New Constructs' Live Podcast: Intelligent Capital Allocation - 15 September 2023

We were talking this week to one of the financial advisors that's a customer of New Constructs, and he was talking about companies that he would like to buy someday that were on his wishlist, that were great companies. He thought they were run really well, but they just weren't at the right price for him to buy.

Right.

And it reminded me of this quote that we've got on the screen. Willing to not buy something just because it's a company that you admire? Thanks everybody for joining us. You are with New Constructs. This is our live podcast, Intelligent Capital Allocation. Today with you, you have the usual, myself, Tamara Pesek, David Trainer, and Kyle Guskey. And very excitingly, our special guest today. John Rotanti. I'm going to go through the agenda very briefly, and then we will get into it. The same as last week, if you would please nominate companies for reverse DCF or further analysis using the Q&A feature in Zoom, we will use that to help us decide what companies to do reverse DCFs on in the future. And topics to talk about as well. We really appreciate your votes and participation there. Latest and forthcoming research, a great Danger Zone podcast out this week. David did that. The executive compensation aligned with ROIC model portfolio had an update. There is the IPO of MapleBerry, better known as Instacart. And the Most Attractive and Most Dangerous model portfolio also had some featured stocks that are being spotlighted on the research tab, as well as a focus list long update. A lot to go through there. David is going to talk more specifically about CART and Arm, the IPOs, shortly. And then right after that, we're going to jump into our discussion with John. Super fun Twitter to follow, so please don't hesitate to get to know him there. If we get to it, we will also be talking about Match.com, moving on to the Most Dangerous List, uh, an update on what we're doing with the new product Starter Pack 50, and then we'll jump on out to society and see what's going on out there because there's always something fun going on out there with you guys. Let's move on to interesting headlines, David.

Yeah, you know, look, it's looking like an IPO season here again, not too different from what we saw around this time a couple of years ago when we started the zombie stock list. So this time at least, you know, the businesses are at least generating a little bit of profit and that's a good thing, but the valuations remain really extended. Whether you're looking at Arm, Maple Bear and Instacart, or Birkenstock, which was noted on Circle recently. And we're just looking at expectations baked into these stock prices for really highly unrealistic growth. For Arm, it's maintaining best-ever margins while growing revenues. What is it, Kyle? Like in the 20s for the next several years. And then for Instacart, they're supposed to do something very similar in terms of growing revenues and maintaining best-ever margins for over a decade to where they're going to be doing the kind of gross transaction volume that Uber does. And, you know, talk about a business competitively boxed in. Instacart really has no chance of really, I think, ever being that big. Especially when their primary customers or partners, Kroger, Walmart, Target, and maybe even Amazon a little bit, are competing directly with them. So if they ever do that well, you know, it's curtains. And then the Birkenstock IPO. Yeah, you've got a little bit, you got at least a positive ROIC, a little bit of NOPAT there, but then again, then again, really expectations are way too high. So We've got some detailed reports out on that. We encourage you to take a look. I think we've been getting quite a bit of press coverage in our sort of lonely, but still ardent voice to say what we think is right about these. You know, there's an avalanche of positivity around these IPOs because guess what? Wall Street makes a lot of money, tens of millions of dollars on each one of these transactions. So. You can see where incentives drive behavior for sure in this part of the market. All right, let's get to it. John and I met, I guess, I don't know, 2 or 3 years ago at least.

I think at least, yeah, closer to 3.

Yeah. John tweeted or I tweeted him because we were saying the same stuff. John says it a lot better and more often than I do on Twitter, but he's really pounding the table on what it means to be an intelligent investor. And what it means to be discerning about making investment decisions. And it's just so rare to have someone else really raising that flag and really being an advocate for so many investors. And so often it's, they don't even realize it, right, John? They just think we're jerks saying bad things about stocks they like. But at the end of the day, you know, our hearts are in this to help people save their retirement, save their wealth. Protect their wealth because if you're just following the Wall Street narrative, they're going to send you over the cliff with all the other lemmings. And so John and I had a quick and tight bond and we worked together some when he was at The Motley Fool. He championed some, I think, very helpful ideas and tools to those folks. And I think really warned them that maybe some of these high-growth stocks that had done so well might not continue to do so well. And you know what? He was right. Right. In a big way. And, and so John and I just have grown closer over the years. When we started this live podcast and wanted to have guests on, John is at the top of the list as a friend, as someone who shares the New Constructs mission and someone who can speak to the value of what it is we do and the value of this approach in general. in a way that I haven't already. Thank you for being here, John.

David, thank you for that introduction. I think I first came across you because, you know, so I study for a living and for a passion, for a hobby, I study businesses and I try to value stocks. And I learned that you were ranked number one stock picker pretty much year in, year out. And so I want to associate myself with and learn from the best. And so that was the impetus for me originally reaching out to you. I don't remember how long ago it was, but that was it.

Anybody who's in investing, John is an awesome follow. You want to follow him, not just because of what he says, because of the great information you pull up. I mean, whether it's the interviews from famous folks, John is reading all the time and he's pulling cool stuff out of whether it's Ken Griffin, Howard Marks, you name it. I read everything. Yeah. And it's cool stuff and always pounding sort of a similar theme, which is Hey, look, this takes real homework and you need to understand businesses and valuation matters. And it's been proven over time, no matter what the shiny object is today, that homework and diligence are important.

Homework matters. That should be a tweet in and of itself. Do the work.

Yes. Yes. People want to believe that you can make money doing nothing because that would be great, but it just isn't sustainable. You might get lucky for a little while, but I wouldn't expect that luck to last for too long, and it might actually go against you in a big way if you don't buy the seat before the music stops. So, John, talk to us a little bit about your investing process.

I consider myself an intrinsic value investor, which just means that after I research a business and the industry that it operates in, I want to try to estimate a fair fundamental value based on the business, a fair intrinsic value, and a range of values really. Sometimes if it's a more predictable business in an industry I really understand, maybe that range is going to be more narrow. And sometimes if it's a faster-growing, earlier business, earlier in its corporate life cycle, maybe that range is going to be wider. The range of outcomes is going to be Wider. The rate at which a company is growing doesn't matter to me. It can still be valued intrinsically. I prefer a business to be growing faster if it's profitable growth and if I think it's long-duration growth. As long as it's generating a return on invested capital well above its cost of capital, and I think that the growth can be extended over a really long period of time and it's not just going to phase out, then I prefer faster growth. But regardless of how fast the business is growing, it can be valued intrinsically. So I don't consider myself value or growth. I consider myself an intrinsic value investor.

I think the whole value growth thing is just a misdirect.

Exactly. And everyone's heard the quote a million times, but it's true. Growth is a component of valuation, and companies that have high ROIC are worth more if they're growing faster, if they have high ROIC. And so intrinsic value is how I would describe myself. You asked, what's my research process look like, which is a great question. I think you asked, how do I use new constructs in that research process? So my research process Starts with idea generation, as everyone's does. And I tend to get ideas from reading investor letters, looking at large new buys or large additions in 13Fs of intrinsic value investors that I admire and that I know have a long-term investing horizon. They're not just going to buy something and trade out of it. I get ideas from talking to my network, and the main place I get ideas is from my watchlist. So I have a watchlist of what I believe to be the highest quality profitable growth businesses in the world, and that I would like to own at the right price. And I just monitor that list and wait patiently for their stock prices to get slaughtered, honestly. So then once I have an idea that I want to research, I start by quickly scanning the financials with an emphasis on on the balance sheet. If it has a balance sheet that I think is too weak, then I move on. To be clear, I do not avoid leverage or avoid debt. In fact, in some instances, I don't think a company is using its balance sheet enough, has enough leverage, but I do avoid what I believe to be too much debt when I believe the debt becomes an existential risk to the business. So the balance sheet is my first filter. It's my first line of defense because we want to avoid blowups, to avoid the effects of negative compounding in a concentrated portfolio. And, you know, I can scan that balance sheet in, I don't know, 10, 20 minutes. It's just an initial filter of whether I think the company has too much debt to where it becomes a big blowup risk. So after I'm comfortable with the balance sheet, then I read the most recent investor presentation slide deck. I read the most recent 10-K, the most recent 10-Q, the most recent CEO letter, and then I spend a lot of time reading earnings transcripts, y'all. So I typically read the prior 8 transcripts. So I go back 2 years usually. Now, if something big happened further back than 2 years, let's say the company had a new CEO that came on 3 years ago, or They had a big business model shift, or they made a big transformative acquisition or a big transformative divestiture, whatever it may be. If I need to go back further than 3 years on those transcripts, I will, but I spend a lot of time reading earnings transcripts. Let's see, then I scan press releases to make sure I don't miss any big news stories, and I read any other CEO letters. If they post 5 or 10 years of CEO letters on the website, I'll read those as well. I should mention during this entire process, from the very first minute of the very first day, I'm keeping a list of questions that I have. So I literally have a Word document. I write down a list of questions that I have, and that's a growing list. As I do more research, I will get more questions. Also, as I'm going through this process, I'm answering those questions on my own. A lot of them, not all of them, but I'm answering a lot of them on So earlier on in the research process, I may have a list of 10 or 12 or 20 questions, and then as I go through the process, I'm learning more about the business, learning more about the industry, learning more about how management thinks and acts, and I'm answering these questions myself as I go through. After I read the transcripts, I read any Wall Street research I can get my hands on. Honestly, I read any good industry journals or industry-specific publications I can find. For example, I learned a lot about Linde from Gas World. I read the Harvard Joint Center for Housing Studies and the National Association of Home Builders, their reports to learn about the home building and the home improvement industries. I read the reports put out by the American Truckers Association, by the Association of American Railroads, by the Semiconductor Industry Association. The list goes on and on. I think I read recently that Ted Welcher, Weschler at Berkshire Hathaway. He likes to read Furniture Today and Uranium Weekly. So there's great industry-specialized publications out there. I literally have a call on Monday with a top researcher at the American Rental Association because I'm doing some research on the equipment rental industry. So constantly reading, And speaking to industry experts. While I mentioned industry experts, you know, in addition to these people that work at these industry publications, I'll try to talk to industry insiders. For example, if I'm studying a healthcare technology or a medical device, I may try to speak to a surgeon or some healthcare provider, just as an example. At this point, I've done a lot of reading. I've done a lot of thinking the whole time I'm thinking about Do I think the company has competitive advantage? Do I think they're durable and sustainable? I'm thinking about risk analysis the whole time. At this point, I'm probably ready to do deep financial statement analysis. After I do deep financial statement analysis, I try to speak with management. And the questions that I ask management, y'all, are the remaining questions on my list that I was not able to answer on my own. So really easy for me to come up with the questions for management because I've been keeping track of those questions all along. After I speak with management, I do deep valuation work. After that's all done, I write a 2-pager for companies that I'm, that are on my watchlist. I then send that 2-pager to my network, someone in my network. I give my thesis, I give my pitch, and I get feedback and they ask me the tough questions. And then maybe I go back, do more research, make adjustments. That's typically The process. That was one part of your question, David. The next part was how do I use New Constructs? So I think of New Constructs as 3 separate tools. First, I think of it as a financial data platform that provides the best, most rigorously calculated financial data on the metrics that matter. NOPAT, invested capital, return on invested capital, economic profit, or EVA. And free cash flow and some others. I believe it's the most rigorously calculated financial data that I am aware of. I say it's the most rigorously calculated because you calculate NOPAT and invested capital in 2 ways using the operating method and the financing method, and you get the exact same number down to the penny using both methods. So that serves as a mathematical Proof. Or a mathematical check on the correctness of the data. The other reason I think it's the most rigorous is that, is that the platform provides an audibility function so that the user can trace back exactly where the data, the raw data, or exactly where the adjustments are coming from inside of the corporate filings. So it's not a black box. I, it's almost like whatever it's called, the trace function in Excel when you draw the lines and it Shows you where the data is coming from in your formula. It's almost like that. I can literally trace back to the corporate financials, to the notes in the financials to get the data. So first tool, a robust data platform. Secondly, I think it's the most robust reverse DCF I've come across. So that's the second tool. And of course that reverse DCF. Is using the reliable data that I just mentioned. And then the third tool is the Advanced Screener, which once again is powered by the rigorously calculated data. That's how I think about New Constructs. Here's how I use it. I use it at different stages all throughout my research process. To begin, I use it in the very first minute of my research because the platform allows me to quickly scan the financials To get a good initial assessment of the strength of the balance sheet. In fact, you provide a credit rating, not only the strength of the balance sheet, but also the quality of the business. So, you know, in 10 or 20 minutes, the first 10 or 20 minutes in my research process, I can quickly scan every ROIC metric that you would want. I mean, ROIC, return on incremental invested capital, return on gross invested capital, return on tangible invested capital. Average ROICs over 3 and 5 years. Any ROIC metric you could dream up, it's got it. Every free cash flow metric you could dream up. Free cash flow, free cash flow growth, free cash flow per share growth, free cash flow as a percentage of revenue or free cash flow margin, free cash flow yield, free cash flow conversion, or free cash flow as a percentage of GAAP net income, free cash flow as a percentage of invested capital, or free cash flow return on invested capital. Every free cash flow metric you could want in the, I call it the free cash flow box or free cash flow tab. Every balance sheet metric you could imagine. And all this data is going back as far as publicly available data exists. So in those first few minutes, not only do I get a sense of the strength of the balance sheet, the quality of the business, the growth of those metrics over time, I can also get a good initial sense of valuation by looking at whether it's priced to economic book value and then compare that to its long-term average trailing free cash flow yield, and then compare that to its long-term average and your reverse DCF base case for the growth appreciation period, or, you know, what's also been called the competitive advantage period. How many years does the company have to grow revenue and at what rate and at what ROIC WACC spread to justify today's stock price? So I can get all that in a couple minutes, and that really helps me determine whether I want to go forward with my research or not. And then later on in the process, I use the reverse DCF tool When I'm really diving into valuation in a big way. The last thing I'll say, I know I've been speaking a lot, but last thing I'll say is corporate finance and valuation are based off of 2 metrics, NOPAT and invested capital. And that's really not up for debate. And I'll tell you why it's not up for debate, but the platform that you've built, New Constructs, is set up around those 2 metrics. So it's built from the ground up on the 2 metrics that matter most to corporate finance and valuation. And the reason they're the 2 most important metrics is because NOPAT and invested capital, those 2 metrics are used to calculate return on invested capital, free cash flow, and economic value added or economic profit. Those 2 metrics are used to calculate The 3 most important metrics used to determine intrinsic value or intrinsic value growth: ROIC, free cash flow, and economic profit. ROIC is simply NOPAT divided by invested capital, or if you want to get more specific, NOPAT divided by average invested capital. Free cash flow is simply NOPAT minus change in invested capital or incremental invested capital. An economic value added, economic profit is simply NOPAT minus parentheses invested capital times WACC. ROIC, free cash flow, and economic value added all use NOPAT and invested capital. And so if you don't get NOPAT and invested capital right, you cannot get return on invested capital, free cash flow, and economic value added right.

Okay.

That was great.

Thank you, John.

Thank you.

Why is the data robustness so important? Right? I mean, you can get ROIC from other places for sure. There are other firms that provide it. They even put the term ROIC in the name of their business. And yet that's not a place where you go. You mentioned data robustness. Why is that important?

I think it's for 2 reasons. One is because I'm an intrinsic value investor. And so if I want to increase the odds of my valuation being in the right ballpark, my valuation's not going to be precise, right? No one's is. But if I want to get as close to the right ballpark as I can, then I want to use the right data. I want to use the rigorously calculated, robust data. And the other reason is because one of the reasons investing has become more difficult over the years is because markets have become more efficient. They're not totally efficient, but they're more efficient. And one of the reasons that is because everyone has access to all this free data out there and all that free data looks the same. Well, if I want to have a contrarian point of view, one of the ways is to have access to better data, better information. That's where you can find a contrarian viewpoint, a variant perception. And so I do believe that better data that can be proved, that can be traced back, that can be audited, provides me with higher conviction and maybe a competitive advantage when I'm doing my research.

It's also a safety thing too. I mean, if you are making an investment decision based on an accurate understanding of the business, the profits of the business, you're going to be, you could be way off and not know it.

All decisions I make are based on valuation. And so I want to get as close as I can to an estimate of fair value, a range of fair values that I'm comfortable with. And so yeah, having the right profit metrics matters.

Yeah. And ROIC, would you say, is that your, is that your, is that the most important profit metric or are there other others that you like?

I think so. I think that, you know, there's no one probably perfect metric. I think ROIC is probably as close as it gets because, you know, McKinsey's valuation book a long time ago said there's 2 drivers of intrinsic value growth and only 2 drivers of intrinsic value growth. And this is just mathematically correct. Mobison has said the same thing. Y'all have said the same thing. The drivers of intrinsic value are return on incremental invested capital and revenue growth. And people are going to say, hold on, hold on, hold on. I thought that the intrinsic value of a financial asset is the present value of future free cash flow. Well, that's correct, but revenue growth and your ROIC are how you calculate free cash flow. Right? And so I think ROIC is the most important because companies with higher ROIC, all else equal, generate more free cash flow per dollar of reported earnings. So there's companies with higher ROIC have higher free cash flow conversion. And as we just said, free cash flow is ultimately what you're after. after as an investor. Free cash flow, particularly per share, is what drives intrinsic value, but you need ROIC to get to free cash flow.

Can you give us some examples or talk to us about why it's important to make sure your data's right or how wrong other data sets might be? Why do the adjustments matter?

You know, there's just so much material information that Affects the numbers that companies can bury in their in the footnotes of the financial statements, and you know they're releasing it to the public. It's in the corporate filings. A lot of times it's just on page like eighty-seven in footnote thirteen or something like that, right? And so a lot of times. Those adjustments can have a material, can make a material difference on the metrics that drive intrinsic value growth.

Do you know anybody else that regularly and with scale goes through the footnotes in the way that New Constructs does?

Individual investors. I know some individual investors that go through footnotes and read every page, but at scale, I'm not aware of another platform or another shop. That does it across 2,000 or 3,000 companies. I think y'all have a goal to cover every US company in the foreseeable future. I don't know of anyone that does it at scale like New Constructs. Not saying it doesn't exist, but I'm not aware of it yet.

Yeah, there are no other services, no other research firms. Some individuals are willing to roll up their sleeves and do that.

Individuals, yes, but they can't do it across 2,000 names, right? At least Not to the scale that you can. So, uh, I'm not aware, I'm not aware at this point in time of another service that, that does it and provides the traceability to the auditability.

Well, that's the only way, you know, that we really do it. And I, for me, the traceability was, was more to get our clients and potential clients to challenge our competitors to do the same thing. Because they can't. As you know, as a buyer or user of a lot of different platforms, the traceability of data back to the footnotes does not exist anywhere else.

I haven't seen it. I haven't trialed every platform out there, but I haven't seen it.

Fair enough. Yeah, I shouldn't say it doesn't exist because I don't know that, but we've never seen it. And you'd think that if you had it, you'd show it. I mean, that's kind of where I come from on it, John. Like part of the reason we have it is to, is because we can. And I think if you're in the business of showing people that you're doing good work, you might want to show that work. Otherwise, why hide it? We want our clients to know how much work we're doing for them. So that's why we show these details and we link in all of our reports back to the, in some cases, the footnotes where we're pulling the data and the calculations and things like that.

And clearly you've also built a technology platform that allows you to do that at scale, which is, which is impressive.

Yeah. I mean, that's what the business was for, is to have that technology. Because you got, you need technology. There's just no way that any one person can do this kind of work and continue to do it. Or even a team, you know, in terms of managing, making sure people are getting data right. That takes systems.

I think so.

There's not enough people in the world who want to read 10-Ks cover to cover. And certainly even fewer that want to do it and share it with everybody else. That's typically their key to their advantage. John, for the audience, some of these, we have a wide variety. Some of them are sophisticated investors and some are new to the business. I'd love for you to give all of them kind of what you think is most important, the one or two things that are key to being a successful investor.

I think successful investors have a combination of talent, Plus passion, because there must be a willingness to work so incredibly hard to put in the deliberate repetitions and deliberately practice that talent to get better over time. You must put in the reps in a focused, intense way to sufficiently stimulate and exercise the investing muscle. to get better and stronger over time. You can't just go through the motions, just like you can't just go through the motions in the gym if your goal is to sufficiently stress and stimulate the muscle so that it grows. So talent and deliberate passionate exercise, I think, are key and table stakes for successful investing. Now, this talent-building process takes time, and over time you build up a process that is robust and repeatable. And I truly believe that a repeatable process increases an investor's odds of investing success over time. Beyond talent and passion and a repeatable process, I think that great intrinsic value investors share a similar emotional discipline and mindset. They're contrarian by nature. They have a deep respect for the concept of opportunity cost. They feel most comfortable being alone and looking wrong. They run from FOMO like it's their job because it is their job. They're independent thinkers and they have conviction in their abilities and in their independent work. They understand that the crowd is average at best, and they say no to almost every opportunity that comes across their desk because of opportunity costs. Like I said, there's a deep respect for opportunity costs. Finally, I think they're extremely humble. They know that even the best investors are only going to be right 55 to 60% of the time, so they're going to be wrong almost half of the time. And so they turn being wrong into an opportunity to learn. They are learning machines, and the best way to be a learning machine is to be open-minded And honest about your mistakes and be very, very humble in that process.

I really, I completely agree. I think understanding your limitations is part of like being a good human. As long as you're overconfident and think you can do things you can't really do, you know, you're going to have some troubles. And I think the really smartest folks understand that learning is a constant and continuous process. Because once you think you know it all, That's when you really start falling behind. You never know it all. It's a constant effort. John, what about some of the big mistakes that you see investors making out there? What would you, would you name a couple of those as being?

I'll say since I've been on X, formerly Twitter, just 2 and a half years now, I get to see a lot more mistakes than I saw before because people People write about what they're buying. You know, back, you can't make this up, David. You can't make this up, y'all. But back in 2020, when we shifted to work from home, remote work, and there was this manic fever pitch over everything tech, you had people on Twitter that were posting their daily returns. I can't make this up, right? Posting their daily, they're not doing it anymore, of course, but You know, you had people posting their daily return. You mentioned overconfidence. That's obviously a sign of overconfidence, but being on Twitter, you get to see a lot of mistakes people make. I think some of the common mistakes more beginner investors make are they, first of all, maybe I'll start with really easy ones and get to more difficult ones. There's this idea out there that if a company pays a dividend, it's no longer It's absolutely insane. It's perverse if you think about it. You know, yes, I understand the math of investing clearly. If a company is generating high returns on invested capital and it has opportunities to reinvest 100% of its earnings back into the business, obviously that's ideal because a company cannot grow faster than its ROIC. That's just math. It cannot grow faster than its ROIC. Without taking on outside capital, right? So if a company has a return on invested capital of 20%, it cannot grow its operating profit faster than 20%. And to do that, it has to reinvest 100% of its earnings back into the business. That's just ROIC times reinvestment rate equals operating income growth, right? And so yes, I get that, that if a company is reinvesting everything, it's in high growth mode, but then people take that math and jump to, Anytime a company pays a dividend, it's no longer a growth company. It's insane. Microsoft pays a dividend. Costco pays a dividend. MasterCard, Visa. I mean, the list goes on and on, right? It's just, it's just so that, that's just rule number one, mistake number one. Secondly, there's this idea that high gross margin is like the end-all be-all measure Of the quality of a business. That's obviously wrong. We talked about earlier in this podcast, free cash flow and economic profit are the measures of quality. And, but you know, there's this idea that if a company doesn't have a growth, high gross margin, 70, 80, 90%, whatever, whatever it is, then it's a bad business. Well, then you miss Costco, 12% gross margin. You miss Chipotle, You missed Amazon, you missed Netflix. Some of the biggest compounders the world has ever seen did not have high gross margins, did not have gross margins above the S&P 500 median or average, right? And I just mentioned Costco's gross margin is 12%. It's almost in the dirt, but it's an exceptional quality business that generates mid-teens returns on invested capital because of its invested capital turnover. So I guess the second mistake is not realizing there's multiple ways to get to a high return on invested capital, and a high gross margin is just one of them. That's insane. Now I understand why it's because everyone's a software investor these days, right? Everyone's a software investor, and a high gross margin does matter for software because they're just investing so recklessly down that income statement, right? It's better to start off with a really high gross margin If your R&D and your sales and marketing are just going to be reckless and just very high investments through that income statement. You want to be left with some bottom line profit. So they start with a high gross margin, but then they take that and just translate it over into every business in every industry should have a high gross margin, which is just clearly wrong. Third is, you know, really first-level thinking is this idea And I love Peter Lynch. I do. He's one of my favorite investors of all time. But this idea that management teams will sell for a variety of reasons, but they'll only buy for one reason, and that's if they think their stock's undervalued, that's wrong, right? If you read David Einhorn's book, excellent book, one of the best books on investing ever written, he talks about, you know, sometimes management teams, and he gives an example in the book that are running a fraud. will buy tiny amounts of the stock to signal to the market that it's not a fraud, that the stock is not about to blow up, that the company's not about to blow up. And so, you know, you just hear about a lot of these just sort of like first-level thinking concepts that'll blow your mind if you think about it, y'all. The fact that a company that pays a dividend that generates so much excess free cash flow that it doesn't have enough investing opportunity, reinvestment opportunities, The fact that a company that generates more free cash flow than it knows what to do with is no longer a growth company. I mean, some of these ideas just get pretty perverse. I'll just mention 2 more really quickly. One is they get momentum investing all wrong, right? And so there is actually research, substantial research that shows that momentum investing is one of the few factors to beat the market over time, to outperform over time. There's actually research that shows this. Quality is one factor. Value is one factor. Small cap for a long time was a factor, and momentum was a factor. Well, momentum investing, I'm not an expert and I don't practice it, but momentum investing is you buy as the stock is going up, but then you sell as the stock is going down. And the research shows That does well. Well, you've got investors today that are getting momentum all wrong. So they buy into stock strength. They buy Nvidia at a trillion-dollar market cap after it releases its AI chip, right after, you know, people fall over themselves trying to get into this stock. So they buy at the top, but then they implement a buy and hold forever strategy. So it's like they're combining momentum with buy and hold value, but you can't do those 2 things because value, you have to buy cheap. You have to buy when there's a margin of safety, right? So what they're doing is they're buying into strength, buying as a stock is reaching a peak, buying as there's a manic fever dream of buying taking place, but then they don't sell. So it's not momentum and it's really dangerous. I think, David, it's really dangerous. We're doing half of the momentum trade, but that's something that worries me is what happens when these momentum trades start to unravel. You saw it in 2022. Some of these stocks can fall 60 to 95%. And of course, if a stock falls 90%, it has to go up, I don't know, over 1,000% just to break even. So lots of mistakes out there.

Combining momentum with buy and hold is like the most inverse thing in the world, right?

It is.

And maybe you would like, if you buy and hold strategy, find a cheap stock and it keeps going Maybe you could justify momentum, but I think the reason, John, is that very few people, not enough people have a process like yours. And very few people follow sort of the core elements of success that you outline, which is to be disciplined and to be learning and to be humble enough to not fall into the confirmation trap. Thank you. Because the group of folks that, or most momentum investor folks that you're describing, I think of The crypto and the Tesla and a lot of these other like people who are like, you know, we got to hodl, you know.

David, they were paying a hundred, they were paying hundreds of thousands of dollars for cartoon JPEGs.

Right. Right.

Can't make it up.

That, yes, that did not turn out to go so well. And so, but they're hodling after speculating, right?

Right.

That's, that's the problem. And I want to be clear, I'm not saying there's anything wrong with holding a stock for decades. Because there could be an opportunity, you know, there could be an opportunity. For example, you know, in 2014, you could have bought Apple and Microsoft at 10 times free cash flow, right? So you buy when everyone else thinks that these stocks are left for dead. I mean, this was prior to Satya coming in, you know, the people thought these stocks were left for dead. You can get 'em at 10 times free cash flow. I bought both of them around that time and I still own them because I'm not saying they're no longer fully valued, but their intrinsic values have continued to grow over the last decade, right? Their intrinsic values have continued to grow. Apple generates $100 billion in free cash and their valuations, in my opinion, never never ballooned outside of a zone of reasonableness. You know what I mean? And so there are companies you can absolutely buy cheap that are super high-quality, profitable growers that have long-duration growth that you can hold for decades and that you should hold for decades. Like Chuck Akre and an American Tower, Chuck Akre and Berkshire Hathaway. You hold them for decades because they're compounders and they never balloon outside a zone of reasonableness. What I'm referring to is buying at a valuation that is priced for perfection, buying into stock strength and, you know, into a manic buy. Into a raging mania and then not selling. It's like they're practicing only half of the momentum trade.

Agreed. Agreed. Well, John, we are at our, at our limit, man. This has been awesome.

Thank y'all so much for having me. I talk about ROIC all day, every day, so happy to come on anytime.

Me too. Me too, brother. I could do it forever. It's good stuff.

Thank y'all so much. Yeah.

Thanks everybody. We are, Tim, we're closing it up here and we will, we'll take the votes on the reverse DCF and we'll try to get some clips up on the Society for Intelligent Investors. And we'll see you later. Thank you very much. Bye, John. Have a great weekend. Thanks again.