps good investments. We own a lot of those uh businesses.
We looked up a statistic.
uh along the lines of what you're suggesting, uh last year if you there are now uh two hundred ninety nine companies that lost money
in two thousand nineteen. So this is pre Covid.
So they were money losers in two thousand nineteen, with a market cap now over a billion dollars.
And if you bought every single one of those money losers, those two hundred ninety nine companies with
Market caps over a billion dollars now.
Uh, you would be up over a hundred percent so far this year.
And the median stock is up, I think, forty seven percent, you know, through the end of November, anyway, I had those stats.
So it's not like one stock going up a zillion percent. It's you know, pretty much across the board. These money losers. That's your strategy. Buy everything that loses money. Now
I have a lot of statistics to say.
That buying that group of companies is the single worst
Strategy you could concoct in the past.
Will it be the single worst going forward?
I would say
There will be definite winners from that group.
That lose money, and the world has changed.
And the business world has changed in this way.
That
Many of those businesses are investing in their future.
It looks like not an investment. You know, it used to be, you know, you build a factory or you invest in capital equipment or whatever it is.
And you can see it on the balance sheet.
Here, you know, a lot of that gets expensed.
Uh
You know, I'm just thinking like we just switched over to Salesforce, you know, it's
Pretty much all over the place and
Uh Salesforce actually and I don't remember the exact number, but
Paid fifty thousand dollars or something to some third party to convert whatever system we were on before.
Convert us, you know, our business onto their process. And I don't know what we pay for salesforce, but not fifty thousand dollars a year.
But their bet is that the lifetime value of
us as a customer, you know, we'll last eight or ten years and then that payoff is gonna be huge over time.
And so it's the same
Thing as let's say
Amazon doing crime video.
You know, they spend a lot of money up front.
spending billions of dollars on uh movies
series and things like that.
And they're betting.
that you'll stay as a customer more, you'll spend more over time, and your lifetime value will be a lot higher.
But the way our accounting system works.
you get to expense those things. So it looks like cash out the door, but really it's capital spending.
Same with marketing. If you if you spend uh
Forty if you're software manufacturer, you spend forty dollars to
Get a new customer.
And he hasn't paid off yet, but you're gonna make two hundred fifty dollars from that customer. He's worth two hundred fifty dollars over the years. Well, you get to deduct that forty dollars now. You know, people are yelling, hey, Amazon doesn't pay taxes, this and that. Well, they keep taking all their money that they earn from all their
great businesses reinvesting in their business
you know, customer retention, customer acquisition.
you know, it's all from creating things that they think they'll get paid off over the long term. But I don't think the accounting world has
has kept up with that, so you know just because you're losing money now.
Uh what I would say though for those two hundred ninety nine companies is everyone realizes that
And everyone is assuming that these guys are gonna be the next Amazon, Google, Microsoft, and there will not be
There'll be a handful of big winners like that, but those two hundred ninety nine companies are getting credit as if they will be the next Amazon, Google, Microsoft. Seems unlikely.
Yeah.
All of them, or even a big percentage of them will. Is there a way to think about which ones are more likely to create that outcome than other ones? Or is it sort of a lottery ticket?
How do you think about that?
You pick the ones you can't figure out. So for the most of the ones
You you take a pass, you throw it as Buffett was saying the too hard pile.
I think anyone who's honest about it would say, Hey, I can't know all these industries, I can't know all the prospects for these businesses. The world is changing very quickly.
TikTok or whatever it's called didn't exist. Now they got billions of followers. And you know, where does that take business out of and you know, everything else. So
very hard to predict, you know, which ones will be the winners, you know, if you have a particular expertise in an area, have a particular vision, or, you know, something seems simple to you.
There will be those, but
One person is not gonna know hundreds of those uh to pick.
And so I think you just have to know yourself, know what what you're good at, and I'm sure people can take good bets on some of those bets.
How do you think about printing money? Is there a point where that becomes counterproductive? And how do we identify that point?
That's a that's a more of a macro question.
that uh is above my pay grade logic would say
You know, I learned a lot of Milton Friedman and like that that
You should be able to create inflation by just printing more money.
Seem straightforward to me. When when
you know, no one rings a bell, but it just sort of hits and all this extra money floating around.
causes inflation and then it's a question of how you measure inflation because
these stocks levitating, you know, all these uh
spAs and IPOs and everything levitating at high prices, you know, going up five and ten times in a year. That doesn't factor into the inflation number, but that's where the money's going.
So it depends how you measure inflation.
Does it get inflate asset prices of homes or
Stocks.
uh securities and if it doesn't count inflation. But are we having inflation or are we not? It depends how you define inflation. And so
So that's a sophisticated question, once again, beyond my pay grade. And will that filter into
uh affecting inflation. And then of course all these other countries are doing it. You know, we don't live alone here in the United States here. We're printing money, so is everybody else.
They're artificially, you know, taking that money and buying securities.
Making negative interest rates.
It's hard to believe some portion of this doesn't end badly.
in some kind of consequences.
I don't believe it has yet.
It's a question of
you know, what happens. Now I do believe whatever the repercussions, you know, we've had Covet, right? And so the question is, you know
people think we're gonna get through it and you know, what should the government have done?
you know, during this time, and I'm a firm believer the government should.
uh spend as much money as necessary to
Keep the consequences slow, because this really is a one offer, hopefully.
The next
you know, maybe or won't happen again for twenty or thirty years or maybe it won't be as bad, but
I think that there really is a big loss of jobs and there's a big loss of ability to do business and
I think the government has the unprecedented
Opportunity
To print the money now.
whether it's three trillion or ten trillion. Let's say they have to spend ten trillion, which they haven't spent yet.
And they just print it.
Well if you can borrow it.
You know, one point three percent.
over thirty years.
And that's a hundred thirty billion dollars a year.
That's
you know, three percent
Of our
Annual budget United States.
It's not a good thing to do.
Uh and and actual the actual cost after inflation, however you want to measure it, is probably free.
Uh I I can't I don't want to ask
How did that happen?
I guess I would ask
Well, it's great that it's happening and I can borrow money for free, and I got to go help these people now. And we have this unprecedented opportunity to do that. And so I'm not too worried about that.
I think that's a smart thing to do. I think we can afford to do it as long as we
Now we're not borrowing that money over 30 years. I think our average maturity is like six years. So I think that's insane. I think we should borrow over 30 years from free.
That would be my one suggestion to anyone listening. Uh we should uh
extend our maturities when they're lending us money for free.
I like the long duration idea. Um, you said you're you're not really worried about the printing money. What are you worried about in the markets these days?
Uh it depends what you're invested in. Once again, a market in stock. So if you said, Are you worried about the prices of Amazon, Google, Microsoft, uh, Apple
Uh I would say no, it doesn't mean they can't fall thirty or forty percent. It just means that if you're a long term holder
you'll end up getting a decent return.
And maybe a good return over a longer period of uh time.
So I don't think that's where the problem is, and that's where a lot of the market cap is. So I don't really think
А вот да, де с одер спекуляцію.
uh in you know all these spacks and all these companies that are losing money.
That are given, you know, I was looking at uh just for curiosity, I was looking I don't know how to pronounce it, Nicola or uh Nicola, however you pronounce it, you know, that truck company Electric Comp Truck Company. Yeah. I was just looking after it's turned out that it appears to be mostly
A fraud, and they really haven't come up with anything uh that they promised.
Still has a market cap of six and a half billion.
And I don't I I'm not gonna pick on that name as particular. I would just say it's an indication of potential froth.
In a lot of other companies they're getting the benefit of the doubt that shouldn't have
Was that it badly? Yeah.
Battle and
badly for those companies. But once again, if you add up all the market caps of those companies, they will pale in comparison to
an Apple or an Amazon. So as far as the market as a whole or the economy as a whole, people are speculating
maybe in a good way we'll get slapped on the wrist for speculating too much and you know learn the same lesson that everyone learns in every new generation that, you know, some of these things are speculative. But
I don't think that's gonna bring us all down, I think.
uh actually
Might bring some sanity back.
Coming back to something we said earlier, so there's spotting an opportunity, there's sizing an allocation, and then one of the other variables that seems to matter a lot is the management team. I'm curious as to how
you evaluate a management team, what you can observe from the outside without talking to them, that would be an indication that they're competent and capable.
both qualitatively and quantitatively. How do you think about management teams?
Well, first uh I have a partner Rob Goldstein who joined me in nineteen eighty nine and and he and I used to go out and visit a lot of management teams and to become a
CEO or CFO of a public company, even a small one, you gotta be pretty smart.
Yeah.
Uh, you have to have some business savvy.
Some sort.
And I would say for the most part, most
management teams impress
Me anyway.
When I walked out of the room.
Everyone had a good story.
about what they were gonna do, uh, you know, how they were gonna spend their money going forward. And the best rule of thumb that I learned was if this management team was good at allocating capital before I walked in the door,
The assumption that they would continue to be good was a really good assumption.
And if they were really bad.
At it.
No matter what story they told, and how smart they seemed, and how logical.
What they plan to do was
The better assumption would be that they would continue to be bad at it.
So
I would not реali, mi personally, reali so much.
on my assessment of the management team.
But my assessment of what they've done in the past.
uh is very valuable.
And that's really, you know, how have they allocated capital in the past? Have they done it in a smart way?
Or have they not done in a smart way.
And so that you can look at quantitatively in a lot of ways. And if you were gonna be
cold and calculating and unemotional about it.
You're probably better off.
Because everybody tells a good story and everyone seems pretty smart to me.
uh who's reached.
that level who you would speak to. So I didn't find it super valuable. Now if you want to look at what offs
Uh there are some geniuses out there, uh, you know, I go back to the story I told about Ted Turner.
Like I I didn't really know. You couldn't really tell.
Uh from
looking at the numbers, and then I just heard him speak for about an hour and a half once he was
presenting to a group of analysts why he was doing I think was the MGM deal.
Watch him speak him.
understand his logic and how brilliant he was. Said well
That was just obvious. There weren't that many
people that I've seen that are just so obviously you know, obviously if I were smart enough to Steve Jobs, I would hope would have been one. And there's some other visionaries that just are clearly have the whole package, but having the whole package yourself and then being able to explain it in such a simple way that I understand it, that's even more rare.
But if they can, that's what I would look for. But that's very rare. I haven't
I haven't made a lot of money from doing that. I did make money in the
M G A, you know, the Ted Turner case, but
uh very rarely since and so I think looking at the numbers and seeing people's
track record has been much more helpful than trying to assess
Why you know, it's like they say when you interview people.
Some people are good at uh
being interviewed and some people
Or not.
has little correlation.
With how they were performed.
If you hire them.
Really, the best advice I got is talk to the people that they've worked with in the past.
That's much better than assessing how they answer your interview questions or trying to think of the great interview questions, or at least
It's true for for me and I and I think that's at least for me that would be the better way to look at it. So the same way with uh assessing management side so
I know a lot of extremely successful people who interview very poorly.
Well, uh it's uh it's very interesting. My partner Rob Golstein joined me in nineteen eighty nine. I hired him right out of college and uh he was so bad he reminded me of myself.
And that's why I hired him, because he said something within the interview that made total sense to me, and that's why I hired him. So it wasn't like he totally flubbed it.
But he did remind me of how bad I was on my interviews and
Uh and endeared him to me. I'm curious as to how what you look at um public market CEOs, who's good at capital allocation.
uh in your mind, who's really good. Who are the top five and non investment advice and not respective of share price, but who are sort of the top five allocators that you
You always keep your tabs on what they're doing.
Jeff Bezos.
He was a visionary in the early nineties when he envisioned
At least a big chunk.
of his success. And you know, this whole thing I'm talking about is investing in your business and not worrying about
profits now and you know building long term value of customers. That was his vision.
twenty whatever it was, twenty seven years ago, uh, which is, you know, at least a few decades ahead of
Most other people who have uh
Thought that way.
More along my skill set would be uh watching Warren Buffett.
allocating capital over the years
trying to learn from what he ended up liking one of the best things I ever learned from.
was when he bought Coca Cola.
uh and analyzing how he could pay at that time what I thought was such an astronomical price for a fairly uh mundane
Business.
Uh it had great franchise, obviously. It was growing reasonably, but still.
Based on
You know, just my cheap gene and buying things cheap.
And trying to learn from someone
who wanted to buy good and cheap.
How much could you pay? And so
you know, Rob and I ended up uh analyzing when we took a look at uh we like to look at spin offs and different things, we took a look at Moody's
uh which is you know the rating agency
Which was trading at twenty times earnings at the time we were looking at it. And uh, you know, back when we were looking at it twenty years ago was not a value investing kind of multiple of you know, the value investing kind of multiple at that time was six, seven, eight times.
And this was trading at twenty times. But we love the business.
And so one of the exercises we did is said, Okay
Let's
Compare it to when
Well, Coca Cola.
and compare the metrics of these businesses and how they deploy capital, what kind of returns do they get, how fast does it grow, you know, all those things.
And see whether it's as good.
Turned out it wasn't as good.
You know, if you said that uh Buffett bought
Coke at ten dollars a share.
It worked out that we were paying thirteen dollars for moody's.
But of course Coke went to
thirty or forty.
you know, short you know, within five years and paying thirteen.
for something that goes to thirty or forty.
would also have been pretty good. So just looking how he allocated I mean his allocation of capital was like
most akin to ours as an investor. He runs his business like it's a portfolio of companies, you know, a stock is
Not a piece of paper that bounces around that you put
fancy ratios on there actually ownership shares of businesses that you value and at the end of the day
Our only uh home base or true north is that hey, this is
An ownership share of a business.
Can I value this business as if I'm owning the whole company like a
Private equity firm.
What's it worth? What am I paying?
You know, is management gonna be a good steward?
Till we get there.
uh you know, you ask those kind of questions.
But that's how we look at it, and and Buffett's just turned that into actually
put it together a conglomerate of a portfolio businesses.
Like that. So
I think he's the one I've learned the most from.
Uh but Visos, I think, taking us
uh into looking at
The way companies deploy capital, like if you look at Costco, for instance, very straightforward. We don't make money on our business.
We make more money from our memberships and you talk to Jim Collins, so it's a flywheel where
If you sell people
uh products.
At cost.
It's very hard for people who are trying to make a profit to beat you.
But if you can make all your money on the memberships, just selling more and more memberships for the ability to buy it cost.
Very simple bottle.
Not so hard to understand and
There are few and far between, but there are models like that just learning from
watching the best do it as you're suggesting. I I don't want to name five, but
You know, those are three models that.
you know, have certainly resonated with me.
I'm curious as to what you you've studied Buffett a lot. So what have you learned from him that you see as non obvious or other people don't tend to see? So something again where it's in plain sight, but people don't value it the same way that you value it, and you have a different aperture into it.
Maybe I'll stall by uh answering it this way. I got to take my Columbia class to visit Buffett probably thirteen years ago or so.
I had never met him before. I don't go out.
to the annual meetings or anything, and always been a uh big
F
I don't know if he's the wealthiest guy in the world at that time or top three or whatever he might have been. I can't think of anyone who's ever been more gracious with me.
Not even in that position. I'm saying anyone who has been more gracious with me and the students and and really the desire
uh to teach them by example and also
uh explaining really taking a real joy in sharing his wisdom.
Uh and then just on a personal level level
uh, you know, knowing it was like one of the biggest days of my life, my chance to to meet Warren Buffett, you know, someone I've
idolized in so many ways, uh and tried to emulate, uh, both personally and and professionally.
I don't know what the lessed in there
is in general, but if you can be that successful and and be that
Oh gracious with
People really who have
probably nothing to bring to the table for you other than you want to share.
you know, the the opportunity I guess he has to share with others.
He he finds that.
Deeply meaningful. So I guess you know he gets
Pay back that way. It was just a a a lesson to me that
You know, there's no excuse for not trying to be gracious with
Everyone uh if he can
Be that way.
You know, I only got a small
Little clip.
My one day that I got to be there and a few hours we got to spend with him.
But it really.
Resonated with me.
You know, ever since and
Great to be able to admire in person someone you admire from afar for so long. So it's great. Seems like he makes everybody the most important person, or they feel like they're the most important person in the world when he's around them, which is a great trait to have and develop.

seem to do ever is stock options. I'm curious as to your take on stock options as a means of compensation.
And also in terms of how that gets accounted for.
I mін the information is disclosed.
So it's really wanting to uh you know, some businesses set people the right way.
uh you know stock options or
sort of gambling in some sense that, you know, you have a job in a particular department and
but you're reliant on everyone else. So in some way it gets everyone, you know, rowing in the same direction and caring about
The ultimate.
Outcome.
But the the accounting issue isn't a big thing for me because the information is disclosed, how analysts go take that information and then give credit to companies.
uh for for that's not a cost of of compensation
And not expensing it in the right way.
I think the information's out there. I think it would be very hard to do because uh stocks are quite volatile.
And then attribute, you know, expensing one year and then the stock fell, and then you take the expense off. It would be very complicated. So I think uh disclosure is important.
Cl clarity of disclosure is important.
The accounting of it.
Is very difficult, but as long as it's disclosed, I think that's really the analyst's job to interpret it correctly. So I don't have a
Doesn't keep me up at night, let's put it that way. Uh but
I do think that.
Uh they should be fully accounted for the cost of
Paying your people's clearly a cost.
It's not an invented cost, it's clearly a cost.
you could probably do it more cheaply, but as long as it's accounted for correctly. And I've always been for
Management being responsible to shareholders.
in such a way that they their bread is buttered the same way.
So I have no inherent problem with incenting people the same way the shareholders are incenting.
You know, there's this whole argument about
You know, what should be the role of corporations?
you know should just be increasing
the stock price or
uh rather than
taking care of the community or employees and everything else and I think
Really, it should be and and it goes the same for stock options, that it should be long term they should be predicated on long term value creation.
uh and the and the same for businesses in other words
You don't create long term value by cheating your customers. You don't create long term value by not treating your employees well or being a good member of the community. You don't create long term value that way. You might create
the appearance of short term value, which may be reflecting a stock price, which may affect your stock options because she trick somebody into thinking
you you did well, but that's not the way to create long term value. So I think if we just adjusted things
both in stock options like you asked for even in uh
What is the role of uh
A good company.
the role of a company is to create as much long term value as possible.
And the only way to do that is to treat employees well, to treat your customers well.
To treat the environment well.
If you just go for the short term wins, which sometimes the stock market.
might influence because you're getting paid in the stock option that
might reflect it over the short term or be fooled into reflect it over the short term, that's when, you know, you end up with problems both with stock options and also with uh management's
being short term caretakers rather than long term value creators in the business. So that's why it's really great.
too and and the market values that. I mean if you have a guy like uh Jeff
Vizos who's really only thinking long term. And then you think of all those companies.
that are losing money that people are giving value because they see the future.
It's not that the market is trying to be short term orєinti, they see the real deal.
They do give credit for it and so I don't think they're counterproductive, you know, I gotta make the next quarter or I gotta look good.
I think I like I'm watching Elon Musk even, you know, who's been obviously
incredibly successful. I don't want to take anything, but
Worry about it
How we look over the next quarter.
Yet he's a visionary.
you know, a decade out.
I I I see that as troublesome. That they don't look at one another, so I I my only advice
to most man public company management is do the right thing over the long term.
And the market will recognize it. But don't play for the next quarter or worry that, you know, the analysts won't like it or anything. And I see that time and time again, that management's really worry about the stock price. And maybe your question about stock options has something to do with it. I don't know.
and and how to adjust and make everyone a long term holder of the stock rather than a short term trader.
You know, sounding good for that.
quarter. So I see
the issues there. I I I don't have a solution other than
That the market has been giving value to the long term visionaries.
uh who invest over the long term, not just for what it looks like this quarter, but what they're building over the long term.
And and so I think that's healthy.
Oh to some degree.
Are there accounting rules that you think are
Blatantly wrong or misleading.
I don't know. I I I guess I'm just more for transparency.
Uh you know, even when people say oh
Ebah.
uh not including the cost of our inventory or our labor or something. You know, if they come up with new measures like that.
I think the importance is to say how much you paid for labor and to say how much you
you paid for uh your inventory.
And so I think just providing enough information.
And it is helpful to
Hear how management is thinking about those things.
But if they're
just trying to use them to goose up their short term returns by not counting expenses or
Something like that.
I'd like to see that too.
Counting is like a side show.
You know, it's
That's Buffalo would say the language of business and you have to understand accounting.
But I never
And I was an county major, by the way, at Warner. I don't know what I did. I mean, you know, you have sales, you have expenses.
You have in common.
Here's what you have, here's what you owe, here's
you know, I don't know what I did for four years.
uh doing that uh and I don't try to memorize every accounting rule out there. I go through every statement and say, what does that number mean?
Or how did they get to that number trying to understand what's going on?
What you know, and there's somewhat different standards across the world, and what I try to do is homogenise them into economic reality.
And that's what I'm doing. So you
You're asking me some
questions about what I do, you know, with some arcane accounting rules here or there.
And I'm just for disclosure, however it's disclosed. I'm for management trying to.
uh express how they're thinking about their business and and how they think about the numbers and how they utilize the numbers they have.
I've never bothered that much.
With worrying about how something is accounted for.
I try to homogenize in such a way that I can understand it. Right. I mean there are uh I think we were you know looking at international companies.
There's some holding companies and things like that in South Korea that are very hard to figure out.
uh and and some are off balance sheet some are on balance sheet
You know, that goes for a lot of different companies.
And
I just figure if I can't figure out, they don't want me to figure it out and I gotta go to the next one. I mean I'll I'll spend a lot of time doing it, but if I can't figure it out, then I just assume that's intentional.
And uh I don't think that is a good thing. As you're reading financial statements, are there thoughts going through your head that are consistent across different companies, where you're like, Oh, this management team doesn't get it, this management team doesn't get it, they're missing something, or there is a recurring thought that goes through your head.
that you find yourself just saying more more often than not.
Not really. I'm re I'm looking for successful a capital allocators.
Not like I said a story just because I'm not good at that. I don't know who the next Picasso is, but
Uh if there is a uh
franchise or brand or network or something that they can continue to exploit.
I want them to be thinking.
sort of along those lines.
I don't spend a lot of time with ones that don't make sense to me or don't look promising.
And there's lots of companies and there's lots of things to look at. So you don't want to
Waste a lot of time on things that immediately don't
You know I pass a lot.
on you know, maybe
Too much.
But it's like I said, as long as we concentrate on the ones that make sense.
That's more important than missing it.
out on you know air civil mission.
What you've done with charter schools is astounding. I'm curious as to what you've learned from running effective education for the masses, in a way.
Well, uh number one, your your earlier question about finding good management gives uh my my partner John Petry and I uh hired a woman named Diva Moskowitz uh to be the CEO.
of uh Success Academy and
Uh the idea behind it, there are now twenty thousand kids in forty seven schools, and they would be the top district in New York City, and most of the kids are eighty seven percent or minority uh low income.
kids and that yet they would be all the wealthiest school districts.
And it's really uh due to I think uh relentless uh
Brute force, hard work, h high standard setting by a woman named Diva Moskowitz.
I don't know, smart enough, but lucky enough to hire
uh to do this the idea really was based on a business idea
Uh that
Fourth grade.
Learning the different
subjects should be pretty similar across schools. So if you could do it well in one, uh the model cannot be
Just hiring the top one percent of teachers.
Because you run out of those.
The model has to be
uh giving the supports necessary and the training necessary to an average teacher to become a great teacher.
That that had to be the model.
Also, if you could do it in one, two, or three schools, can you do it in a replicable way?
And the question that we looked at was always
Well, okay, we opened the first school and
You know, there's gonna be a big mess.
You know, and you can
Put all your energy into one school and through brute force make sure all the kids learn. Don't let anyone fall through the cracks. Put a lot of resources in there, which was the basic idea.
to develop the model.
That made sense, and then
uh a couple years later opened three more schools. And then the question is
How much better are we doing
On those three schools, how much far ahead are we?
From where we were in the first school, how can we measure
Uh which
Teachers
In each of the four schools now.
Are doing better than the other teachers in the grade? Which which school's doing better? Which third grade's doing better? How can we share across plat you know the different schools?
What's working, what's not working.
How do we create the systems that allow that sharing?
And allow it to be not a competition, but more like hey
Our profits are the kids learning. That's how we measure.
uh and and you know, over ninety percent of the kids reading and and doing math on grade level. And then if they do that, then raise the standards some more.
Eva was able to implement this, uh learn, uh develop, and now we have
Forty seven schools and twenty thousand. The the idea behind this was that can, you know, uh low income minority
Kids that are currently homeless, kids with disabilities.
Can they learn at the highest levels?
And if they can
The theory was that people would care. I think you you've proven that they can.
Well that was the idea to prove that it can. The uh I think in some ways
At least in New York City with this mayor, it's kind of failed to say
Hey, what are those guys doing?
And what can we learn and how can we help each other?
Which I thought would be automatic, just
With the logical
business mind, especially for non profit and
you know, we're all have the same goals in mind. I thought that, you know, if you repeat it ten times, twenty times, thirty times, forty times.
That that would speak for itself, and that's
Uh where
The plants have crashed and burned a little bit, but I I I haven't given up.
that uh they will and
There there were obviously uh Mayor Bloomberg really cared.
And Joel Klein when he was
school su superintend care. This mayor doesn't, hopefully the next mayor will, but the real problem
is that if you are a uh
low income or minority in a major one of our cities, your chance of graduating
uh college now or one out of eleven.
I wrote a book called Common Sense.
that just came out and I wrote about a district school.
Where ninety nine percent of the
Kids uh passed the uh math test and ninety four.
percent past the English test, a regular district school, one of the poorest sections of Brooklyn.
But the stats I just gave you.
were for the kids with disabilities.
And so the idea behind the best charters and the best district schools, not just charters, it's anyone doing a good job.
But it shows with the right supports almost every kid could achieve at high levels. So that ten out of eleven that aren't making it, that's even more tragic because they all could with the right supports. I'm not saying let's not try to keep fixing the card system.
But we spend a trillion dollars a year in kindergarten.
through university education here.
And ten out of eleven low income or minority kids in are
Top fifty urban centers aren't making it through.
To the gold standard. And if and if you get a college degree, you're 70% more than someone with a high school degree. High school degree 30% more than a high school dropout. So
Ten out of eleven aren't getting there.
There's gotta be another way.
I really appreciate all the work that you've done there and the results sort of speak for themselves and hopefully it starts to catch on soon.
Well, I appreciate that. So uh
Uh one of the things that
I was hopeful would catch on and as some of the major companies were talking about.
Not it's that responsibility, but something they can do to help themselves, maybe get more diverse talent.
is something I wrote about uh you know, what can Google Google, Microsoft, Amazon, JP Morgan do. Yeah.
is something I talked about was alternative certification. And and what I suggest is all they really would have to do
Is say, you know, what
what tests, what courses, what certificates in lieu of a college degree.
can you pass or do well on? What test courses or certificates can you get outside of a college degree.
That we will give you a high paying job in let's say the Microsoft uh HR department.
Just set the standards.
And then a whole ecosystem. Once there's a buyer.
whole ecosystem of uh supportive services whether they're online or tutoring services
can be an alternate way for people to
gain those credentials. And all you're doing is setting standards. I'm not saying these companies would need to make tests.
Or give tests.
Just set standards.
I I like that would be a great way to do it. Hopefully somebody listening can uh take that and run it up the flagpole of one of these larger corporations. It'll just take one or two and then it'll start going. Reminds me of the certifications we used to have
uh at the beginning of sort of like the Internet and the early
Late nineties, early two thousands.
you'd be able to get Cisco qualified and then you'd get a job out of that. And uh it didn't really matter if you couldn't do anything else or you didn't have iSchool or whatever, as long as you pass these certifications.
high paying job. A lot of those people have
uh become super productive members.
Um of those organizations.
area where it's really s very skill based, but
That same idea could uh uh could be applied.
There'll be
have to be new tests developed, but you know, McKinsey's developed game base game based tests
that you know supposed to look at decision making and critical uh thinking skills
So there's a lot of ways to test for skills that companies could use and
There's a lot of studies done saying that having a more diverse workforce.
Actually makes you a lot of money.
So if ten out of eleven aren't making it.
Uh, through a college degree.
uh we're wasting a lot of talent because they all can do it. That sort of was the point of what I
I'm so excited about the the success of the best district schools, the best charter schools with the right supports.
We have a lot of talent out there that's being wasted and this is something companies can do to
sort of uh start the
process going to start the flywheel going.
Where you know there's demand, there's a buyer.
And and now
the system and the network and the ecosystem can get going.
Oh but he's it.
That's a great place to end this conversation, Joel. I wanna thank you so much for your time.
Well, thank you so much. Really appreciate you.
Hey, one more thing before we say goodbye.
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