Chit Chat Stocks - Francine McKenna | Accounting Matters

Episode Date: January 19, 2021

Welcomed onto the show this week is Francine McKenna, an independent journalist, and CPA. Francine, Brett, and Ryan discuss how and why accounting can actually influence your company analysis. Listen closely and Francine will share some secrets that every investor should know and that she uses to analyze different companies. Below the links, you can find the timestamps for this week's episode. As always enjoy the show! Get 20% Francine's Substack by Messaging Her: https://twitter.com/retheauditors?s=20 Subscribe to 7 Investing with the code "CCM": https://7investing.com/subscribe/ Subscribe on YouTube: https://www.youtube.com/c/ChitChatMoney Follow Chit Chat Money on Twitter: https://twitter.com/chitchatmoney Visit our website to see more from your hosts Ryan and Brett: https://www.chitchatmoney.com Timestamps Stories | (2:58) Fintwit | (15:39) Interview | (22:23) Hot Water | (1:30:52) Buy-Sell-Hold | (1:39:54) Anecdotal Evidence | (1:42:14) Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. Today is Tuesday, January 19th. Today we have an interview with Francine McKenna, a forensic accountant, investigative journalist. She has her own sub stack. She's really good at digging through SEC filings and finding red flags in businesses and not letting them, I don't know, breeze past the retail investors. Yeah, she's really good at investigating the disclosures, risk factors, things like that. So I learned a lot. I think anyone else would too. Yeah, definitely. But before we get to that, we have our 7investing sponsorship, promo, whatever you want to call it. Partnership.

It's called TCM, yeah. And we always, what we're going to do, the seven different... Advisors, yeah, they're lead advisors, yeah. And today we can do Austin, Austin Lieberman, one of the four people that started off the 7investing team. I mean, I don't know if he stays. I guess he kind of leans into the software and high-tech stuff, but it's not like he's one of those guys that's strict with that. But I think what he does have his philosophy is taking high-risk, high-reward bets, but he sizes them appropriately. I think when he was on our show doing the 25 Stocks of Christmas,

he may have discussed when last winter he made four different bets in highly— I wouldn't describe them as highly speculative names, but more risky names, smaller companies. But he only had them at 1% of his portfolio. But, you know, some of them didn't do too well, but one of them did quite well. So it's kind of like the slugging percentage over batting average. That seems like his, that's his investment style. And if it's up your alley too, I mean, he has a lot of good picks around that type of style. Yeah, he has a very good gut feeling for the market, which is kind of hard to, you know,

I guess you can't really put any numbers on that. but a lot of his picks have done really, really well, and it's not just him broadcasting the big winners. Yep, track record speaks for itself. Yeah, but now our stories for the week. What is your story? Yeah, hopefully this title's good for you this week. The Samsung Executive Imprisoned.

We'll get into the details of that later, but yeah, shorter story than yours, but I think, yeah, interesting enough. Mine is long. It's The Scariest Investor Alive, and it's about Paul Singer, Elliott Management. It's a story from a long time ago, but really fascinating. So I hope the listeners enjoy it.

And then as always, we have hot water, current state of FinTwit, buy, sell, hold, and anecdotal evidence. Let's go. Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investment. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are not financial advisors.

Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guest is not formal advice or a recommendation. Now please enjoy this episode. Welcome in. I'm going to kick things off with the scariest investor alive. So it's a bit of a long story and this came out a while ago, but I don't think we've ever talked about it in any depth on here. So I thought it'd be fun. Yeah. What inspired you to do this? You're just reading up on it? Yeah, I just thought about it yesterday and I was like, the difference between individual investors and people like this is like, it's totally different worlds. Yeah. I guess we were talking about financing Japanese war bonds in the early 20th century,

a very exciting topic, but that was kind of similar, right? Yeah. So if you're looking for the full story, the New Yorker has it on him. Just look up New Yorker Paul Singer or something like that. But most people are familiar with who Paul Singer is. he is the founder and general partner of Elliott Management, which is one of the largest hedge funds in the world. But Singer's background, he was born and raised in the Bronx, which always, that's just a cool background. Yeah, exactly. He might, like the Bronx, I don't know, I've never been there, but it sounds like he really

had a tough upbringing. Bronx, Brooklyn, or Staten Island, that's where, I don't know, it always puts my, like the grit factor seems higher. Yeah, definitely. But he got a degree in psychology at the University of Rochester and then finished with Harvard Law School. I think he finished that in three years. And he lost – apparently he lost most of their family's money when he started as a trader with his dad. So he then – that's apparently what gave him such good risk management. And then he had a brief stint in corporate law but eventually came back and started Elliott Management in

1977 with $1.3 million in AUM. It's not a ton of money but I would say that's pretty small for hedge fund. I don't know what it is in today's dollars. But yeah, that's a small amount especially to kick things off with. But he's since become the face of basically conflict investing or he's not afraid of litigation. Like it's not where you just buy something, sit on the sidelines and wait. He is proactively making sure that his bets pan out. And so he really made a living in the distressed debt world with both companies and foreign governments. So LA management would find developing countries that borrowed way too much money and when economic disaster struck, they would spend time in court making sure they got their money.

And he was – like it's one of the only investors I know that was almost hoping he'd get in court like legal battles because that's really where he generated a lot of returns because he was basically just ensuring that his bonds were senior to other bondholders and he would get paid first. Yeah, it's a smart strategy, especially because not a lot of people can do it. And he has the expertise, and I'm sure he's hired plenty of people that have the law expertise for whatever country they're dealing with. And they can kind of go into the room with a knowledge advantage there. Yeah, and at first he did this with Peru, and he had a lot of success, which set them up for an even bigger bet.

Apparently it was worth approximately $600 million in Argentine bonds. Is it Argentinian? Argentine? Either way, it was Argentine bonds. And a year later, Argentina defaulted. Apparently, they were in an economic depression. Seven in ten kids lived in poverty, and there was exceptionally high unemployment. Sounds like the perfect scene for Elliott Management to come in and swoop some returns. And the reason they're investing in these is because they're typically really high yields, correct?

Yes. And five presidents came and went within months in Argentina at the time. And finally, it gave rise to a couple who pledged to get rid of foreign capitalists. So that was like the thing they were running on, like we're not going to be taken advantage of by all these other governments just because – just for their own money and their own returns. And Argentina said the only hope bondholders had of getting repaid was to accept their terms. Singer did not accept those terms. Elliott Management sued Argentina in federal court in New York. And apparently this litigation took a really long time, more than a decade.

And Singer did all he could to seize Argentina's assets as collateral. This is where it gets kind of interesting, including in 2012 when Singer got a warrant to seize an Argentinian naval ship in Ghana. So he was – like not all – a lot of governments don't want to give warrants to go seize stuff as collateral because it can be sort of like a war crime. Yeah, or almost an act of – it's an aggressive act. Yeah, and – but Ghana granted one. And so Argentina rushed to get a lawyer in Ghana, like the best lawyer they could to fight it. But Elliott Management had already hired the best one. So they were prepared.

And the two went back and forth in court for a while. And at one point, a Ghanaian policeman came with a hydraulic crane and said he was going to board the ship. And basically he's saying you have to get out. And Argentina's soldiers drew their weapons. So they're literally pointing guns at this guy like, we're not getting off the ship. I don't care what your warrant says. And the ship finally sailed away after I think two years of litigation. And litigation continued.

Eventually, new Argentinian leadership was put in place and negotiations resumed. Apparently, they had stalled out. And remember, Elliott Management is a big company. So it's not just Singer. Singer subordinates at the time were doing most of the litigation. And apparently at one time he was just finally tired of it and he's like, all right, I'm coming in. And here's a quote from the article. It says, Pollock told me, it quickly became clear to me that Singer had completely supplanted his subordinates and he was going to take over the negotiations.

Before the meeting, Singer's personal security detail arrived at Pollock's office to conduct a sweep, checking the exits and making sure that the premises were secure. That just sounds like he's coming. A bit paranoid maybe. Yeah, yeah. Yeah, he's – I mean he definitely has that aura or narrative of being a killer. I don't know. Not something you want to go into a legal battle with. That's for sure.

Yeah, and finally the negotiations I believe ended in 2016. I think they started in 2003. So we're talking about 13 years of like litigation and negotiations. And by the end, Elliott Management recorded a 1,270% return on its initial investment. 14X, not bad. Does this style of investing interest you? No, not at all. Not at all.

No way, no way. I mean, it seems like someone like Paul Singer or Elliott in general, Icon's Starboard and then Ackman's Pershing Square, I mean, they're getting into the news a lot if that's your thing. You know, if you really want to, this is the type of investing that can get you into the news and give you a lot of notoriety, and it definitely works. They all have great track records, but it feels a bit stressful.

I don't know. Not really up my alley. What do you think? this uh everyone talks about like esg and conscious capitalism this is like as far the opposite as you can go find countries where kids are living in poverty and the governments are sort of corrupt or they're not you know it's not working for the people uh and try to capitalize on it maybe you can uh i don't know that and then you can put it that way i don't know i'm not sure if that was their motive it might have just been some yeah i mean i don't think that's their motive

is we're gonna find impoverished countries but they're just finding opportunities where there's high yield debt yeah which just so happened to be countries that were on the brink yeah i could look i don't want to defend them here because obviously they're pretty ruthless but it might just be correlation you know what i mean yeah they're not causing this and uh keep in mind These are the activist investors that just took Boyd's seat on Twitter. Oh, yeah. So if Dorsey thinks he's just going to walk out of it. I would love to be a fly on the wall in the meetings with Dorsey just sitting there like,

you know, I was on my French Polynesian trip meditating for a few hours. I did some stretching. And then I thought, you know, we really shouldn't have Trump on here. And they're just like, you know what? Why are you spending $900 million in R&D? yeah like or whatever like i don't know and it's funny like i was reading up on this jesse cone guy and it's like paul singer's weapon like he's like all right go ahead jesse give him the call and like they're just like calling ceos yeah we have taken a five percent stake just wanted you to know

that we'll be looking to make some changes yeah it's like that scene in them it's it feels like a movie scene when they talk about how he makes the call and the ceo's hand is shaking they know that they're going to lose all their job and the salary and the millions in stock bonuses that they're probably giving out to themselves. But, yeah, good story. I don't know. Yeah, what's your news story? Okay, another international kind of deal, geopolitical.

Samsung executive in prison. So a Seoul high court today sentenced Lee Jae-yong to 2.5 years in prison. Lee was the ex-CEO, or maybe he's still the CEO of Samsung. Either way, he used to be an executive. The sentence comes for bribing the ex-president, Park, who was impeached in 2016 on corruption charges. And, you know, this is very important for the South Korean and global economy because Samsung is by far the largest company in South Korea

and accounts for one-fifth of global exports. I mean, if you're in America or probably even Europe, you understand that because you've got the second best-selling phone, you know, probably by revenue just because there's a lot cheaper ones that sell for more volume. And then they got the TVs, refrigerators, all the electronics division. And Lee has also been accused of securities fraud and stock price manipulation, which, I mean, we'll see. That's a separate charge, but it looks like there's a lot of, you know, I don't know, corruption going on here. It doesn't seem like he has a very clean record.

No, no, not at all. And also his father, who is the ex-chairman of Samsung, was also convicted of bribery charges twice. And no one knows if he's actually alive, which is kind of a long story. I think I mentioned it in one of our hot waters before, but he had a heart attack or something like that in 2014, and they put him at the top of this hospital. Samsung might own this hospital, and they're like in the penthouse of something, and it's a rumor that he's up there, and he never leaves, the old chairman.

But no one knows if he's actually alive. It's kind of like an Al Davis thing with the Raiders. You know what I mean? No one actually thought he could be dead, but I don't want to speculate. I've got a few questions. Does a story like this where the government actually takes action against bribery, securities fraud, stuff like that, what does that make you think about investing in South Korea? I mean, yeah, any time that the government is doing something.

It shows they might have their eye on the ball, you know? Yeah. I don't know. I mean, frauds have been found out in China, and I don't know if it's been directly by the government. Well, there might be some government helping of the frauds in that country. It's more of the American short sellers and other countries. Yeah, I mean, until, I guess, if there's a good auditor on their statements and stuff, and it's not self-audited.

But remember when we talked with Francine in the interview, I mean, sometimes the auditor, you know, like, even if it's good, you don't even know if it's a foreign country. So, I don't know. I think it's a good – I like it because it makes me give more confidence that South Korea is actually, as a country, is trying to be, I don't know, fair markets. You know what I mean? It's hard to describe. Yeah, yeah.

I'd agree with that. And how do you think something like this would go down in the United States? Because I feel like they would get a small fine, probably get like 1% of their net income in a fine, and then everything would go back to normal. CEO would get $100 million in stock options. I don't know. Maybe I'm being pessimistic, but... I mean, we haven't... Where's Trevor Milton right now?

Is he in? Or is Adam... Well, they didn't... How is that not securities manipulation? Yeah, no, that definitely... It is, but it'll take a few years in court. I mean, yeah. The purest one was Adam Neumann, because he didn't do anything wrong. He was just so good at telling the story.

And then... Alright, last question. Do you think the chairman I mean, you haven't researched this. Do you think the chairman of Samsung is dead or alive? If you had to bet. I don't know. I wouldn't want to sit in some penthouse for 20 years. I think he may be dead.

I think it might be a conspiracy theory. We'll see. We'll see. But we won't ever. Yeah, he'll be alive in 2050. Don't worry. All right. Well, that's my story.

A little shorter, but good update for anyone. All right. Current state of FinTwit. I only have one thing. It's kind of interesting. um but do you want to go first you want me yeah you can go first okay so i saw this on twitter and i wanted to see what you thought it was a post i don't know where it's from but i'm going to read it um the guy's a mailman that posted this and he said i'm a mailman slash investor

i saw the rise of etsy on the street the name on a growing number of packages coming and going i talked to people did my homework and i'm up about 10x over the last few years i've also bought stamps.com stitch fix and amazon based on what i see on the street i bought netflix and o2 based on red envelopes but didn't hold long enough i've never been more excited for an ipo than i am for poshmark poshmark how do you say it they turned profitable profitable because their base is growing their ambassadors big sellers were given the option of buying shares ahead of the public users love to talk to me about this stuff to say they are head and shoulders above the competition is an understatement.

I see this as a good, safe place to park some money and make 8 to 10x over the next few years. Guess we'll see. How much of an edge do you think mailmen have? That's the kind of analysts big funds need to be hiring. Yeah, they're hedge funds or whatever. The big billion-dollar funds are spending a lot of money to get in that credit card data.

They're even doing the satellite surveillance of parking lots and factories and stuff like that. And then this guy. All they need is the Newman. All they need is Newman, yeah. All right. New one would be up for that. I just thought that was interesting.

No, it was good. It was good. Does it make you a little bullish on Poshmark, Poshmark, how it would be set? Yeah. I think it went out an absurd valuation, but I liked a lot of their unit economics. Is it out? I believe so. I believe it went out.

We talked about it last week, or that was my story last week, and this was a pretty easy prediction, but I said it's probably going to double, and I think it did that as well. although it could be I could be wrong that could have been another company like a firm

but it's hard to know all the IPOs are popping 100% now okay what's your what do you have well we all saw

I think the Fintalk investors video oh yeah don't want to say those I don't want to those people I don't think anyone knows their names

but you probably know the video buy stocks when they go up sell when they don't what did you think of that he's not wrong Yeah, so again, the momentum strategies are probably like, yeah, this guy, I mean, we charge $2.20 for this.

He's probably outperformed most value investors this year. Oh, yeah. I mean, the Robinhood account that they, I don't know if it was both of those people, but the Robinhood account they showed, and again, a lot of people lie about those things with those screenshots. You know, they're like, my account's up. it was up like a thousand percent so yeah they're crushing everyone uh but i thought the funniest part was a comment uh when someone asked like or was like how do you do that and he was like or he's like that's dangerous you're just kind of just buying things willy-nilly and their response was it's only dangerous if you refuse to sell your stocks when they go down don't do that lol

Well, I mean, I hope they're just trolling the momentum strategy because I think they're sincere, but they're also trolling momentum, which I think is kind of funny. This is like, this is the stuff that makes me really optimistic about companies like The Motley Fool. Like, hopefully that's a much better funnel. Oh, yeah. Because, I don't know, Fintalk, Wall Street Bets, it's probably not good for most retail investors. You should spend your time with 7investing and Motley Fool. Those people will teach you actually how to invest in individual companies safely and with the right risk, whatever you want. Yeah.

It's just watching it is so – like you do cringe a little bit. Oh, definitely. I don't even – I can't watch them because I know it's just – I just read the little transcript thing. What happens when you wake up and your stock is down 45% like that happened to whatever the QS company? That's a good question. Well, sell when it goes down. Yeah, sell before that. Great.

You just lost all your – I wonder how many earnings seasons they've been through because, you know, I mean stocks go down like 20% during earnings season when the information changes. But it also makes me think people are like, no, this doesn't feel like the dot-com bubble. And it's like, well, if this isn't euphoria and greed and hubris, what is? Could it get worse? Maybe I'm just more aware of it now. Maybe it's always going on.

No, no, no, no. You've seen those call option numbers? They're insane. I think so. Insanity. Yeah. Okay. I think that's it, right?

That's all we have? Yeah. We've got the interview next. Okay, so a few things on the interview. I guess this is the time we've got to talk about our Substack, right? Yeah, so she said the Substack is called The Dig, and I'm going to pull up her email right now. If you find her on Twitter, it's Francie McKenna.

If you search it, she's got a pretty popular name. It's called The Dig at Substack, and if you DM her, tell her that we sent you, that you listened to her on the show, she will give you a 20% discount. someone i know it might be like for the first month or maybe it's for the entire thing but yeah if you like what she uh is doing and you think you want to learn about that type of stuff i mean it's a fantastic resource yeah i feel like we're pumping things on here all the time but she gave us a look at the sub stack and it was really good yep uh and so if you're even considering it just

be like hey you know dm or i think your dms are obviously open and just be like hey chit chat money listened and they said uh i could get 20 off yeah and what was your favorite part of the interview oh uber i'd say or um i don't know the internal controls or weaknesses yeah she kind of she kind of says those are things that she looks for uh i've been since every sec filing i've looked at i've been like digging into that control f control f-ing it uh yeah that's good i like the auditor stuff too i'm trying to learn more about that i know that's kind of tough to understand because you really don't know sometimes whether the audio is good or not. But, yeah, I thought it was good to talk either way.

Okay, and I should mention as well, at one point, I think it's like early on in the interview, there's a dog in the background. You guys will probably be able to hear it, but it goes away after a little bit. Yeah, it was there for like three minutes or something. Yeah, just know it goes away. But, yeah, here's the interview. I hope you guys enjoy.

Cox Panoramic Wi-Fi includes advanced security to help protect all your connected devices. You'll get real-time alerts. Oh, like this one. So you don't have to worry about malware. Or when your kid downloads a song from a shady link. And now all your computer can play is

Red color, red color, where are you? All blocked, thanks to Advanced Security, included with Cox Panoramic Wi-Fi. Advanced Security must be enabled in the Panoramic Wi-Fi app. Restrictions apply. Today we are welcomed by Francine McKenna, Francine is a certified public accountant and independent journalist.

Francine is also a two-time Gerald Loeb Award finalist. Thank you so much for joining us. Why don't we kind of get started with your background? So tell us why you got into finance, where'd you go to school, and then what led you to journalism? Sure. It's sort of a long and winding road, but it just goes to show that it's never too late to keep changing and doing something else.

So I'm a Chicago native, Southside of Chicago native, and I went to Purdue University for an accounting degree. And that wasn't really my first choice. I thought I was going to go to law school. But, you know, in those days, it was sort of what should a girl study so that they can get a job? And it wasn't nursing and it wasn't teaching. So it was accounting. And I didn't really, when I got out, I didn't really want to go work in the public accounting firms. I had no context for that. My father was a Chicago fireman, so I didn't know anything about that culture, that that opportunity.

And so I went to work in a big bank in Chicago and Continental Bank was actually the first too big to fail bank. It was the one that went nearly bankrupt, got taken over by the U.S. government because of the Penn Square syndicated loans crisis back in the 80s. And so I joined right sort of in the middle of this crisis and started doing internal audit work for trust accounts. So people owned in these trust accounts, real estate, like more farmland, minerals and other kinds of alternative assets. So the early days of that's what used to be an alternative asset, mineral rights and farmland and, you know, some kind of obscure stuff that you inherited from your rich, your rich relatives. So I was doing internal audit of those trust accounts. And the bank ended up getting taken over by the government. I left and I ended up in a couple of companies doing basic accounting, controller, general ledger manager. I was responsible for all the stuff, payroll, et cetera, et cetera. And that was fun because you were managing people, you were doing the month to month, day to day kind of stuff. And I got tired of that routine. So those of you who've ever been an accountant or know accountants, that if you're working in a company, that monthly routine, quarterly routine, annual routine is pretty routine. It gets kind of tedious. And I liked all the project work. I liked when there was a problem. I liked when we were implementing new software. So I gravitated towards the consulting firms. And that's when I ended up going to work for KPMG. So about 10 years into my career was when I ended up in the firms.

but at the consulting side, working on implementing software for state and local government. So I was the accounting person in the state and local government software stuff and worked for KPMG, worked in Latin America, ran the project for JP Morgan for year 2000 in Latin America, and came back and was sort of trying to do independent consultings around the same stuff. Sarbanes-Oxley had been passed because of the Enron failure and it was a little hard as an independent person to try to, you know, put together a team and go down to Mexico and Brazil and Argentina, you know, and manage that kind of process. So I was attracted to a job at PWC in 2005 and they said, come in, we'll make a job for you. Well, I'll give you a clue from a

career perspective, if anybody ever says, come in, we'll make a job for you, turn around and run in the other direction. And the reason is because when you're going into a firm or going into a company and there's not a well-defined role or responsibility, the minute you get in, people wonder what the hell you're doing there. And it can breed resentment. And in particular, in companies or firms like the accounting firms where people grow up with the firm, they start there, you know, as interns in college, somebody comes in from left field as a very senior person, and starts giving their opinion about how they do stuff. You're not very popular. And that was what happened after about a year and a half. And I left PwC. And that's when I started a blog,

this is 2006. And I said, how, you know, can I use all this experience I've had over the years, people said write a book but you know how do you get an agent how do you write a book if you're not associated with a company or a firm or or a university or you know and in those days there were a lot of these confessional bloggers people writing about stuff to try to get a book contract for you know uh the guy that the guy that was a model for me was a guy who was a bouncer in the bars in new york and he was writing about being a bouncer it was called standing on the box you You know, he was the bouncer in these clubs in New York and he would go through all this stuff. And I'm like, that's what I want to do.

I want to tell the inside stories and, you know, be the one that's there, you know, observing where people don't even know that you're observing. And so I started a blog and the lucky thing or unlucky thing was it was right before the crisis really started blowing up. And there was really nobody who had had the kind of inside experience I had at the partner level, managing people, working outside the U.S. There was nobody like that who was free to talk about it, who was really providing good information to everybody who was writing about what was happening in, you know, the banks and AIG and, you know, Goldman Sachs and et cetera, et cetera. So I started being asked to give quotes, and then I started being asked to write about stuff. And that's when I started writing. And that's sort of the, you know, once I started doing that, and probably when Lehman failed and Ernst & Young ended up in the spotlight, then suddenly it was like no going back. I had really sort of burned bridges in terms of ever going back to a firm. Right, right. And I thought, okay, I got to move forward.

And so I, you know, made a new profession. Did the crash kind of get you a bigger audience because it was so, I don't know. Absolutely. Absolutely. Absolutely. I mean, let's be honest, you know, accounting and audit and corporate governance, you know, unless you're actually working in it you know most people think it's kind of boring and they don't see where the sex drugs and rock and roll are they don't see how that's going to really

impact you know the share price you know you had a question you know when you sent me you know things we could talk about does the auditor matter you know and I would say in a lot of cases people's perception is that it doesn't. And my job was, job one was to tell you about the times where it does, where it does matter. And to try to do that in a way that people, you know, sort of were like, whoa, okay, that's interesting. That's more interesting than I expected. And I definitely, you know, had an opportunity to prove that there was more to the story. There was more to the auditors. They were not sort of these capitalist eunuchs sitting on the sideline, you know, not involved in what was going on or potentially, you know, tempted by what was going

on. I actually tried to get a book contract about a year after I started the blog in 2007. It was too soon right and the agent said come back when you have more sex drugs and rock and roll and now you know 13 14 years later um i have a lot there is a lot and and it's non-stop and you know they're like everybody else and so there's plenty of stories out there right right And now you have The Date, which is a new newsletter you started. I'm not sure when you launched that, but why did you start that on your own? I think it's through Substack. And what does a subscriber get, you know, when they sign up?

Sure. So I started my blog, my legacy blog, in 2006. And that was called Read the Auditors. And that's still out there. And any time I wrote for others like Forbes or for MarketWatch, where I was a full-time employee for five years, I kind of had to back off of the blog because you owe your loyalty to the outlet and you've got to give them your best stuff. But while I was writing for MarketWatch, there was more than enough, you know, opportunity for me to get out all kinds of stuff that I was thinking about, plus more stuff that they asked me to do that wasn't even really about auditors, which was great. but um i started thinking probably in 2018 2019 i don't know how much longer this is going to last because in particular politics is really really really the key focus in washington dc in the bureau

where i was and although they wanted regulatory and all the things that the sec was doing and all that kind of stuff if something happened if trump tweeted okay that took precedence right and you always had to be talking about the politic political angle of whatever it was you were talking about so and of course always you know why should investors care and sometimes investors just were not interested they were interested in politics and certainly in washington that was the focus. So I decided to leave MarketWatch in November of 2019. There were a couple stories that I wanted to do and they didn't want to do them. And I said, you know what, I know how to be on my own. And I had been seeing Substack for a while. They had been asking me to write for them, but I

couldn't do it because I was employed full time. And you know, you can't, I really wasn't worth it for me to do it if i couldn't get paid and so i kind of the minute i knew that i was leaving it was really a one two three to set it up um i had you know stories to to go with immediately and i left uh my last day was november 22nd and my first um post that i put out was november 24th All right. We do want to dig into sort of your work with SEC filings and kind of give our listeners something to take away from that. Because a lot of our listeners are individual investors, and when they look at SEC filings, they probably see a lot of stuff that they don't think is that relevant. So from your perspective, where do you think investors should spend a lot of their time and effort when looking at SEC filings?

And then do you have any big keywords that they should use? Because I know a lot of people just control F and try to find certain words in the document. Sure. So one of the things that was a big revelation to me when I came to MarketWatch, that's a very investor-focused site. And the people in New York and San Francisco that focus on companies, they focus almost exclusively on the earnings releases. and um that's what drives you know sort of you know earnings is coming out conference calls etc this is what's happening you know what what's the announcement how are they how are they uh measuring up compared to estimates or guidance and that was just that just blew me away because

as a as an accountant by training i'm looking at the filings i'm looking at the 10q the 10k I'm looking at the proxy. I'm looking at any other additional filings that they make. I'm looking at the real numbers. And earnings is not real numbers. Earnings are unaudited results. Earnings are sort of projections and forecasts. Earnings are in many cases dominated by non-GAAP or non-standard accounting metrics. And when my colleagues at MarketWatch started getting used to the idea, oh, we have an accountant here, you know, on staff. We can ask her questions about stuff we don't understand in the earnings release or stuff that they, you know, say in the conference call. And they would ask me a question. I would say, but the earnings release, you know, has one

line. It doesn't explain this. Well, yeah, that's why we're asking you. I'm like, well, how am I supposed to know? They don't explain it. You know, we need to look at the queue. Well, that won't be out for another, you know, two weeks. And I'm like, okay, well, we'll look at it, you know, when it comes out and we'll, we'll, we'll buy that time where I'm already looking at the next earnings release. And it, it was, it was apparent to me that investors in general, or at least active investors, we're not looking at the Q's and the K's anymore. They were really, really focused on what the company said in the earnings releases. And I thought that the SEC and others had really gotten away from making sure that what was said in the earnings releases

eventually or matched what companies put in the Qs and in the Ks later. And they don't sometimes. Sometimes there's very significant adjustments or changes. Sometimes the earnings releases are dominated by non-GAAP metrics and they bear absolutely no relation to the actual accounting numbers. So what do I do? I focus on the Qs and the Ks, and I encourage others to look at the Qs and the Ks. Why? Because that's where the real numbers are. That's where audited numbers will be once a year, and that's where they're going to give you a lot more information about what's going on. S1s are, of course, very, very interesting, the filings for companies that are going to IPO. Those are a little different than the Qs in the case. Of course, they have

audited financial statements. They're going to have two or three years worth of audited financial statements, the actual real audited financial statements. But they've got a lot, a lot, a lot of puffery and marketing and kind of like, blah, blah, blah, here's who we are, and here's how we're going to change the world. But what's interesting is they also have an enormous amount of information about risk factors. And they also have an enormous amount of information about the history of the relationship that the company has with the auditor, and if they've had any stumbles or changes or any issues along the way. And I think that that's something, again, that most active investors kind of ignore. And instead, that's what we started focusing on when we were

doing sort of five things to look for in an S1 at MarketWatch. And it's a nice little template that I came to really love, except I focused on the things that others maybe wouldn't like, control and material weaknesses in internal controls, auditor changes right before the IPO, things like, you know, what is the control structure of the company and whether you're really going to have any influence whatsoever, and other kinds of risk factors that kind of stick out. I remember in Levi's, which has been public more than once and went public a couple of years ago again, Levi's had a risk factor about how they were concerned about climate change. And we were like, wow, somebody's actually talking about climate change in a filing.

But the reason was because they sourced an enormous amount of their materials and had lots of manufacturing in places that were vulnerable to the rising sea levels. So they were in a lot of places like the Philippines, coastal areas of Thailand and other Southeast Asia or South American places where like people are working in places that could be run over by, you know, by tsunamis or water, you know, that's rising. And we were like, wow, that is really weird. Like this is, this is the stuff that, you know, sort of the fundamentals that I think it would, it would be great if people were focused more on, but we've gotten sort of divorced from the fundamentals. We're looking at, you know, momentum and volatility and what's happening tomorrow and how is, you know, what the company says in the earnings release driving the stock tomorrow. And in the end, companies can't sustain that momentum if they've got fundamental things wrong. And it does pop up eventually. And, you know, sometimes the risk factor section can be upwards of like 50 pages long. And I think investors get daunted by that. Is there any way that, you know, to help try to, you know, either speed things up or just make that research part more efficient, you know, especially in the S-1?

So I pointed you to a newsletter issue that I put out, which is basically how I look at an S-1. and there's a couple of uh you know there's a list of sort of uh top 10 things and there's also um you know some examples from recent s1s and i'd be glad for any of your listeners if they get in touch uh to give them a significant discount on a on a on a trial to to the uh uh newsletter so that they could take a look at that because it was one of my most popular newsletter items and I'm like, oh, this is interesting. I look at things like control, weaknesses. I look for things like, I always look at what they say about revenue recognition, because

we had a huge change in how revenue is recognized at the beginning of 2018, a big new standard. And companies are still digesting that. And many of them are trying to work around the edges and take advantage of sort of loopholes in those rules and the enormous amount of judgment and depending on the industry um you know they're dealing with that very differently but we've seen some patterns develop in certain industries for example anything um where there's subscription revenue um media where there's any kind of repetitive advertising any kind of long-term contracts like in defense industry so there were specific areas that had dramatic impact from the new revenue rules.

Leasing, so Tesla had a big positive impact because of the impact on leasing. Any kind of long-term contracts, any kind of subscriptions, any kind of situation where you have deferred revenue or had deferred revenue because you sold something like software, hardware, and services in a bundle. Those companies had significant changes. Sometimes it was negative. Sometimes they had to regroup and say, I can't do this anymore. I can't pull this revenue in as quickly as I used to. But in a lot of cases, it was, oh, now I can pull this in more quickly because I get to make the judgment on how this looks based on how I see my obligations in delivering that product or service. So revenue recognition right now is a big one. A lot of people talk about

leases, but leases, again, very specific to certain industries. If you're looking at airlines, if you're looking at, I don't know, a company that leases an enormous amount of its physical infrastructure, you know, like a franchise business or some kind of retail outlet if they're leasing a lot of buildings. But in general, that banks, of course, but in general, the impact of that is over. It is what it is. And that's over. Revenue recognition is a little bit different because we went to a very principles-based approach. And there's a lot of companies that are taking advantage of that leeway. And you've got to really look and say, oh, what are they doing here? Does this make sense? And what does this mean for what we can expect?

Okay. And what do you look at in a proxy statement? I know that's one that, again, investors kind of get daunted by. And a lot of people don't look at it at all. It's a long document. It's out once a year. What kind of stuff do you look for in that? So proxies, of course, are very, very, very helpful. They're the number one source. If you're looking at related party transactions. You're looking at who's who on the board of directors. Are there unusual people sitting on the board of directors that either aren't qualified or that are somebody's brother-in-law or daughter or somebody who's doing a job that should be done by somebody who has more competence? Also, you have companies that have super, super, super

aged, uh, board of directors, people that are really, you know, past their sell by date in terms of, you know, active business, uh, uh, activity and experience. And I hate to see them on the audit committee. Um, I'm looking at, uh, of course the section on the auditors, which is, uh, that's the only place where you're going to find how long has that auditor been in place and how much are they getting paid and what services are they providing and are any of those services on the edge of things that they maybe shouldn't be providing because they present an independence or a conflict of interest in their primary auditing role. And then finally, if there's an issue about non-YET metrics and how they might be affecting

compensation. So I've caught a few situations where companies were adjusting revenue and that was specifically so that they could create an adjusted revenue metric so that executives could get paid on some kind of inflated revenue metric or custom revenue metric that had bear no relation to actual gap or accounting standards. So you're looking at the compensation part of it, and you're looking at not, you know, all the really tedious details about any particular executive's contracts. There are some other sub-stakes that are really good for that, and I can send you a list for the ones that are really focused on executive compensation. But when it comes to how does the accounting or the non-GAAP metrics that they're using flow into how executives

are getting paid. I've written quite a bit about how Elon Musk and Iger over at Disney and some others have used sort of the non-GAAP metrics to make sure that they got paid no matter what the results of the company were. I was about to ask about adjusted EBITDA as a performance metric because even companies we like, sometimes we look in there and a lot of the executive compensation is tied to non-GAAP adjusted EBITDA metrics. Is that like a big red flag for you? And then what are some metrics that you like to see or that you think can be tied to success in the future? Right. So many people have the impression that I'm totally anti non-GAAP metrics. That's not really true. The purpose of non-GAP metrics is to allow companies to say something a little

bit more or a little bit different to explain something that maybe is an anomaly or a one-time kind of unusual thing that does not really well explain the future trend. So something's happened, they have to book it for accounting purposes, but we really don't want to incorporate that number, that impact into the long-term trend. So in those cases, that to me is a reasonable situation. Let's say a one-time restructuring charge or a one-time unusual item related to an acquisition or something like that.

However, it's become really, really, really abused because companies are just plugging in things that basically they don't like. So the biggest, the most controversial item is, you know, adjusting for stock-based compensation. Okay. Well, in some companies, that is a huge, huge, huge number. And you have companies that are losses. You have these new IPOs and they're not making money. And yet they're paying enormous amounts in stock-based compensation. And so the adjustment for stock-based compensation really skews your look, your outlook in terms of

well, how are they prioritizing? You know, there were companies that were losing money and getting PPP loans during the COVID crisis, and yet they've got huge stock-based compensation. They're paying out huge, you know, they're still paying out all this stock-based compensation. So, looking at that adjustment in its relationship to, you know, why are these guys still getting paid? You know, how does that bear, you know, any relation to what is really going on in the company and whether, you know the results justify that um restructuring of course has become another area where people are abusing so companies used to go through big restructuring because something very dramatic happened in their industry or in their environment and they had to reorganize and yes there were one

ton charges for you know cutting people or you know moving buildings or whatever now it's a chronic thing now you have you know just on and on and on and so they uh load all kinds of other expenses into a restructuring charge that goes on for years and years and years every every quarter they've got some kind of restructuring charge that they're pulling out of results um the one that i'm uh really hot on and that i'm pushing the sec and i've been writing about and i'm going to write about some more tomorrow, is adjusting revenue for deferred revenue that they acquire during an acquisition, but that gets written off permanently during the acquisition. And yet, companies are keeping a kitty, a cookie jar of these write-offs and adding them back in

to their EBITDA and saying, you know, we really hate that we had to write off this deferred revenue when we acquired this company. That's the accounting rules, but we don't like that. It's not fair. And we want to add it back in. And we're going to kind of think about when we might have recognized this revenue if we weren't forced to have to write it off because of accounting rules. And basically, it's just a cookie jar. They can plug in this revenue whenever they want in order to hit earnings, you know, in order to hit targets for compensation. So what you want to look at in that reconciliation that actually is required in the earnings release, so the reconciliation between gap and non-gap, you want to look for stuff that is not a one-time anomaly,

you know, something that really is required to explain an unexpected kind of hit or trend that isn't going to happen again. And so, therefore, we want to sort of separate out and sort of keep the trend going in the normal, you know, kind of operations. If they start adjusting constantly for the same old stuff over and over, basically to burnish the results, the most egregious examples are when you have companies that are showing losses on a gap basis, And all these adjustments consistently put them in a profitable category and that, you know, using the adjustments in order to consistently put yourself in a we're showing a non-gap profit, but we're consistently showing a gap loss. you know something's wrong with that picture and again it can't be sustained um over a long term and you know what's the long term well sometimes you have to wait you know with some of these

companies that have eventually sort of gone you know down the toilet there's a lot of back and forth there are a lot of people who want to prop it up there are a lot of people who want to tell the opposite story. And, you know, as short sellers will tell you, okay, you know, sometimes you got to wait a long, long time for it to sort of, you know, self-immolate, you know. You don't have, you know, the SEC is not going to come and save the day all the time and say, oh, yes, this is a massive fraud. Sometimes the company just has to, you know, go down the toilet it on its own because it runs out of cash. Okay. And I guess one follow-up on that, we look at the options packages that companies give out to their executive teams, specifically

the CEOs. Are there any red flags you see within that or maybe an example of a red flag? And then what kind of options are, there's the standard stock option and then there's restricted stock units. I guess, what are your thoughts on restricted stock units? So, as an accounting professional, I'm really kind of a tight ass because I don't think CFOs should get stock options. Okay. So if you have the ability to influence the financial results, then you should not be getting, you know, compensation that's based on, you know, the performance of the financial results. The performance of the stock price is a little bit different. Okay. Because we know anything can happen when it comes to the stock price. But again, there's lots of things that

management can do in order to influence the stock price too, like buybacks or these kinds of, you know, rah-rah earnings announcements that then end up being sort of tempered or sometimes even corrected by the time you get to the Q or the K. I mean, there was a famous story that my colleague wrote at MarketWatch about Citigroup. When you had the Tax Reform Act, when you had the new tax law in 2017, many companies, the banks, they all had significant impacts from that. Some of them very positive, some of them very negative. And the announcement of what your impact was, everybody was interested in. But in general, everybody decided the tax reform was sort of a one-time thing. It was going to impact you sort of at the beginning of 2018 to end of 2017.

They were going to throw out a number. And then going forward, everybody knew what the tax rate was. And everybody knew how your business was going to be affected or not affected, depending on if you had stuff outside the US or whatever. And in general, companies were pretty consistent. Almost always they pulled the impact of the Tax Reform Act out of GAAP results. So that's sort of a justified non-GAAP adjustment, all right? This is a one-time thing. We're not going to have a lot of different changes or whatever going forward. We're going to take that out because sometimes it was millions and millions of dollars and it really was a dramatic difference. Some companies didn't. If it was positive, they pulled it in the gap.

And some companies, if it was negative, they forgot to pull it out. So some people are just dumb. But what was interesting is that Citigroup and some companies actually had to make very significant estimates in some areas. And they made an estimate and they plugged those into their earnings results. And in Citigroup's case, they plugged a result into their earnings and they announced earnings. And then when they got to the queue, they realized they were off by like several hundred million dollars. Yikes. There was another recent situation where Goldman Sachs has had two very significant judgments related to 1MDB, related to their legal liability for the 1MDB fraud. And in both cases, they made their earnings announcements,

did not say anything about the fact that they may or may not have settled those uh those uh amounts and then they plugged them in between the earnings announcement and the queue okay all right so that's a definite red flag right that's a definite red flag keep an eye out for changes before the 10 queue before the yeah well the 10 the the the queues you know the quarterlies that's a little bit more subtle but when you have a change like city group did for the k where they actually announced their fourth quarter they announced the results for the k for the year and then you know the k's take even longer usually like another month before they come out yeah i mean and they had a significant dramatic difference

that's a big deal all right i guess we'll we'll switch back to you mentioned before you talked about how the auditor does matter. I know the majority of people, you know, whether just it's not on purpose, they just ignore who the auditor is. Can you explain why that is important when looking at financial statements and then any, you know, times where there's like conflicts of interest or maybe an example of an auditor historically acting ethically and where you can find that potentially in the filings? Okay. So one thing that a lot of investors, especially newer investors um um think is that if you have one of the largest one of the big four audit firms in particular like if you're investing in companies in emerging markets like china etc

if you have a big four audit firm name associated with it you know you're good right those are vetted but you know these guys are on the job they're the pros right and the reality is that Yes, there are wonderful, smart, competent, ethical people at all of the firms, large and small. But the firms are separate legal entities in every country that they operate in. And in China, they're really divorced from any kind of control by any of the developed market companies, developed market firms. So like U.S. or U.K., there's only so much they can do to influence how the Chinese member firm is addressing audits, et cetera. So Alibaba is the big example right now. Alibaba and Ant is very, you know, controversial situation.

Alibaba went public and got a listing here in the U.S. And Alibaba is audited by the PwC Chinese firm. and that firm has never been inspected. There's no ability for U.S. regulators to go in and look and say whether or not that firm is following U.S. auditing standards or whether any of that work is being done properly. So that's one issue, okay? The firms have varying quality in all locations, depending on the local management, because each firm in each country is a standalone kind of partnership that runs itself like a little franchise. And they just have this marketing umbrella over them that say, I belong to the PwC network, or I belong to the Deloitte network,

or I belong to the KPMG network. So that's one thing. The other thing is that But auditors are part of now very large firms that also do tax work and do a lot of consulting work. You know, KPM or PwC and Deloitte do an enormous amount of technology work. They all do work around, you know, being monitors or helping investigate when there's a fraud allegation or a whistleblower allegation. So there's an enormous amount of work that they want to get from the largest clients, the big multinationals, et cetera, that don't have anything to do with audits. And you can see in the proxy sort of whether or not those audit firms who are designated as an auditor have also been doing lots of other work for that client that maybe is skewing or compromising their ability to focus on being an objective, independent arbiter of whether or not the company is following accounting standards.

And the classic case is Enron, where, you know, all that stuff happened and all the new regulation came in because there was this perception that Arthur Anderson, who ended up, you know, going out of business, Arthur Anderson had taken their eye off the ball of the auditing. They were too focused on doing all kinds of other M&A consulting work and tax work, et cetera, that they were never going to, you know, call out the company for any kind of shady accounting because they did not want to lose the lucrative bank relationship. So anytime the fees for the auditor get out of sync with the audit fees. So you have, you know, and the rule of thumb is kind of 10% are all the other things that the auditor is doing more than 10% of the total fees that they're providing.

Then you've sort of got this idea that maybe they're, you know, they're going to take their eye off the ball, that the consulting and tax and other work that they're doing for the client could become more important than calling out the company if they're, if they're going, you know, rogue. Okay. Should we talk Palantir? Yeah, I guess we wanted to talk about some specific examples. Palantir is a new S1 that came out, and I think you wrote a couple of things that you saw in their S1. You mentioned before about the control stuff and internal controls and how that can be something that investors look for in a new company. What is Ernst & Young's history with Palantir and the internal controls you saw with them? So Ernst & Young in particular has a record in recent years of when they are the auditor of a new IPO, those IPOs don't admit to any kind of material weaknesses and internal controls.

So, you know, what are we talking about material weaknesses and internal controls? Your financial reporting and financial accounting structure is weak because you don't have enough competent accounting people. You don't have good systems. You are not following. You don't have people that know the rules. you have made mistakes in things like taxes you know like there's a you you're come as a company you have a history of not getting your accounting or accounting right and it's because you're not focusing on that you're not prioritizing that you don't have competent people doing that you're not willing to pay outside expertise for that but ernst and young has a history of in recent years all of their IPOs, WeWork, okay, which was almost there, okay, Palantir, and several others that I've written about, where by zero, they never notice anything that rises to a material weakness.

Now, nowadays, because of all of the reforms and Jobs Act and all of these ways to make it easier to IPO, the auditor doesn't have to give an opinion on these things, a formal opinion right out of the gate. And depending on the size of the company, they get longer in order to have to pay for that. However, the auditor has to provide audited financial statements. So everybody who goes out IPO has to have two or three years of audited financial statements to back up the IPO. And so if the auditor notices something while they're doing those audits, they have an obligation to tell management. And if they told management, management has an obligation to disclose it. And curiously, in the EY clients in the last few years, seems like nobody ever notices anything.

and that is noticeable because if you do the stats for all the other big four they do not a lot not all the time not every time not sometimes when they should but there's always something right because i mean new companies young companies companies that are focused on tech and fintech and you know they don't want to we know how they are they don't want to do that and so that's why the auditor is there to kind of keep them on the program make sure that they're focused on this stuff so that when they get bigger when they get more scrutiny when they get you know under the the the uh you know uh umbrella of the sec they've got their act together and if you let them get away with stuff and they go public you're never going to reign

And so it's very noticeable that EY consistently in the last few years, their IPOs never have these issues. And Palantir is one where, you know, again, I call them the immaculate IPOs. You know, they're just everybody's doing everything perfectly. And yet you can see that, you know, there's issues, there's things that, you know, they could do better. And I, you know, in the article that I pointed you to about Palantir, you know, I pointed out a few of these things that, you know, they, they're a little odd. They're an odd company. You know, in particular, you know, I looked at, you know, they have or they say they have service revenue, but they don't break it out, which tells me they probably don't have that much. um and um you know there's other things about um how they had a change again with the revenue recognition rules they got a little positive impact because they were allowed to change how they recorded some of their deferred revenues related to some of these they mostly sell

licenses to their software so that people can do all this data analytics yeah do you want to ask about follow-up with 606 or is that yeah i mean i i don't know if you have the specifics but how did that new accounting measure uh change the way that they reported revenue and then also i guess the follow-up would be uh deferred revenue so in general when people when the companies adopted the new revenue uh standards 80 90 percent of them used an approach called modified retrospective, which meant that when you were looking at the accounting information and saying, oh, I'm going to have to record this differently now. I'm not going to be able to record these revenues as quickly, or I'm going to have to record them more slowly.

When you put those numbers up going forward in 2018, all of those companies that chose that methodology, they didn't have to restate their prior period numbers. So they were putting up numbers with comparisons to prior years. Tesla was one that I wrote an article about also at MarketWatch. And there was an apples to oranges comparison. They were putting up 2018 numbers that were under the new standard, which may have treated certain kinds of revenue differently, but they weren't restating, they weren't creating comparable numbers for the prior years. Basically, they plugged the impact into retained earnings and they just moved forward. Other companies did.

They actually went through that work. Microsoft, for example, went through that work and actually had comparable information. At this point, though, we're kind of past that period. So most companies only show comparable information for like the last two years. So if you're putting out results for 2019, you're going to have 2018 and 2017. So again, you've got a mishmash. You've got 2018 that's under the new standard, and you've got 2017 that's not, and 2019 that is. Once you get to 2020 results, anybody who shows, you know, two years or less, it's all going to be on the new program.

It's all going to be comparable. But for analysts, for others that look at, you know, back period data that build trends, it's something that I want you to keep in mind. In Palantir's case, they did that modified retrospective, so they go public and their comparable information for anything prior to 2018, okay, not consistent with what they put out for 2018, okay? Secondly, they were able to record a small catch-up because they looked at deferred revenue and they made a change in terms of how they were going to record some of their deferred revenue. Okay, not as significant. It's not a big thing. But they looked at their long-term contracts for some of this licensing.

And in some cases, they were able to take the revenue in more quickly. Or they decided they could take the revenue in more quickly. So they've got these long term licensing or subscription contracts. And again, they can look at that and say, it's all based on when are we going to actually perform the duties or provide the services that the contract is covering? and when did we get the cash and how much cash are we holding back and sort of trying to make that assessment again. And it's all about assumptions and estimates and we don't see any of that usually. Some companies tell you a little bit more than others

about what those assumptions are. But Palantir had very little, very very very little details about you know these things in this in the s1 okay and uh i guess in general i mean this isn't really specifically about palantir but when i'm hearing all these things about you know revenue adjustments um adjusted evita it kind of makes me think is it just i mean should investors just be caring about cash flow is that really what you know to evade all this should you just be looking at the operating cash flow statement well i think that it's always really important to look at the operating cash flow statement. I think that

one of the, again, areas where companies have abused that, even that is when they start defining free cash flow according to their own sort of whims. So you want to really look at the definition, how they define free cash flow, and look at whether or not they change that definition over time to kind of meet their needs. And it's what they do, because again, it's a non-GET metric. You've also seen that in the cash flow statement, companies can get really tricky, and they're going to put something in cash flow from financing versus cash flow from operation, you know, they're going to move stuff around. And it's a tough thing to catch. but moving things around will make your ratios look better yeah and so um yeah definitely you

should look at cash flow i mean one of the most important things uh i i was looking at um well disney um i looked at disney uh during the covid period so in these uh you know this first quarter second quarter of 2020 and they had significant significant significant decrease in revenue in particular in the theme parks right because the parks are closed right um and yet you know they did report some revenue and then i looked at a historical uh trend of their revenues deferred revenues and their cash flow, it didn't sink. So when you've got cash flow that's not following revenues, when you've got deferred revenues that seem to be manipulated in terms of they're not following a logical pattern of, okay, you know, stuff goes into deferred revenue because we

collect something in advance and then, you know, we're going to recognize it over a reasonable time and that's predictable and it follows the way we operate with the way our business model works but instead you know deferred revenue is used as a cookie jar and they pull it in when they need to or when they want to but yet neither of those numbers matches how much cash they're showing so when cash gets out of sync with what you're reporting as revenues um i mean it's always useful when you have a company that is reporting really, you know, just, you know, revenue growth that's just, you know, unbelievable and consistent and, you know, hockey stick kind of thing to look at the cash. Does the cash track it? And does it track it consistently? Or does the cash, you know,

kind of go like this? Or is the cash always lagging way too long? Are they, you know, Disney was also borrowing they had to raise a lot of money um during that period and you're going if they're showing these revenues why do they have to raise money you know where's the cash i mean people have raised that issue with tesla a lot you know you have revenue revenue revenue and you know where's the cash why do they have to keep raising money you know when are they getting to cash what what's happening to the cash that matches up with these revenues that they're reporting or the deferred revenues related to all of the different you know um accessories and stuff you know the software accessories that they're selling so tracking those especially in a company

that reports high growth or consistent high growth or unbelievable growth you know especially that's that's doesn't sync with the economic environment or what you would expect or is contrary to what other companies in their in their cohort are doing um look at the cash where's the cash are they actually reporting any cash yeah i think an example of that is amazon so a lot of you know a lot of people talk about how they weren't you know technically get profitable for a lot of time and that's because they're reinvesting in the business but they were generating a lot of cash during that time. And they've been free cash flow positive for over a decade. Right. Well, Amazon is an interesting situation because, as you said, it's the opposite. So why weren't they reporting a

profit and yet they're reporting all this cash? And I wrote about Amazon a long time ago and said Jeff Bezos hates paying taxes. That is true. And Amazon accumulates all kinds of tax credits and other kinds of tax, you know, deferred tax kind of issues. And they've got, you know, tax is a really big deal with Amazon. And as soon as Amazon has a tax credit or something that they need to plug in that's expiring. In other words, you can't take a tax credit unless you actually have a profit because it's an offset to your taxes. Think about the Trump situation and what they reported, what the New York Times reported.

If you have credits, you've earned credits for one reason or another, you can't take them unless they're offsetting an actual profit. And if you're constantly showing losses, then they sit over here and they wait for when you're going to actually show a profit, and then you can offset your tax liability. So what does Amazon do? whenever they're those tax credits are expiring or near expiring that's the quarter that they report a profit just enough to absorb the the tax credit interesting so they found a loophole because this technically isn't a it's not illegal but they found a loophole so they cannot right and there was you know there were there were people that wrote about how amazon has people you know, full-time who try to look at, you know, what they should report every quarter.

I remember it was one of the Ben's from, from Andreessen Horowitz. I can't remember if it was Ben Horowitz or the other Ben, but they wrote an article and I wrote about it. It was like, how much more blatant can you be? They're saying Amazon is so successful because they focus on free cashflow and they focus on the share price and they don't focus on, you know, they reinvest, you know, this money, blah, blah, blah. And they have people full time focused on making sure that they spend all the money that they bring in on things that they can get tax deductions for or generate tax credits for because Jeff Bezos hates paying taxes. Okay, I think got to move on to another company we just have a few questions uh about uber uh my question is that they why do

they recognize revenue differently than lyft i saw i think that you mentioned that and then how do they recognize it differently so uber and lyft are the same but different in that they both recognize uh net revenue okay not gross revenue but uber is much more aggressive in terms of all of the different adjustments and using all kinds of different other non-GAP metrics. And they're constantly talking to the SEC about that. However, Lyft also just recently had a comment letter from the SEC about, again, it's non-GAP metrics

and adjusted EBITDA and all kinds of other metrics that it's using. So they're both sort of aggressive, but Uber is much more aggressive. What's interesting with Uber and Lyft is that they're both audited by PwC in San Jose. okay and they have and they're recognizing revenue differently that is that is interesting and they're they're treating certain things differently and it just goes to show you that

even if you have an auditor even if you have an auditor that's may even be sharing sort of the staff in the same office so the partners are different but the staff is the same and you have pwc putting out you know really detailed and thoughtful and technical guidance about every little detail, you know, about how you're supposed to do stuff. In the end, a company and its executives can be extremely powerful and influential in terms of we want to do this this way. We define our business this way. We see how we're handling this this way. And coming up with the rationalization and the specific partner that's his franchise that his client right he's like yeah let's see how we can work this out the other difference between uber

and lyft is of course uber has significantly more international operations than lyft does and uber has a significantly different approach to um the last time i looked to taking cash which is hilarious um so they've got a whole process a whole program a whole deal that they have to do because in countries like brazil okay they have to take cash right and so changes everything and so they are sort of different companies in that they do in some cases have different issues and different uh business uh issues that are unique to where they're at and their maturity, their organizational maturity. But in general, it's the same business.

And it's kind of interesting that, you know, there's any variation at all in how they're handling, you know, things like in my initial articles about those two, when they first came out were about how they really handled things like marketing expenses and incentives to the drivers and things that are very similar in both businesses but which you know put a different you know wrapper around it and one will rationalize one approach with their audit partner and another will rationalize their their approach with their audit partner and the sec will say give us a good argument and we're okay okay and what i know that

when we look at uber we see that giant adjusted ebitda i mean adjustment um and i know they talk about say like either 2021 or 2022 uh they're going to get to you know quote profitability um and we've discussed this already but maybe you could re-harp on like how you know companies are saying they're going to get to a profitability but in reality they're adjusting for you know in uber's case maybe something like 500 million dollars in stock-based compensation Right. So it's pretty it's pretty chronic that companies like that will be talking about we're going to get to profitability and they're talking about non-get profitability. They're not talking about get profitability. And they're talking about getting to some number that is is manufactured. And in many of these companies, it's manufactured in a very inconsistent, you know, kind of pick and choose way.

So they're choosing, as you said, from this long list of menu items, and they're not even being consistent from quarter to quarter in terms of what those menu items are. And the SEC does try to look and say, if you're including it one quarter, why wouldn't you include it the following quarter? You've got to include things that are negative as well as positive. You sort of have to be consistent. You can't just cherry pick all the positive stuff and leave off the negative stuff. There is a rationale, though, for sometimes low-balling your results, right?

And that's the classic cookie jar mentality. So let's say that you've already accomplished what you need to accomplish. You've already hit whatever estimates or guidance you've done. You don't need to go overboard, right? it's kind of like if you you know you have a boyfriend or a girlfriend and you're shopping for the holidays and you already got the killer gift you already have spent you know what you were planning on spending there's no need to spend an extra 200 bucks on something else that's just going to sort of not be absorbed save that for the birthday or valentine's day right and that's

the that's the concept of a cookie jar like diminishing marginal returns you don't get any benefit in the market from going way over the top you only need to get to where you need to get to and so they will include or they will manage negative and positive in order to hit a number which is what they need to get to it's a classic ge you know didn't uh didn't under armor do that as well recently they were just under armor you know under armor is interesting because you know it was a big story a big deal Under Armour was the story that Market Watch did not want to publish that I published on my own site instead which is what could be leading to these criminal charges criminal charges not just civil not just SEC but criminal investigation of Under Armour what's

interesting is we don't have any update I left a year ago there's a Wells notice we don't have an update jay clayton's sec did not come and do anything on under armor but under armor was chronic there was all kinds of stuff they were really looking at every single number and they needed to meet again a lot of that is often driven by executive compensation we don't need to go we don't need to like blow the whole wad we need to just get to where we need to get to if we hit the hit the targets then we save it for later save it for a rainy day for later all right okay all right i think we're going to hit our wrap-up questions uh i have the first one here what is one financial saying that you disagree with the audit is not designed to detect fraud it is and it's been

proven and it's been litigated and judges have said it and audit firms have paid significant damages award because it is true the audit has to be designed to detect higher risk due to fraud or material misstatement and they have to do the audit and adjust their procedures in order to investigate and do that work. Why don't they want to do that? Well, before a fraud is uncovered, it's because they don't want to upset their client, right? They don't want to push back on their client and jeopardize the work. After it's discovered, they say the audit was not designed to detect fraud. Collusive frauds are hard to find. You know, if they lie to us, we'll never find it. It's because they're trying to avoid liability. Right. Okay. And yeah, do you think,

I mean, you know, companies pay the auditors to do the work. Do you think it would help if some other entity paid the auditors and there wasn't that contractual relationship where they're providing the services, they're making these auditors livings? Do you think that would help at all? That's sort of the $64,000 question, and it's sort of the thing that hangs every other reform or recommendation up. Lynn Turner, the former SEC chief accountant who's sort of a big crank on the audit firms, has been a critic for a long time. He actually works a lot as an expert witness for those that are suing the audit firms. So he has a lot of experience in this area. He actually continually proposes an even more dramatic recommendation, which is let's eliminate

the mandate for audit completely. Who cares about the audit? Who pays attention to the audit? Does It ought to have any value anymore. Take it out of the requirement in the securities law and let investors decide whether or not they want to pay in a particular situation. I don't agree with that. That's like sort of a pure libertarian perspective. He thinks that investors will most often say, yeah, we want auditors to we want to have somebody vet these accounts. I think not. And I think that that really, really screws retail investors who don't have the critical mass to make sure that that happens. Theranos is a good example. Theranos, they raised hundreds of millions of dollars, billions of dollars, and they never had an audit. Why? Because those sophisticated investors, the Murdochs, the Carlos Slims, the DeVos, the Walmart family, whatever, they didn't want the auditors in the way. They didn't want to know what they didn't want to know.

Interesting. All right. I'll hit the last question. What is one piece of advice you have for anyone considering a career in investing or maybe journalism, too? In general, nowadays, my advice I teach at American University, I teach MBAs. MBAs, I talked to a lot of accounting students, I talked to a lot of people who are CFAs, etc, people are investing. You have to read. Okay, I know everybody has ADHD, everybody, you know, is worried, you know, nobody has a short or long attention span. But things like reading the cues of the case, you have to read and you have to keep learning. And you have to keep like, seeking out, people to learn from, and you have to stay active. I got a master's degree from University

of Chicago at 53 years old, okay? I got my first job in a newsroom at MarketWatch at that same age. I changed careers. I've changed jobs. Resilience, you know, ability to sort of grow and change, constantly learning um you know uh eat your Wheaties because uh it's not easy out there you got to keep up your strength uh your spiritual your intellectual your physical strength but you're going to get rolled over if if you don't and they're going to leave you in the dust so So I'm a big reader. I'm a big researcher. I'm kind of a 24-7 workaholic. But I also, there's a million things I can do. I never have, you know, a need to, you know, worry about where the next dollar is coming from. there's always something and uh i you know i'm excited by constantly meeting new people and learning new things from everybody that i i run run across so mind open and uh stay hungry

all right all right i think that's all the questions we have thank you for joining us francine you're welcome all right welcome back in next up we have hot water i just have two how many do you have three always always beating you by one uh one up any other i think i think we might have different ones this time so do you want to go first sure yeah uh this is a question from hotlanta capital um you might be laughing but that's a very normal name for someone on twitter uh just put something crazy and then capital in front uh he asked if sas companies are so great why do they need to spend 50 to 90 percent of their revenue on a sales force what do you think about that you think he's on to something there yeah i mean i think they talked about this on

value after hours and there's such there are sass businesses that really are that great well adobe yeah i mean but a lot of them are dependent on other sass businesses oh yeah i mean okay that's true there is a little bit of a chain banking type deal where everyone's paying for each other's but yeah like someone like Adobe who's generating 30% free cash flow margins they obviously have that lock-in they don't need the sales force the products you know says what it is the value proposition is there but some of these companies that are spending you know say they got 200 million in revenue and they're spending 130 million on marketing and their revenue is growing out like 25% I don't know suspect to me yeah and that is kind of to go on like a tangent here a lot

of people see gross margin and they're like, all right, well, that is the margin that they could reach. Like not necessarily, but, uh, or like they subtract like 20%. Yeah. They're like, well, at scale they could get close to their gross margins. And so they see these high gross margins and it seems all appealing. A lot of those operating expenses don't just go away. Like there's certain operating expenses that really scale with the business. And so, you know, go into the 10 K 10 Q, whatever, go to their operating expenses, they categorize them there and they tell you what it is. And if you think that that's going to scale with the business, maybe you should be looking at the business a little differently. I also like to do, and you don't need to do like

just divide it, but R&D spend versus sales and marketing spend. If R&D spend is a lot lower than sales and marketing spend, that shows me that they might be trying to get too much revenue right now and they're not worried about the long-term product. I don't know whether there's like any, I don't know it's not like black or white or anything like that but if you see that R&D spend is low as a percentage of revenue and sales and marketing is high to me I like it the other way around yeah that's also where stickiness comes into play because if you're if you spend a lot of sale on sales and marketing but you don't have to do it all the time because they just stick around you don't have to keep spending on them that's one thing but if you're uber and you have

to go acquire a customer multiple times, that's probably not as skillful. And giving him all the discounts. All right, my next one is Warren Buffett. Apparently, Chamath, who I have no disrespect for, but apparently he is the next Buffett, according to Josh Brown. Do you agree or disagree? Okay, you know what I'm going to say. I disagree.

Chamath is good, but he is a little more aggressive. He's a little more risk-tolerant. He seems like the opposite of Buffett. People use that headline, I think, for clicks because no one is – there's no next Warren. Like he's – Well, you got to establish – I mean there could be. I mean it's not like – Potentially, but –

You got to establish like a 40, 50-year track record, you know. It takes a long time. Well, I mean it's not to say there aren't investors that could emulate his returns. but no one's going to be able to teach the way he's taught and have the impact. So far, it doesn't look like there's going to be as many people that have the impact on the average investor that he had. Yeah, and it seems like Buffett's so super patient. Chamath is very the opposite.

He doesn't seem like it's not – again, it's not bad. He's very aggressive with his deals. Well, I mean, he's doing deals like every week it seems like and that's not a bad thing if you're trying to get a lot of investments into things you like, but Buffett waits sometimes years and years and years before making one, which, again, just contrasting styles, but they're totally not the same. Yeah, I mean, it's just a headline to, like, grab clicks.

Yeah. They knew the reaction they'd get. It gets people angry. All right, the last one for me is AUM. BlackRock hit $8.7 trillion in AUM this year, up 17%. can they get to 10 trillion do you think and is how far is passive going to go

these are hard questions but I don't know yeah they are hard questions yeah it seems like based on natural compounding they could get to 10 trillion I don't know no I know I know

that's not a hard question but the passive stuff do you think I mean you see these numbers you see Schwab you see Vanguard I'd have upwards of a little bit less than them, but still in the multi-trillions of dollars. And I just think it's not, I think the people that argue that passive, whether you understand how it works or not, doesn't have an effect on the market. If you argue it doesn't have an effect on the market, I think you're just in denial at this point. You know, does it affect the long-term investor who has a, you know, decades long time horizon? Maybe not, but it does have effect,

i think because when people ask like i'm a terrible teacher when other people ask me for like uh when people are beginning like just starting out i almost always i say just index you know play it safe index uh dollar cost average into an sp500 index i don't know all 500 companies that are in there and i would say 99 of the people that are indexed don't so a lot of people are buying stuff they don't know which is creating i assume a lot of ownership if you're really interested in this stuff i would definitely go listen to like michael green more than myself you gotta yeah he uh you might have to listen to him a few times because it's hard to grasp but yeah and i don't even know if he's right but i think it's just ignoring the passive stuff if

you're someone that has a shorter term time horizon or even like if you're worried about short-term volatility i just think it's foolish i don't know all right where are your hot waters Intel is in hot water, I guess. I don't know if it's Intel versus ex-CEO. Aren't they? Oh, it's – yeah, the CEO is the ex-CEO, right? Remember when we talked about – is it Dan Loeb? It's Dan Loeb, right?

Yeah. And third point, taking an activist stake. Well, this week, ex-CEO, I guess, Bob Swan stepped down and Dan Loeb tweeted, Swan is a class act and did the right thing for all stakeholders stepping aside for Gelsinger. Troll, dude. What a troll. So we literally watched. What a troll.

Bob, live tweet, a hostile takeover. What a troll, dude. I mean, that's pretty cool. We kind of got to watch this thing play out over Twitter. Oh, yeah, you got to see it on Twitter. I don't know. That's exciting. But if I was Bob, I'd be like, fuck, like, screw you, Dan.

Like, we saw this. I mean, it's not that bold of a prediction, but he took the stake, told everyone about it on Twitter, and was like, all right, we think there should be some changes. And then a week later, he's like, kudos to the CEO for stepping down. It's like he had no choice. And the stock went up like 8%. I bet Bob has a great big – I don't think he's – in the long run, I think he'll be fine.

He probably has tens of millions in stock from his executive package. So I think he'll be okay. But for that day, I would be very upset if I was him. Yeah, I don't think he's struggling financially. But second one here, the World Health Organization is in hot water. Almost exactly a year ago today, I think maybe – Oh, wow. Actually, maybe like a year and five days.

The WHO, or the World Health Organization, announced after preliminary investigations conducted by Chinese authorities, they found no clear evidence of human-to-human transmission of the novel coronavirus. Talk about a cold take. Yeah, well, they didn't, look, yeah, they were totally wrong, but technically at that point, unless they were just lying, maybe they didn't have the evidence yet, you know what I mean? Is that maybe the coldest take of all time?

Yeah, but look, like, they're trying to investigate it. if they hadn't found the evidence yet it's probably tweeted it yeah saying you hadn't found like just because you hadn't found something yet doesn't mean it wasn't there you know what i mean so it's not like they were like oh this is definitive they were like we haven't found anything yet but it's like you shouldn't have proclaimed that at that point i don't know definitely cold take um and yeah they've had a tough go of it in 2020 you remember that taiwan video where they were like remember that one where the taiwan taiwanese lady talking about taiwan independence and the guy shut it down it was a little weird but yeah anyway okay

well those are the two that i had buy sell hold the theme is managers slash capital allocators to bet on for the next three years chamath chamath john wb rich okay bill ackman and pershing square chamath and social capital or buffett and berkshire keep in mind it's the next three years next three years uh so you're betting on mean reversion or blow off top i'm like a pershing square see if they're trading at a discounted nav uh i'd probably go pershing square chamath i'm selling i'm sorry i just don't like his strategy and I'm holding Buffett. I mean, Berkshire seems like it's impossible.

Unless there's just a hurricane because of their super cat strategy or whatever with their, you know, reinsurance stuff. Unless there's just a giant hurricane that wipes out the whole southeast. I mean, I hate saying it's impossible, but it feels to me like it's impossible to lose money with Berkshire right now. Will you gain that much? I don't know. You know what I mean?

But I'd probably buy Bershing Square. I don't know. It seems like they're really finding their stride. Yeah. Ackman, I gained a lot of admiration for Ackman after his – when I was listening to the shareholder meeting, the Berkshire shareholders meeting. And in like 1995, I heard him ask a question. I was like, okay. And he was like a nobody at the time.

He's like, I'm William Ackman from New York. And he asked like a good question. I was like, okay. He's a prodigy. We don't want to call him a prodigy. You just said there could be no one like Buffett. All right, well. But you could get Pershing Square at 30% discount to NAV like two years ago.

I think MedFaber was big on that. I was looking at it, and I was like, Ackman, he's not good after Herbalife, but they've crushed it. I think they've gone up 50% the last two years. So what would you choose? Yeah, I'd probably go the same. I don't know. If we're betting on blow-off top for the next three years,

I'm going to bet some off because a lot of those, There is a Chamath premium in this market. Oh, yeah. Put his name on a SPAC and you're pretty much getting a premium. Yeah, the company he's been in is up 300% this year. So that's not a sign of excess. Anecdotal evidence. So I've got two.

The first one for me is Tegas. We got a free trial and no, we're not sponsored by them or anything. But it's a pretty cool service. It's very useful. Yeah. Do you want to describe what they do for anyone that's actually interested? Yeah, I feel like this whole show has been free ads. If you're listening for the first time, we definitely don't do this.

But if you are interested and are like some sort of fund manager, yeah, I mean, they have transcripts of expert calls. So it's kind of like similar to what you get for a conference call transcript. But it's like, say you're a fund manager, you pay to get a call with an expert in a certain field or an expert on a certain company. they discuss it and then if you subscribe to tgs you get a free transcript of it you can learn a lot and that's great it's good stuff it's not just like conference calls you're getting like sort of bland management commentary and they're going to give you probably fluff whereas these

are like sometimes ex-employees ex-execs less fluff less fluff and it's they're very frank yes um so yeah it's definitely i don't know i've really enjoyed it but number two our producer got the first part of the vaccine, and so question, once you get the second part, what do you think Bill Gates will want to do with your body on the first day he has it? Well, we all know that, yeah. Well, you can tweet about it from your phone. That doesn't track it, but he's smiling over there. Yeah.

But that was a good joke, Ryan. Yeah, well, that was my, yeah, there's my joke for the day. What do you have for anecdotal? Okay, I saw someone tweet a Yeti water bottle, and the question was, 50 bucks for a water bottle like you know this is ridiculous and i thought you know man yeti has some strong pricing power do you agree uh i mean as a customer no not really but uh looking at it from other people that buy it yeah like i as a customer could really kind of care less what mug i have to hold my coffee in but uh oh yeah and i could care what less what phone i have

but people still pay you know there's a lot of other people that pay 400 buck premium for an iphone yeah i do see people i mean the data shows i mean they wouldn't get a sales show yeah i mean they it's weird how much it doesn't it's one of those things that doesn't make sense it's kind of like peloton where you're like people really paying this much for them like yeah and they love it yeah i guess maybe there's the uh there's no yeti community aspect maybe there is maybe it's a social media campaign definitely definitely there's definitely a yeti community aspect because of the outdoor like you know hunting outdoors stuff like that camping and like frat like uh yeah and young yeah young uh young partiers as well yeah the hats are big you know

the trucker hat if you're a girl and you're not wearing a trucker yeti or patagonia hat you know Okay. Any others? That is itch. How do you think I'm doing? One to ten, how do you think I'm feeling about my challenge of not mentioning those two popular things? Tesla and Bitcoin. I don't know what you're referring to. I don't know. You've been good so far. I see you liking stuff on your Twitter.

Oh, I can like stuff all I want. It's still living rent-free in your head. Oh, yeah. I mean, I think I'm about like 70% frustrated that I can't say anything. All right. Well, I think that's going to do it. Thank you guys for listening. Thanks, Francine, for coming on.

Am I forgetting any big – should I – CCM is the code for 7investing. Sorry, we've thrown like an overload of sponsorships on here today, or it feels like it. But, yeah, we're not financial advisors. Anything we say or discuss here on Chit Chat Money is not formal advice or recommendation. Thank you guys for listening. We'll see you next time. We'll be right back.