Invest Like the Best with Patrick O'Shaughnessy - Michael Mauboussin – Great Migration Public to Private Equity - [Invest Like the Best, EP.189]

Episode Date: September 1, 2020

My guest this week is Michael Mauboussin, the head of consilient research at Counterpoint Global. Michael is an all-time favorite guest here on the show, and this is his fourth appearance. We discuss one of the biggest topics in the world of investing: the shift from public to private markets that has taken place over the last several decades. We explore the reasons for this shift, the biggest overall changes in capital markets, and what the future may hold. Along the way we explore other fascinating topics like the rise of intangible asset investments, employee-based compensation as a form of financing, and more. If you enjoy this conversation I urge you to read Michael’s paper on the topic which will be linked in the shownotes. Please enjoy this conversation with Michael Mauboussin.   This episode of Invest Like The Best is sponsored by Canalyst. Canalyst is the leading destination for public company data and analysis.  If you’re a professional equity investor and haven’t talked to Canalyst recently, you should give them a shout. Learn more and try Canalyst for yourself at canalyst.com/Patrick.     For more episodes go to InvestorFieldGuide.com/podcast. Sign up for the book club and new email newsletter called “Inside the Episode” at InvestorFieldGuide.com/bookclub. Follow Patrick on Twitter at @patrick_oshag   Show Notes (2:27) – (First question) – Motivation for writing the book from public to private equity             (2:28) – Public to Private Equity in the US: A Long-Term Look             (3:02) – The Incredible Shrinking Universe of Stocks (4:48) – Size of the public vs private markets (7:20) – History and changes in the public to private markets (12:00) – Public market vs venture capital returns (16:48) – Persistence of returns (20:01) – Role of price and EBIDTA on the returns of a buyout (23:31) – How buyout forms are sourcing the debt (29:31) – Transition to businesses relying on intangibles             (29:42) – Capitalism without Capital: The Rise of the Intangible Economy             (30:13) – Endogenous Technological Change             (30:36) – Should Intangible Investments Be Reported Separately or Commingled with Operating Expenses? New Evidence             (34:18) – Explaining the Recent Failure of Value Investing (36:21) – Superstar firms and increasing returns (42:38) – Role on monopolies in creating network effects (4:52) – The allocators perspective in these investments (49:16) – How does this all impact public market active management (51:54) – Advice to young people getting into the investment industry             (52:30) – Jeremy Grantham Podcast Episode (53:30) – Other areas he is researching/looking into (55:44) – How investment work and Santa Fe research influence eachother (56:54) – Investors to learn from             (57:15) – John Collison Podcast Episode  Learn More For more episodes go to InvestorFieldGuide.com/podcast. Sign up for the book club and new email newsletter called “Inside the Episode” at InvestorFieldGuide.com/bookclub. Follow Patrick on Twitter at @patrick_oshag

This episode is sponsored by Canalyst. Canalyst is the leading destination for public company data and analysis. I'd heard of Canalist over the past few years and became more interested after meeting the founder and CEO last year to pick his brain about SaaS businesses. Founded by a former byside analyst who encountered friction in sourcing, building, and updating models, Canalist is now used by over 300 institutions, including the largest money managers in North America and by a number of guests on the show. With detailed company-specific models on over 4,000 public companies, Canalist platform lets analysts update their own models in seconds, complete with KPIs and segment data, adjustments, and restatements.

Everything you want and expect in your own models on virtually every investable public equity. If you're a professional equity investor and haven't talked to Canalyst recently, you should give them a shout. Learn more and try for yourself at canales.com slash Patrick. That's C-A-N-L-Y-S-T-com slash Patrick. Hello and welcome, everyone. I'm Patrick O'Shaughnessy and this is Invest like the Best. This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to

date at investorfield guide.com. Patrick O'Shaughnessy is the CEO of O'Shaughnessy asset management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaunacy Asheno Sasset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaunossey Asset Management may maintain positions and the securities discussed in this podcast. My guest this week is Michael Movison, the head of conciliant research at Counterpoint Global. Michael is an all-time favorite guest here on the show and this is his fourth appearance. We discussed one of the biggest topics in the world of investing, the shift from public to private markets that has taken place over the last several decades. We explore the reasons for this shift, the biggest overall changes in capital markets, and what the future may hold. Along the way, we explore other fascinating topics like the rise of intangible asset investment, employee-based compensation as a form of financing, and more.

If you enjoy this conversation, I urge you to read Michael's paper on the topic, which will be linked in the show notes. Please enjoy this great conversation with Michael Movison. Okay, Michael, for the first in-person podcast that I've done since early March, this is great. Great to see you, as always. The topic of our conversation is your latest paper on the transition from public to private equity, which is effectively a book that you wrote. And one thing that we've been talking about for several years just between you and I and I know you've been thinking about forever, I think your motivation would be an interesting place to start. Why take so much time and effort to write a mini book on this key transition? So there are a couple things, Patrick. First of all,

great to be with you and great to be with you in person. The first was in 2016, we wrote a piece about we called it the incredibly shrinking universe of companies. There have been some academic work on this idea called the listing gap, which if you look at the size of the U.S. economy and the population is that we should have many more listed companies than we actually do. And there was a sort of beautiful symmetry because the data went from 76 to 2016, so it was 20 years up because of the peak year for a number of public companies was 1996. And then from 1996 to slide down to 2016. So that alone was a really interesting exercise. And of course, this number of companies going up and going down as a function of basically supply and demand, what's coming in, what's going

out, and breaking all that down was really interesting. So obviously, the big input of what goes in and what goes out of the public markets is from the private market, to state the obvious IPOs, venture capital being a big source of those IPOs to a lesser degree buyouts, and then, of course, what's removed mostly mergers and acquisitions and the buyout industry playing a role in that. So this in the sense is a larger spin-off from that. But the second thing is Patrick is one of we're having a cup of coffee with Brent Bishaw. We're just sort of talking about the world. And I was saying to you guys, I'm not sure I have a really good understanding of the lay of the land here. I mean, I understand that these are different asset classes and I read all this stuff. But I really didn't have a clear

synoptic view of both where these industries are, these asset classes are, and how they got to where they are. So that was also motivating. So it was really just kind of a drive to learn about that. And as you saw throughout the piece, we try to sprinkle in a fair bit of history. And I actually learned a little bit about sort of the genesis of the buyout industry. And I knew a bunch of that stuff, the genesis of the venture capital industry. So it was just trying to get a broader perspective on where we are. And I just think if you're in the asset management industry, again, whether you're in buyouts or venture or in public markets, this backdrop, I think is very helpful for thinking about the world. We've talked a bit about in the past how companies are staying private for longer.

The average market cap at IPO or direct listing has gone up a lot. And that's because of a lot of what we'll talk about of funding sources in the private markets. But before we go there, I'd love to just level set a little bit on the relative size of the major categories here. Maybe you could mention the stat you just mentioned to me a minute ago about the market cap added by the biggest public companies and then sort of work your way down from there. Yeah, I mean, I think that this is something that it's not surprising, but the numbers are really big. So public markets as of year end, 2019, so they're probably an ooch larger now, or $38 trillion. The assets under management for the U.S. buyout industry. So again, I want to be clear that we're talking about the U.S., not global, but the U.S.

is $1.4 trillion. And the asset center management for the U.S., again, not global, U.S. venture capital industry is about $450 billion with a B. So public is 27 times larger than the AUM for buyouts. And it's about 80 times the size of the venture capital industry. And the statistic that I find interesting is when you're an investor, especially if you're running a relatively large pool of money, say a large pension fund, you need to make dollars. Like rate of return, as people say, you can't eat IRA, you need dollars. So here's an interesting little statistic is that if you look at just five stocks, Facebook, Amazon, Apple, Microsoft, and Google through July 30th, so the beginning of last month, their market cap went up roughly by $1.8 trillion. That's bigger than that. It's bigger

than the aggregate buyout industry, and that's obviously multiples of the venture capital industry. And even in venture, if you look at so-called unicorns and CB Insights counts about 225 of those in the United States worth about 650 billion. Just the market cap change is not quite three times, two and a half or three times that. So these are really interesting statistics on just the absolute differences in the sizes of these different asset classes, which I think are really helpful for people to bear in mind. And related to that in venture, you just think about some of the great funds. Benchmark is one good example. We're friends with the benchmark folks. And their latest fund is the same size of their last few funds, which is between $400 and $500 million, million, million,

not billion. So if you are lucky enough to get in there, which not that many institutions are, even if the fund does incredibly well, the dollars that it can earn, that's great. They're just not, for many large institutions are just not needle movers. Let's talk about, again, this transition from public to private with that caveat that public markets are still just a massive, massive player in the overall ecosystem, as you said, multiples of the other two major equity players. Say a little bit about the history that you learned that you think is relevant, both for venture. Maybe we'll start with venture and then go to buyouts. And sort of what are the key important things that have changed in each of those places that you think are contributors to

the way the landscape looks today? So the first thing, and you alluded to this a few moments ago, is if you look at IPOs, just literally the number of IPOs from the mid-1970s through, let's say, 2000, so we'll pick that sort of dot-com peak. The average was about 280 per year. Since that time, so 2001 through 2019, the average is dropped to 115. That just tells you there are very much fewer number of IPOs. And one of the most interesting charts, I think, in the whole piece is actually the exit strategy from venture capital. So it used to be in venture. And if you look back in the 80s in the chart, you'll see that the vast majority of exits were IPOs. And by the way, many of those were actually done quite quickly

after the company was founded. And today, the majority of exits, the vast majority are actually sales of the business to sales of the business. So that to me, that's an interesting one. By the way, one of my favorite statistics in the whole piece, which is sort of tucked away in a little corner, the IPO market from the late 1960s. This is pre-Nazdaq. NASDAQ was sort of started in 1970s, so this is a lot of stuff that was sort of a little bit off the radar. But in 1969, there were 720 IPOs, which is 20% of the number of public companies today. So it's like this incredible, incredible number. And then the other point that is related, and these are all sort of related concepts, you already also pointed this out, that the IPO,

the age of a company at IPO has also increased very significantly. It was just a little under eight years. And that early period is called the, again, mid-70s through the late 1990s. And today, it's closer to just a shade under 11 years. So even venture firms that are going public, they're waiting longer for those businesses to go public. Buyouts sort of an interesting story as well on the exits. Again, these were thinking about what's contributing to the public markets. Again, always the number one way to exit in buyout industry has been to sell typically to a strategic buyer. IPOs were not insignificant back in the early days, 80s in particular. But what's happened recently is this big surge has been so-called secondary transactions, where the buyout firm sells the company to another buyout firm.

So, and essentially that capital gets recycled. There are companies that just sort of bounds from one buyout firm to another buyout firm over time. And that's an interesting concept in and of itself. I mean, I think one of the interesting questions is if one of the big premises of buyout, one is a governance thing, that there's better governance. And I think that is probably really true. Small boards, more engaged, better incentives. and so forth. But another big part of it is we're going to improve the operations. So you can buy the fact that maybe the first buyout firm says, we're going to take on this business and improve

the operations. But when they hand it over, they sold to another buyout firm, the question is they going to just going to prove it further? Is this like an ongoing thing? So these are all really interesting. So on exits. And so you can see how both of those would have contributed to fewer public companies. The other side of ledger to state the obvious is mergers and acquisitions. throughout this period, especially in the 90s and 2000s, we've seen a fairly active market for M&A, and that's obviously reduced the number. There's one thing I want to mention, Patrick, and we just refer to this paper in the piece, and we have, I think, a brief paragraph on it, but it's actually quite interesting. So there were a couple professors that said, hey, guys, stop thinking about the number

of companies. That's the wrong way to do it. Just think about following the assets. So in other words, big public company A buys big public company B. Then they merge. And so we go from two to one. So we've shrunk that by half, but they're saying by our methodology, we're counting assets, that just stays as the same number of entities. So likewise, if a big public company buys a private company, that company obviously didn't go public, but in a sense they came into the public domain. So they're going to count that as going from private to public. So there's a little bit of an accounting thing. But if you do that analysis, rather than us having half as many public companies in 2020 versus 1996, the assets are only down about 5%. It's still a thing, although it's

vastly less dramatic if you just count the number of companies. So that's an interesting way to think about it too, is a lot of small companies rather than IPOing are just selling themselves. Another interesting aspect in the paper is the committed capital to these two major private categories where I think buyouts are at a record high. Venture, interestingly, still a decent amount below the record high that was, you could argue, a bit artificial in 1999, because there's this crazy spike up, but still below that 1999 peak. I'd love to hear what you learned about returns. So I want to introduce the concept of public market equivalent returns, especially for buyouts, and also what you learned about venture capital returns, both the average and the dispersion of the returns in those two

categories. In measuring returns, there are sort of three big ways to do this. The first is, often this considered standard, is internal rate of return, IR. And, and And IRR, people have known for a long time, has a number of significant shortcomings. The biggest one is the assumption that capital lets return during the period earns the IRA rate of return. So there's a reinvestment assumption that in many cases is unduly optimistic. And there are ways to deal with that. By the way, there's a literature on this called modified IRA. Modified IRA tends to get you closer to the truth and gets you to more realistic numbers.

The other challenge with IRA is there's no benchmark. So we don't really know what is a good number or what's not a good number. The second approach is just return on capital. So you give me a dollar, how much money do I give you back? Here again, the sort of two challenges is it depends a lot, how fast I give you the money back. So if you give me a dollar and I give you a dollar 50 and I do that in 12 months, that's pretty good. But if I do that over five years, it's obviously not very good. And also the benchmarking issue. This technique's been around for probably 15 years or so academics came up with something called the public market equivalent. And the idea was to say, hey, let's think about this in terms of opportunity costs. So rather than give you the money, if you give the money, if you give the money, to a venture fund or buyout fund. We're going to give an equivalent amount of money to an appropriate benchmark. And we could, that's a lot of debate about that, but approach your benchmark in public markets. Let's say the S&P 500. And then we're going to watch the flows of each these things over time and then measure so-called public market equivalent. So it's a very nice measure in the sense that one equals essentially the market. So if your PME is in excess of one, that's good. If your PME is below one,

that's not as good. So this is a sort of a uniform metric. You can get fancy with this. You can make different adjustments for size and leverage and different things, but that's the basic concept. If you review that history for buyouts, the PME has been over time about 1.2. So that's saying after fees, after risk adjustments and so forth, the buyout industry has historically added about 20% versus public market. So that's been pretty good. Obviously, you always have to ask about what the prospective returns are, but historically, that's been a pretty good asset class. Venture is actually quite a bit higher. It's about 1.4. What's interesting, however, Venture is it sort of puttered along around one from most of the 1980s and into the early 1990s, and then it went ballistic

in a dot-com period, so called late 19s into 2000s, and then it sort of regressed back to one. So it was this one spike in sort of a half-dozen year period that really drove the asset class returns over the life. Now, that said, for both of these things, this is really important to underscore is exactly what you just said. There's enormous dispersion in returns. So if you look at just different asset class, you'll get mutual funds or you look at bond funds or whatever, you could take a look at how the best funds perform versus the worst funds to get a sense of that. And those dispersions are there. They tend to be reasonably modest. But in buyouts and in venture, those dispersions are really high. So they're the highest in venture capital. And they're the second highest in buyouts. And that is to say that, As I mentioned, sort of even if the PME for venture in the last, say, 15, 20 years has been close to one, if you were anywhere near the top quartile and certainly near the top decile, you did incredibly well. And by contrast, if you're in the bottom desksile and the bottom quartile, it was much more of a struggle.

Ditto for buyout. So if you can identify and invest in the most skillful general partner managers, you have done it really, really well. So that's an important thing to bear in mind is when we talk about these asset classes, broadly speaking, and we're giving these sort of medians or averages, they really belie a very rich distribution of returns behind that, and that's a really important thing for people to make sure they consider. The follow-up thought I'll just say is that there's a recent Department of Labor letter saying that there's some thought about making private equity in general, so buyouts

and venture accessible for 401K programs. In some ways, that's an exciting development because that means individuals can access these asset classes where it was much more other they're not accessible or indirect through other things. But the question is, what access are they going to have? Like, which kinds of funds are they going to have? So they get access to the average asset class, that might be okay. But if they end up getting access to sort of the weaker of the industry, that might be not great for individuals.

Say a bit more about what I would say, the one click deeper on the dispersion is, which is persistence of the returns on a, let's call it, firm by firm or fund by fund basis. Do the best players tend to continue to be the best? players in both buyout and venture? The first thing is to say, so exactly what you said. Persistence just means past predicts the future. And what the data show are in buyouts, that was true for venture and buyouts, certainly through 2000. So if you could just latch

of one of the stars, these good performing funds, you did really well. Since 2000, persistence remains in the venture capital industry. So once again, best funds tend to be the best funds going forward. It's really interesting. No one knows, I think, exactly why that. that is. One of my pet ideas, which I cited a paper that also agreed with it, so I put it in there, is this idea called preferential access. The idea is something like this is that a venture firm does well, and it could do well originally by luck. It doesn't have to be skilled, but it does well. So it builds a good reputation. And then you come along and you know that you're a pretty good company and you know that your prospects are pretty exciting and people can identify that pretty

readily. You will attach yourself to the best firms in the sense to get the imprimatur. from them, and then, of course, they want to attach with you. And so that creates a sort of positive feedback that all the best companies want to work with the same venture capitalists. And that sort of allows them that positive feedback that allows them to do well. And I think there's something to that. One of the ways you would test that hypothesis, by the way, is to look at partners who have left these leading venture firms and to see how they do on their own, to see if the magic is in the seat or if the magic is in the individual. On the buyouts, it's more equivocal. There's research that demonstrates that persistence has moderated, so there's less persistence. There's also some work

that's showing that if you, depending on how you measure these things, that some persistence remains. But one thing I'll just say, especially for buyouts, which again is a much larger asset class, and this is going to make complete common sense, and it's actually something that's relevant for public markets as well. But if you imagine, we'll just make this up, there are a thousand funds, and so obviously break them into quartiles, 25, 250 each, they're going to raise the next round, the next fund, it turns out that the 250 top quartile or maybe the top half, the 500 top half, they're going to be able to go out there and make a case for themselves. But in the bottom quartile, like that 250, they're not going to be able to raise money. So they essentially drop out.

That's not literally true. They just participated in a much lower rate. So as a consequence, the successful guys are the main ones that compete in the next round, if you think about it that way. And so that's a really interesting phenomenon in and of itself, which is if you're successful in a sense, when it was out the weaker guys and the stronger guys have to compete with one another. Now, new guys obviously enter. It's not a completely true story. But we're measuring persistence. That's also an aspect.

And then we talked about this idea that we call it the paradox of skill, which it basically says again, that often as skill improves and more money comes in, more competition comes in, it gets harder to grind out excess returns. And I think there's probably some of that is true in buyouts as well. It's clearly true in public markets. So it's just the nature of these things. as things get bigger, more people participate, more smart people get involved, it just becomes intrinsically more difficult to distinguish yourself consistently.

On the buyout side, can you dive a bit into the role of price and EBITA adjustments? I found these charts so interesting about how much price paid drives outcome and PME, of course, and sort of what the trends have been there. And then this really interesting chart that shows the percentage of companies with EBITA adjustments coming through the buyout space, I also found fascinating. Yeah, let's start with the latter one first. And these are data, I think, from S&P. And as you point out, in 2019, we had a record year of companies that have EBITDA adjustments. And that was something, I think it was north of 40%, 40% or more. And these adjustments are things that are typically

we're going to take into consideration future cost savings. They're sort of given themselves the benefit of the doubt before they get going. And this is actually not insignificant because these are the kinds of numbers they're using when they're talking to their creditors as well. So will you lend to us? Our EBITDA is not 100. It's 125 because we're going to do all these really great things. There's also a statistic we cite that a couple years later, a lot of these companies miss those EBITDA forecast by a meaningful amount. Shocker. So yeah, so they're not, again, caveat MTOR. On the EBITDA, that was also, I thought, a fascinating chart. So just to be clear, 2019, the average EBITDA multiple paid was 11.5 times. That was a record high. And there's a great chart from Steve Kaplan at University of Chicago where they show on the X axis,

if you can envision it, is EV to EBITDA multiple. So that's just from lower to higher as you go from left to right. And then on the Y axis is PME, as you pointed out. So public market equivalent, and again, low to high, so if it's high. And what you see is almost a perfect looking downward sloping chart, which is to say the more you pay, the less the PMEs are in the future. It makes some sense. Now, the one caveat to stay on the multiples is there are two things that are a little bit tricky and you have to think about when you think about the multiples. The first is interest rates clearly are lower. And a lot of the buyout industry is about servicing debt and making sure and so forth. So with lower interest rates, there may be some reasonable increase

in multiple you'd be wanting to pay, although we see that again. We see higher multiples. across all different industries. And the second is really interesting is the mix of buyouts in the United States. In the last five years, we went from something like six or seven percent of the deals being in software to now just under 20 percent. I think it was 17 percent of the deals were in software. Now, when I grew up, I started in this industry in the 1980s and buyouts were all the thing back then. And the whole story was you need to have hard assets and stable cash flows and sort of tangible assets to use as collateral, the notion of an intangible-based business being something that you could ever put leverage on and certainly do a leverage buyout would seem to be completely out there.

But that's happening. And obviously, we've seen some buyout firms who only traffic and software businesses do incredibly well. So those are some interesting underlying developments. But Dan Rasmussen, our dad, our mutual friend, Dan's, I think, talked about this quite clearly. And his analysis has demonstrated that typically over 10 times, least historically over 10 times, was a warning sign that it was very difficult to generate access returns. And so, again, if you want to rationalize it, you would say it's interest rates, but by the same token, you see this long-term chart. And these are deal level. These are deal level. That chart is deal-level stuff that is more sobering. I'd love to talk about the L and LBO and use that as an excuse just to talk about how companies finance themselves

and their growth more generally, which I think is something really fascinating that has changed a lot, not just with interest rates, but with things like stock-based compensation, dive into each of those topics. Talk about how buyout firms are sourcing the debt side of their deals, where it's coming from, what the rates are, what the cost of capital is, how those things have changed in important ways. The middle part of the paper, and I think it's probably fairly boring for most people, was we talked a lot about sort of how the backdrop changed in the world and how that contributed to the growth of either buyouts or to venture. And one of the things we spent some time on was, I also call it the co-evolution, but first the high-yield

bond market and then the leverage loan market. So this is now specific to buyouts. And as everybody knows, these things tend to go in waves. The first big wave for LBOs was in the 1980s, sort of apex of that was the RJR Nabisco acquisition by KKR. That was about $50 billion in current dollars, so in today's dollars. So that was a very large transaction by any measure. A lot of the early buyouts were fueled by junk bonds, high-yield bonds, and that was due to the rise of Drexel Burnham-Lambearing and Mike Mielken in particular. So those two things co-evolved in an important way. And then the high-yield market, again, grew, fits and starts, but that market sort of peaked four or five years ago. And what really started to emerge, starting in the late

1990s, but certainly the last 20 years for sure is the leverage loan market. The leverage loans are a little bit different than buyouts. It tend to be more senior. They tend to be collateralized. They tend to be floating rate versus fixed rate, and they tend to have less covenants, interestingly. What's happened is through the collateralized debt market, they've been collateralized in what are called CLO's collateralized loan obligation market. So what you do is you take a package of these loans, and then you break them into tranches, and there's a waterfall for cash stream. So AAAs get all the first stream of cash, and then the AAs and so on and so forth.

And the CLO market's grown quite rapidly. So it turns out in recent years, the leverage loan market now, is as large as the high yield market. So that's a really striking finding. And the CLO market now is about half the size. So half of those loans go into the CLO market. And again, those are packaged and sold out into the world. So I think there was a really interesting co-evolution of now the leverage loan market and the buyout market. Now, in terms of actual multiples paid, we already said that multiples are high, but it turns out you might think, gee, they're using more and more leverage. And the answer is not really because they have to measure, they have to monitor for debt to EBITDA ratios. So what's

happened is as the multiples have gone up, there has been some more leverage, but a lot of it is just more equity going in. So there's actually, amount of equity going to these deals is actually reasonably high. Patrick, I've not looked at it really super closely lately, but what's remarkable is what's happening just in markets in general, right, in the credit markets. And so I think it was last week, within the last couple weeks, a high yield issuer issued debt at below 3%. It's hard to get your head wrapped around that. It's 200 basis points or 225 basis points over the 10-year treasury note yield, but that just seems like that's who would have thought of that? That's on the buyout thing. On venture you raised, I mean, I found this interesting. We didn't draw

this out, and I think this is a really interesting discussion that I should have spent more time on. So one of the points we make, and this also goes to sort of what drives this, is that we made the case that, gee, these companies are not going public, sort of that in the 50s and 60s and 70s, companies had to go public because they're tangible businesses and they needed capital to grow. And you think about Walmart, Walmart went public in the early 1970s in their first 15 years. They had negative free cash flow every year because they're billing stores and so forth. Sort of the model you have in your mind and they need capital. So the negative free cash will they have to finance themselves externally.

And the argument is now these companies are now all these intangible companies and it's just a bunch of guys in a garage and they're using the cloud and so on and so forth. And there's some truth of that. But one thing that's really missing is the change in. compensation and how stock-based compensation in particular has essentially become a form of financing for these companies. Again, if you think about stock-based compensation, to be clear, and it used to be mostly employee stock options, that's much less of an issue today. It's more now restricted stock units or performance stock units. So you just think about if I grant you and RSU a restricted stock unit,

there's sort of two transactions that are happening. One, in effect, I'm raising capital from you. It's essentially financing. And then I'm compensating you for remuneration. So in other words, I could say, what's the difference between me selling that stock to the public, taking the cash and then giving it to you. The difference is your owner, but okay, those numbers are very significant. So we just took a peek at the S&P 500, and we looked at SBC is a percentage of cash flow from operations. So this is off the cash flow statement. And this is S&P 500 technology companies. So these are the more mature and established ones, and that number was 18%. So almost one in every $5 is coming. By the way, that should not be in the cash flow from operations. That should be in the financing section of the cash flow from operations.

So in a sense, you'd say you'd be taking down cash flow from operations by 15 or 20% for these companies. The ratio is vastly higher for smaller companies, so younger companies. So a lot of this, I'm not going to call it an illusion, but a lot of the sense that these things are super capitalized is because in a sense they're raising capital internally with their own employees. I think that's a very big change versus 40 or 50 years ago. We just have to keep our eye out. Now, I'm being agnostic. I'm not saying it's good or bad, but I just think that as you're thinking about value clearly in your mind, you should understand that distinction. And as an analyst doing financial statement analysis, you need to sort that out when you look at the cash flow statements and just not,

there's a very common thing where people say free cash flow is just cash flow from operations minus cap X. And that is extraordinarily misleading. You're missing a lot of stuff if you're doing it. So you really have to be much more careful and measured as thinking. about where different accounts go. With these same companies, intangibles is just become an incredibly important concept, balance sheet item, and so on. I remember getting interested in this issue five or six years ago when I read a book called capitalism without capital, which is just very thought-provoking. And we know that a lot of you mentioned software a number of times, mentioned that $1.8 trillion of market cap added to those companies heavily dependent on

intangibles to grow and run their businesses. What did you learn about this transition as you studied the history of equities. I like that book, by the way. It's got some good stuff. There's sort of a whole literature on this now. A lot of you can trace back to the work of Paul Romer, who won the Nobel Prize a few years ago, in particular, Romer's 1990 paper. There are really three things that are tricky about this. One is, how do you measure this intangibles? So very much to your point, we know that a lot of investments that are made are intangible. The key from a valuation point of is they typically show up on the income statement. One task would be for us to take that off the income statement and put it on the balance sheet. There's a paper that came out in management science

by Luminita Inake and Anup Shavastava. And I thought it was just fascinating. They said, hey, maybe we should segregate SG&A into a component that's maintenance, like the SG&A we need to run the business and investment SG&A. And they use that technique and they go back to 1970 to demonstrate that there's been this huge upswing in intangible investments. By the way, when people lament that companies aren't investing anymore and they're hollowing out their businesses and using all this money to buy back stock and so forth, they're missing a huge component of this, which is intangible investments. And if you properly reckon for that, not only have investments not gone down, they've actually gone up quite materially.

To give you some sense of this back in the envelope, intangible investments in 2019 for U.S. companies was about $1.8 trillion. Capax was probably about 700 billion. R&D was about four, and this is separate from R&D, about 400 billion. So we're talking about very large numbers. The first task, though, is just measuring it, and it's very difficult. We can do it reasonably well on the aggregate level. And by the way, we also know Carol Carrado is sort of one of leaders on this. And she's written a bunch of papers which she shows and go back to 1970s, lines right up with our public company thing. Tangible investment was double that of intangible investment, which made sense. And today,

intangible investments 1.5 times tangible investment. So there's been a complete flip. And this is just a few couple generations, let's call it. So the first thing is measurement. Now, we can do it in the Agri pretty well. It's really hard to do it for an individual company. So the question is, can we develop sharper tools and techniques to do it for individual companies? So stuff like R&D or maybe advertising, that would be pretty obvious. But within that, within other components of SGNA, how do I think about what is really a tangible investment versus what is maintenance investment? That's the first point. The second point is actually, as you mentioned, capitalism without capital, in that book, they have a section where they talk about the economic characteristics of intangible assets versus tangible assets. And again, this rifts off a lot of the work of Romers and Brian Arthur and others.

And there just needs to be a core understanding that none of the laws of economics have changed. They've not been repealed, but that intangible assets have different characteristics. And the simplest thing is this idea of rival versus non-rival goods. So we don't get too technical, but rival goods are a good that one person can use at a time. So your laptop, you're on it, I can't use your laptop or you're reading a book. I can't read that book. By contrast, a non-rival good is one that we can all use at the same time. So it would be a recipe, it would be software, it would be anything digital. And then the second is the degree to which you can control it, essentially. So if you develop some incredible intellectual property, some song, some software, and you want to keep it proprietary, how easy is it for others to take it or not take it? So the concept is technically called excludability. What Romer talked about was these non-rival goods, are partially excludable, which allow companies to generate huge excess rents. So that's a really interesting area. But that whole area, what are the differences?

And again, I think that there's a large literature on this, but as an investor, if you're trying to understand how the world works, understanding those distinctions is incredibly valuable. And then the third component is really what we said, like, why is this matter? And, you know, this is part for you, Patrick, even part of your core business, which is, how do we think about measuring value? How do we think about the importance of factors? For example, if you capitalize these investments, it will have a very material impact on earnings, which will go up a lot.

And it'll also have a very material impact on invested capital, which will also go up a lot. So things like price to earnings or price to book, you get a very different signal based on this. I'll just mention there was one paper that came out in the fall. It was updated earlier this year, but came out in the fall of 2019 by Shravastava and Baruch-Lev. They talked about value investing in particular, and they sort of did this really interesting thing where they used from France value versus glamour. So glamour are the most expensive stocks, value are the cheapest stocks. And they said, when we make our adjustments, they find that up to 30 to 40 percent of the companies in each of those categories leaves the category. And they claim that they find a much stronger signal when they make those adjustments. So these are really interesting areas. So the implications are really interesting to think about that as an investor. And again, certainly for system. investors. And I think systematic people understand everything I'm saying. There's no revelation here, but it's the constant chase to get it more efficient. But even as a fundamental investor, you have to say, I have to think about these things properly from an accounting point of view. What is an

investment? What is maintenance? What is a return on investment? It's all the same basic things. The last thing I'll just say is that notwithstanding sort of these adjustments, the thing that doesn't change throughout this is free cash flow. So free cash flow is unperturbs. It doesn't really matter where you account for stuff. It doesn't matter where accounts put things. What matters is free cash flow, but why I think these adjustments are useful for the investors is it gives you a clear view of investments. And then if you have a clear view and you have a sense of return on investment, you have a better understanding of future profitability, future free cash flow. So to me, it's just mostly revelation. So those are three chunks that I think most people don't do much. Can we measure

better? Do we think about the different characteristics of intangible assets? And what are the implications for how I actually do my job. And I think each of those areas, broadly speaking, I perceive people could do better. By the way, when we make small, simple adjustments capitalizing some of the intangible investment for something simple like book value, it drastically increases the return of a value strategy. And this is a simple, simple version of that adjustment. So you have to imagine that more properly accounting for intangibles, not just for systematic, but for all investors, is really important. If you had to segregate the successful versus non-successful, at least,

public market investors over the last, certainly last decade, maybe the last 20 years now, you might point to whether or not they embraced Brian Arthur's idea of increasing returns. You talk in the paper about superstar firms and returns on capital earned by those firms versus sort of the rest. Tad those two concepts together for me. Yeah, I mean, I think this is really, again, I had this in the back of my mind, but this sort of brought to the front of my mind. They're sort of two related phenomenon. One is, as you point out, this idea of superstar firms. And there's a lot, there's been a fair bit written on this. And the way we could try to think about that is looking at the gap between return on investa capital for the biggest and the smallest. And the claim is that that gap was

call it 15 percentage points 20 years ago and now it's closer to 30 to 35 percentage points. And Patrick, I think you've seen, and we've talked about this board, I think you've seen this too as well. If you look at operating margins for businesses and you break them into quintiles, you see the bottom three kind of bumping along. They go up and down with the economic cycle and so forth. But there's not been a market change where you see the action is the second quintile and then the top quintile in particular pulls everything up. So the averages, again, these averages sort of belying this sort of weird sets of distributions underneath it, the rich are getting richer. That's certainly the phenomenon. So, and another one that's related to that's just a sort of small company, I don't know we call it

the small company trap, but this also relates to fewer IPO. So why are a few companies listing and the academics sort of say, hey, this is kind of a, there's a proclivity to list. And it's based on a cost-benefit analysis. And the costs are what you'd expect is regulatory and legal costs and IPO costs and once you're public, a lot kind of stuff. And then the benefits are you can have access to capital and you can compensate people more efficiently. But they basically argue that the costs have gone up more than the benefits, which means that you need to be a larger company to be able to shoulder these burdens to go public. And the second argument, which is really afforded by Jay Ritter, who's like sort of the main academic doing work on IPOs, is this idea

of economies of scope and small companies are having a harder time transitioning to becoming medium and large companies. And as a consequence, they look into the world and they say, we're better off just selling ourselves to a big company because there's going to be a lot more opportunity economies of scope. A lot of the exits now are just selling to larger street by it. So that's sort of like that big, small companies. Brian Arthur, and by the way, I've been very enamored by this work since the mid-1990s, but Brian was one of the first economists to identify this concept called increasing returns. What you're taught in microeconomics, and by the way, for the most part, is still a valid assumption is that return on capital tends to migrate toward the cost of capital,

which makes complete common sense because it's competition. So in other words, Patrick's Lemonade Stand does really well. Michael Lemonade Stand opens next door, cuts prices, and then we go back and forth until we're basically earning the opportunity to cost to capital. And that could take time and so on and so forth, but that's basically the path that almost every industry follows over time. So Brian heretically came out with this idea of increasing returns. He said, under certain conditions, especially when there are networks, one company can kind of run off with its spoils. So he called this concept increasing returns. By the way, one of the really interesting proxies for this is just look at market share distributions. So in the traditional businesses,

if you think about soft drinks or sneakers or whatever, the top companies like 40-ish, 40, 50, something like that. Next company is like 20, 30, and something like that. And then it goes from there. Whereas in these certain types of businesses, these network affect businesses, top companies have 90% market share, 80% market share, like things that we never had never seen. These are, we're going to call them natural because they evolve. So Brian's talked about this idea, mostly from network effects. Network effects exist when the value of a good or service increases as more people use that good or service. And I think as we move to more intangibles, we see more incidences of network effects. Now, I should mention that network effects have been around for a million years. I actually just

was looking at the other day at the 1908 annual report for AT&T, 1908 annual report for ATT. They actually laid out network effects beautifully in this annual report from 110 years ago. So the idea has been around for a long time, but the applicability I think is more material today. So now here's what's really interesting is when you think about why this has such a powerful influence on value and value creation. Classic economies of scale, which is a form of increasing returns, just says as your output increases, your cost per unit goes down. Economics 101. You learn that in your third day of microeconomics. What Brian, I think, introduced in a way that I hadn't appreciated before was demand-side economics, which says, as more users use your good, the willingness to pay goes up

because it becomes more valuable for them. So if you can imagine these two curves, these two charts sitting next to each other, the one on the left has sort of this declining cost per unit as a consequence of scale. And the picture on the right has this increasing willingness to pay is a consequence of scale. If you don't increase the price of your good or service, you give huge amounts of consumer surplus. When you think about a lot of these platform businesses, and I think if you think a lot of venture capitalists, I think they are very overt in trying to engineer that two-sided benefit. That becomes an incredibly powerful mechanism for creating value. And when you think about the leading technology companies, almost all of them are employing some element of that

basic picture, which is really cool. How do you get there? Is another question. How do you unseat those guys? Another question. But that's the Brian Arthur connection and why it becomes really difficult for small companies to unseat all this. One other thing I'll mention is I mentioned a moment ago about M&A being more active. And one thing we've also seen is a fairly liberal antitrust. We've seen, if you look at the number of public companies, I mentioned already sort of this introverted use. So from 1976 and it peaks in 1996 and then it goes back down to now, 2019. So think about the inverted view. If you actually do a Herfandall Index and Herfandall Index is a measure of concentration

in industries, that actually is a U. So it's almost a perfect mirror of that. So Herfandals were high in the 1970s. They dropped in 1996 and then they're back up. So in the last 20 years, we've seen a meaningful increase in concentration. I think largely as a consequence of mergers and acquisitions. that's also played into this whole equation of both fewer public companies and also greater profitability for the leaders. What are your thoughts on the role that monopoly starts to play in these big

companies? I love the 1908 AT&T report and our friend Modest Proposals idea that I asked him if he could pick to invest in anyone's sector. He just say communications because you always have some monopoly to pick from and that communications companies naturally create these network effects and therefore sort of monopoly. I think what's been unique about this cycle is people mostly love these companies and spend a huge amount of their time and dollars on their products and services quite willingly. And it doesn't feel anti-competitive in the sense that normally would be the case for attacking and breaking up a company like AT&T was broken up in the early 80s. So what's your sense of how that regulators may play a role in the future returns of these businesses?

I'm very interesting this topic and I've read a number of books on it. So I don't have a strong view. I have a leaning, but I don't have a really strong view. And so I do think, look, the key was historically those kinds of monopolies, including AT&T, were regulated. There were other monopolies. I mean, you think about your utility or so forth. Those are regulated in a sense that we're going to trade off allowing you to have a monopoly in this particular market, but we're going to make sure that you don't make too much money. And I think what feels unusual to people is that certain companies get into these so-called natural monopolies. They can do whatever they want with their economics. They're not going to be regulated in any meaningful way. And I think

there's some sense that those profits could be unjust or these companies extend their power too much and so forth. So I don't know. I would just say, though, as an investor, notwithstanding wherever you fall on the continuum, whether there should be action by the regulators or not, it's something to be incredibly attuned to. Just I would pay attention, especially if we have changes in administration and just watch those political wins. Those could be some major development. Now, all that said, and I think AT&T is a good example, it's not super clear that breaking up these companies would be bad for shareholders. In fact, there have been cases where these sort of monopolies have broken up, and it's actually been pretty good for shareholders. So it's not clear that from a shareholder

point of view, it's completely dire. So I don't really have a strong view on it. I think it's an incredibly important topic and topical thing. So people should pay attention. And especially as we get through, for example, the election in 2020 and we move into 2021 and so forth, people should continue to monitor this closely to see what developments take place. The angle that we haven't talked a lot about is what I'll call the allocator's perspective. You mentioned, earlier is sort of the generic big pension fund that needs to make dollars and the dollars are coming from public markets at a massive multiple of either buyouts or venture capital. How do you think that will continue to evolve? Do you think that we'll just see more money put on a relative basis into

private markets just because returns have been good there and companies are staying private longer? Do you think that it just trends more towards indexing? If you're an endowment or a big pension that has spending requirements, but it's also probably going to be around in 30, 40, 50 years, what do you think the change in perspective has been and might be in the future. I think it's really challenging for these pension funds and for endowment because their liabilities are growing. They're probably not going to get more cash flows and they have their beneficiaries expect these benefits. So I think it's a really tough one. And by the way, that depends on what estimate you accept, but underfunded pensions, the United States are somewhere between one and a half and six trillion dollars trillion. So these are big

numbers to begin with. One of my favorite charts from the report was that of CalPERS, And the reason I liked it is because these are all just public data so we can get these things. And we went back to 1960 and CalPERS has posted their assumed plan return. And we just compared it to the U.S. 10-year treasury note yield and when it traded the 30-year treasury bond yield, so the 30-year didn't exist that full 60 years. And so back in 1960, the 10-year was at 4%. And the plan return was 4%. So there's basically no risk premium.

In 1981, it's hard to think about this, 1981, so to call it 40 years ago. the 10-year was yielding about 14% and the plan returns were 8%. So there was a negative 6% risk premium, right? You could have basically locked up a lot of your returns for some period of time. And then now the 10-year is at 70 basis points, roughly speaking, and the plan returns are 7%, which doesn't seem crazy, but that's a call it roughly almost a six percentage point equity risk premium. So we've gone from negative 6 to positive 6 risk premium.

Now you're the chief investment officer in one of these big pension funds. You're like, how am I going to get there? The first thing, it seems pretty clear. It's unlikely to come from credit, certainly from corporate basic stuff. And then public equities, I mean, you tell me what public equity returns will be, but even if you assume... Low, it seems. Yeah, low.

I mean, I think even if you assume they're sort of low end of the historical ban, you're going to be hard pressed. And so people sort of say, like, I need these alternatives to try to get there. By the way, that's not, I mean, most a very high percentage of funds. say that they're going to allocate more to alternatives. So that is the most common thing. The interesting thing is when surveyed institutional investors, this class you're talking about, almost 90% said they have penciled in 8% or higher returns for alternatives. 40% of them, so it's a subset of that group, 40% have penciled in 14% or more returns. So you're like,

all right. Now, part of this is actually interesting. And it's actually, to some degree, almost like an agency issue, which is to say, I'm in charge of venture capital for the pension fund and you're the CIO and you say, hey, Michael, we need to get these returns. And I go, oh, it's great. We're going to invest in this venture fund. I mean, we don't really know if it did well or poorly for five, six, seven, eight, nine, ten years. Maybe I'm not even doing this job anymore, but certainly maybe you forgot. So another is it's a very different thing. Whereas if I say, hey, we should put more into public equities and then they go down 15%. You'd be looking at me like six months later, 12 months later, giving me a funny look. So I think that there's a lot of

appetite for this. It's just a question of whether the return, those expectations will be met. But again, that's the tradeoff. We talked about the dollars versus the percentages. And it's hard if you're calipers and you're $400 billion, it's hard to see, can you put enough money to work in these kinds of things where you're big enough to make the dollars make a difference versus the percentages. And that's a challenge. One last thing, there was a really interesting roundtable in the new issue of the Journal of Applied Corporate Finance. And it was actually a bunch of GPs, general partners, these are investors sitting around talking to one another. One guy says, you know, it's kind of interesting.

All these guys come in and they say, we think the asset class will earn somewhere between 9 and 11 percent net. He goes, but our fund, we think we'll earn closer to 20 percent. So in other words, they know about the base rates for the industry or they have a view of the base rates for the industry, but they don't think that those base rates are applied to them. Another interesting phenomenon is these guys go out and market. What do you think this all means for public market active management?

We've talked about this a decent amount before, so we don't have to go too deep into it. But I'm just curious what, if any, changes this research made to your thinking there, especially around the lack of small and mid-cap companies, historically a place where there has been some higher dispersion and maybe more opportunity for Alpha, if not Alpha itself. Any updated views on the role of active management in public market specifically? No, not really. I think that one of my other favorite statistics in the paper is that in 1976, there were less than one CFA charter holder for every public company in the United States.

And today there are 27 CFA charter holders for every public company in the United States. So a lot more eyeballs on the companies that are out there. I think that, and maybe there are clearly more dispersion in smaller mid-cap companies. But look, the world is just a super dynamic place. You see these value changes are quite dramatic. You think about 2020 and had anybody had any idea what was going to go on, you know, it's really hard. So I think that there will always be a role for public market investors. And a lot of the issues we talked about is it is a changing world. And it's a global world. And so there will always be opportunities.

Things will go up and things will go down. And that will always be an opportunity for public market investors. So I don't think it goes away anytime soon. Now, one thing we've talked about quite a bit is, is it a role for indexing? And the answer is absolutely yes. And I think for many people, that's a very sensible solution. But that does not mean that the active management industry. can go away. It's not going to go away because there are two things that it does that are still really important. One is price discovery. And again, indexing benefits from that positive externality. We can never lose that. Essentially, the fees paid to active management subsidize the indexing industry. And the other is liquidity. And even in these environments, we see that index people

don't trade that much. And so we need liquidity if you have it. So I think those are public goods. Those are vital. And those will continue to play a role. So the debate should be what percent of the assets should be active versus past. that's a vibrant debate, but it's not going to go away. I still think that there's going to be a huge opportunity. I'll just say that my point of emphasis for my students at Columbia Business School this year was exactly this intangible thing. I just think if you can get in front of that and think about that intelligently, that can add a lot of value. I also think something you and I've talked about is Dan McCarthy and Pete Fader have done this great work on customer-based corporate valuation.

Again, the ideas have been around for a very long time. These guys have extended it and made it more rigorous, those kinds of tools, I think, can provide certain people with insights that can be valuable. There's always a frontier of something interesting to work on. You mentioned the kind of focus on intangible investment and that concept for your young students, many of whom I think will go on to be professional investors. Beyond just that, let's say it was your own kids and they all want it to be. They're all kind of of that. Some of them are of that age that they might start a career or have started a career, maybe in investing. I'm just curious kind of what other advice you would give, I think a lot of young people out there that want to get into this business,

investing business, I'll say, very generally speaking, venture buyouts, public markets, maybe the loan markets, but just more generally. What trends do you think are established and persistent enough that they should merit attention from young people? By the way, I love Jeremy Grantham's answer to that question when you posed to him. I was like, wow. Yeah, exactly. That took me in the back a little bit. I think one of the answers to that is if you're serious about making a long-term career is to try to think about, can I do something that other people aren't doing. So to be the nth person doing the same thing as everybody else is very challenging. And so that might mean, are there parts of the markets that are less trafficked?

Are there geographies where you could be on the smarter side of the people in the room? That would be the advice is to try to find something that's not what everybody else is doing. The challenge with that is it's often the case that those are smaller asset classes. And so you have to be modest in terms of what you think you can actually do in terms of a size of your business. But that would be my advice, is almost certainly try to find and figure out something that other people aren't doing that can be beneficial and get really good at it versus trying to, again, be the 1,000th large cap growth manager or something, which is difficult. Every time we do this at the end, I ask you sort of what are the two or three issues on top

of mind that you're working on and actively researching and then eight months later we do this again and you've written a book on the topic. So what will the next book or two be on? Well, a couple of things. One is this intangible thing is something we'll most certainly do more work on and probably have something on that. We're also doing an interesting bit of research on the concept of team decision-making and in particular the rule of cognitive diversity.

What we're trying to do is go beyond sort of the headline, feel-good commentary and actually analyze as rigorously as we can. And we started with something pretty basic, which is about 50 investment. committees of real endowments and pension funds. And we looked at the size of those committees and actually the composition. And we talked to Scott Page, University of Michigan as a friend, one of leading guys thinking about diversity and developed like a little scorecard of cognitive diversity, not social category diversity, cognitive diversity. And we're just using some very simple machine learning techniques to do dimension reduction and probably some K-means clustering

to understand that. And the early results are pretty exciting. We'll see more on that. The other thing we're doing in the background quietly, I don't know if it's going to see the light of day, but working on a revised version of expectations investing. So my mentor, Al Rappaport, he's an amazing, just an amazing guy. He's in his later 80s, but just going strong. And so we've been talking about what have we learned the last 20 years since the first version of that book came out. I'm happy to say that a lot of this stuff stands up pretty well, stood the test of time. But, of course, there are many things we were talking about today that would be novel and interesting to contribute. So that's another project that's going on. There are other things I'm interested in

just, we have files on a bunch of these things. One of them is there's a lot of stuff in computer science on this, but this idea of exploit versus explore. So as a company, how do you think about you're allocating your resources? And this actually could be our intangible thing, sort of masked in a different argument. How much allocation of my time and energy and capital do I spend on just exploiting what I'm doing well and how much do I allocate to exploring something new? And how does that change over time for a business and evolve. That's another cool topic. So, you know, Patrick, there's always like a zillion things that are so fascinating to work on. Any of these concepts that manifest more directly in your work with the Santa Fe Institute of late? And I'm always just curious

how ideas move from your kind of investing work to the Santa Fe work and which direction it tends to go. Yeah, well, definitely. I mean, intangibles check. The cognitive diversity work is really collective intelligence. And I think SFI has done some of the most profound work on collective intelligence and understanding that. So that would be certainly a check. Explore versus exploit, some of those original ideas were some of our SFI scientists were very early in all that stuff. My first call, and when I was thinking about that and building my file on it was our president, David Crackauer, and he gave me a whole bunch of things to pursue. So yeah, I think that SFI clearly had a major imprint on me. And when I started to think about these ideas, it certainly

is always in the back of my mind. So in all those cases, for sure. And even things like expect expectations investing to some degree because it gets into interesting questions about how do we see the world, how do we form expectations, how do we behave as collectives versus individuals? I mean, these are all super interesting, super interesting topics. So yet at this point, it's hard to untangle like my thought processes from what I learned from SFI. In closing, are there any investors that you think people could go learn from that have been especially good? I mean practitioners, not just academics in this era of the rise of intangibles in your initial study? If someone asked me right now, I have them listen to many of the things you've done,

interviews you've done, and discussions about bundling, discussion I thought with John Carlson was fascinating on many levels and very useful. Where the John Collison conversation I thought was really interesting was he was not only interested in the concept, but interesting like measuring the concepts, which is also, I think, the next level. But I had to say that I know people report they have bad experiences on Twitter and so forth. Twitter's been phenomenal from my point of view. Like the people I follow, I really like, I learn a lot.

threads I see I can sort of start to work on. I don't know if I point to any specific investors. I would highlight Dennis Lynch, who was the head of Counterpoint Global, and Dennis has tremendous track record as an investor over time, but perhaps the characteristic of him that I admire the most is he's just one of the most actively open-minded people I've ever met. So he's just completely open and thoughtful and willing to hear different points of view and rigorous in a sense, but flexible in his thinking about what's going on in the world. The one thing I will say is that I have a reaction people lamenting the world saying like, oh, this is Fed doing this or indexing is doing that. I mean, you have to play the cards that are there. You have to deal with the world as it is, not as you want

it to be or you wish it to be or how you think it should be. That's also another thing to bear in mind for people is that don't complain about the world, figure out a way to thrive in it. Well, as I said yesterday when I was reading this again, I think it is sort of the definitive piece that everyone in the asset management business needs to read because it gives you enormous context for what has happened and what the persistent and important trends have and where money is managed and how. So I love the piece or the short book, we'll call it maybe. As always, love this conversation. Thanks so much for your time. Thank you, Patrick.

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