Yet Another Value Podcast - Mike from Non-Gaap on the Corporate Dark Arts

Episode Date: August 6, 2020

An interview with Mike from Non-Gaap (https://nongaap.substack.com/). We discuss the corporate dark arts, how insiders profited from good news at Kodak (KODK) and Vaxart (VXRT), and more.

All right. Hello and welcome to the yet another value podcast. I'm your host, Andrew Walker. And for those of you watching on YouTube, you might be wondering why I'm wearing this outlandish pirate t-shirt. And the answer to that question lies in my guest today. He calls himself a corporate governance pirate. So I figured I'd kind of honor that pirate tradition with a pirate shirt despite my wife's objection. So today's guest, Mike from NonGath. Mike, how are you doing? I'm doing great. I appreciate the theme. I think the shirt looks great on you. actually. Well, look, I'm going to let you tell everyone about non-gap in a second, but before you do that, you know, let me just kind of plug you a bit. I mentioned this on my blog, but non-gap is, you know, if you put a gun to my head and said, hey, you can only subscribe to like kind of one investing newsletter or anything, what would you just subscribe to? Non-gap would be my choice. And I don't say that lightly because I write a substack and I would recommend your sub-stack over mine. You know, it's just a great blend of the corner of corporate governance and investing. I come away from every edition with learning something

new. So, you know, I don't say this lightly, but I really enjoy the product. I'm so glad to have you on. And I'll let you kind of go into your background and describe non-gap a little bit. Yeah, and, you know, go ahead and send the invoice for that plug. I really appreciate that. You know, non-gap, I guess, it's interesting. I actually initially started non-gap as kind of a social experiment. I've been on Twitter for a few years and, you know, interacted with a lot of folks. And a lot of them just kind of encouraged me to, you know, you should write more. And I was like, all right, well, I guess, you know, I think earlier this year, everyone in their mom started a substack and they decided to launch a newsletter. So I joined the crowd there and decided,

you know what, I'll start sending out different thought pieces that kind of just float in my mind for the most part, and, you know, see if it got any traction. And so, you know, the first piece I wrote was actually about Hasbro and Entertainment One. And I know we share an affinity for, you know, content IP. And I thought that was just a nice kind of starting point as far as, you know, I think most people kind of understand what the merger was about. But what was really interesting is when you read the background on the deal, you kind of realize that, oh, hey, they started these conversations.

around the same time that insiders, specifically directors, suddenly started buying stock, you know, after the stock tinked. And I thought, okay, this is a good example of trying to blend corporate governance, board behavior, insider transactions as a, as a way to signal, you know, potentially material moves or changes or pieces of information. It's never exact, right? It should, at the end of the day, hopefully apply to your general mosaic. You still have to apply, that's a perspective.

But that was, you know, that was kind of a great start to, you know, talk about this stuff. And, you know, I think the biggest takeaway or surprise for me was people actually started responding, reading. They actually thought it was interesting. And I didn't expect that to be the case. I thought, you know, I mean, governance was pretty boring, right? Like, no one really wants to read a proxy, aside from maybe me now. But, you know, back then it wasn't really a thing. But I thought it was a great way to share my experiences and how I looked at the world

just based on kind of, you know, I guess in a past life, I used to do activist investing at relational investors for close to eight years. And this was kind of where rubber meets road, right? Like, I mean, imagine, you know, most investors, is you have a thesis, you have an idea of how the business should go and the value outcomes, you know, activism is a similar approach, except you're also advocating for a certain thesis. And if you're going to advocate for certain thesis, you have to think about, well, how do you make sure you're aligned with management? How do you keep them motivated? How do you, you know,

it's one thing to tell a company to, you know, cut costs or, you know, reinvest in certain parts of the business or, you know, spin-off or breakup, you know, all the different activist's it's a completely different game to try to come you know structure a plan and a governance framework that that actually causes your thesis to cascade down through the organization right so that you learn kind of little tips and tricks over the years and and really after I left there wasn't a place to share those experiences or pattern recognitions and your substack has been a pretty interesting experience as far as being able to share those stories.

And so far, I mean, I think we're what, six, six months in or so. And, you know, it's been well received. I think, you know, I'm just happy that it's starting a conversation about what is best practices, what is the best way to, you know, advocate for shareholders, but also address stakeholders. I mean, ESG is such a hot space in general. and I think everyone is trying to raise capital. And I think my point is, you don't, if you want to make a difference in this space,

you don't even necessarily have to have an ESG fund or, you know, do anything in that. I mean, it's, you'll be well compensated, which is why they pursue ESG funds. But, you know, I want to, and this is a lesson I learned at relational is, you know, don't underestimate the power of a single voice in the room, you know, advocating. Because more often than not, you're actually saying things that a lot of people agree with they're believe in, but they're, you know, for one reason and yet, or the other, they can't, um, for, for very good reasons, they can't talk about those things, right? Warren Buffett has said, like, look, if you're, if you're a director in the boardroom,

like, yeah, I think it was with, uh, Coke had some egregious, uh, comp, comp plans. And he voted for them. Like, how could you vote for him? And I, I believe he went and kind of tweak them behind the scenes, but he said, look, if you're a director in the boardroom, often you can't be the one who kind of burps in the boardroom because you will get kicked out of that board. and you'll get kicked out of a bunch of others. And I do think that's one of the reasons.

Like an activist, and you know this, having worked for an activist one, often like a Vanguard will go to an activist and they'll present all the research and say, like, hey, here's all the issues we have, but we can't be the one who burps, right? Because we're invested in 5,000 companies and we'll get this invited. We need you to take a stake and go burp for us. Do you think that's about right? Or would you have anything to that? That's a great burp.

I would say that's absolutely true. I think a recurring theme in governance and boards and directors working with each other and relationship building, there are tradeoffs, right? Like I try to emphasize that when I write about this stuff. It's not obviously good, not obviously bad. There's a lot of gray area. There's tradeoffs. There are people that want to do good things. And that's, so one thing that's really underappreciated by a lot of folks is how can one person, you know, in a boarder, one person, you know, voicing their concerns, change so much stuff.

And the answer is no one else can burp, but they want to. And so now you become kind of the vessel for change, so to speak. And you're able to build a quiet, you know, silent, you know, majority or coalition that will, you know, privately advocate for you, but they'll, you know, they might not necessarily acknowledge what you're doing or maybe, you know, in certain ways they'll let you know, like, hey, keep going. This is the right thing to do. But for, yeah, for personal reasons, professional reasons, they don't do.

that stuff so when you show up like it feels like you're you're on a lonely journey right but you know you're you're actually you actually have a lot more support to get stuff done than when you realize within the boardroom i think there i forgot who did the survey is it price waterhouse cooper you know they do this annual director survey and it's anonymous and and they ask directors all these questions and and i've seen this to be kind of true like anecdotally they'll ask like do you think you know one of your directors should be replaced And, you know, half of them actually vote, yes, anonymously. And I think up to a third, actually say two of them should get replaced.

Yep. So this is the dynamic, like just assume this is the dynamic you're showing up to in a lot of these places where there's already victims and friction and, you know, competing interest on these boards. And it makes it, you know, I think I've talked about this before. It's like a soap opera when you start, you know, thinking from that context. And it's really trying to bubble up what is the story within the story and the relationships and how does that. actually impact the organization because what happens in the board you know flows through everything else yeah as an outsider you tend to think of these boards and these companies as purely rational rational institutions for the most part right like the directors are

going to oversee the management team perfectly the management team's going to maximize your value and the fact is like these are humans and they've got a lot of external incentives like uh i was at mckinsey for a long time and i remember once uh a cfo hired us for something i was doing all this work and it's like i don't get what we're doing and eventually one of the directors pulled me and he was like, look, the CFO has a son in college. And all the CFO wants is for his son to work for McKinsey when he gets out of college. So he, this is a project where he's just trying to get to know a bunch of people at McKinsey so he can, like, have a warm intro when his son throws his puts an application in, right? And a McKinsey project's not a cheap project.

But, you know, this was the CFO. He had money. He had influence. He was doing something for his personal incentives. And with the board, you know, all sorts of victims. But, you know, if I had to boil non-gat-downs one sentence. I think there's lots of things, but I think my major thing when I think of it is you look at the corporate dark arts, as you call them, and you find little tweaks to incentive structures that indicate a stock might be about to move, a company might be undervalued, something along those lines. So can you kind of explain the corporate dark art, the corporate governance dark arts, what goes into them, what you look for, what types of signals you look for? Yeah, I mean, I've, listen, I've thought a lot about like what

are the dark arts? What is that all about? How did I figure it out? And I mean, the honest answer is I didn't really start calling it the dark arts until I started a newsletter, right? And actually had to have a, like, it was a forcing function, right? I actually had to like put it within a understood framework of what's, you know, like most investors, what's floating in your head, right? It's like, it's like trying to ask someone, you know, when was the first time you're really figured out like, you know, investing in cheap companies was the way to go, right? it's kind of like, well, I can't really remember it, but now that you've mentioned it, here's kind of how I think about it, right?

And frame it. The best thing in chief companies is the way to go, by the way. The past couple of years might prove that wrong. Well, you know, us contrarians are going to say cheap, well, I should mention I started my career as a big Seth Clarman stand, you know, also Joel Greenblast stand. So a very event-driven deep value. I actually started my by-side career in small. micro small cap deep value like which you know today is kind of at the heart of like none of this

works i don't know why any of it doesn't work but back then it really worked and and i always joke that even though as a category i'm probably more of a traditional garp investor you know deep down i i've seen myself as a deep intrinsic value investor it's just the way i value and you know the intrinsic values a little bit differently today but you know everyone's a value investor in my mind no No one's going, I'm going to buy an overvalue stock, right? Like, I'm not going to begrudge someone who has a different view on intrinsic value than I do. We may disagree. We may have differences.

But, you know, I'm never really a fan of the us versus them dynamic, but I'm sidetracking there. But going back to, you know, the dark arts and how I figured out that signaling, you know, I spent most of my career doing, you know, I, well, it's not, I don't know what's the opposite of the darker or the good. I don't know. Implementing best practices, right? When you do friendly activism, the goal is to be behind the scenes. You don't want to start like public fights. What people don't realize is like for most activists, if they end up on the board, that's usually a measure of failure. And what I mean is if you if you can't get the management team and the board to work with you privately without getting on the board, it's kind of a letdown. I mean, like you, like you, end up being locked up, you're restricted. Yes, you have inside access to, to, you know,

company plans and information, but the goal is really to try to, you show them the framework without having to be in there. The goal is, the goal is you have a nuclear weapon, right? But you don't want to use the nuclear weapon and you don't want to show it. And they say, okay, yeah, don't use it, please, we agree. Right. Yeah, it's Dayton, right? Or I think the way, the way Ralph Whitso, the founder of the firm Ralph Whitworth, he describes it as, And I'm paraphrasing, this isn't exactly what you said, but, you know, friendly activism is about getting people to work with you. And 99.9% of the time they will. But there's going to be that one moment when someone challenges you or tries to call your bluff. And you got to go all in and just, you know, make an example. I described as at some point, someone's going to dare you to rain hellfire.

And when they do, you have to rain it. And when the ashes, you know, come floating back down, pack a up the ashes and ship it away because you need an example for the next scenarios just as a reminder is like hey we're reasonable but if you want to if you want to go down this path you know and go nuclear we you're more than welcome to do it um so you know activism and good governance that's where i initially learned this stuff right like what are what are the levers to actually drive good behavior which drives good performance and stock performance from there i mean you I didn't really think of it as a dark art or really considered, like, the negative ramifications of it until maybe, like, I want to see a decade ago. And, like, Michelle Letter at footnoted, great, great person, fellow footnote reader.

She wrote an article talking about going back to content IP, Marvel, right, like the comic book company when they were public. And she wrote about the story of the CEO, their contract was. up. And around the same time, they were having conversations with Disney about doing an acquisition or selling themselves. He reloaded himself with options. And that was kind of the first exposure of like, oh, this is, this is kind of like what I do, but like the complete opposite and like kind of a really bad practice, but they made a lot of money doing it. And it was kind of like that was kind of the seedling, that in a few other situations. I think, you know, I talk about TBG all the time, so I'm going to try to not talk about TBG on this podcast. But those sort of scenarios

questions about private equity. Or we can talk about. But that's when I started learning that, hey, there are ways where, you know, we try to implement plans to encourage good behavior and shareholder alignment. There are, you know, a mirrored, you know, I call it a dark art now, but back then I was like, there are mirrored behaviors that actually shows disalignment and and shows that, you know, insiders can enrich themselves using the same mechanisms. With a big,

with the big caveat being, they're doing it in plain sight. So if you pay attention and you notice certain patterns, you'll be able to, you know, I say profit alongside. Now, it's not, you know,

100%. And, you know, sometimes it feels like hindsight analysis. But, you know, if you figure out someone, and this probably, segues into your private equity question. If you figure out a person or individual or a holder is practicing the dark arts,

you might not catch him the first time, but then you know, okay, this is a guy that they're on the list officially, he's someone to pay attention to. And someday down the road, it might be next year, it might be two years, it might be 10 years, they're going to do something that basically screams, they're doing it again, and you should be ready and trade on it. And you'll have high confidence that it'll probably work out for you. That's a great because we've been talking about the dark arts, but I don't think we've given a specific example.

So it doesn't have to be a specific company, but can you just give an example of what a company would do for this dark arts so that insiders can profit from a stock that's about to move? So I think that, you know, the most popular, or at least the one that, you know, I talk about a lot is a concept called spring loading. And what spring loading entails is, imagine you're on the board and your annual numbers are in and the year's done and you're reviewing it and

everything looks great right you're beating analyst expectations not only are you beating analyst expectations during the board meeting as you discuss forward-looking guidance and what you're going to set for next year's expectations you actually are going to guide some blowout number because, you know, trends are going in the right direction. And really, it's next to impossible not to guide something spectacular, right? So when you think about that, like, people are in a really good mood. The dark arts and spring loading would then say, hey, this management team did such a great job. Is there a way to actually reward, you know, a job well done?

And one thing they can do is actually try to, you know, grant equity or options or some instrument. at, you know, stock prices that haven't necessarily priced in all those good news. And so what you do is you give them options before, you know, earnings. And when earnings come, you announce you beat expectations and you increase guidance. And the stock just, you know, sometimes even stock will move 20, 30, if not more, 20, 30% or more. And that's one way to kind of reward the team for a job role done. And this kind of goes back to this, like, gray area, like, is that the right thing to do?

Like, should you be doing that? What's the best practice? So that would be like a very obvious form of dark arts is we know good news is coming in. So we're going to give you equity before we announce it. And oh, by the way, yeah, this would be totally illegal for you to buy these shares and the SEC would come cracking down. But because the compensation committee and our advisors are signing off on it and approving it through these mechanisms, there's a lot more gray area and wiggle room to legally get it done. Yep.

And you pull it off. So let me just, so one that's been popular, and I think you made it public, so I feel okay, I mentioned this Kodak, right? So Kodak, you know, very rough numbers, their stock was lingering at a dollar. They announced they, they had announced, they were about to strike a deal with the U.S. government for a huge loan to pivot into pharmaceutical manufacturing, right? Right. There was absolutely no doubt, you know, it was a 750 million basically non-reversal, and I mean, this was great for the company. And the company gave their CEO, I'm just going to use rough numbers. They gave their CEO a bunch of options struck at $3 per share. So you would only do

the stocks at one. You'd only do three if you knew the stock was going to explode. They did it. The next day everything leaks. The stock goes to 10, right? The CEO makes $30 million or so, right? Now, I think one thing way to look at it is, hey, this CEO and the board just kind of stole $30 million from shareholders, right? They enriched the CEO for $30 million. Another way to look at it is, hey, the CEO, you know, he made this incredible deal that is going to create a billion for shareholders, shouldn't he get a piece? And, like, I think back to Steve Jobs coming back to Apple, right? He came back to Apple.

I think he worked for nothing for eight years. He turned Apple into this. It was on the verge of being in Goliath, and the board eventually had to say, hey, we need to reward Steve. And I think the board actually got in trouble because they gave him some backdated options or something. But, you know, is it really that they're stealing from the teams?

Or is it actually that they're rewarding, like, tons of value that they've created that they wouldn't have captured otherwise, but they've actually done a spectacular job. Or do you kind of just look at it as, hey, I'm just here to make money and trade on it when they signal this is happening? Well, it's never about the money for me. That sounds cliche. Let me rephrase that. I love puzzles.

Yeah. I love understanding people, like, before I got into investing, you know, I wanted to get into diplomacy and be a Jack Ryan and do psychological profiles and do all that cool, you know, Tom Clancy stuff. So, like, that's always been something that, like, I naturally gravitate towards, like, trying to understand people and, and how they tick and how their decisions get expressed in organizations, right? Because you're right, like, it's very easy to get sidetracked and forget that these are, at the end of the day, these are people making decisions, right, and pulling lovers. And so when you talk about, you know, is it an injustice, is it fair or unfair? This goes back to the whole notion of trade-offs, right? I think clearly, I mean, if you're following the news, like, you know, the politicians, the media do not like what happened here. And there's a, you know, there's a very good argument for that and understood.

On the other hand, to your point, I mean, how did Kodak pull that off? I mean, think about it. When that news came out, it was like, wait, what? What are they doing? Like, pharmaceutical loans? Like, you know, do you reward these guys? because like they actually pulled off something just so like out there so like they had to leverage their relationships and hustle and you know talk to you know people in the

administration to even get in front like what was it that should they get reward for that I mean I think a lot you know there there are a cohort of people that say yeah I mean they should be able to share in some of those games um I would say if you want to reward them there are probably other ways of doing it in a way that's more aligned. That's, you know, they'll get paid, but it's kind of, you know, above board. But, you know, that's very, that's nuanced. That's hard. You have to think through it.

Whereas, like, these guys clearly demonstrated that they kind of, they got very excited and couldn't help themselves, right? Like, they landed on pocket aces and they couldn't help but go all in and, like, just notify the rest of the table that, okay, this guy, this guy is. doing something here. Like, he's not bluffing. I know that for sure, right? And so, I mean, that's where, you know, it's hard to say. But I will say for Kodak, like, even if you think they deserve to get rewarded, like, you are being a knucklehead.

And I rarely use knucklehead. Strong language for the podcast. Strong, strong language for the podcast. You're being a knucklehead granting out of the money options one day before you're announcing a deal. Like, you're just asking for trouble. I mean, the more nuanced thing that they did was the directors double dip that same year. Like, so they normally get grants in January for the directors, the board of directors. May when they started these conversations with the government, suddenly they grant themselves out of the money options again.

I mean, they did restricted stock in January, and suddenly they switch to options. And, like, here's a less, here's a free, like, tip. whenever you follow a company like a Kodak or like I call them tire fires they're just like they're there like you don't know what they're going to do to get out of it if if you're following a situation that's a complete tire fire and ad blue they start changing compensation or they get they start singling something very bullish like that's the time to pay attention right because they're thinking the same thing that you're thinking like this is this is a dire situation like this isn't a good place so for for them to suddenly get really bullish, give them a ton of, you know, options or do something that like, hey, this is out of character of a company that, you know, is, you know, a tire fire for less of a better description. Like, okay, there's something going on there. So that's, that's, that's a free advice.

That's kind of how Kodak played out, right? Like, when, when the directors suddenly double dip, give themselves options out of the blue in May, you should be paying attention. Like, why would you suddenly give yourself options? And then, you know, they were able to hide the other grants until after the news is announced for the insiders. But that's kind of how you try to, you know, capture what's going on. And like, yeah, you can make a risk-adjusted bet to capitalize on those kind of trades. But yeah, going back to that whole debate, like, it's hard to say.

That's why I'm always like, it depends, right? And Kodak, I don't want to put too much morality on it. but I believe the CEO sold a bunch of the options after the pop, which I think adds another element of, hey, there might be something sketchy here. And anyone who's profiting from COVID, hysteria, not hysteria, COVID is very, but anyone who's doing anything to profit from COVID, I also think there's a little moral, but neither here nor there. A major trend of your work has been private equity controlled companies

practicing the corporate dark arts. And, you know, as an investor, I was actually surprised because I always thought it was a little contrarian where I was like, hey, the private equity company owns 60% of, public company, I actually feel a little bit better investing alongside them because, you know, they ultimately, like private equity is focused on one thing. That's IRA and making money for their shareholders. So if I'm buying into this company, ultimately, they're probably going to do what's right in terms of capital allocation and giving the share price as high as possible. And I'm not sure if your work neglects that, but a lot of your work has surprised me in terms of private equity

firms being able to, trying to enrich management team. So could you dive into like why private equity goes do this and kind of why you picked up on private equity practicing dark arts because i think you've described several of the firms as masters i think so private equity one thing you'll notice about private equity versus a public equity investor is they are very insistent on having um strong board representation right like you talk to public investors they don't really talk about governance um in general private equity like that's one of top priorities of like we're going on the board, not only are we going on the board, we're going to go onto your comp committee. Not only we're going to go on in the comp committee, I'm actually going to be chairman of the

comp committee, right? Like, they know to drive behaviors and align incentives, they want to be in control of the purse strings. And so they take a much more proactive, you can say, cutthroat approach to governance versus like a lot of, you know, activist funds or public, you know, investors. And there's a reason for that, right? Right. Like most of these businesses that they acquire, like there's a lot of leverage. You can't mess around here. You got to be totally focused and execute and operate on the business. And there are only so many executives and management teams that these funds are comfortable, you know, manning that sort of organization, right?

Because there's a lot of risk. And what happens is they, they know, like, speaking of unicorns, you know, private equity executives, like those are the unicorns of the PE industry. So you want to keep those guys as happy as possible because if they are proven that they can make you a lot of money, you take a company private, they do their thing, you go public and you make a ton of money, like you want them to be happy so that they will do your next deal, right? And so by the time a PE firm takes a business, you know, clean, I'm not going to say clean it up. They do their PE thing as a private company and then they go public. can make a ton of money, their equity is pretty much deep in the money, right? This is now the

opportunity to reward the management team with, you know, large grants and different kind of levers as a way to kind of remind them like, hey, thanks so much for like pulling us off, taking it public, making us a ton of money. We're, you know, we're going to reward. And what's going to happen is when the next deal comes along, that team will want to work with, you know, the PE firm again. or if they try to recruit other, going back to the BIRP concept, they try to recruit another management team, they're going to go talk to the other portfolio companies.

What was it like to work with this fund, with this partner? Did he take care of you? Like, was he a good guy to work with? And so there are certain things where it's like, you know, they will implement the dark arts because they're already in the money. So this is another kind of lesson I picked up over the years.

When an investor is deep, the money, whether it's PE or venture capital or even a public investor that has a 10-bagger in the portfolio, you're going to be a lot more tolerant of certain behaviors that the management team does to the point where it's detrimental, but you just kind of look the other way. And I think there's a certain human nature about it where this guy made me so much money or this woman made me so much money that I'm going to tolerate, you know, I mean, VCs talk about being founder friendly which is their way of saying

you get to do whatever you want as long as you make us rich private equity has a similar dynamic right with their management team so when they do spring loading when they randomly give options on the same day as the IPO so that they can participate in the IPO pop

these are ways to basically reward these teams that you know they got well compensated the private company but this is really their way of juicing you know their their personal ROI of these management teams because they've proven that you can make P.E. money, we're going to make sure you're happy so that we can work on the next deal together. And that's, I mean, when you study a lot of like P.E. firms, like that, whether it's J.Crew

or, you know, some other entity, when they can get a proven winner, and they're going to, they're going to try to like, you know, work with them as often as possible. No, that's great. You know, I guess the two things there, like, I've been reading E. Boys recently. And the thing you say with private equity, trying to make those teams happy, whether it's for their next company or so that they refer the next management teams to them reminds me so much of the VC model, as you said, where, hey, we make these guys happy. They're a proven founder. They'll have us be the anchor for their next fund. Or when their best friend launches a startup, they're going to refer them to us. And with Jay Crewe, I think

that obviously did it not end up working well in the end game. But, you know, it was TPG who bought Jay Crew with Mickey, right? Yeah, I mean, they double-dipped, right? They, they, they two deals. They literally like went, you know, they acquired Jay Crew, brought in Mickey Drexler, you know, was a huge success, took it public. I mean, he was a rock star. And then, you know, they used, you know, certain compensation, I guess, levers, like spring loading to keep him happy. And also, you know, to privately, like, show him, hey, like, whenever you're ready to sell Jay Crew again, like, think of us. And, you know, low-key, you know, use the compensation. as a way to kind of win them over, right, and made it tough to run a fair process.

Exactly. Because then when they were ready to sell, Mickey was the key man there, and Mickey told everyone else, I will only go work for these guys. So those guys, when you're the only buyer, you can get a good price. Everyone else might have been saying this business is worth a billion to us. It didn't matter. Mickey was key, and he wanted to sell it to you, so you could buy it for $500 million. So, yeah, just super interesting. Just real quickly, one of the signals I've never seen in your writing, not that you know, insider purchases, buying on the open market has never been a signal in any of the writing.

And part of that is the Dark Arts is learning how to reward management teams often when you have MNPI that they can't buy on the open market with, right? But do you just find insider purchases are too noisy, or is there something else going on there? I mean, I don't talk about insider buying. too much, mostly because it's kind of a well-understood signal to the point where it is kind of a soft or weak signal a lot of times. Now, granted, there are scenarios where, like, I didn't mention it in the Kodak write-up, but Kodak insiders were extremely aggressive buying stock, right? Purchasing

shares even before the news and even before they're aware of it. So clearly, like, there was something going on that got I'm very excited about whatever they're working on to buy shares. So thematically or directionally, I will use insider purchasing. As far as writing about it, it's not necessarily a strong signal. And it's one of those things where by the time I start looking at it, I mean, there's probably already three or four different articles on seeking alpha, talking about the insider buying. There's nothing new I'm going to tell you about this particular part of what's going on here.

And there's already like, you know, there's literally a bunch of subscription programs. just a flag inside you're buying. So it's a crowded kind of category, so I don't talk about it. I think it's worthwhile. That said, the reason I don't spend too much time on it relative to the grants is the reality is the way like the rules are set up. You can make more money working with the board and the compensation committee, restructuring, readjusting your grant,

than being, you know, trembling with greed buying stock in the open market. Like, if I were talking to a CEO, right, and he thought that, you know, there's something exciting going on and, like, he wants to really maximize his economic upside, I mean, one thing would be, yeah, you can buy back stock. I mean, that would be one way of buying stock for yourself, open market purchases. But the reality is you can probably get multiples. of that, you know, working with the Com Committee to, let's say, overweight options that are out of the money strike prices as a way to make more money than just, you know, it's one thing

to spend $100,000 on, you know, open market purchase. It's a whole other ballgame when you're, you know, dealing with millions of dollars with the target grants. That said, now I'm just shooting off the hip. I apply less signal to insider buying from executives. but I put a lot more weight on insider buying from directors. And the reason I do that is directors aren't as they have access to kind of the material information and where the business is going, but they're not necessarily experts, right? So when you get a director committing, let's say, $100,000 to buy, you know, shares in the company, like, that's usually a big deal because that's not common practice, right?

you kind of like think think critically like what what compels a director to buy back stock when it's not a normal thing to do yep like either either there's an opportunity here that's so good that they can't help themselves or more often not what happened and this is where you see clusters if you see a cluster of directors buying stock that's that's them talking to each other and going like there's a really good opportunity here I bought that you know I bought 100,000 shares and then you know they talk like you bought a you know I'm going to buy 50,000 You can actually see that thinking get expressed in the form four filings where it's like you see one savvy director that, you know, you suspect has good, you know, a good view on valuation buying a lot of stock. Then you see kind of the other directors that might not be financial experts, but they're, you know, their marketing or like valuation isn't their thing.

But suddenly they start buying shortly after that other director. And that's a signal. So I'll talk about that for sure. The only other thing I'd add there is, you know, if the CEO is buying, the CEO often, you know, you have, I am the man syndrome, right? Like, hey, I am personally going to make this company a success. And maybe they will, maybe they won't, who knows? But a director can be a little bit more objective, right?

So maybe they sit on multiple boards. And when they're putting money to this, they're saying, hey, you know, I got a lot of context. And this is the company that I think is most undervalued. And they really don't have much of a dog in the fight, to be honest with you. Yeah, I think it's that objectivity. helps because you're right like probably the most bullish person in any company is a CEO and they might be irrationally bullish when they're buying back stock um to to the detriment of using it as a

signal and and and that's you know i i think we've all experienced that feeling of going oh my goodness a CEO bought a lot of stock i'm i'm going to ride that that narrative and just getting your face ripped off yep um whereas yeah directors are much more cautious and you know a director A director spending $50,000 to $100,000 on, you know, a company that they're not running or in control of, I mean, they're a director. I don't know. There's just a bigger, like, mental hurdle that you have to get over versus a CEO that's, you know, they're already getting millions of dollars in equity grants on top of it.

You know, that $50,000 might not be that big of a signal on the buy. But if they randomly started shifting their equity compensation structure and made it very, aggressive that that's interesting to me and that's a much stronger signal now we you talked about sometimes you know Kodak a couple other examples come to mind you called it the tire fire they make a they make a change and that can be a screen by and you know Kodak who wouldn't like it went from one to I think it peaked at like 40 50 something like that like anyone would like to be any part of that but you know a lot of these you found and I've texted you about this I look at it and I'm like it's too much of a tire fire for me like I just can't get comfortable so when you see these

tire fires with strong signals like how do you think about it is hey i just need to put a small position on just because the signals are so strong here i need to do more fundamental work see what i'm missing i you know if i can't get comfortable with just too much of a tire fire probably just passed like how do you think about that i mean genuine tire fires like a kodak i i mean that's not a real that's not a real investment decision for me i mean that's your you know i call it by side bets right not Wall Street, but you're playing around with your PA, you're putting on small positions, maybe you do a YOLO, you know, out of the money option. You know, it's not much different to me as like going to Vegas, right?

Like you budget a certain amount that you're willing to lose and like, okay, you know, this isn't a portfolio decision. This is a trading decision. Now, there are tiers to the tire fire, right? Different tiers. So I think I've been on record calling Snapchat a time. tire fire. And what's funny is, like, there's certain tire fires where, like, I think I should have just gone long when I called it a tire fire because I think my returns would have been much

better. In that case, they're not really tire fires. It's just a tongue-in-cheek comment. But, like, when I find a scenario where, like, the fundamentals or the financials look bad, and suddenly insiders are given, like, let's say, makeup grants or, you know, a Snapchat had, like, I've never written about Snapchat, but there are some, like, grants that, like, caught my attention there that actually said, like, okay, there are a lot of bad things going on here, but there's a sell-off. That sell-off causes a lot of focus with management teams. It causes them to go to first principles, really recognize, like, what are we trying to accomplish? And, like, you'll see it, right? Like, that's when you get infamous, you know, letters to the insiders, like, hey, you know,

we made a mistake like we're retrenching like Snapchat did the same thing so after a sell-off if if you suddenly see insiders like readjusting your game makeup grants and there's something fundamentally good about the business so in Snapchat's case i always joked no one gives this business or gives well yeah gives the business side any credit but this thing is consistently the number one or two downloaded you know app in the app store during certain periods of time like young people you know, this is their preferred method of communication, messaging is important, and so, you know, there was a big brouhaha about like Instagram stealing stories from Snapchat, right? And it's going to kill Snapchat. They stole this concept. It's over. And I actually took an opposite to take

where I was like, Snapchat is really lucky right now because their cohorts aren't going to just move over to Instagram and suddenly stop using Snapchat. They now have quite possibly quite well actually I don't think it's an argument this is the best

when it comes to social media like social networks network network affects businesses this is one of the best business machines on the planet

probably in the history of business right what Zuck built for you know monetizing the platform is extraordinary they are now Snapchat is now blessed

with Facebook copying stories And now you get Facebook's machinery thinking 24-7, how do we monetize stories? How do we monetize this emergent form factor that users love, drives engagement? And how are we going to educate the advertisers to use this form factor? Because before this, if you're Snapchat, you're a small entity, you're kind of a niche concept. How do you convince the big advertisers to advertise Snapchat stories? How do you get them enthusiastic?

Like, what is this form factor? Half the people don't even know what Snapchat is. Facebook is now... The people who know it, they're 15 to 18. They're not the people who are buying the advertising. Right, exactly. But now you have Facebook figuring out what is the best product-first monetization model for this stories form factor.

And they're going to go out of their way and educate all the advertisers on why this is important. And fast forward, you know, a couple years. Snapchat stories and Snapchat advertising probably has some of the best CPMs for advertisers that know what they're doing, right? Like, it's, it actually harkens back to when I was looking at Google years and years ago where, you know, people thought Google was expensive,

but when you looked at it from an advertiser's perspective, like AdWords, like the ROI is of deploying those dollars into Google was superior to any other form factor. And it's like, I don't care what the valuation is, as long as their customers, the advertisers, are getting, you know, 5X, their return on their spend. They're going to keep spending it relative to other options. And you're kind of slowly seeing that, you know, play out in Snapchat, right?

Like, people are starting to figure out how to use stories and advertise and use more native, you know, models to get people to convert. And, you know, it's starting to work. People finally are figuring it out. So going back to your tire fire comment, in general, it's not a, you know, It's a gamble, but in the scenarios where the business side is a tire fire, but the core business or what really makes that business special, whether it's the network effect or the users or something else, if that's still intact and still special, then you can actually start putting on conviction

positions. And that reset in compensation is kind of a signal that not only are we going to try to make whole our team, but we're in an environment as a company that we're going to focus. And it kind of goes back to the notion of busted IPOs are a lot like spin-offs, right? Like, when it's busted, suddenly, like, everyone that was previously there is gone. They want to get out. It makes you, you know, focus on first principles. You try to do realignment. It's, I mean, you know, all the things you're looking for in a spinoff that are kind of arbed out these days, like you can find in busted IPOs or busted company situations today. And I'm sure they'll get arbed out. But in the time, it's a decent place to fish for ideas.

Yep. Yep. No, look, I think that's incredibly interesting. When I think of your work over the past, you launched a newsletter in February, most of the situations, I think, have focused on either kind of the biotech slash pharmacy or software slash technology side, I would say. And I have to wonder, is this because that's where you spend most of your time? Or is this because these companies were particularly unique beneficiaries of COVID. So kind of in the March-April timeframe, board started looking and saying, oh, my God, our business is going off the charts, like, we need to reward these executives.

Or is this just because, you know, the upside for a biotech pharma company hitting it right is so much higher than the upside for a retailer hitting it, right? So, you know, why do you think these areas have been kind of such a focus for you? I mean, I would say it's a few things. So, you know, my background was more in tech before this. and like you know if you if you've read enough of my stuff or you follow me on Twitter I kind of parrot myself when it comes to governance where like don't just mechanically blindly follow this stuff like have an investor perspective it's no it's not much

different than trying to you know then all the other pieces of due diligence you're trying to pursue or investigate or research to get a view on the company so always kind of have that perspective even when you're looking at governance like that's where you get the most signal. And so I generally am biased towards situations where it's technology or network effects or networked assets because I think those generally have,

there's some of the hardest things to value. So I generally gravitate towards things where I think have a lot of value potential if certain things are there or if the star is aligned. But if they don't, they get deeply undervalue. So content IP, I think we mutually have. have a love for, it's some of the most difficult assets to value, right? It depends on monetization platforms, like, can you make a movie?

There's a gaming opportunity, like cards, like, there's a lot of, like, reasons that cause, which is why I love Power Rangers in the history of Power Rangers, like, and the different valuations that it's been acquired and sold off over the years, because it kind of captures, like, the difficulty of content IP. So I naturally gravitate towards those type of assets. Couple that with governance quirks that serve as signals, right? Like these are hard assets to value in general. If I'm given an edge where the management team changes their comp plan

or there's some interesting adjustment and governance that I notice that's a tell for the core business, right? That's something I should be paying attention to. And if you nail it, like, I mean, you've probably been in enough of these next. network or content IP plays, when things are aligned, like the stock moves, and it works, and it works very well. So partly, I look at that space because that's my preferred watering hole. Now, as far as biotech or things outside of tech, the nice benefit of writing and just kind of having your thoughts out there in public is you start getting inbound.

Yep. And there are some incredibly and talented, smart, like, brilliant people that follow certain industries and spaces that have never really entertained governance. And, you know, I'm appreciative that they think of me when they see a weird change because usually I'm probably one of the first emails they send out, go like, hey, what do you think about this? And then I'll give my high level, like, general thoughts. And then they kind of feel it, you know, they actually fill in the investment. perspective for me. And they'll say, oh, that makes a lot of sense because of X, Y, and Z. And then I'm like, oh, really?

Like, oh, yeah, okay, this is definitely the case. You should, yeah, there's something here. I mean, that's where Vaxart was an inbound from someone very thoughtful that covered the industry very closely. And they had questions. And by the time we kind of framed it out, I was like, yeah, there's something here. there's like I know we haven't really talked about Vaxar but like the type of compensation structure that they were implementing

was so unusual and I've seen hundreds of these plans I was like there are only a handful of conclusions you can make and in the case of Vaxar it's like most of them lead towards the stock going you know up into the right yep how you know value accrued you know the move's going to be but you definitely have good enough signal to, you know, throw a few shuckles at it. Yeah, no, just for people who don't know, I'll just quickly summarize backstart. So backstart, they, correct me if I'm wrong on any of this, they changed their CEO to an investment banking CEO. They hit them with a ton of options that were just way, way out of the money. You know, the stock was at like two

or something at the time. They hit them with some five, $7.50, $10 stock options. And maybe a week after the change and the new options came out, they said, they announced that they had been selected for Operation Warp Speed. So, you know, they had a COVID vaccine and the thing. And the stock has gone absolutely ballistic. So, and you wrote that up and pointed it out. And actually that kind of segues to a question I wanted to ask, Kodak and Vaxart, you know, with Vaxart. Bernie Sanders came out and said Baxart should be investigated. There was a New York Times profile, a New York Times piece on Vaxart, which I'm not going to say was a, carbon coffee of your write-up, but it was pretty close. And with Kodak, Elizabeth Warren came out

and kind of said, hey, Kodak needs to be investigated for this. So when you see these, like, how do you feel about that? Is it proud? I mean, obviously, I think you kind of should have got a shot at there. Do you mind if you shout at all these? How do you think about that? I mean, I don't know what to think about it. I will say I'm pleasantly surprised. But But I will note, like, you know, when it came to Vaxart and these other pieces, like, I try to emphasize, like, the answer is not, you know, straightforward, right? It's, there's a lot of gray area. Like, in the case of Vaxart, I mean, listen, if they actually come up with a vaccine for COVID and it's a pill form, you don't have to get a shot, they're going to be one of the winners. And, you know, an argument should be made that, that, you know, they should be rewarded for that.

how like maybe they should have done a better way but like you know i i think uh you know backs art probably isn't the most egregious you know situation i've come across over the years when it comes to stuff like that but as far as like attention um yeah i mean it's it's it's it's nice that we're having a conversation about this stuff this was one of my goals about you know writing and evangelizing governance it's like it's one thing to try to teach people best practices, no one's going to pay attention. But if you teach bad practices and show like how people make a lot of money and how you can make a lot of money, you're going to implicitly learn good practices because you'll go, oh, spring loading is bad because the best practice is to release

the material information and then grant shares. It's a different way of learning. And it's also kind of, you know, a way of highlighting, hey, you start these conversations. Like people, people will take notice if you have something important to say and you can actually drive a drive the conversation and drive positive change now that said you know I've had my frustrations with with you know how you know some folks you interpret what I have to say but you know more importantly I get frustrated because you know just email me guys like I can actually tell you exactly how to how to investigate these things because if you're taking so Vaxart I actually broke up into two like thank you for your for your patronage and your subscription all the good

stuff is behind a paywall yep and I would actually say if you know what you're doing it's the obvious stuff too so for someone to take inspiration on on something and write about it which is fine but you butcher a very important story you butcher a very important conversation And that's, like, I always joke about the whole Picasso, like, you know, like, good artist copy, great artist, steal. Like, my view is like, do not copy me. If you're going to do it, steal for me. Yeah.

Because at least steal, I can be like, that is dope, right? This is really cool. They took something that I wrote about and they made it their own and, like, actually forwarded the conversation. And I can now steal from their work and build on top of what they've done. Like, that's what I want you to do. Like, do that. but don't just like carbon copy something and um you know it's water on the bridge like it is what

it is but it's like like don't butcher it guys like there's there there it was an important opportunity to have a good conversation and if you if you politicize in a way that doesn't really really get to the crux of the issues it just i mean it looks haphazard and your argument like weakens and it could actually set you back so um i guess that said i'm you know i'm i'm pleasantly that I've gotten the attention, but, you know, I think there's still a lot to do. There's still a lot to, you know, chip away and grind. And I think the big lesson, hopefully, is, like, the next time I write about something, like, you know, someone will actually reach out and want to talk to me about it versus

just trying to, you know, take inspiration from it. Well, I've got some questions for listeners that, questions from listeners I want to wrap up with, but is there any situation like you wanted to cover, any company you wanted to talk about that we didn't have here. The floor is yours if there's anything you wanted to discuss real quick. No, I mean, fire away. I have an answer question. Most popular question, and I've asked you this several times, so I think I know the answer, but I think everyone who follows your worker subscribes is impressed with how much you read into these proxies and stuff. What's your screening process? How are you finding these things?

well you know because it's a newsletter I don't proactively screen for this stuff I mean the newsletter is kind of an offshoot of just me like I follow I'll like pull strings and follow curiosities so this kind of goes back to the investor perspective if I if I look at like if I come across the situation stay on Twitter or I see like a ticker where it's like oh that stock blew up it's near it's near that it's fiscal year end like I'm curious how they're going to to adjust compensation of the governance given, you know, what's going on here. So I usually kind of go to, like, I've gotten very lucky finding these situations, right? Like, I'm not actively screening for it.

I'm not actively trying to find them. It's more like this is a, I often ask myself when I find these things, how I end up there is I ask myself, this is an interesting situation, you know, X, Y, and Z blew up. Here are the challenges. I'm curious how the board is going to proceed. And then I start digging in. And more often not, you kind of identify very quickly what they're doing. I'm sure I'll get arbed out at some point the more I talk about this stuff.

And I really probably should proactively screen it since I kind of do it for the newsletter. I mean, if I were doing this as a fund, I would actually invest time, capital resources to do it correctly. but this is more kind of a passion project hobby. I mean, I'm sure you've seen me on Twitter on a random Friday night at 11 p.m. reading a proxy and going, what is wrong with me? I'm reading a proxy at 11 p.m. But I guess the answer is I just kind of, you know,

I enjoy and I find it by happenstance because I know what I'm looking for, but it's not something I actively look for. You get a proxy at 11 p.m. on a Friday. What's the first section you're going to flip through if you think there's been some shenanigans going on in the company? I mean, I will always look at long-term equity incentive discussions. How do they frame it?

What are the hurdles? What kind of what's been their historical philosophy? And then I'll check kind of historical grants, see if they're consistent. You know, the key here is, is there a process in place? If there's a process in place, then there's not as much room for the dark arts. Or if there's a process in place and they make an adjustment, you know, at the 11th hour for the most recent grants, that's more telling to me because that means they purposely diverged from the process. So usually the first thing I'll look at is, you know, their equity incentive program, I'll look at their bonus hurdles, you know, for the annual years, compare that to maybe guidance if they provide that, see if there's mismatch. and if there's any sort of disclosure or dialogue on like go forward grants or how they're going

to grant you know next year's grants I'll look at that but I mean from there you can build a pretty good narrative as far as what's potentially going on there and what the company prioritizes we've talked a lot about long-term equity grants a lot of people ask changing kpIs is that too soft of a signal or do you see something in there and I'll just give an example a company that has traditionally had rewarded their executive team on book value growth or something, switching to a return on equity target or an earnings per share growth target or something. Do you read anything into that or is that just a little too soft? I always pay attention to changes in compensation and hurdles. Even if the composition

is the same, so let's say you're sticking to options, but the hurdles change. I mean, I always take note. And the reason I do that is those things those things are thought through right those are you know because they they are going to influence and impact behaviors and cascade down the organization and drive behaviors so it's very important to understand you know or try your best to understand the why behind changes and hurdles I would say in general I mean there's not strong signal in the sense that when you see changes, often it's at the request of a shareholder or it's realigning to industry best practices. It's not necessarily a big, you know, a flag or smoking gun necessarily. But if it's

something out of the blue after, so the best time to actually look at those changes is if a stock's blown up, right, how are you going to incentivize the management team to execute on whatever plan and it's likely a turnaround plan going forward and keep them engaged in? motivated. What are the right hurdles for that? So when you take, when you approach it from that investor perspective and just kind of common sense perspective, it kind of bubbles and puts light on those hurdles. And, um, and that's when you go, okay, year to year, just kind of process related hurdle changes don't interest me. But if the stocks move 40%, and they suddenly move their hurdles to, you know, option or they move their grants to options and the hurdles are now, you know,

tied to, you know, returns or something else, I'm going to pay attention. Yep. And everyone should pay attention. That's like, that's like just equity research 101. Makes total sense to me completely agree. The question was originally what was the biggest mistake in your life? But I think that might be a little too deep for this podcast. So maybe like what's one dark dark art spring work investment that you picked up on

and you kind of regret or either passing or investing into it? it so i i think if you get to know me long enough i i don't really think in terms of mistakes i think in terms of tradeoffs um and i think everyone i mean you have to be happy well you don't have to be happy but you have to be comfortable with the tradeoffs you're willing to make right like these aren't mistakes these are like you want as long as you understand that if i do this then, like, you know, these opportunities are probably going to, you know, shut or they won't be, you know, a good opportunity for you. Like, that's fine.

And I would say probably the biggest trade-off personally I've made is I just, like, I've come the realization that I'll never get hired through the front door of any company ever. Like, I'm never going to be able to submit a resume. And this is, like, absolutely true. So, like, when I graduated, you know, college, I ended up doing, you know, nonprofit and all that. But I interviewed at all the other places, banking and all that. Like, my batting average for sell side is, like, zero. I cannot get a job, like, I can't walk through the front door of any of these places and get a job.

What's quirky and why I love Byside, because it's full of, you know, interesting people who are very, a lot of them are eccentric. they will give you a shot. They will, you know, they're willing to take a risk or they're willing to, you know, bubble up, you know, the potential in candidates. And that's been my saving grace. I think, like, as a career, like someone in Bioside saw something in me and was willing to give me a shot.

So from this point, you know, from that point on, you know, I just, and people talk about social proof. and, like, you know, networking into jobs and it's a well-understead constant. Like, every job I've ever gotten has probably been through the side door because, you know, I talked to someone that had a good conversation. So, like, if I were to submit my resume right now to, like, most hedge funds, like, realistically, I'm not going to get through the headhunter screen. I'm just not.

Like, this is a fact. Trust me. This is a fact. I'm not going to get through the headhunter screen. but if if a fun was reading my stuff and I tweeted like you know what like the newsletter is great but I feel like going back to by side at the very least I think I can get some interviews right I think I think someone might be interested and and will talk to me I have a feeling the work on non-gap if you put that out you would be a very hot commodity so I was just laughing because

I think it's funny like the headhunters would reject you and anyone who subscribe to your stuff would be like, oh my God, we got to get this guy in for an interview at a minimum. Yeah. So, like, that's why I don't like talk about mistakes because it's like, I talk about mistakes. Then I'm trying to tell you, like, avoid this. And it's more, no, like, be comfortable with the tradeoffs you're willing to do, right? Like, I, you know, I have no problem, like, like, quitting a job and just not having a fallback. You talk to some folks, that terrifies, like, there's nothing scary than quitting a job and not having, you know,

something in place and it's like that was a trade-off I was willing to make like I you know I wasn't particularly interested in kind of the hamster wheel of you know doing X Y and Z I like I was fine being patient and waiting and and betting on myself to a certain extent so I guess that that would be my roundabout meandering way of saying like I don't necessarily think of mistakes but I definitely think of trade-offs as far as misses investment misses and I think this is a theme for a lot of long time investors is, you know, I keep on forgetting the whole like never sell notion, right? Because a stock run, like, listen, I, my biggest, I mean, the, my biggest miss is probably like selling Etsy. And my cost base was like six bucks a share. It was like,

I think it was a, I mean, it was like a nine bagger for me. But like, I should have just held on, right? Like, it fit my wheelhouse, it fit the story. Like, Etsy is actually a really good case as far as, like, using governance as signals to, you know, like, speaking of, like, pseudo tire fires and using governance as signals. Etsy back in 2015, 2016, excellent case study. I should probably write about that at some point. But I think that's, okay, that I will say are misses. When you get into this whole, like, never sell, like philosophy, you're really trying to adopt it. and you still can't help yourself and you do it anyway.

And you know you shouldn't be doing it, but you still do it. I'll never sell. It's so interesting because like the past, I'd say five, six, seven years have taught you never sell. And people particularly use it for the compounding tech fang type stocks, right? Where, hey, these things have scale. They have network effects. And because there's no limits to the internet, they can grow beyond the world. But, you know, if you rewinded it 10 years back and you took the concept of never sell,

it actually probably would have worked out it wouldn't not have worked out well for you right like outside of Berkshire just about every other large company that never sell has been applied to it's pretty much blown up I would say if you're ignoring the past 10 years so I do wonder if that's like part of the environment today

or if that is actually like you should kind of never sell when you've got one of these big winners I would say personally the answer is and this kind of like a call back to earlier part of the podcast you know, networked assets, network effect businesses are some of the hardest things to value. And people tend to undervalue them because they tend to lean into the business model side of trying to value, right? Like you have Etsy or some of these businesses fantastic like network effects, but really what are you like valuing?

You're valuing the business model, but you're not really, it's hard to business. It's hard to value, like, the true assets, which are the users and the merchants and the independent sellers. And I think never sell for me, just given my preference to look at more kind of networked assets and businesses, is more of a reminder of, like, hey, the reason you fish in this pond in the first place is because people misunderstand and misvalue these sort of situations. Like, you're going to do the same thing, too. to a certain extent, and when you nail the story, even if you think that it's well-valued or

you want to trim it, that compounding moat, and I don't like using the word moat, but that competitive advantage, that differentiation continues to compound underneath whatever business model you're valuing off of and you're probably underappreciating it. You're probably falling into the same pitfalls that most investors were doing when you got into the name is just now to add a much higher valuation. So, I mean, that's kind of like, I agree. Like, never selling can be a bad thing, too, for certain situations. For the kind of things I like to look at, like, I mean, it's been more of a, you know, a mistake. I don't like you a mistake. I guess, you know, I've definitely, I've definitely probably left.

a lot more money on the table selling versus just like hang on. And I guess just like with Etsy or I think back to the content things we were talking about earlier, right? Like often you sell because you look and you say, hey, this is a video game company. And, you know, I think the company has fully priced in all the profits they'll get from video. But if it's a great company with a great network or great IP, it's like, well, the video game can evolve into a Netflix TV show or they can build a theme park around there.

There's lots of options with these great assets. you often sell because of trailing financials, but that ignores all the, Elliot and I on our podcast yesterday talked about, you get all these different level up opportunities with great assets. Last question, and then I'm going to let you go. You've been inside the boardroom.

You've been inside the boardroom. You write about the corporate dark arts, and I thought this is an interesting question. What do you think about normies, not kind of corporate executives joined the board? And I guess an example that comes to mind for me is Ryan Reynolds joined Matches board at the beginning of July after they spun off the IAC.

I know a bunch of people who kind of dumped on, why is Ryan Reynolds on The Match.com, this, you know, $15, $20 billion growth tech company, why is he there? Do you have any thoughts on that? I think it's great in the sense that, and, you know, Ralph Whitworth is a big advocate of this. Like, I believe most boards,

when it comes to, like, identifying directors, where they kind of, like, fall short is they take a checklist approach, right? They always think, who do we need to add? like and and it's usually like very crude right it's like we need we need another woman we need another x or y or you know it kind of like takes away what you're trying to do from a governance and board perspective like you need to take a more holistic approach what are what are the next four directors we need over time not not just the next one like don't say you know this person left so we need a final replacement that meets that exact you know specification that just that's a limiting

approach. And I actually believe that you need to broaden the top of the funnel. And you actually have to be more open to interviewing and considering people from all sorts of backgrounds, whether it's, you know, a celebrity, which maybe, you know, brings a differentiated view as far as, you know, advocacy or, you know, like an investor that maybe isn't a CEO or hasn't had, like, you know, experience on the board. But, you know, it would probably do a good job. Like, I mean, like, I joke, but I'm probably the most qualified, unqualified director candidate you could probably interview, right? Like, everything on paper says I probably shouldn't be on your board, but I would probably be one of your better directors. And I think that's like on a risk-adjusting basis.

But, you know, most boards are looking for ex-CEOs or current CEOs or like very high bars that actually, this actually goes to the heart of the diversity debates and trying to bring more. diverse voices and perspectives, like if your hurdle is, you know, a public company CEO and you're trying to bring in a diverse board or a diverse perspective to the board, there are not many candidates that you can actually narrow down. It's probably the same, you know, handful of people. But if you're looking more on a forward-looking basis, like, who do we think can add value and, you know, help bring a different perspective or we can, you know, train. them or bring them along on certain things, like kind of just the basics, but they bring like an outstanding difference in view and something else, we should consider them. And I think

that's been kind of, you know, Ralph's advocacy for, you know, 20 plus years is like, that's one the first things he does. Like, don't, don't just like, you know, carte Blanc just consider CEOs. Like, be willing to be open and consider folks that maybe otherwise wouldn't even, like, you know, make the first screen or wouldn't even be on the short list. Like, it's, it's easy to, be, you know, have a need-your-judgmental reaction to certain, you know, additions. But, you know, like, there's something we said of giving people the benefit of the doubt and actually saying, like, can we drive, you know, meaningful value and can they offer a value at perspective?

And I say if more companies and more boards could actually broaden the top of the funnel, I think performance and governance and a lot of things that, you know, people are concerned about, a lot of that stuff will get addressed and and long-term value will be you know produced but i mean that's that's more of a you know in my you know in my heart of hearts you know got like like my north star that's what i think is possible look i i completely agree with you uh my puppy is starting to line over there so i've been so generous with your time you have a standing invite actually i think your your background and everything is history i think everything you've talked about uh with ralph and with the Intuit board is so interesting.

We're going to have to have you back on so we can go into that a little more deeply at some point. Last thing, is there any person you'd like to hear interviewed on this podcast or any stock you'd kind of be interested in learning more about? Sure. There are probably a handful that I'll let you know offline because I don't know if they want to be publicly mentioned. Yeah, yeah, because they're private accounts. But, you know, like my favorite, so everyone when they follow out.

activism like they kind of follow the headliners right elliot and things like that you should really i don't i don't know if you can talk to you about elf because they settled but like maria sabelli have some really interesting perspectives it's fun i i dmed in today and i think he's coming on next week so i'm perfect so you're front-running me i know i'm front-run well they he was like probably aside from core logic and you know the craziness that bill foley's doing right now elf with marathon and TPG and just the technical fight that they had as like for him to drive some of the things that he did at elf when he basically had you know a 40 plus percent vote against him yep it's unbelievable so like that's you know I think that's kind of a you know

an activist activist campaign right like you do you do this long enough you're like that's spectacular I saw you writing about this and he he was doing it and I was looking. I was like, at TPG, as you said, they own 40% of, they own 40% of the company. There's, there's no way that they can get anything done here. And, uh, I, I haven't followed this story too closely. But as you said, you got something done. And that, that's just Herculean. It's, you know, it's, um, yeah, it's, it's, it's contrary to what people assume, right? Like, most people wouldn't even bother trying to take that on. So it's, you know, it's, um, it's definitely interesting. And that's why I love kind of more technical activist fights personally. But, um, yeah, definitely, I think

a good resource. And I'm happy to DM you a few others that I think would be phenomenal. Hey, well, this was Mike from Nongap again, everybody. It is worth this description. You should absolutely do it. Thank you for coming on. We're going to have to have you again at some point. And we'll talk soon. All right. Sounds good.