Motley Fool Money - Aswath Damodaran: Read Less. Think More.

Episode Date: February 4, 2024

Want to follow the great investors? Then good luck beating the market. Aswath Damodaran is a Professor of Finance at the Stern School of Business at New York University. Bill Mann caught up with Damodaran for a conversation about: - Corporate lifecycles, and why investors should understand them. - The problem with trying to follow great investors. - The fall of research analysts, and the rise of passive investing. - An investing lesson from Charlie Munger. Companies mentioned: TSLA, META, BIRK, DIS, NOK Host: Bill Mann Guest: Aswath Damodaran Producer: Ricky Mulvey Engineers: Dan Boyd, Desireé Jones Learn more about your ad choices. Visit megaphone.fm/adchoices

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If you have an absolute rule of I'll never buy a stock with a P-Ratio greater than 25, God help you. Because all you're going to be stuck with are dying companies and value traps in your portfolio. I'm Mary Long and that's Aswath Demoderin, a leading professor of corporate finance and valuation at the Stern School of Business at New York University. Bill Mann caught up with Demoderin for a wide-ranging conversation about how the wrong statistics can lead investors astray, what really drives interest rates and the difference between pricing a company and valuing one. I do want to start here at the beginning of 2024 by asking you, I guess, might,

what might be an unfair question, given your willingness to share with people online, at the outset of the internet age, we believe that information available to us would help us make better decisions. And in a lot of realms of our lives, it has. What is your impression of how the instant availability of information has helped the average investor, if it has at all?

I think we have to start by drawing a distinction between data and information. We have a great deal more data now than we did 25 years ago. That's without contest. That is absolutely true. Our challenge now is to convert that data into information. And here's the problem of FASIC. We're drowning in data to the point that we give up. I mean, psychologists have discovered that when you provide people with too much data, they

go to mental shortcuts. So in an ironic way, the more data we have available, the more we fall back on simplistic rules, because we just can't handle the data. So to me, the challenge is figuring out how to take those mountains of data we have available. Nobody should ever say we don't have enough data anymore. We have too much data. And ask the question, how do we convert that data into usable information?

That requires discipline. It requires the structure of thinking through data. And that's partly what I've wrestled with. I won't claim to have the answers, but I wrestle with every year when I update the data on my website is how do you convert that mountain of data into something that you can actually use in day-to-day investing and valuation? It does seem that a lot of times that we as investors try and solve for the complex before we even get to the simple. if you will indulge me, I thought we might do something that would be, you know, a little bit fun is to, you know, is to describe how you might go about sorting through the data with, you know, with with with with a company and untangling what the company does, how it makes money and, you know, what its prospects might be. So why don't we take a, a fictional company, let's call it universal export just because I, you know, I do love a James Bond. reference, its 10K has just landed on your desk. What to you are some of your first areas of exploration? The first thing to figure out is what does a company do? I mean, you said universal exports. That could be a trading company or a manufacturing company, very different business models. And I think the first step is to figure out what exactly, especially with a name as nebulous as universal exports, what the company does. Besides hiding spies. Exactly. Exactly.

Exactly. Now, in fact, it's even more dangerous when you look at the name of a company and you assume that it does something which it doesn't. I mean, across the world, there are companies that call themselves one thing and they do something different is start by examining what does a company do, who does it sell it to? Why do they buy it? And then you can start looking at the numbers. I think we're too quick. And again, this is the problem with the data age. We have so much access to data. We jump at the financials and we start computing every conceivable ratio known to man. when in fact it's good to step back and say, what does a company do? How does it make money? What makes it different, if at all? And that becomes the basis then for what you will learn from looking at the numbers. So you describe yourself as a teacher first. I want to reference another teacher for a moment.

Someone who I believe you know rather well is Joel Greenblatt, who's written on a number of books. Perhaps most seminally, he wrote two books, the first of which was you can be a stock market genius, I put on the rankings as the best named book of all time. And then another, the little book that beats the market. He often, he mentioned in the second book that in the first book, he felt like he was writing at a seventh grade level. But what he really found out once he started teaching even MBA students at Columbia is that he had really overestimated the financial acumen of students.

So the magic formula that he put together was a way to try and, uh, compensate and simplify. So from your perspective and your experience, when you see so much data that's out there, that's, you know, that, you know, and I completely agree with you, it, it doesn't edify at all. What are some of the first steps that you can, that you can take to simplify the data, either numerical or, you know, factual or, you know, or in any realm that you can take? you think is important. You're describing why we take statistics classes. Why we should remember our statistics,

because that's exactly what statistics is designed to do. It takes huge amounts of data and try to make sense of it. Unfortunately, the way we're taught statistics in college is so bad that we tend to forget our statistics very quickly, which is unfortunate because I think one of the central skill sets you need as an investor is not your accounting acumen, but how well you can deal with data and how much you remember your statistic classes. If the only statistic you remember from your statistics classes is the average, you're in big trouble. And I'll be quite honest, a lot of equity research analysts that I talk to seem

to remember only the average. Think of how many times they say, will this company's P.E. ratio is lower than the average. You say, well, you do know the average is not a good statistic when you have skewed distributions. And their reaction is, what is a skewed distribution? A skewed distribution is a fancy word for if all your outliers are big positive numbers and you have no big negative numbers to offset, which is the case with PE ratio, the average is a hopeless statistic. What do you use instead? Well, that's why we talk about medians and we talk about aggregate numbers.

So I think that one of the skill sets that I ask people to pick up, and it doesn't have to be an advanced statistic. It's just basic statistics. In fact, a couple of years ago, I put together a bare-borne statistics class. which looked at statistics from my perspective, what are the kinds of statistics I need to know when I enter into finance? It's 12 sessions altogether. It's about four hours of sessions, plus with X, maybe 10 hours of work. You can get yourself up and running with statistics because that's exactly what statistics is designed to do. Is you're faced with 50 companies

with very different P.E ratios and ask you, what is a high P.E. ratio in this group, you should, should be able to answer that question with basic statistics. But strongly encourage people to kind of, you know, take another look at their statistics book if they haven't sold it back, or at least take a look at my statistics class to get up to date with, hey, here's what I need. I will make sure that the links to your statistics class. I could not agree more. And I love the fact that you went directly to Wall Street analysts who, I mean, obviously as a group, are a sophisticated bunch. But one of the things that I notice, you know, just to edify your point, is that a lot of times you will see someone who's leaning upon a statistical average. And so,

therefore, what they do is if you have a company that's well below the average, they will say, well, you know, the downside for this company is 17 percent upside, which is, it may be statistically defensible, but it's not logical. It's not even statistically defensible, because implicit there is a belief in what I call mean reversion. You know, you can't just pick on saleside equity research for this. I mean, I've been a harsh critic of old-time value investing. And, you know, I've been to Nebraska, what, six times to the Woodstock in Omaha.

I've never been to the meetings themselves, but I've gone to talk to those people who show up at that meeting year after year. And the last time I was there, the 300 portfolio managers in the room, all of whom professed to be value investors and asked them a very simple question. When was the last time you actually valued a company? The answer was, most of the people in that room had never valued a company. Say, how do you become a value investor? They said, buy stocks with low P.E. ratios. And you're going to be okay.

That's mean reversion, basically driving an entire investment strategy. I mean, I wrote a piece called mean Reversion works until it doesn't. And I think that it's a very lazy way of investing. And I don't think anybody deserves to earn excess returns or beat the market by buying, you know, by betting on meat reversion. And 90% of old-time value investing was just mean reversion. And when it's not working, I have very little sympathy for the investors who ring their hands. The markets become all irrational. look, we're not making, you should never have made money.

Right. The only thing you don't deserve you from the outset. People didn't even know what the mean was, you know, because they didn't have the data. Now, anybody with the database can figure out what the mean is. So what's, what do you bring? I mean, I have a no saying we don't bring anything to the table. Don't take anything. You don't expect to take anything away.

And a lot of investing is built on mean reversion and assuming things move back to the average. And neither is a defensible. assumption. Yeah, companies have life cycles, you know, for example. So you have a company that is, that is in a late stage or a terminal decline. Of course, it's going to look cheap, but you're not necessarily bringing anything to the table in terms of understanding of what that business does. In fact, let me add to that. I mean, the 20th century, the strength, the reason mean reversion works so well. First, it worked really well in the U.S., which is the most mean reverting economy of all time and you had companies with really long life cycles. Think of the GEs, the GMs, the Fords,

the company that built the 20th century at long life cycles. So you could get away with mean reversion. 21st century, the type of company you're going to see is closer to Yahoo than to GE. Yahoo was founded in 1992, peaked in 1999, started its decline in 2003, died in 2015. team. The life cycle for companies has compressed. And in a compressed life cycle, assuming things move back to the average might be the most dangerous assumption you can make and invest it. Because there is no average you're going to move back to you. You're moving towards death as a company. And you're betting on this company as it slides down that life cycle. You know, it's fascinating that you bring up Yahoo. There was an example that I've been studying recently. And it was a company that I, in 1999, I thought was

going to be a world beter. And let's just say for three or four years, Nokia was a world beater. But there was a fascinating interview with its CEO from the time that Nokia was at its peak. And he said something fascinating. And at first, I thought it was excuse making. But then I thought about it. It was like, you know what? He might not actually be wrong, where he said, I don't feel like we made mistakes. What happened was... events overwhelmed us. That's where, you know, my newest book that's coming out this year. It's called The Corporate Life Cycle.

And part of it is in a big chunk of this book is to show that, I mean, people assume that if you have great management, you can live forever. I mean, I have lots of problems with the word sustainability, precisely for that reason, is, you know, people talk about sustaining companies. A company is a legal entity. The reason for your existence is gone, you need to leave. Yeah. Because if you stay, you suck up resources.

A lot of what happens to companies is out of their control. Can good management delay aging? Yes. Can it stop aging? No. Once in a while, you might have a great management that manages to reincarnate a company. Apple, Steve Jobs, Microsoft, Sethia Nadella. You know what happens to those companies?

They become case studies that get used by Harvard. So everybody can be sold. The message, you too can be an Apple or a member. Microsoft. It makes consultants and bankers really rich, but shareholders really poor. I think the sooner we accept, I mean, just in our human existence, that aging is part of the natural process that companies go through, the better off we will be. But unfortunately, I think we revere empire builders. We make those CEOs who make their companies bigger into heroes, and we have to stop doing that. I love that you put it that way, and I immediately went to maybe something that's a little

bit adjunct to that, which is one of the best known business books from the last 20 years has been the outliers by Thorndyke. And when I read that book, I said, I am being given case study after case study that's in the right tail of the distribution. There are companies, hundreds of them, that made similar decisions that ended up like Nokia. So I'm not sure what you can draw from those case studies. You know, as you said, you know, like Apple itself, there's a lot of money that's going to be lost trying to replicate Apple. Why pick on Thorndike?

I mean, let's face it, how many great investor books do you see in a bookstore, right? You go and half the books are about great investors. Yeah. I think we need to stop reading about. about great investors. Because the reason we read them is because we think if we replicate what they do, we're going to make money. In fact, I teach a class got an investment philosophies precisely to push back against that concept. I mean, there are hundreds of books on Warren Buffett. But you know what? I would wager that if you took all the people who read those books and you looked at the returns

that those people made in their portfolios, they'd have been better off buying index funds instead. The reality is, you know, great investors are a product of both the investor qualities they bring in and the time in which they operate. Warren Buffett had the advantage of both, and I don't think it's easy to replicate something like that. No, I mean, he has said that himself, that when he started investing, if you were the cheapest insurance company in the state of Nebraska, you had a moat, whereas, you know, 20, even 20 years later, you were going to be. found out by by an international or a multi-state company. You were going to be, you were no longer able to count on those types of advantages. And I think also the other thing to keep in mind when you think about why value investing has had such a tough time in this century. Value investing has not won in this century. This is a really long drought. And at some point you got to stop and ask,

is this steady state? We are the Chicago Cubs of investors, right? And I think in a sense, we've got to accept that the century of value-investing dominance is behind us. Doesn't mean value investing will always lose. I think we're going to see a year in which growth investing wins, which is healthier, because it means there's no easy way to make money anymore. So I think there are many factors conspiring against value investing, including the fact that data is more easily accessible,

including the fact that your big invests, who take advantage of small mistakes and including the fact that life cycles have shortened. I was thinking a little bit about what you were saying about Warren Buffett is that, again, getting back to the heuristics of what people would take from saying, okay, well, he's done it this way. One of the first and primary lessons that people took from Warren Buffett was don't invest in technology companies, right? Because their life cycles are too short. And it is difficult to be able to predict what they're doing five years from now. And the point you're making is, yes, but that's the reality of even the great businesses today.

That's the flip side of disruption, right? That's what I hear when I hear the word disruption. We thought automobile business was set for life, right? During the 20th century, every attempt to start a new automobile company. Remember the DeLorean, you know, attempt? Every one of them crashed in bird. So when Tesla came about, our reaction was, this isn't going to work. the automobile business has an insurmountable mount, and 15 years later, we're looking at

what I think is the death march for legacy automobile companies, GM, Ford, Volkswagen, Daimler. I mean, you're seeing these companies looking at a precipice that they might not be able to avoid. Yeah. So some of the biggest success stories in the market are companies that would almost never have attracted statistical value investors. And even their companies, they're companies, that even if you came in day one of an MBA class and the professor said, okay, I want you, you know, I want you to break out a discounted cash flow statement and give me your predictions for a company, a company like Tesla, a company like a monster beverage, even Costco,

the assumptions that went into what actually happened, you'd fail. I mean, there's no, there's no investing professor who would say, oh, yeah, it is reasonable to suggest it. the company is going to grow at 22% for 20 years? Bill, that's not true at all, right? You take the greatest companies at the top of the pyramid now. During the last 20 years, every one of them has been cheap three or four or five times. People talk about Nvidia, right? I bought Nvidia in 2018. I mean, people assume that when you see a company go up 5,000 percent in 20 years, it's had an uninterrupted run of success. That's not the way the markets work at all. I bought Tesla twice in

lifetime at times when it was cheaper. So I think that is the mistake that value investors make is they rule out these companies before they even look at them. No, my point is never say never. That's one word in investing that you should avoid. I will never buy this company. At the right price, I will buy any company. At the wrong price, there is no company in the world that I want to buy. It's all about the price. So the truth is people give up too easily on these growth companies. And you do a discounted cash flow valuation and you don't follow rigid, simplistic valuation models. My promise, now there are lots of D.C.Fs, but very few of them actually capture the essence of intrinsic value. Yes.

Think about a business. Think about the story. Think about how that plays out. So I own six of the seven winners from last year. I got incredibly lucky. Every one of them. And as I look at those companies, I didn't buy them last year, obviously. I bought them at times. I bought Facebook.

After its collapse, you remember the meta earnings report? Oh, yeah, they were done. And I think that's something you, so when you look at companies, I wish I owned the company. Don't give up on it. Track it. Try to get a valuation of the company going. And there will be a time when this too will become a company that you can buy. And that's part of the reason I push back against, I mean, I admire a lot of what Joel's done.

but any approach that builds on book value and price to book return on equity, the kind of combination that drives old time value investing is going to bias you so badly against growth companies that you're not even giving them a chance to make it into your portfolio. So give companies a choice and don't go with metrics that rule them out. So P.E. or price to book. If you have an absolute rule of I'll never buy a stock with a P.E. ratio greater than 25. God help you, because all you're going to be stuck with are dying companies and value traps in your portfolio.

Are there pieces of financial information that, to your mind, have risen in importance over the last 20 years? I would say one piece of financial information, of financial good sense that seems to have gone out of the window is what drives interest rates. You know, the answer to that is, right? If right now you ask most investors, you ask what drives interest rates, the answer is very simply the Fed. What a lazy and dangerous way to think about interest rates. Right. It's a wizard of Oz answer is what it is. It's a wizard of ours answer, which is the Fed, if it wants to, can bring rates down to zero.

And this is at the heart of many of the investing mistakes people have made, is they think the Fed can set rates. In fact, leading into this year, what is the source of optimism? The Fed is going to cut rates. The only rate the Fed can cut is the Fed funds rate. None of us has ever borrowed money at the Fed funds rate. Last year, if I asked you, what did the Fed do? The Fed was raising rates, right? You know what we started the year at in terms of T-bond rates?

3.88%. You know what we ended the year at? 3.88%. So what the heck did the Fed do? The truth is we've lost common sense perspective on what drives interest rates. What drives interest rates is inflation and real growth. We need to return to first principles. So to me, the macro mistake that people have made is assuming the first.

Fed drives interest rates. And as a consequence, all you have to do is what's the Fed. I mean, you hear it all the time. And again, you know, it's a heuristic. Don't fight the Fed. Yeah. And I mean, Wall Street is full of euphemism. Most of them don't work. Right. I mean, I don't even know who makes up these euphemisms, you know. So if you're saying, you know, if interest rates are going up, don't invest. If you expect rates to go up, then you probably shouldn't. Absolutely. I don't have a problem with that. But why make it about the Fed? Yeah. Yeah. Maybe that's what university. exports businesses. They're a euphemism creation company. That could be. That's their business.

So we talked about this a little bit earlier, but I think another area of exploration is, you know, is the fact that so many businesses in the United States and the economy used to be driven by assets. And now it is driven so much more by knowledge, by information, by data. How, How should investors think about adjusting how they think about whether a company is expensive or not, given that so much is based on intangibles? Stop thinking like accountants. Accountants of this obsession with tangible versus intangible. The accounting balance sheet, as we know it, is built around.

I know accountants are trying, but let's face it, they're incapable of doing this right. The problem is not that companies used to be driven by assets and they're not anymore. it's the type of assets that drive value. So GM might have been driven by physical assets, plant and capacity. But guess what? Apple is driven by just as a valuable set of assets, perhaps more so. The fact that you cannot see something doesn't make it not an asset. I give a very simple example, right?

You take a patent and I sell you the patent. Do you have an asset? Absolutely. You can't see it. But to me, an asset is something that generates expected cash flows. That's my definition of an asset. I've never had issues with companies with intensible assets. Because to me, it's all about the cash flows.

If you have a patent, you have technology, you can get cash flows. I'm going to give you a high value. And this is precisely why I think book value-based investing is a very dangerous way to approach investing. Because whether you like it or not, book value is accounting driven. An accountant, as I said, can't wrap their heads around. I know fair value accounting is out there, but it's an oxymoron. You can either do accounting of evaluation.

You can't do both. So the truth is book value has less and less meaning every year because, not because it doesn't matter what you own, but accountants are incapable of capturing that well. Yeah. In fact, the rules prevent them from doing so in a lot of cases. You can't take, and you can't even take physical assets and value them up. But you certainly can't take, I mean, look at, look at Disney, for example. show me Mickey Mouse on their balance sheet.

Maybe the most important asset they have is their character library and it's not there. It's not just that they cannot take into account. They're trapped in a legacy of their own making, right? In a sense, and I sympathize with accountants because when they try to come up with a rule for an intangible asset, it has to become. It's like an Apple coming out of the new operating system where they have to figure in all the old operating systems that people have and try. So in a sense, you've got to make compromises. Accounting is trapped in a legacy that makes it almost impossible for them to think sensibly about intangible assets.

You know, a few months ago, I valued Birkenstock. Now, perfect vehicle we're talking about valuing intangible assets. I valued the brand name. After all, without the brand name, what is it, a really ugly looking scandal that people claim itself. I value the fact that they brought in a new management team 12 years ago. They replaced the family running the company with the profession, and he's turned out to be incredibly good.

I even valued the Barbie buzz, which is during the summer, as you remember, the Barbie movies, the highest grossing movie on the globe, and Barbie wore pink Birkenstock, which pushed up sales at Birkenstock stores, about 30. percent during the summer. My point is these are all intangible. I can value it. It's easy to do. But I don't want to even, accountants even try to bring that on the balance sheet because they're going to screw it up. You know, it's better that they stick with old-fashioned accounting. Let me or other people doing valuation, handle the valuation. But I think in a sense, my problem with accounting is they, accounting wants to feel relevant again. So that's part of what's

pushing fair value accounting is they want to be in a position. where balance sheets actually compete as a measure of value. It's never going to happen. So might as well just give up and go back to old-fashioned accounting and let valuation take care of the rest. Who else can we insult? Or anybody you want? So one of the things that has happened,

and I don't happen to think that this is, that this is healthy in aggregate, but really to your point, I see why this happens. We've seen a bunch of return to prominence and return to use of adjusted numbers, where, you know, where a real rise in companies that talk particularly about adjusted EBITDA, but, you know, and Charlie Munger had his own, you know, very cold for term for EBITDA itself, which is in itself an adjusted number. But are there actual adjustments given that we're talking about the imperfect language of accounting that you find, find to be either egregious or, on the other hand, useful? Let's face it, no.

Much of what you see out there is pricing. Equity research analysts don't value companies. They price them. What does that mean? They compare companies on a ratio, price earnings, EB-to-ebit. When you're doing pricing, you want to make the denominator as consistent as you can across companies. So there is, I think, a logical reason for adjusting is if I'm going to compare 20 companies

and some cap-x and some expense and item, I want to make sure they're comparable. So some of the adjustments are just to make things comparable in a pricing domain. Some adjust, I think, reflect the laziness of sales side equity research analysts, and I want to pick on them again, because we talked about accounting not doing the right thing. Eventually, even accountants do the right thing.

It takes a while. You've got to drag them in to do it. Let me take two examples. Stock-based compensation. This has always been an expense. I don't even know why there's a debate about it. It took accountants about 18 years and in 2007 or 8 they decided finally, if you gave options or restricted stock your employees,

that had to be treated as an expense and lowered income. They did the right thing. Yeah. But guess what analysts did? They reversed what accountants did because they were too used to the way they thought about these numbers before. 2019, accountants finally come to their senses and say leases are dead. They've always been dead. I've always treated them as debt.

But 2019, after seven decades of talking about it, they did it, guess what accountants are doing now? They're reversing the lease adjustments to income so that they can get back to a number they used to use before. So this is a scenario where accountants try to do the right thing and then people try to reverse it because, you know, sometimes with a misguided sense of, a stock-based compensation is non-catch. depreciation is non-cash. I can see the rationale for a stock-based compensation is not

non-cash, it's in kind. It's like a pizza store owner giving away pizzas to his employees to supplement their wages because you can't pay them high enough wage. Guess what? It's eating into your profits. It's got to be factored in. So I think a lot of the adjusted numbers, I can see what people are doing, but you know what? You know, investors get what they deserve to. I think that companies do this because investors and analysts are willing to go along with this premise of it's adjusted. So we'll use the adjusted number. But I think if you do it, I think you have nobody to blame but yourself. And I think we need to kind of, it's bio-aware. I think it gets, and David Einhorn spoke about this in this last year, that it may be

even worse today, given the rise in passive investing. Where, and I happen to think that one of the greatest inventions of the last century in investing was the index fund. But when you have so much of the market that is indexed, they are taking a naive approach. And I get the sense, and I'd be interested in your take, that the fact that so much of the market isn't even looking can't possibly be helpful for the discipline of the companies themselves. I'd have more sympathy for the argument. if an analyst had actually been doing, the analysis, you know,

unfortunately, it's never been the case. So, you know, it's like, you know, I remember when, when ATMs first came out, and I think it was the head of Bank of America,

talked about what would be lost, would be the experience with bank tellers. And I said, man, he's not been in a bank in a while. I remember the kind of banking advice I got from a bank teller, and how much I'm,

going to miss it. I think that, you know, equity research analysts are like the bank tellers before the ATM. Nobody's missing them because they weren't bringing anything to the table. So I have sympathy for the argument. I think that, in fact, one of the most famous papers in finance is called the impossibility of efficient markets, Sandy Grossman, and Joe Stiglitz wrote it in the early 1980s. And the argument they were making was a very simple one. If everybody believes markets are efficient, markets will become inefficient. Because if everybody believes markets are efficient, nobody's doing the work looking for market mistakes.

But the reason they wrote it is to point that this is an ebb and a flow. So people believe markets are efficient. They start to passively invest. Market mistakes become bigger than active investors come in again. So I have, you know, and you don't need very many active investors to keep markets on their toes. So, you know, much as that argument has merit, I think that. The truth is that David Einhorns, the Bill Ackmans, the Carl Icans have a place in this process

as to the short sellers. I think we need to be okay with the fact that short selling is not a vice, you know, that how do we end up with this premise that being long is a virtue and being short as a vice? It's almost inbuilt in the way we think about investing. But I think we need people digging for information and they're not going away. So there's a natural process which will keep them around. Do you journal or how do you go about

holding yourself accountable for the decisions that you have made? Luckily, I don't manage other people's money. The only only people have to be accountable to me and, I mean, there's a reason. I don't, you know, people ask, well, if you think you know, I have no desire to manage other people's money.

None. It's a responsibility. You know, I've, you know, I understand the pressures, tension, stresses of doing it, and I chose not to do it. So I'm lucky enough I don't have to do it. The only people I have to be accountable to are the people whose money I manage, my wife, my kids, and so far they haven't fired me.

And with my kids, incidentally, I've given, you know, I increasingly move their money out of individual stocks into funds, index funds as they get older. Because individual stocks require a lot more care and maintenance. I've been doing the exact same thing with my children. And I think they have lives to live. I don't want them to be worrying about the individual companies. So each year I shed a little more of the individual stocks I bought 20 years ago, 15 years ago when they were young and replacing them with funds.

Because for me, investing is about passing the sleep test, which is if you have a portfolio that's right for you, you go to sleep at night and you don't wake up in the middle of the night and I wonder how my portfolios do it. I don't want them to be worrying about what their portfolio is doing when they have real life worries and the rest of the lives with families, with jobs. This is not something you want to add to the mix. I couldn't agree more. And I've done the same thing with our children where early on, you know, they would, you know, their stocks were dominated by things like Costco. And now they are dominated by the S&P 500 index fund.

And you're exactly right. and for me in particular, it was a belief that I did not know that I could impart enough information or guidance so that they would have the same level of comfort on a company-by-company basis than I did. And in fact, the reason I think you and I have done this is because we've again pushed back against one of the old premises in value investing, which is you buy something and you forget about it. I mean, how do you come up with this nonsense?

If you're a true value investor and you buy because something is undervalued, there's a flip side to that, which is you need to sell when it becomes overvalued. It's a high maintenance job having companies in your portfolio. I enjoy the process. I wouldn't do it. It wouldn't be worth the stress in the time. I don't expect my kids to enjoy the process. So I'm not going to pass it on to them.

But I think you, with individual companies, you're. no choice but to value every company in your portfolio every year, which with 40 plus companies in my portfolio means I have 40 companies that I have to revalue every year. Luckily, it's part of my teaching. It's part of what I enjoy doing. But it's not something I pass on easily to somebody else. Yeah. And that's even before you think about adding a new idea.

Exactly. That is your installed base in the same way that Apple now has 30 years worth of old operating systems to maintain. You've got an installed base of companies that you have. Exactly. So I wanted to finish with this. I know that you, you know, that you share many people's admiration for Charlie Munger who passed away this last year. Are there any pieces of advice or wisdom that from him that have, that most impacted you? I mean, you've already, you've already said that you never actually made it into one of the meetings in Omaha. But, you know, he has, he, he, he like you, I've considered to be a great teacher of investors. I think, you know, Charlie's

lesson for all of us is when something conflicts with common sense. I don't care, who's, you know, presenting there's something. It'd be Goldman Sachs. It'd be somebody on CNBC. If it doesn't, you know, connect with common sense, he said disbelieve it. And I found that to be incredibly, powerful advice. Because I hear experts all the time and I listen and said, that doesn't make any sense to me. And I don't care if the expert is a Nobel Prize winner. I happen to be on a floor with three Nobel prize winners at Sturne at NYU Stern. And I admire all of them, but, you know, they make, they're human beings. They make mistakes as well. So I think that, you know, nurture your common sense. I, you know, I often get people asking me, what should I read?

No, what books should I read next? They say, read less. Think more. I think we're in a world where we're so caught up reading about what other people do on books and blog posts and, you know, that we're not spending enough time thinking for ourselves because common sense is like a muscle. If you stop using it, you lose it. I mean, I'm amazed at how many professional money managers have no common sense because

they've not used it for so long. So I think, you know, exercise your common sense and push back against ideas that don't make sense to you. As always, people on the program may have interests in the stocks they talk about. And The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Mary Long. Thanks for listening. We'll see you tomorrow.