We Study Billionaires - The Investor’s Podcast Network - TIP203: Learning from Billionaire Jack Ma and his company Alibaba (Business Podcast)

Starting point is 00:00:00 You're listening to TIP. Hey, so how's everyone doing out there? On today's show, we're going to be talking about the famous Chinese billionaire Jack Ma. In the past, we read a book about Jack Ma and reported back on everything we learned about his biography and his rise to e-commerce dominance inside of China. But today we're going to be highlighting a few of the more interesting comments that we've recently found with interviews that Jack has conducted. Jack's personal net worth is around $42 billion.

Starting point is 00:00:28 He's the founder and executive chairman of Alibaba Group. And in 2017, he was ranked second for the world's greatest leaders by Fortune magazine. So without further delay, here are some of the more interesting comments from the Q&As with billionaire Jack Ma. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. All right. So welcome to the show, like we said in the introduction. We're going to be covering Jack Ma, who's the famous billionaire out of China. And to kick this off, we'll just play our first question. And Jack's response to the first question. And this question was, can you give us two or three things that would help people understand more about Alibaba and what it is? And this is what he said. We are a, well, very complicated. We start from Alibaba B2B helping small business to import, export. And then we do the B2C, Taubo, and Timor.

Starting point is 00:01:42 And then we build up the Alipay, the payment system. And we have the 10 of the logistics system. Our mission is helping doing business easier. So we are not e-commerce company. We help others to do e-commerce. If you want to have the payment, we solve the payment solution. If you want to find customers, Alibaba, Taubo, Timo, helping you find the customers.

Starting point is 00:02:05 If you want to have the logistics, we help you to solve the logistic problems. So we are the e-commerce enabler. And we do not buy and sell like Amazon because we think we should help small business to buy and sell easy and effectively. We do not own the logistic services, but there are about 2 million delivery guys helping us to serve. Today, our last year, our sales is $390 billion U.S. dollars. We got ourselves. We are our own. We are our own. of the small business, buy the small business, and for the small business. It's this $390 billion.

Starting point is 00:02:47 95% of them are sold by the 10 million small business. They are all small business. And ourselves this year is gonna be over, I think December we were lucky enough, will be bigger than Walmart globally. And which in five years, I will want to say here, make a bad, small business always make a bet. In five years, we will be bigger. We will go across one trillion U.S. dollar sales. And that is going to be done not by Alibaba,

Starting point is 00:03:27 down by small business. How we can empower them, supporting that. The small business to sell more. And we only have 34,000 people from 18 people. in my apartment to today, we are 34,000 people. And we are going to reach go across $1 trillion U.S. dollars by less than 50,000 people. Because we know the fewer people we have, the more innovative we will create our technology and products to empower the others to hide more people.

Starting point is 00:03:59 Because the more people we have will be very bureaucratic. So some very impressive numbers, obviously, that he's talking about. But the thing that I think really delineates Jack Ma and Alibaba from Amazon is really this small business piece. And I thought that I heard him say in there that they don't have any distribution centers like Amazon, which is quite interesting. I wonder how much, and I've never used Alibaba. I'm curious. Stig, have you ever used Alibaba at all? No, but after listening to this interview, I mean, I need to, right? I'm really impressed. Like, because he was standing this up with about 34,000 people, I think he said.

Starting point is 00:04:39 But then he had two million people delivering the goods. I mean, it really makes you think of Uber or something. Yeah. And I guess when I hear that, I'm kind of curious whether the service would be better than Amazon. Because I know with Amazon, I mean, it's just, it is so consistent and reliable when you buy something on Amazon that you're getting it. You know, I have Amazon Prime. I get it very quickly. it comes in a standardized box with the packaging and everything.

Starting point is 00:05:06 I'm kind of curious if you kind of have the same experience with Alibaba and it's coming at the same speed and maybe the same quality of logistics because he's decentralized all of that. But quite fascinating. And I also think it's just crazy to think that he's going to be over a trillion in sales within five years. That's just, that's astronomical. Yeah, you know, honestly, it really made me think of Google whenever I was listening to this interview because he was saying that they were not an e-commerce company. They're an e-commerce

Starting point is 00:05:37 enabler. And he said, if you want customers to pay for your goods, they handle the payments. It's the AliPay. If you want more customers, then they help you find the customers. And I was thinking about, you know, adverts. And I was thinking about AdSense in the sense that they're facilitating, right? So you will have all these creators of content out there, regardless of the industry. And they'll write something or create a video about whatever it is. And then here with AdSense, you have this amazing sharing tool where Google makes money and you make money as the creator from the ads. And I kind of like that approach. I really like Adi Bavva's way of saying this. They can really steer the ship in any direction because they are enabling other people to do what they're good at.

Starting point is 00:06:23 And of course, they make sure to take a cut out of that. So it was something that really impressed me. And, you know, I kind of like the idea of there, the platform. It makes me think, again, of Google, for me, is really top of the class. And they are enabling artificial intelligence to happen. Like, you can use their code, their open source code, to create your own products that I would assume them would be completely feasible with the Google products, but whatnot. But anyway, they're creating the standards, free or paid for others to thrive, and then they will ensure that they gain pay in the end.

Starting point is 00:06:57 And it kind of seems like that's what they're doing in China too. And though I've been visiting China, I have no clue how it works. I'm just very impressed by them kind of like being the gold standard. It sounds like the way he describes it. Yeah. No, I agree with you. It does kind of seem like they're taking a Google approach to the way that they're outsourcing everything and trying to push it down to the lowest level and let, you know, give other people

Starting point is 00:07:23 the opportunity to perform. And they're still benefiting tremendously from that. by being basically the broker between all these B2B or B to C models. You know, I really like the way he runs through the numbers. You know, he's talking about them being bigger than Walmart. Walmart has 2.3 million people. And I know this is a different structure, but you compare that to Alabama. They have 34,000 employees.

Starting point is 00:07:48 I mean, to me, that's crazy. I mean, that is a different world. Yeah, no, you're right. It is huge. All right, let's go ahead and play the next one here. This is what Jack was asking. What do you think are the types of failures young people make that they should learn the most from? And this was his response.

Starting point is 00:08:06 Let me tell you that one day I was reading a biography of General after Second World War. And I feel impressed not as how much victories successful battlefield that he achieved. I think, well, you know, if I was young man at that time, I could do big. better. But I was impressed by how many suffers, the terrible experience that he survived. That surprised me. The grand-grandfather always tell us, you know, Jack, I've been doing that much, I made a lot of mistakes, I still surviving. I said, wow. But if he said, you know, I've been achieved that much, I say, hey, you know, if I were your age, if that was that was that time, I could do better. So people will feel proud when the day when you tell your

Starting point is 00:08:57 grandson about how much tough days you have gone through. I think one day I share with my kids, my grandchildren, how much Alibaba have gone through the tough days, the mistakes. Doing business, it's just like go to the battlefield. The survivor wins. No matter how brief you are your dad, people forget you within three days. But if you survive, you always have changed. You have chance. And go to battle field is that I experienced the soldier know that how to hit himself and then fight. Young soldiers just to go out to fight. There are various reasons for one person to be successful, but there are almost the same reasons for people who fail. Greedy, round team, round too fast, with too much money, by the way, you will never be. You will never

Starting point is 00:09:57 make big mistakes where you don't have money. People say, if I have money, I'm going to do a big business. No, no, no. Remember that all the mistakes the other people made, you will make it. If you want to be successful, learn from the mistake the other people made. Not because you will avoid these mistakes, because you know how to face these mistakes and troubles when these things come. When you serve a lot of mistakes, we say, wow, these guys coming, these mistakes come.

Starting point is 00:10:30 How the Jack Ma did it? How Bill Gates did it? How Obama did it? You know, when the top day comes, it's not because you can avoid it. Because when the problem comes, how you face it with great attitude. Then you succeed. All right. So this response kind of reminds me of the Damon John book, especially his comment there about not having any money to make a big mistake. I really like. I think that gets at what Damon was hitting wet with his book. You know, so many people say they've got to have $100,000 to do whatever marketing campaign. And, you know, based on Jack's response, it kind of seems like he would disagree with that opinion. He thinks that you need to go out there and make as many mistakes and learn from as many mistakes as you can whenever you're poor. And then when you start making money, you've really got to be ahead of this and study and learn from other people that are smart and kind of capture what they did to navigate those rough seas. And it's just kind of a neat response. Stig, did you have anything else you wanted to add on this one?

Starting point is 00:11:28 Yeah, you know, I really loved how he was talking about how there are many reasons why people succeed. But it seems like it's always the same reasons why people fail. And he mentions three different things. Greed, the wrong team, and too much money that you also mentioned, Preston. And about the greed, I really, oh my God, I really, really love this. You know, it seems like whenever you're in business, you're often faced with options. Well, it kind of seems like you only have one option, right?

Starting point is 00:12:00 You need to get more and then the other party will gain less. That's kind of like how it looks like really from the outside. But I think this is really what Jack is getting at. Do not be greedy. Be generous here. Spend some time considering how you can grow the pie. Because really what happens then? Well, I mean, you're getting more and your partner is getting more.

Starting point is 00:12:22 And hopefully you will open up to it. more wealth and a long-term prosperity for the both of you, it just seems like if you focus on getting more now and really not working to find alternative solutions, there's risk, a high risk of you losing your reputation, which is really the most valuable asset you have whenever you start entering the business world. And it really reminds me of these stories you hear about the good, strict and tough CEO. Like, he would be this tough negotiator, and he does not budge at any point in time. And honestly, I think what Jag was really getting at here is this is a wrong strategy.

Starting point is 00:13:05 I mean, the story should go something like the CEO was fantastic. He found a way of how both parties could prosper more. I might be putting too much into his thesis about greed, but that was definitely what I was reading into it. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom

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Starting point is 00:17:47 Jack's response. If you have a crazy dream, very important is that you have to find the people around you. When we invest a company, I want not only looking at the founder, I want to see the people who work with the founder, who are they did you believe him. If he is the only person that believe in the dream, that's very dangerous. He's not a crazy dream, it's a crazy person. You have to find a group of people who are all crazy, they're all crazy. Something interesting in it. Because it's easier to make one person crazy, but if you make the whole team crazy,

Starting point is 00:18:26 something interesting. This is what I did early days of Alibaba. I made a speech in America. Talk about the value mission and management way of running an internet company. That was very early 2002. There is a guy, an American guy sitting there saying, hey, this is a crazy guy. Internet have to survive first, to make profit, revenue, forget about a value mission and teamworking.

Starting point is 00:18:54 You know, this is all life. This is all lies. He said, you're crazy. I say, sir, welcome to Alibaba someday. So he came to Alibaba spent a few days. The day when he left, he said, Jack, I thought you're crazy. Now I found 100 crazy guys in your company. Because we believe what we are doing.

Starting point is 00:19:14 It's easier to make you believe. But if you can make a group of team believe and continue to do it, then since you. So I think if it's crazy or not, The only testing is the idea if you want to make a company, it sounds crazy, your custom love it. If the custom like it, your team like it, you know it's not crazy. If the custom does not like it, your team don't like it, forget about it. You have to change yourself. Even if you have crazy ideas, don't believe you are always right.

Starting point is 00:19:48 You have to learn. Alibaba in the past 18 years, we have changed at least 18 big major changes. We are not the Alibaba last year. Every year we have different company. So this is, you have to change all the time to be sure that we don't care about it. The other people say, you are crazy. We care about, is this something really different? Really make the difference.

Starting point is 00:20:14 That's what we care about. All right. So a pretty awesome response here. I really liked how he started this out with saying, you know, if you're the only person in the company that believes in it, then you're the. You're the crazy person. I mean, he hit nail on the head. I don't really have anything else to add.

Starting point is 00:20:31 I just really kind of like this exchange, and I like the way that he answered this because it's not really how I was expecting him to answer it. So Stig, I'm curious what you think. Whenever I heard this story, it really made me think of Jack Ma himself whenever he was signing out. Before he became this billionaire, this big shot, right? And Preston, I read this book about Jack Ma. We're going to link to this in the show note.

Starting point is 00:20:55 I want to say it was just before episode 100, probably 99 or something. And he talks about how he kept on applying for jobs in his home city, which was just, Presto already knows where I'm going with us. But there's this iconic story of KFC coming to town, and they were like really just hiring, right? And they had 24 people applying for the job. Yes, 23 people were hired. Jack Ma was the only one who was left out.

Starting point is 00:21:25 Oh my God. What kind of, that must be so hard, like being Jekman. And there was even this story where he talks about him and his cousin going out to this job interview at the local hotel. It was like a four-star hotel. And he was so happy because his cousin actually got a lower score than him. That was not why he was happy, but he was happy because he got a lower score in him and he got the job. But even though his cousin got a lower score than him, they still rejected him because they didn't like him. And, I mean, it's so true. Like, whenever he talks about,

Starting point is 00:21:59 you have to get used to failure. You know, it's like being a boxer. You need to be able to roll the punches. Because if you are in the business world, you will just be punching back one way or the other. I think he had an important point there at the end, the stick with, you know, basically saying you have to be resilient,

Starting point is 00:22:18 but you have to listen to other people. You just can't have this crazy idea or this crazy dream and just move out because you have three people around you that are boosting you up and telling you that it's going to work. You need to listen to what people are saying. And at the end of the day, if it's adding value to the customer, then you're probably making the right decision. All right.

Starting point is 00:22:36 So the next question we're going to play is a question that Jack was asked about his opinion on globalization. So this is what he had to say. I think globalization cannot be stopped. Nobody can stop globalization. Nobody can stop trade. And I believe if trade stops, war starts. Trade is the way to dissolve the war, not to cause the wars.

Starting point is 00:23:01 I think globalization did a fantastic job in the past 30 years, enrich a lot of countries, but of course, cost a lot of problems. Young people did not have opportunities. Small business have not opportunities. Developing countries were neglected, but it's only 30 years. It's a baby. It's a growth. You have to improve it.

Starting point is 00:23:24 If you do not improve it, then you kill it. It's easy. Most of the time, to kill something is much easy. Now, artificial intelligence come. Robots come. My grandfather worked 16 hours a day. And he said he was very busy. We work eight hours a day.

Starting point is 00:23:45 We said, we are very busy. Our children may only work three hours or four hours a day for three days a week. I bet they will say, oh, we're very busy. Then when you work only three hours a day and four days a week, what are you going to do? You're going to travel around, right? You cannot stay in the home for a week. You will travel. 30 years ago, normal life, you visit 20 to 30 cities whole your life. 30 years later, in your life, you will visit 300 cities in your life. because of mobile.

Starting point is 00:24:22 How can you stop it? It's impossible. So thinking about that, the only thing is to improve it, to make it simple. Global trade should be simple, should be modernized, should be increasing.

Starting point is 00:24:37 Everybody has the opportunity. Well, I feel sorry for WTO. They did a great job, but in the past 20 years, when you put 200 government ministers in one room, how can they agree on something? Right? Because I don't like your country. No matter how good suggestion you have, I say no.

Starting point is 00:24:56 But business people, even if we put 200 business people in one room, we will surely agree on something. And this is what I believe. The next generation of globalization should be inclusive, should create opportunities for young people to get involved. The first globalization in the human history was controlled by few kings. and empress. Last 30 years, globalization was controlled by 60,000 big companies.

Starting point is 00:25:30 If you're not among the big companies, if you're not in the big, powerful countries, you don't have a chance. The next 30 years, I bet we will have 6 million or 16 million or 60 million companies get involved in globalization. And I'm sure

Starting point is 00:25:47 we will make it happen. together with a lot of people, maybe with you. With a mobile phone, if people still use the mobile phone, 30 years later. With a mobile phone, you can global buy. You want to buy something from Kenya, you just to click. You want to buy something from Norway, you click. Global buy, global sell. If you're a small thing, without internet, you can only sell in your village or small time.

Starting point is 00:26:13 Today, you can sell across the world. And global pay, global delivery, and global travel. The only thing you have to bring is a mobile phone, not even passport. This is going to happen in 10 years. And this is the message, let's catch this opportunity. If you complain, the other people catch it. If you catch the opportunity in Brace the now, you will be the next Alibaba. I was born in a very poor family.

Starting point is 00:26:43 I never got a great education. I failed all the examinations. For what reason? I don't know. But later, I realize I don't have money, I don't have technology, I don't have a lot of good backgrounds where we have a rich uncle or something, no. The only thing I competed with my people, the young people, is let's compete for 10 years later. This is what I believe 10 years later will be happening. So everything I do for that goal, I know 10 years later, this thing is going to happen.

Starting point is 00:27:12 So I prepare for that. Because I know if I compete with him for next month, no chance. This is how my message, it's a challenge, but it's an opportunity. All right. So some really interesting comments there about globalization and what's, I think, so fascinating about his response is it's totally opposite of what we're seeing in the last few months with the way things politically have been happening around the world with tariffs and kind of this trade war that we're seeing erupt here in the summer of 2018.

Starting point is 00:27:44 But, you know, as we think through, like Jack was saying, in 10 years from now, do we still see the trade war and all these tariffs, these enormous tariffs that are being waged around the world continuing to exist or getting worse? I don't necessarily know that I would see that getting worse in a 10-year time frame. I think that it's going to probably get worse through 2018 into 2019. But I think that you're going to see a reprieve from that. And there's going to be some type of agreement that comes out of this. And then maybe it even gets better from there. So Stig, I'm kind of curious how you're hearing his comments and then also looking at things in the modern context of what's actually happening. Yeah.

Starting point is 00:28:24 So Prest, I'm really happy you said modern context. I would like to talk about 1951. So I'm going to answer this in a very different way, but then I'll hope I can go back to the present. You know, back in 1951, the Coal and Steel Union was founded. And today it's known as the European Union. It was founded by Belgium, France, West Germany, Italy, the Netherlands and Luxembourg.

Starting point is 00:28:51 And it was so important in Europe that you have the Coal and Steel Union because if you cooperate about coal and steel, it was really, really difficult to go to war with each other. As prosperous, as Europe has historically been, Europeans tend to go to war with each other like all the time. And I know that since 1951 is only a very brief period of time, but you haven't seen any traditional war in Europe since, in Western Europe, if I might add.

Starting point is 00:29:21 I think that was also what he was getting at whenever he talked about, you cannot stop globalization. Trade is the way to achieve peace. You know, whenever goods are traveling cross-borders, it's really hard to send soldiers also. I think it's interesting to hear his thoughts about simplified global trade. On World War II, you had all these different organizations,

Starting point is 00:29:44 got probably being the most successful, then transitioned into the World Trade Organization. And really the plan was not to have terrorists, and quotas. And even back then, they kind of knew that it wouldn't be possible, but the fewer terrorists and quotas you would have, the better would be for the economy, which in itself is a very difficult statement to present really to the public because the political system does not work like that. Typically, when you ask and you talk about quota and you talk about terrorists, the rhetoric is more about protecting domestic labor. And there's definitely some truth to that,

Starting point is 00:30:20 and it's very, very difficult to do it any other way. But if you look at it in aggregate, more tariffs and more quotas would be bad for the overall employment. And it would be bad for prices. Really, if you would like to have low prices as consumers, we should welcome trade as much as possible. So if we talk about more present issues, I mean, it is very, very difficult to reach these agreements and you have 200 government officials together.

Starting point is 00:30:49 It's close to being impossible. And we see that over and over again. And Jack Maher brings up this example of why do we not let business people speak to each other? Because it's easier for them to agree in something. I would agree with him. And this is a very political loaded question. So it really depends on which side you're on. Because if you put together 200 business people, what would they agree on?

Starting point is 00:31:12 Well, they'll probably agree on free trade, more or less. Like, in general, for most business people, they like free trade, they like no tariffs, no quotas. But we also know that free trade is something that can create more social tensions. We also see that it can create high inequality. And a lot of these people who might agree on this might not be averse to high inequality if that is where they're getting at. So I'm really trying to, before throwing over to Preston here, I'm really trying to see it from both angles, like from a financial or economic perspective,

Starting point is 00:31:46 No free trade is 99.99% good, but it might not be good in the political sense in terms of employment in the short term for some countries. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up and customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust together, on one AI-powered platform. So whether you're prepping for a SOC 2 or running an enterprise GRC program, VANTA keeps you secure and keeps your deals moving.

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Starting point is 00:35:03 Carefully consider the investment material before investing, including objectives, risks, charges, and expenses. This and other information can be found in the income funds prospectus at fundrise.com slash income. This is a paid advertisement. All right. Back to the show. So the first thing that I would say to them is, well, the decision makers aren't all business people in the room and I don't see that happening in the next 10 or 20 years either. I'm more of like how are things actually going to happen? And whenever I think about that, yeah, free trade is is a great thing from a global and macro perspective of everybody involved. But if you're the country that has an enormous trade deficit, it's not. And that's very bad for a country that has

Starting point is 00:35:45 an enormous trade deficit. And so I don't know that I see it as cookie cutter as he's making it. I think that I agree with him on the front that technology is going to maybe have the impact here and where I think that that might end up being. He said in his comment, global money. He said things are going to have global money. If there is truly global money that is a fixed monetary baseline that can't be manipulated, you're going to see things have to mature and have to evolve to what he's describing. But if that doesn't happen and you continue to have fiat-based currencies that are completely centralized around the world, I think you're going to continue to see the same dynamic we're seeing today play out.

Starting point is 00:36:30 and it's just going to be who's fighting for more tariffs and who's not. For me, that's the big discriminator between the world that Jack Ma just described and whether we continue down the status quo of what we've seen in the past. Yeah, and short, like, we also have to think about where the message is coming from. I mean, if you were the CEO and founder of Alibaba and you would like to, you know, sell your goods in all countries around the globe, would you like terrorists? Would you like quotas? probably not. If you were a congressman from Nebraska and you know that your voters would like, you know, terrorists of whatever kind of crop that they're growing, it's different. And that's

Starting point is 00:37:07 also for good reason why it's not easy. You know, you see this new agreement between the European Union and Japan, like this huge, huge deal. And they would like to remove terrorists or lower tariffs and quotas of as many as 99% of the goods. But then there's one Japanese good that is always protected, and that's rice. And think about this Japanese government who would say, well, sure, we've just liberalize everything. No, that would never happen, because they have strong historical reasons,

Starting point is 00:37:38 and there's a lot of lobbyism in terms of having your own rice production. It's just as simple as that. And you see that all over the world. So I like your point, Preston, about this hypothetically would be the best thing, but that's not how the world is. like saying that a world without politicians is in one shape of form. I don't know. I have a real hard time seeing that too. I'll grant you that. Yeah. Now, I think that he has some interesting points there, but there's some things that I think have to happen in order for that vision that he's

Starting point is 00:38:09 talking about to actually mature and happen. And I think that this thing with the currency stuff is interesting. And I think that, you know, you got a lot of people talking Bitcoin, talking cryptocurrencies, and how they could become global money. And then you get into the energy discussion with some people. And, you know, there's a lot of people arguing why they don't think that something like that can happen. I don't necessarily know. I kind of think that something like that is going to happen.

Starting point is 00:38:37 But who knows? I mean, there's just no way of knowing that. But I think that that's going to be a really critical point to all of this is whether you get people that are not manipulating currency in what. what's happening. Because let's talk about what's happening right now. This is a perfect example. So in the U.S., they're exercising enormous tariffs on China. And so what did we see? How did China react to that? Well, their currencies devaluing at the fastest rate that we've seen, you know, since we can remember. And it doesn't look like it's stopping anytime soon. So the yuan's

Starting point is 00:39:13 devaluing at a rapid pace, which is completely offsetting the tariffs that are being in placed. I don't know that it's a one for one, but it's definitely a fighting strategy to offset what's being done. So without any type of control over how Fiat is managed in the monetary baseline of Fiat, you're going to continue to have this back and forth and this wrestling of what's fair, what's not fair, because at the end of the day, this is a big power struggle of who's controlling what. And the dollars talk and the currency talks, and we're seeing it play out first. hand. It's quite fascinating. We had a guest on the show, Richard Duncan, and he did a fabulous job laying out how the dollar has evolved over the last, you know, basically the last century

Starting point is 00:40:03 and how whenever the dollar became depagged, you had other countries around the world, print a bunch of fiat, which then caused the U.S. to basically flood the world with dollars. And it's just a quite fascinating discussion. We'll have a link to that to discussion in the show notes, if you want to really dive into some of the stuff at a lot deeper level, he gives an unbelievable description on how all this is played out and kind of led to what we're seeing today with some of this stuff. All right, guys, so this ends our discussion about Jack Ma. And at this point in time, the show, we'd like to play a question from the audience. And this question comes from Madison.

Starting point is 00:40:40 Hey, Preston, Stig. This is Madison. First and foremost, just want to thank you for all the time and effort that goes into your show. I know not only for myself, but on behalf of all listeners, it really does bring a lot of value in the education. It's priceless. So I've been listening to about a year and a half now and really just want to thank you for all your hard work. My question today is regarding an area that Buffett and Munger put a lot of emphasis towards and have also added that it's on their investment checklist. And that's management who operates by honest, integrity, and are competent. So I was wondering if there's some financial metrics, whether you look at or you would suggest us as listeners look at for us to gauge whether, you know, management is

Starting point is 00:41:21 operating under integrity and honesty and are really competent. Thank you. I really like this question and it's definitely a question that I thought a lot about. I'm doing that today, but I also really did that when I was starting up with stock investing because you hear so many smart people, including Buffett and Munger. And they talk about you should only invest in companies that has really good management, they have high integrity, they're honest people, but where's the integrity number in the financial statements? I guess that is what you're getting in here. And of course, it's hard. Like you almost need to derive those numbers. So really to me, I guess the key metric to use would really be the track record. Now, I can be a bit more specific

Starting point is 00:42:08 here, but I think the track record, at least as long as the same management, I think that would be a really good indicator. Talk is cheap. And if you jump on these earnings call, you know, you hear these managements who are just like, they know everything, right? They say all the right things. And every time they get a question, they have just the right answer and they have no shred of doubt that they're correct. And then you look back at the track record and, you know, they haven't made a dime over the past 10 years. And you're like, no, I don't trust that person. So it is, of course, difficult just like listening to what they say. So that's why I placed so much emphasis on the track record. I look at debt. I think that's an important factor. I think it's

Starting point is 00:42:48 very tempting to a lot of management to use that as a shortcut, because whenever you're using debt, especially since it's limited liabilities, even though that you are the CEO and you have a resume to think of, there is a lot of downside risk that is not really, it might be your responsibility, but that's not how you might act because you get so much of the upside if that debt is really put you use in a good way. So I would definitely say I would look into two months debt. I don't like a too high debt to equity ratio. I also use the coverage ratio. Prefer if it's above five or 10. And then in general, whenever I am listening to the managers or the CEO talk, like, you know, who takes the credit for when and who's blamed if something goes wrong? And the thing you can

Starting point is 00:43:39 read a lot into that, especially like looking into. to all companies here over the past few years, and whenever you saw the price plummet, you know, there seemed to be some CEOs, and they're talking about their own failures, and then you had other CEOs. They only talked about, oh, they were just so unlucky that the oil price slept, right?

Starting point is 00:43:57 And you're like, you see off an old company, you had no clue that the price of all could cut down. It's like just the way that they talk about. I think that's a huge red flag. And just one more metric that I really find interesting and really look looking at how it's composed. It's something like the turnover rate. So the turnover rate of your employees. And when I was thinking about this, I would say, well, if it's a bad company, then the turnover rate would be high. Or if it's a good company, it's the other way around.

Starting point is 00:44:28 So apparently a lot of studies have been done on this. And really what you come up with is that comparable companies, they're more or less the same as the best companies that you can find out there. But great companies, they do something different. Again, so the average is the same, but they do something different. So either whenever they bring people into the management, they are there for a very, very long time, and it's really good with the consistency. Or they realize that they're not a good fit. They're not top performers. And they just fire them just right away, because then there's no reason why they should dilute the quality of the management in the company. So I know that this was a lot of talk.

Starting point is 00:45:12 I guess I didn't give you that key metric, that metric that it's called the integrity metric or good management metric in the financial statements. But it is, I guess it is to me it's hard to come up with just one key metric to look at. So, Madison, your question is not an easy one to answer. And I think anyone that you talk to is going to tell you that this is very difficult to be able to assess. So I think that's the starting point is that I don't think that there is, a right answer here. If I was going to tell you how I personally do it, I think the conference

Starting point is 00:45:43 calls you learn a lot. I think you learn a lot about the people that are leading the company. And, you know, Stig was talking about humility. I completely agree with him. You're looking for somebody who has a lot of humility that's calm, that's balanced, that talks about the pros and the cons in an equal way whenever they're discussing their company. I think that's really, really important. You're obviously looking for somebody that has a track record that's been there for a while. Let me give you an example of what I think is a bad example of ethical behavior. And I'm going to get a lot of flack for saying this. But for me, I see this as a red flag.

Starting point is 00:46:20 I'm not saying this person's unethical, but what I am going to tell you is this is a flag for me and this is not normal behavior. And this is something that I'd be looking out for. And the person is Elon Musk. With his recent conference calls and the way that he's acting and his behavior, it's not normal. It's not balanced. Does that mean that Elon Musk could be doing everything ethical and his company could go on to quadruple in size? Absolutely. But for me personally, you know how many companies I can invest in on the public markets? Thousands upon thousands. There's tons of choices

Starting point is 00:46:53 out there. I don't have to own Tesla. I don't have to put myself and expose myself to somebody that I don't think is in a stable position right now. That could be a major mistake. But something else that Buffett and Munger and this guy say is I'd rather make a mistake of omission opposed to a mistake that I clearly could identify as maybe being an issue. And for me, when I look at Tesla, I think that there's concern there. I think that maybe he might not be doing things completely ethical. And so that's, I guess, maybe the best way to describe it is give you an example of an area where I think there is a concern and that for me is a concern. You know, I really like that you bring up Elon Musk also because not too long from now

Starting point is 00:47:36 we'll actually go to an episode like this about Elon Musk. We definitely think there's a ton of things we can learn from him. And in our research, we stumbled upon this question when he was asked by a reporter. We're not going to play it, so I'm just going to briefly talk about it here. It talks about how much do you think about headlines whenever you're making a presentation? And he was like, sure, I do that. Yeah, it's very important because you try to kind of. convince investors to do this and that.

Starting point is 00:48:01 And I was like, can you just imagine Preston having Buffett say that? Yeah, I think in terms of headlines, I need to convince investors to give me more money because I'm losing. I have never made a profit. So I need to convince investors to give me more money and the bank to give me a loan. Well, I think that their approaches are completely different. So like Warren Buffett, Elon Moss, completely different approaches to building value for society. right. So I think that we've got to first delineate those two and say that we're not comparing apples to apples. But at the same time, I think that the propensity for somebody to do something unethical is way higher when you're trying to move really fast and use a lot of leverage. Okay. I just think that you're more prone to that because you're influenced by continuing what you're trying to do and trying to continue.

Starting point is 00:48:55 you to grow. And that opens the door to be doing those types of activities, a whole lot more than somebody who has a ton of retained earnings, who has very little debt that is operating a very consistent business with a competitive moat that is impenetrable. You're in a different situation. You're not reaching for those potential situations where you have to be unethical in order to keep the boat afloat. And so I don't know. I think that those are considerations. Those are things you have to think through whenever you go out and you buy or you invest in Tesla, that there's that potential that maybe they're cutting corners or whatever. But typically there's a lot of upside on those kind of businesses. So if it continues to grow and mature and everything else,

Starting point is 00:49:39 but it's just stuff people have to be thinking about. It's stuff that you have to be aware of. And it's risks you have to assume as an individual investor. All right, Madison. So a fantastic question. This is really, really important stuff that you're asking about. As a result, we're going to give you a free course on our TIP Academy page. It's for our intrinsic value course. This is a paid course. But for asking your question, you're going to get it completely for free. For everyone else, you can check out the course we're giving to Madison for this great question. You can do that at TIP intrinsic value.com. But, guys, that was all that pressed on the hat for this week's episode of The Investors podcast. We see each other again next week.

Starting point is 00:50:22 Thanks for listening to TIP. To access the show notes, courses or forums, go to theinvestorspodcast.com. To get your questions played on the show, go to asktheinvestors.com and win a free subscription to any of our courses on TIP Academy. This show is for entertainment purposes only. Before making investment decisions, consult a professional. This show is copyrighted by the TIP network. Written permission must be granted before syndication or rebroadcasting. Thank you.

We Study Billionaires - The Investor’s Podcast Network - TIP203: Learning from Billionaire Jack Ma and his company Alibaba (Business Podcast)

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