#111 Joel Greenblatt: Investing Made Simple
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At the end of the day, I try to boil things down to make it very simple. As Buffett would say, you know, you don't have to swing at every pitch. You can swing at one of 20 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 hit, 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. While we talk about investing, distinguishing between luck and skill, traits of successful management teams, stock options, what he wishes 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 now.

and learn.

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I'm curious, 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 I'm mostly looking at equities and how to value businesses. I actually started with one of my partners, John Petri, something called the Value Investors Club.

back in 1999, which we have to evaluate investors reading applications actually for people to join the club, which is how you get into it. And I've also been teaching since 1996. 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 lot of them. What makes a good investor is a combination of being able to do that and passion. I've learned from teaching that some people are, and also just being in the business, some people are in it for the money because if you're pretty decent at it, you tend to get way overpaid for your contribution to society, let's put it that way.

And so some people are in it for the money and some people like solving puzzles and figuring things out and figuring what's going to 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

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 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 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 40 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 make it very simple and obvious, right? It's as Warren Buffett would say,

you know, if I have to get to page 40 of a spreadsheet to figure out this is a good investment, that's not really where I find it. 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 1996. And I would say for the first two or three years, at a minimum, I wasn't really very good at

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, when I wrote my first book in 97, 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 my firm Gotham Capital since, with my partners since 1985.

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 one of 20 pitches, but as long as you do a good job with that one, you're

It all works out. It doesn't mean it doesn't matter that you missed out on them. So I knew what I was thinking. 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 so then when I wrote the book and when I teach, I just tried to boil down to 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 tried 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, when you're teaching,

Of course, it's good to talk about your losers, but you sound really much better if you can explain some of the winners and 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 looking for lessons that were a little different. So that's that's one of the benefits. I'm not super fleet of tongue. You know, I'm not even a good natural writer, meaning anything.

It doesn't come right out and it's, you know, I write 20 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 going to 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 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 my students, you know, what do you do with a business 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, you know, when you figure out a value of a business, you're trying to figure out what it's going to earn over the next 20 or 30 years.

And 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 get to pick and choose is one thing. And the other is it's not on page 40. It's really you're looking at things, you're tilting your head in a different way. There are a lot of smart people out there, a lot smarter than me.

But if you look at things from 40,000 feet or from a different angle, or that's where I've tended 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, 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 have a weekend house in Connecticut. And they would spend their weekends going to country auctions and yard sales and galleries off the beaten path. And when they found a painting that they liked, their question was not, is this painter going to be the next Picasso?

Their question was, is there a painting by this same artist that 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 genius or their advantage came from finding it in a place that's off the beaten path.

At least in my career, I've tried to look at things 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 weren't looking and having some ability, some ability to value it the way if everyone found this opportunity, they would value it too.

So it's more like that rather than deciding that this guy is going to be the next Picasso or this business is going to be the next big hit. I like how you keep it simple, simple, but not easy, right? 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 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 simple. I remember back when I was getting started at Gotham Capital, Ted Turner bought MGM.

And it was a little bit of a minnow swallowing a whale. And he didn't have enough money to go buy MGM. And there was this billionaire named Kirk Kerkorian that owned MGM at the time. So what Turner did was he paid cash for part, and then he gave away some funky preferred securities, which Kirk Kerkorian was going to have a big piece of because he owned a big chunk of MGM.

And that preferred, if it didn't pay, was going to have Ted lose control of internal broadcasting. And so I looked at that and said, I guess he's betting that...

he's going to 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 not even on the main dial of a TV set for those old enough to know what UHF was. So he had like a fourth or fifth biggest station in Atlanta. So he bought all this programming, including the Atlanta Braves, and figured out how to stick it up on a satellite.

but only paid for 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. He created TBS and figured out all these things that baseball teams really software. And it's creating three hours, 162 times a year of things that people can watch that are alone.

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 going to pay this paper. And I also figured out that, look, he only paid 50% in cash. So as long as he didn't

overpay by double, I was backed 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 60 cents on the dollar that people figured it out a few months later and I got my dollar. So I was kind of 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 going to go broke and I'm going to get fully paid. So that's 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 50 ways from Sunday. It was really a big picture to say, I'm going to buy this because this is money good. What got you interested in investing? How did you get started? What was that path? Well, I was at Wharton, you know, because I'm from a typical Jewish family and my only choices were really doctor or lawyer.

I was applying to law school, studying 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're learning is, you know, markets kind of 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 a

Well, at one time during the year, stock was at 100. They used to have something called the 52-week high-low in the newspaper. And so they would show every single stock, really, the high for the year was 100, the low for the year was 42.

And every year that happened for every stock. And it didn't make sense to me that the value of the business was right at all those times. And in November, it was one thing. In February, it was another thing. And they were both right. So just simple powers, simple again. Observation said, gee, what 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 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 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 on my way to law school 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 a little bit. 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 all different publications. I'm reading things off the Internet. I'm 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 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 I 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

You 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 know, learn from the past and reading how smart people think, it's only helpful. I'd rather not make those mistakes myself. I'd rather read their mistakes and make different ones myself.

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 not good at looking forward a lot of moves. I think it's simpler than that. Waiting 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 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 20 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 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 10 or 20% of things I've seen. And if you have that ability to contextualize with a little experience, that's always helpful. So the good part about that is I've always felt

investing is continual learning. I never feel like I got it. I never stopped making mistakes. I want to be right more than I'm wrong. I'm not even the most patient. I just feel like I have enough patience that 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. And

I'm good at simple things, you know, 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 your simple concept still holds up. But at the end of the day, it has to be simple to me. And that doesn't come around all that much. And you have to know that too soon.

Don't get frustrated waiting. I want to 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 great question. And I think that's almost the most important question because, you

If you have this great investment, unless it's, you know, Tesla last year, that's going to go 10x and you put 2% in and it goes up 50 or 100%, you could have blown it. That could have been your worst investment of all time because you should have had a 10 or 20% 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 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 10 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 going to pay 10 or 20 times. Obviously, if you have a $10 stock that's sitting with $9 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, you can be a stock market genius. I wrote, 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 say lose,

Crazy things happen, whether it's COVID or 2008, 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 is 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 going to 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 could lose a dollar or two in, I could easily have a 20% position in because I'm not risking that 20%. I'm risking, it's almost like

let's say you're buying, 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, and it's obviously going to 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 how much do I think I could lose in this investment rather than that big, hairy number that's scary because houses are expensive and

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 10 or 20 percent of whatever I pay for my house realistically, that maybe makes it more sleepable. You know, you don't want to bet. 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 the same thing with investing, I would say, that it's how much it's at risk, not what the actual size is at all. It's a 10% or 20% 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 remain rational. But I'm looking at the market now, and it seems like there's two things going on. One is

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 100 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 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, partially due to the Internet crisis.

interconnectedness of the world, you can name it, the types of franchises they can create. I don't think we've seen the quality of and the growth trajectory and sort of the unlimited growth trajectory of some of these businesses before. And so those prices 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 businesses.

We looked up a statistic along the lines of what you're suggesting. Last year, there are now 299 companies that lost money

in 2019 so this is pre-covered so there were money losers in 2019 with a market cap now over a billion dollars and if you bought every single one of those money losers those 299 companies with market caps over a billion dollars now uh you would be up over 100 so far this year and the median stock is up I think 47 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 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 no.

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 could see it on the balance sheet.

Here, you know, a lot of that gets expensed. You know, I'm just thinking like we just switched over to Salesforce. You know, it's pretty much all over the place. And Salesforce actually, and I don't remember the exact number, but paid $50,000 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 $50,000 a year.

But their bet is that the lifetime value of us as a customer, you know, will last eight or 10 years and that that payoff is going to be huge over time. And so it's the same thing as, let's say, Amazon doing Prime Video. You know, they spend a lot of money up front, spending billions of dollars on movies and

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 spend a

40 if you're a software manufacturer, you spend $40 to get a new customer and he hasn't paid off yet, but you're going to make $250 from that customer. He's worth $250 over the years. Well, you get to deduct that $40 now. People are yelling, hey, Amazon doesn't pay taxes, this and that. Well, they keep taking all the money that they earn from all their great businesses, reinvesting in their business, 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 kept up with that. So, you know, just because you're losing money now. What I would say, though, for those 299 companies is everyone realizes that and everyone is assuming that these guys are going to be the next Amazon, Google, Microsoft. And there will not be there'll be a handful of big winners like that. But those 299 companies are getting credit as if they will be the next Amazon, Google, Microsoft. Seems unlikely.

that 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 figure out. So for the most of the ones you take a pass, you throw it as Buffett would say in 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, you have a particular vision or, you know, something seems simple to you, there will be those, but

One person is not going to know hundreds of those to pick. And so I think you just have to know yourself, know 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 more of a macro question that is above my pay grade. Logic would say...

I learned a lot of Milton Friedman and like that, that you should be able to create inflation by just printing more money. It seems straightforward to me when 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, all these...

SPACs and IPOs and everything levitating at high prices, you know, going up five and 10 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, 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 that's a sophisticated question, once again, beyond my pay grade. And will that filter into 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. We're printing money, so is everybody else. And

they're artificially you know taking that money and buying securities and making negative interest rates it's hard to believe some portion of this doesn't end badly or 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 going to 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 spend as much money as necessary to

keep the consequences low because this really is a one-off. Hopefully, the next, you know, maybe it won't happen again for 20 or 30 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 $3 trillion or $10 trillion. Let's say they have to spend $10 trillion, which they haven't spent yet.

and they just print it well if you can borrow it at you know 1.3 percent over 30 years and that's 130 billion dollars a year that's you know three percent of our annual budget in the united states is that a good thing to do uh 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 it over 30 years for free. That would be my one suggestion to anyone listening. We should extend our maturities when they're lending us money for free.

I like the long duration idea. You said you're not really worried about the printing money. What are you worried about in the markets these days? Well, 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, Apple? I would say, no, it doesn't mean they can't fall 30 or 40%. 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 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 I'm worried about that. This other speculation in all these SPACs and all these companies that are losing money,

That are given, you know, I was looking at just for curiosity, I was looking, I don't know how to pronounce it, Nicola or Nicola, however you pronounce it, you know, that truck company, electric 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 that they've promised still has a market cap of six and a half billion.

And I don't I'm not going to pick on that name in 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 should. And will that end badly? Yeah, that'll end 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 that.

Maybe in a good way, we'll get slapped on the wrist for speculating too much and learn the same lesson that everyone learns in every new generation that some of these things are speculative. But I don't think that's going to bring us all down. I think actually might bring some sanity back. Coming back to something we said earlier, so there's spotting and opportunity, there's sizing and 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, I have a partner, Rob Goldstein, who joined me in 1989. 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've got to be pretty smart.

You have to have some business savvy of some sort. And I would say for the most part, most management teams impressed me anyway, when I walked out of the room, everyone had a good story about what they were going to do, you know, how they were going to 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

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 planned to do was, the better assumption would be that they would continue to be bad at it. So I would not rely, me personally, rely so much on my assessment of the management team, but my assessment of what they've done in the past is very valuable.

And that's really, you know, how have they allocated capital in the past? Have they done 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're going to 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.

who's reached that level, who you would speak to. So I didn't find it super valuable. Now, if you wanna look at one offs, there are some geniuses out there. I go back to the story I told about Ted Turner. Like I didn't really know him, you couldn't really tell

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 it was the MGM deal. Watch him speak and understand his logic and how brilliant he was. And I 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, Steve Jobs, I would hope would have been one. And there are 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 MGA, you know, the Ted Turner case, but

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. You know, it's like they say when you interview people, some people are good at being interviewed and some people are not. It has little correlation with how they will perform 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. At least it's true for me and I think that's, at least for me, that would be the better way to look at it. So the same way with assessing management, I'd say. I know a lot of extremely successful people who interview very poorly. Well, it's very interesting. My partner, Rob Goldstein, joined me in 1989. I hired him right out of college and he was so bad, he reminded me of myself.

That's why I hired him because he said something within the interview that made total sense to me. That's why I hired him. It wasn't like he totally flubbed it, but he did remind me of how bad I was on my interviews and endeared him to me. I'm curious as to how...

What you look at, public market CEOs, who's good at capital allocation in your mind? Who's really good? Who are the top five? And not investment advice and not respective of share price, but who are sort of the top five allocators that you always keep your tabs on what they're doing? Jeff Bezos. He was a visionary in the early 90s when he envisioned at least a big chunk of his success. And this whole thing I'm talking about is investing in your business and not worrying about...

profits now and building long-term value of customers. That was his vision 20, whatever it was, 27 years ago, which is at least a few decades ahead of most other people who have thought that way. More along my skill set would be watching Warren Buffett allocating capital over the years and trying to learn from what he ended up liking. One of the best things I ever learned from was when he bought Coca-Cola.

and analyzing how he could pay at that time what I thought was such an astronomical price for a fairly mundane business.

It had great franchise, obviously. It was growing reasonably, but still based on just my cheap gene of buying things cheap and trying to learn from someone who wanted to buy good and cheap, how much could you pay? And so Rob and I ended up analyzing when we took a look at, we like to look at spinoffs and different things. We took a look at Moody's, which is the rating agency.

which was trading at 20 times earnings at the time we were looking at it. And, you know, back when we were looking at it 20 years ago, it was not a value investing kind of multiple, you know, value investing kind of multiple at that time. It was six, seven, eight times. And this was trading at 20 times. But we love the business.

And so one of the exercises we did is said, OK, let's compare it to when Buffett bought 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.

If you said that Buffett bought Coke at $10 a share, it worked out that we were paying $13 for Moody's. But of course, Coke went to $30 or $40 within five years and paying $13 for something that goes to $30 or $40.

would also have been pretty good. So just looking how he allocated, I mean, his allocation of capital is 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 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 going to be a good steward till we get there?

You know, you ask those kind of questions, but that's how we look at it. And Buffett's just turned that into actually putting together a conglomerate of a portfolio of businesses like that. So I think he's the one I've learned the most from. But Bezos, I think, taking us into looking at the

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 money from our memberships. And you talk to Jim Collins, so it's a flywheel where if you sell people 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 model not so hard to understand and there are few and far between but there are models like that just learning from watching the best to do it as you're suggesting i i don't want to name five but you know

You know, those are three models that, you know, have certainly resonated with me. I'm curious as to what 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 answering it this way. I got to take my Columbia class to visit Buffett probably 13 years ago or so. And I had never met him before. I don't go out to the annual meetings or anything. Always been a big fan.

fan. And I don't know if he's the wealthiest guy in the world at that time or top three or whatever he might've 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 to teach them by example, and also explaining, really taking a real joy and sharing his wisdom. And then just on a personal level, level,

You know, knowing it was like one of the biggest days of my life, my chance to meet Warren Buffett, you know, someone I've idolized in so many ways and tried to emulate both personally and professionally. I don't know what the lesson in there is in general, but if you can be that successful and be that.

gracious with people really who have probably nothing to bring to the table for you other than you want to share, you know, the opportunity, I guess he has to share with others. He finds that deeply meaningful. So I guess, you know, he gets payback that way. It was just a lesson to me that, you know, there's no excuse for not trying to be gracious with everyone. If he can be that way and, you know, I only got a small, you know,

little clip in 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 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.

One thing that Buffett doesn't 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 mean, the information is disclosed. So it's really wanting to, you know, some businesses send people the right way. You know, stock options are 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 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 for that's not a cost 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 stocks are quite volatile and then expensing one year and then the stock fell and then you take the expense off. It would be very complicated. So I think disclosure is important.

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, it doesn't keep me up at night, let's put it that way. But I do think that they should be fully accounted for the cost of paying your people. It'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 their bread is buttered the same way. So I have no inherent problem with incenting people the same way the shareholders are incentive. You know, there's this whole argument about what should be the role of corporations? You know, should just be increasing the stock price or something.

rather than taking care of the community or employees and everything else. And I think really it should be, and it goes the same for stock options, that it should be long-term, they should be predicated on long-term value creation 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 value,

The appearance of short-term value, which may be reflected in a stock price, which may affect your stock options because you tricked somebody thinking 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, or even in what is the role of 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 a stock option that might reflect it over the short term or be fooled into reflecting over the short term, that's when you end up with problems both with stock options and also with managements being short-term caretakers rather than long-term value creators in the business. So that's why it's really great

And the market values that. I mean, if you have a guy like Jeff Bezos, 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 oriented,

they see the real deal, they do give credit for it. And so I don't think they're counterproductive. You know, I got to make the next quarter. I got to 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 worrying about how we look over the next quarter. Yet he's a visionary, you know, a decade out. I see that as troublesome that they don't look at one another. So I, my only advice is,

to most 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 the analysts won't like it or anything. And I see that time and time again, that management's really worried about the stock price. And maybe your question about stock options has something to do with it. I don't know. And how to adjust and make everyone a long-term holder of the stock and a short-term trader and

you know, sounding good for the quarter. So I see the issues there. I don't have a solution other than that the market has been giving value to the long-term visionaries 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 so I think that's healthy to some degree. Are there accounting rules that you think are

blatantly wrong or misleading? I don't know. I guess I'm just more for transparency. You know, even when people say, oh, EBITDA 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 paid for 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, then I'd like to see that too. Counting is like a sideshow. It's, as Buffett would say, the language of business, and you have to understand accounting. But I never...

And I was an accounting major, by the way, at Wharton. I don't know what I did. I mean, you know, you have sales, you have expenses, you have income. Here's what you have. Here's what you owe. Here's...

You know, I don't know what I did for four years doing that. 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. You know, there's somewhat different standards across the world. And what I try to do is homogenize them into economic realities.

And that's what I'm doing. So you're asking me some questions about what I do with some arcane accounting rules here and there. And I'm just for disclosure, however it's disclosed. I'm for management trying to express how they're thinking about their business 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. I mean, there are, I think we were looking at international companies. There's some holding companies and things like that in South Korea that are very hard to figure out.

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 it out, they don't want me to figure it out. And I got to go to the next one. I mean, 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 I don't view that as a good thing. As you're reading financial statements, are there thoughts going through your head that are consistent across different companies? Are you like, oh, this management team doesn't get it. This management team doesn't get it. They're missing something. Is there a recurring thought that goes through your head that you find yourself just saying more often than not?

Not really. I'm looking for successful 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 if there is a 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 out on, you know, errors of omission. 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, number one, your earlier question about finding good management, there's my partner, John Petri, and I hired a woman named Diva Moskowitz to be the CEO of Success Academy.

the idea behind it, there are now 20,000 kids in 47 schools, and they would be the top district in New York City. And most of the kids, 87% are minority, low-income kids. And yet they beat all the wealthiest school districts. And it's really due to, I think, relentless brute force, hard work, high standard setting by a woman named Eva Moskowitz.

I don't know, smart enough, but lucky enough to hire to do this. And the idea really was based on a business idea that fourth grade learning the different subjects should be pretty similar across schools. So if you could do it well at one, the model cannot be just hiring the top 1% of teachers because you run out of those.

The model has to be giving the supports necessary and the training necessary to an average teacher to become a great teacher. 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, OK, we opened the first school and, you know, there's going to be a big mess afterwards.

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 a couple of 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 which schools?

Teachers in each of the four schools now are doing better than the other teachers in the grade. Which school is doing better? Which third grade is doing better? How can we share across 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 learning.

uh and and you know over 90 percent of the kids reading 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 47 schools and 20 000 and the the idea behind this was that can you know 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've proven that they can. Well, that was the idea, to prove that they can. I think in some ways, at least in New York City with this mayor, it's kind of failed to say, hey,

hey, what are those guys doing? And what can we learn? And how can we help each other? That part, which I thought would be automatic, just with a logical business mind, especially for a nonprofit, and we all have the same goals in mind. I thought that if you repeat it 10 times, 20 times, 30 times, 40 times, that that would speak for itself. And that's where the plans have crashed and burned a little bit. But I haven't given up

that they will. And obviously, Mayor Bloomberg really cared. And Joel Klein, when he was school superintendent, cared. This mayor doesn't. Hopefully, the next mayor will. But the real problem is that if you are a low-income or minority in a major one of our cities, your chance of graduating college now are one out of 11. I wrote a book called Common Sense that just came out. And I wrote about a district school

where 99% of the kids pass the math test and 94% pass 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 level. So that 10 out of 11 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 current system, but we spend a trillion dollars a year in kindergarten through university education here.

And 10 out of 11 low income or minority kids in our top 50 urban centers aren't making it through to the gold standard. And if you get a college degree, you earn 70 percent more than someone with a high school degree, high school degree, 30 percent more than a high school dropout. So 10 out of 11 aren't getting there.

There's got to be another way. I really appreciate all the work that you've done there. The results sort of speak for themselves, and hopefully it starts to catch on soon. Well, I appreciate that. So one of the things that I was hopeful would catch on and that some of the major companies were talking about, not it's their responsibility, but something they can do to help themselves, meaning get more diverse talent.

is something I wrote about. You know, what can Google, Google, Microsoft, Amazon, JP Morgan do? Yeah. It's something I talked about was alternative certification. And what I suggest is all they really would have to do

is say, you know, 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 HR department?

Just set the standards. And then a whole ecosystem. Once there's a buyer, a whole ecosystem of 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. Like that would be a great way to do it. Hopefully somebody listening can take that and run it up the flagpole at 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 at the beginning of sort of like the internet in the early, late 90s, early 2000s.

You'd be able to get Cisco qualified and then you'd get a job out of that. And it didn't really matter if you couldn't do anything else or you didn't have high school or whatever, as long as you pass these certifications, high paying job. A lot of those people have become super productive members of those organizations. Well, I definitely think it's happening in the software world.

Yeah. Where it's really very skill based. But that same idea could could be applied for all different types of skills. There'll be have to be new tests developed. But, you know, McKinsey's developed game based game based tests that, you know, supposed to look at decision making and critical 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. Yeah.

So if 10 out of 11 aren't making it through a college degree, we're wasting a lot of talent because they all can do it. That sort of was the point of what I am so excited about, that 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 start the

going to start the flywheel going where, you know, there's demand, there's a buyer, and now the system and the network and the ecosystem can get going beneath it. That's a great place to end this conversation, Joel. I want to thank you so much for your time. Well, thank you so much. Really appreciate it, Shane. Hey, one more thing before we say goodbye. The Knowledge Project is produced by the team at Farnham Street.

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