No. 1 Forensic Accountant: The Coming Collapse | Anthony Scilipoti

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

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

>> What are the red flags you look for? It's not red flags. We call them flammable items. So, it's a three-stage process. The first stage is >> This episode of the knowledge project is for informational purposes only. The views and opinions expressed by Shane Parish or our guests are solely their own. Nothing in this conversation should be considered investment advice, financial guidance, or recommendation to buy or sell any security. Always do your own due diligence, or consult with a qualified financial adviser before making investment decisions. It's time to listen and learn.

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

>> I was an accountant and I was working at Arthur Anderson doing the normal audit sort of preparatory work and I uh found it unfulfilling uh because the work I would do I would find interesting or concerns with the accounting or otherwise and the clients it didn't end up ending anywhere. So, uh, what ended up happening was the there was some due diligence work to do where we could do actually look at transactions, companies calling us to say, you know, we want to spin out this business or we want to make this acquisition. And then I asked, put my hand up, said, listen, can I do that sort of work? And then I started doing it and I loved it. I saw some huge fulfillment. And then it's all about people you meet. I met a a gentleman named Al Rosen and he was head of accounting at York University and he was a forensic accountant. He had his own practice. He taught taught us to pass the the the Yuthi at the the exam or the CPA exam at the time and um I said you know I'd like to work with you and he said well you get your CA work done and then we'll think about it. And uh that's what I did. And so then I toutelaged under him for some four years. And uh that that really uh made it happen.

>> You weren't on the Enron file, were you?

>> I was not on the Enron file. I left Arthur Anderson in 1997. Couldn't even spell Enron at the time. And uh it's it's a very sad thing what happened.

>> What did happen at Enron?

>> They essentially had a number of off-balance sheet exposures. So they would enter into derivative type contracts where that were tied to an energy price for example or even the company's own stock price and it'd be like this debt only comes due if the stock price falls to X. This debt only comes due or this derivative transaction we'd entered into and Ron was an energy trader. um you know so if the price of electricity in kilowatt hours rises to a certain amount well then there this debt is no longer due. If it falls to this level then they're they have to pay uh some counterparty and so those were those those risks were essentially off-balance sheet. So those were not sitting on the company's liabilities. They were all contingent and at the time the accounting rules were such that the this these numbers were not included on the liabilities. They were just in the notes. And so all of a sudden so people weren't paying attention because nobody read that reads the notes. And so then all of a sudden things started to happen. There was a change and movement in commodity prices. Okay, this is now we're dealing with the dot. There was a lot of a lot of changes that happened in the economy. We we had a we had a a uh a recession in the early 2000s, right? And so that led to a lot of movements in commodity prices that triggered the derivatives. Surprise, surprise, they can't make the payments. It's done.

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

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

>> and so it was found in the courts um upon appeal that uh Arthur Anderson was not guilty but that was way after the fact because Arthur Anderson was already was brought to its knees and it was over. became a scapegoat for everything wrong with uh with with accounting at the time and uh look change needed to happen. Arthur Anderson was around the world all the partners were folded into the other firms.

>> What are the limitations on audits?

>> The limitations?

>> Yeah. Hey, the limitations are you're hired to be a independent to give your independent opinion and attest that the financial statements present fairly in all material respects in accordance with some set of accounting standards and/or standards that's associated with a contract for example. And the challenge is time because you have to do this quickly, pressures on costs and essentially think about it this way. It's like I tell you, look, I I just prepared my report card. I got an A. I now hand it to you and say, look, it's an A. And if you say that it's an A, I'll pay you X amount of money. So, look at your situation. You come back and say, well, it's actually not an A. It's kind of a B+. Uh, how much am I paying you again?

>> Yeah.

>> What do you mean it's a B+? Do you think that question that the way I answered that question couldn't have been this way or the other way you know and this is it ties into so many things you know AI and so forth business is judgment people run companies they don't run themselves the decisions associated with a business transaction end up being reflected on those financial statements but when the group that's making the decision in the business to do something well then they come back to the office and show up in the in the accounting department and say, "Hey, we just did this. You know, can you guys figure out how to account for it?" And all of a sudden, the accountants are like, "God, what do I do now? How do I do this?" Because then they and by the way, when you do this, I want it presented as as, you know, as bright as possible so that our investors and all our stakeholders are really excited by the results like don't present it badly.

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

>> I think it's actually exacerbating the situation.

>> Oh, spend a few beats on that

>> because now read the financial statements, Anthony. I just put it into AI. I asked Chat GPT to tell me, "What about this? Look for that. Look for that." And there's there's all the instances of those things. and then I just read it and it's all there. Well, did the AI miss it? Did the AI understand the linkages between each of those sightings? If I'm if I'm looking at, for example, I was looking at a company recently and I was looking at it was capitalizing costs. Okay, this is a REIT. And if it capitalizes cost versus putting them through the income statement, if it goes through the income statement, it makes their operating earnings look poor, lower, and their net EPS ultimately. But if they put it on the balance sheet, well, you know, that's an investment in the future and everything looks okay, right? And so there's a gray area. Was it an operating expense or was it a capital item? And so I was first thing I looked for was capitalized interest. And so it gave me all the quotes and then capitalized costs and it gave me all the quotes. So then you think that that's enough, but you have to then and I and I was showing one of my guys this. I said, "So then let's go to the income. Let's actually pull up the statements where it told us to go because AI made it faster. I now no longer needed to flip the 300 pages, but it it gave me where to go. So now I went there and now I could say well that means if that is what's happened then we need to look at this other note to see what you know the implications of that and then we got to look at the cash flow statement to see how it's actually impacting what ends up being reported as as cash flow and so those linkages come it the AI makes me get to the answer perhaps more quickly but it's my if I don't already know where I want to go then AI just gives me information, but that information doesn't help my decision if I didn't start with where I want to get to.

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

>> 100%. This is I love it. If that's where investors go and that's where they're going, everything is going to AI. The the bottom level of being an analyst, the junior analyst is is going to be replaced by an AI. the one that said, "Find me all the references of, you know, where the company capitalized costs." That the AI can do. I get it. But you need someone with experience to know what which of those references matter and to what that means to the business. And this brings about a number of challenges because well if that junior person doesn't learn doesn't get on the in on the ground floor they'll never learn to be able to make all those connections

>> and the only way to learn is sort of like being in the weeds and not being in a

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

>> Yeah. 2 * 2 is four and so on. I remember I was struggled with my with my nine times table and then my 12 times table and so I had to memorize them and get them going. But then my children came along and they were using a calculator and apparently that was okay. I went bananas. I said, "You're not going to use the calculator. You need to learn it without the calculator and then you can use the calculator, which is the same with AI. You need to understand how the financial statements are prepared, understand the linkages, develop mental models so that when the AI gives you information, you can you can digest it and make decisions. Reminds me of this funny story. When I started university, uh, I ended up in first year calculus and for whatever reason, the professor who was supposed to teach that class couldn't teach it. So, the dean of the math department took over. And on the first class, in the first like minute, he said, "There'll be no calculators in this class." Oh,

>> nobody of course listened to him cuz graphing calculator, you're like, "Oh my god, this makes my life so much easier."

would show up to the final exam which is like I think 80% of your final mark.

>> Yeah.

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

>> I taught at university for about uh 14 years at York and uh truly one of a very fulfilling time uh in my life and uh I still love doing guest lectures. I remember I I I would always start the, you know, I would go over the outline and I and I would tell the students, I said, "So, assignments are due at the beginning of class.

>> If they're handed in after the 8:30 start time, it's a zero. It's a zero."

And invariably at some whether it was the first and usually the first or second assignment, somebody would show up and hand it in late and I would say it's a zero.

>> Yeah.

and they would whine and say it's how can you do that and you're so draconian and I say well you think in the real world when an RFP is required and you've signed with the contract with a client that they demand the report by 9:00 a.m. on Monday and you show up at 9:05. How's that look? And somehow it's okay. So, it wasn't okay in my class. And and ultimately, I think you you build respect because people see that there's a rule and it's followed and then people have respect for the rule.

>> There's this sort of like weird dichotomy I think with students right now. And dichotomy is probably not the right word. There's this weird path where students are coming out and they're more powerful and capable than ever because they use AI by default

>> and so they can get more output than somebody who's maybe been in their career 15 20 years and I I use my 14year-old as an example. You know, in a world where he never had to show up to work, he's a mid-level employee at most companies based on output. If you never saw him, he can give you the the exact same output that a mid-level employee is going to give you if everything goes right. But the minute something goes wrong, he doesn't quite understand all the nuances and all the and AI the I guess the race for him is like will AI catch up quicker, you know, because he uses AI by default. And I sort of think about this as like making a recipe, right? Like if I pull out a cookbook and I make a recipe and I do everything perfectly, you wouldn't be able to tell the difference between me and the chef. Like the food, maybe it's not plated as well, but it's going to taste great. It's going to taste the same. You'd be like, "This is amazing." But if something goes wrong, if the oven's too hot, if I don't stir enough, I don't put enough salt in. I don't know why it didn't go right. But the minute a chef, the chef who created that recipe, who's got all the experience, who did the, you know, who's made it hundreds of times, they taste it, they're like, "Oh, your oven said 375, but it's actually 350. You stirred this too much. You let this boil. You They instantly know what went wrong." Yes. And I wonder if in a world of AI, that's the nuance. And I I was talking to Steve Schwarzmann about this in a different context. But he basically said, you know, a lot of the analysts coming up, they know the numbers, but they don't know what the numbers mean.

>> Correct. Experience teaches you judgment. And and you talk about this in your book. It's all about the mental models. I I I believe that strongly. The experience teaches you what the numbers mean as we've spoken about. And when you have experience, you say, "I've seen that before."

>> And a lot of the things I see happening today link back to things I've seen when I started my career over the last 30 years. And I think that's something that the AI can't quite do unless you tell it where to look because it doesn't know the link that I'm thinking about, right? But if I if I can make the initial stage, it can help me get there quicker and more accurately. But if I don't if I don't already have a model of what I'm looking for, it's not going to get there.

>> What are you seeing today?

>> We're talking now equity markets. Is that

>> Yeah. I think we're in uh what seems to be, you know, and I I hate calling things bubbles, but I think we're in a period of extreme uh euphoria where the numbers, the fundamentals, and fundamentals is thrown around in the investment industry like the the word love is thrown around among humans. You know, the fundamentals, well, someone looks at the chart and sees that, you know, it did a double bottom. Well, that's the fundamentals. And someone else says, you know, that they're looking at the RSI or some other things or someone else says they're just looking at cash flow or someone's looking at the multiple related to earnings. And those are the fundamentals. Well, at the, you know, historically, and if we follow what what Buffett says, the company is the present value of its future cash flows. And how do you develop those cash flows? Well, you need to do a forecast on what it's what what it's going to drive the business. And so, that's what I think the fundamentals are. And so when a company today is not generating much in free cash impact negative and yet the market wants to trade it at a multiple of its revenues well then the company's valuations is extracted from its current fundamentals and trading based on some future expectations. I've been asked you know if you could have anything what would it be? and I'd say tomorrow's newspaper because then I'd know what was going to happen and I would be able to invest on that. And so we're all trying to do the most the impossible figure out what's going to happen tomorrow. And all I know is I've seen that when you read and speak to investors and they say that the numbers don't matter and the financial statements no longer matter because this is changing the world. I say, "Well, I've seen this before." You know, I saw that Nortell was changing the world and Lucent and Cisco and 360 networks. They were building out the infrastructure of the internet that we're using today. But those companies don't exist anymore. They built what they built and that still exists, but they no longer exist. Either bankrupt or folded into other companies. Cisco still exists today, but has never traded at it at its historical uh valuation. And yet, it's a it's it's a multiples bigger than it was back then and by earnings and by revenue.

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

>> That's right. And and I think right now the reason why I think we're in a in a very high-risk situation is because the cost of the risk is priced very low and that's when the risk is highest. And so how do we look at that? When you look at the uh the high yield bond spread, the spread between the 10-year bond and the high yield bond in the US, okay, that's the non-investment grade bonds. Well, that's the tightest, near the tightest it's ever been,

>> which means that investors are willing to lend money to non-investment grade companies at a spread over what a government bond is at a rate, which is the tightest it's been practically in history. So there's no risk priced into the bond market. And then in the equity markets, we use VIX, which is a measure of volatility of the of the S&P 500. And that is trading at a benign level. It's not the lowest it's ever been, but it's at a benign level. So in essence, what investors are saying is there's no risk. Everything's fine. Isn't that the age-old wisdom of like don't fight the Fed, though? For sure. the future is is pretty clear at least in the short term. But the implications of that are we I I don't proclaim to know but interest rates are coming down. I mean all the governments want interest rates down,

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

>> or political pressure.

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

>> What happens when we cut rates and markets are at all-time highs? It could become a situation of where you sell the news because everybody was moving the market up in anticipation of it happening because the belief is as we when we cut rates we provide more lowerc cost capital to companies they put that capital to work and it generates return. Every company is only as good or as stable or as strong as its customer base. And if we're seeing that the customer base of uh you know, let's call it the average Joe, and I call that Joe Sixpack. Uh he's a buddy of mine. We all have a buddy, Joe Sixpack. And so if Joe Sixpack is struggling, then ultimately, how is everything going to trickle down and create growth?

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

>> Yep.

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

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

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

>> And I like the comment you made, Shane. I'm not here to predict markets. Uh it's a fool's game. Uh I don't know, you know, I I wish I knew then I just buy futures and make tons of money or short them. But what instead I know is I'm looking at the underlying companies and except for some of the mag seven that are growing to earnings, the smaller and midcaps are not. When Walmart is telling you that there's a problem with its sales forecasts and Target is struggling and Lululemon can't sell the same number of pants and Starbucks is considering to changing some of its pricing and some of its its business model. you know, this is Joe Sixpack and and Stevie Weinbox that stepped up from Joe Sixback. You have Stevie Weinbox in the middle. Um, and I think they're the ones that are struggling. And so it tells me that this can continue and and markets can continue going up for for any number of amount of time because it's a function of how much liquidity is in the market as well. People have are if investors have lots of cash, they'll continue to invest. the people that you're seeing that are making the most money today um are not those that historically necess in general I'm speaking the ones that you hear about that have made money historically we talk Ray Dalio we talk about you mentioned of course Warren Buffett and there was a there's a quote that was that I that I learned uh over time and it says during raging bull markets knowledge is superfluous and experience is a handicap Because if you have the the benefit of knowing what happened in all the other blowups, you know how painful it could be. But if you've never experienced it and every time something went wrong, it just rallied back like nothing happened, well, you think it's going to continue.

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

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

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

>> Yes.

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

>> you didn't realize the impact of what you were doing.

>> I didn't like where

>> you knew the accounting.

>> I knew what I was looking at, but didn't realize that if you dropped said pebble into the water, what happens? And then when John Roth gets quoted in the newspaper that we're hurting his ability to raise capital and clients are cancelling and you know employees are contacting us upset because of the things we're saying and it's like I didn't mean to hurt anybody. I'm just saying the truth hence the name Veritas. So let's link to what I think some of the the the linkages from the past. So at the time you had Nortell and you had Cisco and you had Lucent and they were building out various components parts of the internet and what they would do was they needed customers. Well the customers needed to raise money cuz if you're going to build infrastructure you're not going to generate cash flow for some time. So they would raise money from equity holders and eventually get some debt but the powers that be at Lucent and Nortell would also offer them. So they would say buy this $10 million worth of product and why don't you pay me over some extended period of time. Oh, and by the way, we'll give you a line of credit so that you need 10 million from us of of cable. Uh, but we'll you can also you need to buy some routers from Cisco. You know what? We'll give you some line of credit so you could do that because Nortto could borrow money could could had a great balance sheet could raise money whatever. And so that's what was happening. Well, ultimately when the equity market started to wobble and there was no one left to continue to make sales to, right? Well, then now all of a sudden Nortell didn't get paid on its debts and the wheels came off and then the 360 networks and JDS unif mentioned they went by the wayside. And so what ended up sort of now let's take that and think about what's happening today. So you have the likes of the Nvidias of the world and let's say Microsoft and you have Open AI and such and Nvidia is investing in Open AI.

>> Mhm.

>> And Microsoft is an investor in Open AI. Microsoft offers cloud services to Open AI. So it's a customer. So OpenAI becomes a customer of Microsoft. But Microsoft gave it the money so that it could actually pay it back. Nvidia invests in OpenAI and Nvidia is a a supplier of chips to open AAI. So it's all circular. What's going on here? There's a new company that just went public earlier this year, Cororeweave, who is its largest customer. Coreeave provides data transaction like analysis of on chips, right? It's a data farm for the large AI users like Microsoft. Its largest customer is Microsoft. Microsoft hasn't invested in it, but Nvidia supplies pretty much all its chips. Well, Nvidia is a large or is a meaningful investor in Coreave. Corewave goes public. It's trying to close its its equity, its financing. on the last moment, Nvidia buys $250 million worth of shares of Cororeweave so that it could close the deal. These are, you know, JP Morgan gives them a loan so that they could just before they go public and then they go public and repay the loan to JP Morgan who's the one of the lead underwriters, JP Morgan. No one's doing anything bad. No one's cheating. It's just these are all the same type of symptoms of things that were going on way back some 25 years ago. All these things don't mean anything. Nothing means anything until it means something. I say, you know, the things that we're talking about right now, these little things, if you will, you know, in the time of 2000s, just like we talked about Enron, that didn't have the disclosure. So, the key wrinkle to everything I brought up, and that's why now I want to take it to the accounting is the financial statements of Nortell

>> didn't show that long-term loan as a part of current assets. It showed it as part of long-term assets. So, when the simple calculation of current ratios, they would only take well current assets. And so, this long-term asset that wouldn't show up as part of the liquidity calculation. It also wouldn't show up as part of operating cash flow. And if it's not part of operating cash flow, then operating cash flow looks better. And no one would look at long-term receivables.

>> And what they would because they're taught in their CFA, how do you calculate free cash flow? Operating cash flow less capex. But this is the problem with when you just create the ratio and invest by ratio. The ratio needs to be adapted to the company, the life cycle, the industry, the business model. If the company's selling things at a long-term receiv over a period of extending beyond one operating cycle, but it's part of its normal operations, that should be part of operating cash flow. And in fact, after after Nortell, Fazby changed the rules and then long-term receivables became part of operating and short-ter and and and current assets. And that's something we wrote about. We said this is wrong. You need to the free cash flow is actually negative because this number needs to be shown. So they're extremely vulnerable to something going wrong if the customer can't make payments. And today, now let's look at the accounting today. Nvidia would make that investment in in core. It's such a small meaningless dollar amount to the balance sheet of Nvidia

>> that the num amount of disclosure is irrelevant. It it's a it's a related party. Now, we only own 5% so that's not material to to Nvidia and the dollar amount to Nvidia's total balance sheet is also immaterial. So, it doesn't matter. But if this is happening over hundreds of transactions where it's making investments like this in its own customers, then what ends up happening if all of a sudden it runs out of the ability to get cash or the customers end up having problems selling services with the chips that it buys, then kind of things start to fall uh fall apart.

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>> Again, it is it is fantastic business savvy. You want if I'm trying to create a new paradigm which is AI then I in order to foster that paradigm I need to invest in it

>> as a as the key player in it. And what ends up happening if you see that my name as a key investor and and a leader in this industry is making an investment in this company. Well, then what does everybody else do? Warren Buffett tells you he's buying something. What does everybody do? They go buy it. Well, if Nvidia is buying something, what do all the private equity firms do looking around? Well, that's a good one.

>> There's another one. It's on Corenser Weave, like the AMD equivalent, which is private now. So I would imagine they would all

>> exactly

>> pile into that.

>> You got it.

>> Yeah. This Nortell report I want to come back to this for a sec. So you dropped this report and you happen to be correct. What responsibility you know remember the Superman quote with great power comes great responsibility.

>> I tell you Spider-Man.

>> Spider-Man. Spider-Man. Yeah.

>> I love that quote.

>> And I wonder about these things like when you're right it's great but what about when you're wrong? And that's one of the things uh you know we're celebrating our 25th anniversary this year and uh I developed 10 uh rules investing rules and they they relate to life as well but uh one of them is being negative sounds intelligent.

>> Being negative typically is looking at facts. It's looking at numbers. It's presenting them to you in a way that says, "Wow, that seems really compelling. If I want to sell you something that is you know that so that's the negative side. If I want to sell you the positive side well then I got to sell you the dream. AI is going to change the world. People are going to be no are no longer going to need to work. We're it's going to replace jobs. Margins are going to go higher. There's going to create you know it's it's going to improve health care services. All the the phenomenal things that could potentially happen. And so you'd see that and then you're willing to invest. It's you're buying a dream. But if I tell you, yeah, but a lot of this is based on all these intricate transactions where there's no disclosure about you go, ah, that doesn't matter, Anthony. Look, we're changing the world, buddy. I like to say none of these things matter until they matter. And then when they matter, they matter a lot. You know, with great power comes great responsibility. You're right. This should not be interpreted as I'm telling that something's going to blow up. I'm just saying that there are some linkages, things we've seen in past euphoric times. Things could continue for any number of periods. I I don't know. But we're getting to a point, as I said earlier, where there's very little cost to risk today.

>> What are the 10 investing rules?

>> Oh, now you're going to put me on the spot. I I don't I I don't remember all of them. Uh

>> why don't you give me some of them? The number one rule, and I borrow this from from Warren, and so if he ever, you know, he's not going to pay attention to listen to me, but I did reach out to him. His number one rule is don't lose money. And my concern with don't lose money is any investment requires the absorption of risk. And so if you're not willing to take some level of risk, which means potentially to lose money, you won't make money either. So you don't want to invest with a from a from a position of fear.

>> You want to invest I think so my number one rule is avoid embarrassing loss. You want to avoid the loss of a company potentially blowing up. If the company might you know if it looks like it's a little bit expensive and it might go potentially go down 5% or something or 10% or 20. Okay, you can deal with that. But if you're investing in a company where if something goes wrong, you could wake up one day and it's down 20 or 50%. That's the one you don't want to have in your portfolio because investors will never invest with you again. And you'll also be scarred because people make investments. This is why it's so difficult to be to be a long-term sound investor because emotions get in the way, which is one of my rules. emotion has no place in investing. Another rule is uh don't trust management. I'm sure there's many management teams and I run my you know we're a operating business uh private company and it's not that they you know you shouldn't trust anything they say but again it's it's a mindset. Uh everything you do is is about how you pos you you present your your mindset going in. And so if you go in with the mindset of don't trust, then you'll be curious. Then you're going to ask questions. It's not that you you think that they're bad people. I didn't say they're bad people. I said just don't trust. Verify and then trust. And then another rule would be that you have to read the notes to the financial statements first before you actually read the statements. The notes to the financial statements tell you how the company modified the accounting because it ch it made accounting choices. We decided to account for this these type of transactions in this way so that when you look at the financial statements once you know how they're prepared you can better interpret them. Accounting is a language. If I said to you tomorrow you're going to speak Spanish. Oh you know you could do AI and you figure it out and you're going to learn it. But the nuances of the language, an individual who did a PhD in that language, they're going to understand way more about the language than you are. The same like reading the financial statements. The more you understand of what went into them and how they're prepared, the better you're going to interpret them. What are the red flags you look for? I like the way you you posed the question because it sets up what I we've learned over time. The problem with red flags is it gets to your point that you started at before where you don't want to be crying wolf. And so I've learned to temper because you could be wrong.

>> Mhm.

>> It's not red flags. We call them flammable items.

>> Okay.

>> So this goes to the pro our process. It's a three-stage process that we use and we teach because one of our we have Veritasu and so we teach investors how to make better investment decisions. And so the the first stage is you understand the business and the control environment. Okay, again understand and understand the accounting that's being used so that when you study the financial statements, everything else, they all make sense and you understand sort of the the the structure, how is management compensated, what stage of their life cycle are they at? Because those are all sort of constraints and opportunities within the business. So then you look for a flammable item. For example, companies generating negative cash flow. That could be by itself a red flag in the normal way. This this type of I would call forensic analysis is taught unless you know. So if a company's generating negative cash, it may actually be a fantastic thing. They're investing in an AI startup that is going to be a huge opportunity. and they've shown over time that the return on invested capital is in excess of 20% or 50% or whatever it is. And so they're investing in something. Yes, it's negative cash flow today. But I'm not investing for the cash flow today. I'm investing for the cash flow tomorrow. So you see that as a red flag, you don't invest in it. And unless you understood the first part, which was the fact that where they are in their life cycle, type of business, etc., that is now not a red flag. It's just a flammable item by itself. Not a problem. It depends. And then you get to the third bucket, which is the spark. And so you're always looking for a spark because let's use that same negative cash flow. Well, if all of a sudden a new competitor comes into that company's operating space, okay, and is able to take market share,

>> now all of a sudden that negative cash flow is a problem. If you notice in the financial statements when you look at that negative cash flow, the company's taken on very expensive debt. Again, very expensive debt by itself doesn't mean anything because if the potential return on invested capital is higher than that cost of capital, it's all good. But if a new peer comes in play, now all of a sudden that model may not work. And now you have a blowup. In my podcast, the FactFinders, I I interviewed uh an individual who we've used before, private investigator, and he's the one that got me onto this this way of this mental model. And uh he says, you know, if the CEO uh beats his wife and runs stop signs, kicks his dog, doesn't get along with the neighbors, probably could be a problem. But that's not going to show up in the financial statements. That's not going to show up in any interviews. You got to kind of follow things that are going on. What is that organization stand for? How are they operating? What are their values? But not just what they write down. The culture and the values are not what you read on the financial statements and

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

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

Yeah. How did so many well-known, well-respected investors go wrong? People who are known for their due diligence, people who are known for their legwork. I know I sat with them, talked to them before the C, before it's a situation where someone is such a masterful spinner of a story and is...

Are you talking to the CEO?

The CEO and the management team sold. You had Mike Pearson.

Yeah.

And was executing, and you know, he comes, he came from a great pedigree. He was not taking a salary, and everything was tied to the stock price. You know, he, he was, you know, tirelessly working in the company, and he'd proven because what ends up happening is price creates narrative.

Mhm.

So all of a sudden, you don't believe it day one, but then you see that they made an acquisition. It didn't seem like it was going to work, but then it works, and the stock price goes higher, and then they do something else, and it kind of seems a little bit strange. And then they changed their accounting, and they changed the way they rec, they, they present their op, their, uh, non-GAAP metrics, which is things we noticed. Like, that's another huge flammable item. The company says, you know, they're reporting their, they use an adjusted EBITDA, and they calculate it in a certain way, and then the following year, they calculate it a different way. Well, that's a non-audited number. It's a, it's whatever management wants, and, you know, the market just believes it. And so that's something that Valiant was notorious about, but didn't matter because the stock price just kept going higher. And as the stock price keeps going higher, it's very difficult.

Okay. In, in the money management industry, when you're underperforming, it is so difficult to stay the course.

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

And you need to look at the market conditions at the time, because the people are running a business, but the business is operating in a certain economic environment. Well, you had brand new bond market activity. QE. No one ever heard of QE before the early 2000s or 2010s. The bank, the, the central banks were buying long-dated bonds to keep interest rates low. Well, now all of a sudden, what does that do to a company like Valiant that's making, that's growing through acquisition and needs capital? Well, they could borrow money at very low rates. And if that's the case, then their IRR, cost of capital, etc., the hurdle rate is very low. So, they look really great. All these transactions that may not have made, made any sense in other time periods when risk-free rates were not, you know, in the 1 or 2% range, all of a sudden they make sense.

If I had to go back in time, we should have said, "Buy Valiant at the beginning." Because we had studied Biovail. So, Bio, Valiant bought Biovail. Biovail was a Canadian company.

That was run by Eugene Melnik. And we wrote a sell report on, on that company in, in the early 2000s. And, and the company ended up being a figment of its former self. And, but it had something. It had some formulations for of drugs which were elongated in their, uh, release. So they, they would buy a drug and then repurpose the, the, the formulation. So they'll be slow release, etc. And then they, and they also had phenomenal tax structure where they were set up in Barbados. And Barbados is like heaven. So the more money you make as income, you pay a lower percentage tax. Imagine that. So what Valiant did was they bought that structure when they bought Biovail.

And so that allowed them to extract all the cost of tax. So many interesting things they did. They set up their head office in Quebec province in Canada, French-speaking. Well, the Caisse, which is the largest, one of the largest pension plans in Canada, right? Their mandate is not just to make money for its pensioners, okay? And there, this is the civil pension fund, one of, and I think second largest in Canada behind CPP. And one of their mandates is to invest in Quebec-based companies and foster growth. It's a phenomenon. I used to think it was a problem, but actually, I've changed my way. I think CPP should do the same. CPP should be encouraged to invest in Canada. The US pension plan should buy US companies. Encouraged to do that. Anyway, so in this case, you set up in Quebec, you know, you've got a set flow of capital that's going to come from this Quebec-based pension plan. And I remember meeting with the, with the leaders at the Caisse at the time, talking about this, and they're like, "We don't want to own it. We're, we, we agree with you, Anthony. We're worried about all this stuff." But these are the subtleties that you need. Like, every, again, when you see it's a flammable, you didn't even know that was a flammable item unless you know from the first page, "Oh, they're set up in Quebec." And you go, "Why did that happen?" Which is part of the mental model of being curious to say, "Nothing happens without a reason." If you notice something and you go, "Well, that seems really weird. No one else does that." And most people just say, "Well, it's okay. It doesn't matter." Well, actually, that's what matters.

Is complicated, just in general, like a red flag for you? I remember Buffett and Munger got entailed with something with the SEC in the early '70s. I think it was their structure was just it was, uh, legal. It was rational. It was not transparent, if I recall correctly. It was incredibly complicated, and they ended up simplifying it, but they weren't doing anything wrong.

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

The money management fees today are a fraction of what they were even a decade ago.

Right?

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

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

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

Yes.

And they said, you know, "We would call analysts after the earnings call, and we would, you know, legally, but we would definitely lead them, uh, to what numbers to expect for the next quarter, even if we weren't." And we would sometimes manipulate that if we wanted to. And I always thought that that was a bit nefarious, but I mean, this is how people work, and how the world works. So just being, you know, to, I think you asked the question, is being complicated a, a problem? Well, it's just, why is it happening? And you go back to, nothing happens without a reason. Then you point to some company operating in the British Virgin Islands that's listed on the list, and go, "What does this company do?"

Yeah.

And management starts sweating and say, "Why are you asking that?" "I don't know." You have your answer before you ask a question. Do you get to a point where things are like too complicated? People don't even know what's going on? Like, it, it always starts with like, this one thing makes sense, and but over, you know, 30, 40 years, you end up with this structure that nobody, even internally, probably understands.

You know, they, they interviewed, um, Fast, Andrew Fastow, who is the CFO of, of Enron, and he's done many an interview on this. Also, I, because when we do our training, we have a few of these interviews that we, that we quote. And it's, companies don't start out as being crooked. They have to convince someone to buy a product, okay, or a service. So money comes into the company in some fashion or time, and then gets converted into something that adds value. The problem becomes, outside stakeholders come in and say, "Well, I need you to make X because you want my money." Well, "I'll give you my money so long as you give me this return." Well, that works until there's a problem. And now there's no CEO that wants to disappoint. So, it's very simple. The CFO comes to talk to me. I'm the CEO. And he says, "Look, I know, uh, Anthony, we were going to make a dollar, but we're coming in at 95." And I say to him, "You get back to your room and find me 5 cents."

Yeah.

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

And it starts slowly.

It always starts slowly. And look, there...

That was what Andy said in, in the, I think, correct those interviews. It's like, you know, it started with a little bit, and I figured, "Next quarter, I could bring it back."

And it's just, you know, that's the thing. Life is a dangerous thing this way. Whether we push something, even in life, right? You know, "Well, look, if I smoke a bit, or drink a bit, or tell this little lie, you know, no one notices, and I'm, I'm okay." Well, then maybe I do a little bit more of each one of those things, and no one notices, and then it's all good, right? But then, switching gears a little bit, do companies that report free cash flow on their press releases or in their financial statements tend to outperform?

I don't have that data.

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

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

What do you think of EBITDA?

EBITDA is the mother of all disastrous measures.

Why?

Because of what investors want to believe that it is, and that it's something that is cash flow, that it's something that can be compared to total debt, and it is not. It is purely an operating performance metric calculated before interest, tax, depreciation, and amortization. That's it. Now, what runs into a problem is, well, what do I do with stock options? What do I do with joint venture gains? What do I do with gains on investments that I made that I happen to sell this year? What do I do with the charges that I took on that acquisition that I bought this year that I included in my EBITDA, the profits, but at the cost that's associated with that operate, that transaction, should I include that in EBITDA?

Aren't those one-time costs?

If making acquisitions is part of my business model...

I no longer one-time costs. This gets us back to, we have a course called "The Secrets of Free Cash Flow," and that's been our most watched, uh, and taught course, and that's because it started, we said it earlier, we said free cash flow is operating cash flow less capex, but it's not. It depends. Every, every answer that someone asks you, "What is, what should it be?" Well, it depends.

Depends on the company.

You got it. How should I calculate it? Well, it depends. What decision do you need to make? You always start with the facts before you think about a transaction and how you're going to account for it. It's all about the facts, the constraints, and the objectives, right? The facts determine what did I sell, what did I buy, from who, at what cost, under what terms, etc. So, those are the facts, broadly. Then I have the constraints. Well, I'm a private company. Who uses the statements? Well, just me and my partners. Who cares where I put it? It's less, less important. But if there's an outside onlooker on this, well, now it matters because they're looking at it. I now have outside investors. I have debt. I have a debt covenant. All of those things. I'm public now. I have the SEC. Those are all constraints. I operate in the US. I got FASB, PCAOB. I operate in Canada. I have IFRS. I have CPAB. And the last is the objectives. I want to sell my business this year. And my business sells on EBITDA. Buddy, I'll tell you how I'm going to account for it. My business investors want free cash flow. I'll tell you how we're going to account for it. It's those three points. When I teach accounting, I teach those three things.

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

Shane, you're good.

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

Correct. Very good.

So that's an expansion.

I think that, uh, stock options, what they do, every, it comes down to human motivation. So if I am going to compensate you on the stock price, then you're going to make decisions that move the stock price. In my early classes, when I teach, um, I, I always say that economy and economics reality is way over here, as far as I can see with my hand, and the accounting is way over there, as far as I can go with my hand. Because if, for example, you know, I'm going to take a very simple manufacturing company, because everybody understands that we make pens. We drive pens. We're making 1,000 pens an hour. And I sell the pen. You sell, you know, today we made, you know, over eight hours, made 8,000 pens. One of my salespeople sells 1,000 pens. Well, how do I calculate the cost of that 1,000 pens? Do I just take the 8,000 pens that I do, divide, take 1,000 over 8,000, that's the total cost, and then that's what I allocate? Right? The reality is I sold them 1,000 pens, and it was the last 1,000. Do I stop the press, figure out the cost of that last 1,000? Do I average it? Do I, even though I sold them the last ones, do I calculate the cost of the first 1,000, which may be a little bit higher because there were some setup costs to change my machine to make the 1,000?

M. All of those three options I gave you, a business reality for what the accounting is: FIFO, LIFO, or average cost. So the reality is I sold them the last 1,000. The accountant said, "Well, we want to show high margin, so we're going to use average." And that's all good. That ties that point. But I want to get to your question because I, I don't think I, I got on a sidetrack, and I want to answer your question about stock options. So I think stock options should be an expense. And if they're not an expense, I, I borrow from Buffett, and even the chair of accounting has said things like this, that if it's not an expense, then what is it? You can choose to pay someone in stock options, or you can choose to pay them in cash. So if I pay all my employees, you pay, you have the same company, you're, we're a competitor. You pay all your employees with stock options. I pay them in cash. I have a lower EBITDA. I have a lower EPS. Your stock trades higher than mine. Stock price goes down. All of a sudden, all your employees leave and they want to come work for me. And all my guys are pretty happy. They don't care. So you should include it as an expense.

Taking this one step further to, and why I brought up reality and accounting is that as an employee at any level, even the CEO and CFO, sure, the things they say, the things they do will affect market's perception of the company, perhaps in the near term, perhaps in the medium term, but in the, in the longer term, in the fullness of time, the results will prove what's going to happen. But the management, and, and the guy on the shop floor, even the sales manager, may have no impact on what actually happens in the stock price. Yesterday, Powell cuts rates. So that moves the company's price. All of a sudden, as an employee, I'm better off or worse off. But I had no effect on that. I had no, nothing to do with that. A new peer enters the, enters our business, uh, in our, as a new competitor. I have no effect on that. All of a sudden, GDP slows down. My business isn't even affected because the GDP is tied more to consumption problems. My business is a B2B business that's totally outside of being affected by current GDP movements, and my stock price falls. I had no control over that. So I think it, it incentivizes what I think the wrong thing is, and makes people make potential decisions which can manipulate the stock price, which may or may not be good for the company.

So do you adjust, I guess, for options? You just consider them an expense.

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

Oh.

On their stock.

On their stock. Not my company or my stock. And I'll pay you in cash, and I'll give you a cash bonus.

And so this is how he recruited all the best people.

Wow.

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

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

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

What do you think of other incentives and inside companies?

Such as?

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

I'm going to look for. Okay, so for to answer your question is about what, what incentives do I think are, are make sense? Well, you look at what the key measures of success are for the company, and do those align with investors' interests? So investors are con, are care about the company longevity, its ability to generate cash, its ability to grow and sustain itself. And if the company's incentives aren't linked to that, so if they're not tied to, you know, cost control, if they're not tied to, uh, driving revenues from an organic standpoint, not just from acquisitions, um, if they're not, you know, if they're, if they're tied, if they're driven by acquisition, but with no care to what's going on on the balance sheet, um, that's a problem. I would say, you know, it's, it's not easy to say that there's, I hate, I'm sorry, but one, here's the one thing, and it's going to work. But I think it's, it's one where is it consistent? Did it change?

Did a company say, you know, "We're going to pay management on X performance metric." If they hit it, they get 100%. If they don't, they get some graduated scale. Well, then management doesn't hit it, and they change the, the metric, and management still gets a bonus. I think that's a problem.

Oh, totally. Yeah.

Because now what that does is it says that's, that everything's okay.

And, you know, it's hard again. Now, I'm a board. See, the more you learn, and the more experience you have, you understand more about what you don't know, and that there's a lot of things to learn. Well, the board is making these decisions, and everybody say, "Oh, the board's bad." And boards are bad. Think, well, no, the board wants to retain the CEO, and often times, you know, that could be a very significant personality, and that personality may, you know, there's other companies that want that individual to work there, so they have to retain them. And often times, money is, is retaining. That's something that becomes a problem.

What is the role of the board?

The role of the board is to embrace the position, uh, and, and the, and the viewpoint of the shareholder and/or the stakeholder. Uh, we always, always focus on the shareholder, but stakeholder, stakeholders, employees, uh, customers, the communities the company works in, the competitors, and embrace each of those and ensure that the company is making decisions, or that the executive is making decisions in the best interests of those stakeholders. Oftentimes, they just focus on, you know, shareholder value.

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

How do you think most board members get selected?

Oftentimes, uh, by relationships.

Going back to humans run companies.

That's correct.

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

And, you know, look, we, we have a, a board. We also have a, a found, a board in our foundation. And I want to bring on people that are going to make us better.

That might mean that some conversations are not always, "Yes, Anthony. Yes, Anthony." I, I like, I, I actually don't want that. I, I want, even in my, my own partners and my own employees, I, I welcome, please come in. The door's open. Tell me what I'm doing wrong. We're not going to get better. I'm not going to get better if someone doesn't tell me I'm, I'm, I'm doing something wrong.

That is an uncommon view.

But it's the only way to progress, I believe. I'm not saying that we're going to decide what you said, but I want to hear it. If you don't, and then, and the danger, they say, "Well, if you listen to it and then don't do anything about it, then it's like you disregarded it." I said, "No, you listen to it, and you go back to the person, thanks for the input. Here's what we've decided to do as a result of what you've said."

Yeah.

And then they feel like they were part of it.

What do you think of the rise of indexing?

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

Again, you know, the price creates a narrative. And so if indexing works, then why not do it? The danger I think we're having of the index investing, passive investing, is that in essence, all that is is momentum investing because it's a, you're buying an index which is market cap weighted. So the money that you're investing is going to the largest market cap companies. Those companies continue to grow. They drag the index higher. You know, there's really two indexes. There's the MAG 7 and the sloppy 493. And so if you look at the earnings expectations of the sloppy 493 for this year, there's virtually no growth. But if you look at the growth of the MAG 7, it continues to go higher. And so I think that the, the danger is that if that reverses, I'm not saying it's going to reverse, but if that slows, then all of a sudden what's been dragging the index higher will drag the index lower in the same veracity.

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

Right.

All of a sudden the stock falls. Like...

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

You know, the thing about those drawdowns, because each of the drawdowns, that drawdown occurred because Trump put together a tablet. He came down from Mount Olympus, brought down a tablet. Right. I have a picture of it that I use in my presentations and showed how much the, the tariff he was going to charge on all these countries, and that created immediate fear in the market, right? Costs of companies were going to go up, transactions were going to go down, revenues get hurt, margins get hurt, stock prices get hammered. But what the, the second, third level thinking on that is, well, wait a minute, these haven't been enacted. There's still time. Maybe they don't happen. And if they don't happen, well, maybe all this drawdown doesn't mean anything.

Yeah.

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

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

Right.

Kept going for years.

And the other ones have been relatively fast. Even in the financial crisis, that one actually, the peak was in '07.

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

And earnings growth slowing down.

That would be something that would take longer to repair, especially when a lot of the earnings are interconnected, as I talked about, because the companies are dealing with each other.

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

Yes. Yes.

Reorienting.

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

Let's talk about stock buybacks.

Share count doesn't necessarily go down, but buybacks are happening.

It's the same as stock options in a sense, and the disparity between reality, economic reality, and what's going on in the accounting. So when you buy back stock, the company is making an investment in a security.

Mhm.

Which it partially has control over what it does, but it doesn't have full control over what happens to that investment value. Whereas if it takes its cash and buys an, an operating asset that expands its current production, and if it's already generating a meaningful return, then that return should continue.

And expand. So to me, it's a, it's a point that says, "I have no other investments in my business that would generate a return higher than my cost of capital." And so I'm going out and buying my stock. And I think that is very risky.

How should investors look at that or account for that?

I'm not so concerned about the accounting. Stock buyback.

So if you're saying they should investment though...

I understand. So I, I think what they should do is they should look at earnings on a pre. So look at the earnings that the company's generating. Before you divide it by the number of shares.

Okay.

To see, is that number growing?

Okay.

Relative to the revenues.

Right.

Because now you're seeing, uh, is it, or is it just coming from a reduction of stock number of shares outstanding? And if the company's taking on debt, here's the classic example. Company generates, uh, the company borrows money to buy back stock. Why? Because because it's such an, a highly perceived value company and generates cash, it can borrow money and at a very low price and invest it in, in its own stock, which has historically generated a greater return than how much it has to pay in debt. Well, this works until it doesn't. Because if for some reason the business changes or just slows its growth, which could be just a natural evolution, like part of this is the law of large numbers. Okay? And if this happens, then all of a sudden that debt doesn't go away. And what looked like a very low cost is now a meaningful cost that doesn't leave. And I look at Apple, and this is what concerns me. Revenues aren't growing, minimal. And yet it generates meaningful cash because it has a brand. People are still willing to pay $2,000 for a new phone. There's a lot of competitors, and I'm not sure that that will continue forever at the same rate. In fact, it's already slowing. And that debt that they've taken on to buy all back all those shares to generate that EPS growth, that could end up being a problem if they instead took that money and went out and bought businesses, operating businesses within its network that would ensure its sustainability. And it's been doing some of that, but continually do that. Imagine if it, if it just kept the cash, and all of a sudden a business that it always wanted to buy suffered a bad quarter, and it bought it. It's very difficult when you have a lot of cash. Cash is king. Cash is power.

You know, we've been talking, and again, it goes to one of my rules about being negative sounds smart. When, if the market falls, uh, or or suffers some kind of setback, you shouldn't be concerned. You shouldn't be, you shouldn't be scared. In fact, I, I did a trip to China, uh, life-changing practically, earlier this year. I'd never been before. And, um, when I went to China, I, if you go, and in the, and I, um, met with analysts there and taught them our, our training process. And if you, when they, when they look at their screen, stocks that are down are green, stocks that are up are red. That's how you should rejig screen. In fact, I called FactSet and Bloomberg and see if we can change that. Because if you look, wake up every day, and everything's red, and you like, we lived this in '08, right? It went lower, and you thought, "Okay, I'll buy some now." And then it went lower, two early 2000s, and then it went lower until you don't know what that feels like until you go through it. But imagine if every day it was green. You go, "Oh, this is interesting." And if every day it was going up, it was red, you'd go, "Hm, I'm not sure. Is this okay? Is everything okay?" It might be, but it's just, everything's a mindset, right? They talk about, you know, the, uh, habits, right? Developing habits. And that, and of course, that famous book. I, I, I love that. And, you know, you, you want to do small things, right? Develop, put your shoes over there so you remember to put them on there, and then put beside the shoes something that you need to shine the shoes right there. That way you shine them before you leave. Why do you think so few people, like everybody talks like Buffett, and then a situation like 2008 comes along, and people were paralyzed.

He had cash, but he wasn't paralyzed. Why could he act, and other people? To me, it's, it's, uh, it's, it goes back to something we've already touched on, and that is the natural agency issues related with the money management industry. My investors give me their money so I can make a return that is hopefully better than they could make investing passively. If it doesn't end up being that, they decide to take it away from me.

And then I don't have any money. Buffett has built a business that generates cash. So he has operating businesses, Geico, Plum Creek, etc. These generate cash. He takes that cash and invests it when he wants to invest it, in the way that he wants to invest it. You know, the average portfolio manager can't do that because they're tied to, they have to, like today, in the investment management industry, portfolio managers are measured like on a daily basis. There, if you're investing in my funds, you can look right now and see how we're doing versus the index, every second.

Yeah.

Why are you down today? My, you know, my partner that started the business with me says, "I don't know because there was more sellers than buyers today." Yeah.

I don't know any number. And, and someone that tells you they can phys, know exactly why, unless there was some announcement. And even when there was an announcement, it was the interpretation of the announcement that led to the stock price falling, not the announcement itself.

One of the things that we've sort of hit on here without naming it is how important structure is to investing. Part of the reason that Berkshire was able to do that, and Buffett was able to act, is that, or Buffett's able to do what he's doing today is he controls so much of the shares. So he's got the structure to enable the strategy to play out. Whereas if you think about it, you know, there's many times during Berkshire's, uh, long career where an investor, an activist investor would have come in, demanded they return capital, demanded they take on debt to buy back shares, and the structure that's enabled so much success has also prevented that. I, I think about structure a lot in terms of not only being positioned, so having cash and, you know, being the master of your own fate, or what did Buffett say? "I never want to rely on the kindness of strangers."

Yes.

Especially when I need them.

Yes.

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

Y.

And then you think about structure, and how that aligns with the companies and what you're trying to do. And, you know, like, it's similar to how I invest. I don't have a fund. I don't have outside investors. Why? Cuz I don't like that structure. I don't want to answer to other people. I don't want to. And if I want to save up money for three years and do nothing, then I can do that. And if I want to chuck 80% of it into one investment, I can do that.

Yes.

So the structure enables my style of how I proceed with investing. And I think that those are very underrated when we think of public companies because you have a time, a structure mismatch. Said that's the first thing you look at is the structure and the control environment.

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

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

Yeah.

Uh, and I, I sort of like, maybe the analogy is bad, but I think about this in the context of sports, right? Like, if I'm a head coach, I'm going into an 0 and 17 team in the NFL. I'm going to take risks and I'm going to do things that may or may not work out. Uh, but it's not going to be status quo. And I could leave the situation worse than I found it. Uh, but what I'm not going to do is just try to make it incrementally better.

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

And if they lose, they're done.

Yeah.

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

Yeah. And, and so whereas in hockey, you got seven games.

Like, "Okay guys, you know, second period, we're down five. Okay, it's game two. We're good. Okay, like, we got this. Settle down. Let's get ready. We play in a couple of days."

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

Yep.

Uh, they will leverage the future. Y.

Put themselves in a bad position salary cap-wise in five years.

Yep.

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

Y.

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

100%.

You know, forward. We talked about the impact of passive investing. I would say that passive investing has always been there. Okay. Mhm.

What I think the more meaningful, important impact on investing today is the power of the retail. I watched that movie called "Stupid Money," was it called?

Uh, with Hello Kitty and...

Oh, yeah. Yeah. That was great.

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

Yeah.

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

Yeah.

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

Yeah.

At very low cost. So when I started in the industry in 1999, okay, and this, think of Buffett, he'll tell you the story of he used to read the financial statements, and he used to get the chart, the old charts, and look at them, and no one was doing that.

Yeah.

They weren't paying attention. Even, even investor in, institutional investors, and the retail investor was hardly paying attention. We were just learning on dial-up.

Oh, I agree. And you could trade, but you'd have to call in your trade, right, and wait in line for someone, or, and then it started online, but it was really slow, and you didn't get good information, and you didn't get great fills. Now you have Interactive Brokers, that platform that you get is unbelievable. And all the other, all the other comparatives that are coming up, that's empowering that retail investor. So this is creating a significant short-term focus. There are day options, okay, traded all the time. Someone told me that in Tesla, there's more transactions on options than there are in dollar value on the actual stock in...

Oh, interesting. The option market is, we could do a whole discussion on all the subtleties of the stock market that people don't know. When an option is sold, someone has to sell it to them. Well, that's typically the broker, the market maker sells that option. They try to sell it off to somebody else, but if they can't get the other side, well, then then they're stuck holding it. Now, most options expire worthless, until they don't. If something actually happens, and the price rises on the stock, and you've bought calls, now the broker needs to sell, like, needs to act to make that money to pay you for that option. And typically, they're going to start acting on the stock itself to hedge themselves.

They'll buy the stock because if your calls are going up, and the stock, because the stock's going up, well, I want to buy the stock so that I'm hedged. As the calls go up, I'm also hedged with the stock price moving. Well, that just creates more momentum for the stock price to go higher. And so that is that, I think, is also causing big swings. Like, you know, we're looking at on a daily basis during earnings season, stocks move like it used to be 1 or 2%. Now we're looking at 20% moves in a day. Oracle moved 20%. That was like on, I don't recall the exact number, but that move, those were valuations of entire companies.

It was almost 40%.

So you think about that, and yet we're in a period of AI.

Yeah.

We're in a period where there are drones now for Oracle's business. Drones might not help. But think about Lululemon, drones looking at what's being sold, what's being, where traffic is. You have access, and you can buy access to credit card data. You can get, you can talk to suppliers. There's all these expert networks that you can talk to, like individuals working in the industry, or used to work in the industry. They'll give you all this inside, but not inside type information. And so yet all of that is happening, and Oracle's stock price moves 40% on news, and we have access to better, and supposedly better information than we've ever had. How does that make any sense? If we had better information, then, you know what? Stock prices on news would hardly move. Everybody would already have known.

It'd be fully priced in.

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

It's just a tool. We're still human. It's a tool. It doesn't have judgment.

It doesn't have the ability to, you know, make decisions on past links that, unless it, unless that link that it drew, but you don't even know what link it drew. Well, as of today, I guess the, the potential is that it, it supersedes individual and collective intelligence. And so it gets to a point where it's able to do that. I guess that's the maybe...

Yeah, we'll see.

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

Success is achieving something that, uh, I can share with those that I love and care about, my family, and my friends, and my, and my employees, and, and, and my customers. I, I think that's the success, whether it's in sport. It's achieving something that I can share. Um, because if I can't share it, you know, I, I, I learned a quote long ago that, uh, happiness can only be shared.

From, uh, my late pastor, priest, uh, Paul Kuzzac. We'll give him a shout out. He was awesome. And so if you can achieve something and share it, uh, then it, then it's real success. And I think, uh, winning has to be something that, that is everything. It has to, it has to, you have to be focused on on achieving something, then nothing else can get in the way. Big shout out to that book, "Winning." Uh, I'm sure you looked at that book from, uh, Tim, Tim Grover. Uh, that, that's that such a pivotal study. This is a great way to end this conversation. Thank you so much, Anthony, for taking the time today.

It's my pleasure, Shane.