Forensic Account: The Bubble No One is Talking About | Anthony Scilipoti

Summary

The Knowledge Project Podcast

Episode: Anthony Scilipoti: The Bubble No One is Talking About
Host: Shane Parrish
Date: October 28, 2025

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Episode Overview

In this illuminating and wide-ranging episode, forensic accountant Anthony Scilipoti joins Shane Parrish to explore cycles of financial euphoria, the perils of modern accounting practices, and the subtle warning signs he sees repeating in today’s AI and tech market boom. Drawing on decades of investigative experience—including prescient calls on the collapses of Nortel and Valiant—Anthony shares his philosophies on diligence, the clouded role of experience in “raging bull” markets, and how new tools (like AI) both accelerate and obscure understanding. The discussion also dives into incentives, the dangers of passive investing, and practical investing rules learned the hard way.

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Key Discussion Points & Insights

The Nature of Market Bubbles and Euphoria

• Context & Concern:
  Anthony refuses to label current conditions a “bubble” outright but warns of extreme euphoria similar to the dot-com era, where present financial metrics are ignored in favor of “future potential.”

  “We're in a period of extreme euphoria where you read and speak to investors and they say that the numbers don't matter and the financial statements no longer matter because this is changing the world. I say, well, I've seen this before...” – Anthony (00:00)

• Warning from History:
  Anthony observed the same patterns with companies like Nortel and Lucent, which were once considered foundational but ultimately failed despite their importance.

• Bubble Parallels with Today’s AI Boom:
  He points out the interconnected investments between giants like Nvidia, Microsoft, and OpenAI, which create a self-reinforcing cycle of value, reminiscent of internet infrastructure stocks in 2000.

Accounting, Auditing, and the Subtlety of Fraud

• Complexity Enables Issues:
  Enron serves as a case study in hiding risk via off-balance sheet arrangements, with crucial information left buried in notes that few read.

• Limitations of Audits:
  Auditors are constrained by pressure, time, and conflicts:

  “It's like I tell you, look, I just prepared my report card. I got an A. I now hand it to you and say, look, it's an A. And if you say that it's an A, I'll pay you X amount of money...” – Anthony (05:50)

• AI and the Illusion of Diligence:
  While AI accelerates access to data, Anthony argues it may worsen understanding unless you know what to look for:

  “AI just gives me information. But that information doesn't help my decision if I didn't start with where I want to get to.” – Anthony (08:45)
  The experience/judgment gap thus widens as younger analysts rely on tools instead of building mental models.

Investing Rules, Red Flags, and “Flammable Items”

• Beyond “Red Flags”:
  Anthony prefers the term “flammable items”—factors that, while not currently dangerous, can become so with the right “spark.”

  • Three-Stage Process (42:46):
    1. Understand business/control environment.
    2. Identify potential “flammable items.”
    3. Watch for sparks/interacting risks.

• Red Flags Examples:

  • Changing non-GAAP metrics reporting.
  • Negative cash flow without clear rationale.
  • Complicated, opaque company structures.

• Valiant and Narrative Overpowering Diligence: Even experienced investors can fall under the “price creates narrative” seduction, as charismatic management spins a vision.

The Role of Experience, Judgment, and Mental Models

• AI vs. Analyst Judgment:

  “Experience teaches you what the numbers mean... when you have experience, you say, 'I've seen that before.'” – Anthony (15:27)

• Role of Learning the Basics:
  Importance of understanding fundamentals before using advanced tools—a parallel to learning math by hand before using calculators.

• The Danger of “This Time is Different”:

  “Which is the most dangerous words in life and in finance. One day I want to write a book that marries finance with life because it's one and the same.” – Anthony (27:22)
  Anthony stresses that patterns repeat, and the key is to look for what’s the same, not different.

Modern Market Risks and Passive Investing

• Narrow Leadership & Risk Pricing:
  The tight spreads in the bond market and low VIX signal minimal risk perception—a potential setup for sudden stress.

  • “Indexing” and passive investing channels more capital into a few mega-cap stocks, intensifying concentration and possibly setting up for sharper declines if leaders falter:

    “There’s really two indexes. There's the MAG7 and the sloppy 493...” – Anthony (72:24)

• The Rise in Retail Power:
  The ease and costless access to information and trading have greatly enhanced the impact of individual investors, often amplifying volatility:

  “Today the retail investor as a component of total investment is the largest it’s ever been...” – Anthony (87:41)

Incentives, Stock Options, and Earnings Quality

• Incentive Misalignment:
  Stock options incentivize management to focus on stock price over business quality, skewing decisions and reporting.

  • Anthony strongly supports expensing options, echoing Buffett’s stance:

    “If it's not an expense, then what is it?” – Anthony (65:49)

• Buybacks & Financial Engineering:
  Cautions against companies borrowing or using excessive buybacks to amplify EPS:

  “If the company's taking on debt... and all of a sudden that debt doesn't go away... that could end up being a problem...” – Anthony (77:23)

• EBITDA Critique:

  “EBITDA is the mother of all disastrous measures.” – Anthony (58:25)

The Power of Structure and Control

• Why Buffett Can Act and Most Can't:
  Structure (ownership, cash generation) enables investment flexibility and patience, unlike most managers measured against short-term benchmarks:

  “Anybody looks like a genius when they're in a good position, and even a smart person looks like an idiot when they're in a bad position.” – Shane (84:24)

• Culture and Initiative:
  Board selection and company cultures often reflect relationships and comfort rather than challenge:

  “Oftentimes by relationships going back to humans run companies.” – Anthony (70:55)

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Notable Quotes & Memorable Moments

On Recurring Market Cycles:

• “The things we're talking about right now, these little things ... nothing means anything until it means something.” – Anthony (32:37)

On AI and Learning:

• “You need to understand how the financial statements are prepared, understand the linkages, develop mental models so that when the AI gives you information you can digest it and make decisions.” – Anthony (10:45)

On the Danger of Easy Narratives:

• “Being negative sounds intelligent ... Being negative, typically is looking at facts. It's looking at numbers.” – Anthony (38:19)

On Experience in Bull Markets:

• “During raging bull markets, knowledge is superfluous and experience is a handicap.” – Anthony (25:40)

On Passive Investing:

• “If that slows, then all of a sudden what's been dragging the index higher will drag the index lower in the same veracity...” – Anthony (72:24)

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Timestamps for Important Segments

• Market Euphoria vs. Fundamentals: 00:00 – 01:19, 16:12 – 24:58
• Enron and Accounting Notes: 02:56 – 05:48
• AI’s Impact on Analysis: 07:37 – 11:37
• The Value of Judgment and Experience: 08:45 – 16:12
• Bubble Parallels in AI/Tech: 27:54 – 35:15
• Investing Rules & Red Flags: 38:01 – 46:59
• Valiant Case Study & Flammable Items: 46:59 – 54:59
• Incentives, Stock Options, Buybacks: 61:15 – 81:51
• Board Dynamics and Structure: 69:26 – 71:34
• Rise of Passive and Retail Investing: 72:00 – 89:47

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Conclusion – What is Success?

When asked about success, Anthony shares a personal philosophy:

“Success is achieving something that I can share with those that I love and care about. My family, my friends, my employees, and my customers...” – Anthony (93:07)

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Summary

This episode delivers a deep dive into the hidden risks and cyclical psychology of markets, enriched by Anthony Scilipoti’s forensic approach to financial statements and history. His big takeaway: Patterns repeat themselves, diligence is paramount, and accounting is a language—one that’s always evolving but as tricky as ever to interpret. In a tech-driven age, wisdom, skepticism, and asking “What’s the same?” remain investors’ sharpest tools.

Transcript

[A]

I hate calling things bubbles, but I think we're in a period of extreme euphoria where you read and speak to investors and they say that the numbers don't matter and the financial statements no longer matter because this is changing the world. I say, well, I've seen this before. You know, I saw that Nortel was changing the world and Lucent and Cisco and 360networks, they were building out the infrastructure of the Internet that we're using today. But those companies don't exist anymore. Anthony Shilupati is a forensic accountant who saw what others missed, predicting the collapse of both Valiant Pharmaceuticals and Nortel long before it happened. He spent decades reading what companies don't want you to see the footnotes. Now he's spotting familiar warning signs in today's AI.

[B]

Boom. What are the red flags you look for?

[A]

It's not red flags. We call them flammable items. It's a three stage process. The first stage is this episode of the Knowledge Project is for informational purposes only. The views and opinions expressed by Shane Parish or our guests are solely their own. Nothing in this conversation should be considered.

[B]

Investment advice, financial guidance, or a recommendation to buy or sell any security.

[A]

Always do your own due diligence or.

[B]

Consult with a qualified financial advisor before making investment decisions. It's time to listen and learn. I want to start with how you got into forensic accounting.

[A]

I was an accountant and I was working at Arthur Andersen doing the normal audit sort of preparatory work. And I found it unfulfilling because the work I would do I would find interesting or concerns with the accounting or otherwise and the clients. It didn't end up ending anywhere. So what ended up happening was there was some due diligence work to do where we could do actually look at transactions, companies calling us to say we want to spin out this business or we want to make this acquisition. And then I asked, put my hand up, said, listen, can I do that sort of work? And then I started doing it and I loved it. I saw some huge fulfillment. And then it's all about people you meet. I met a gentleman named Al Rosen and he was head of accounting at York University, and he was a forensic accountant. He had his own practice. He taught us to pass the UFI at the exam or the CPA exam at the time. And I said, you know, I'd like to work with you. And he said, well, you get your CA work done and then we'll think about it. And that's what I did. And so then I tutelaged under him for Some four years. And that really made it happen.

[B]

You weren't on the Enron file, were you?

[A]

I was not on the Enron file. I left Arthur Andersen in 1997. Couldn't even spell Enron at the time. And it's a very sad thing what happened.

[B]

What did happen at Enron, they essentially.

[A]

Had a number of off balance sheet exposures. So they would enter into derivative type contracts that were tied to an energy price, for example, or even the company's own stock price. And it'd be like, this debt only comes due if the stock price falls to X. This debt only comes due. Or this derivative transaction we'd entered into. Enron was an energy trader, you know, so if the price of electricity in kilowatt hours rises to a certain amount, well then this debt is no longer due. If it falls to this level, then they have to pay some counterparty. And so those risks were essentially off balance sheet. So those were not sitting on the company's liabilities, they were all contingent. And at the time, the accounting rules were such that these numbers were not included on the liabilities. They were just in the notes. And so all of a sudden, so people weren't paying attention because nobody reads the notes. And so then all of a sudden things started to happen. There was a change in movement in commodity prices. Okay, this is. Now we're dealing with the dot com. There was a lot of, a lot of changes that happened in the economy. We had a recession in the early 2000s, right. And led to a lot of movements in commodity prices that triggered the derivatives. Surprise, surprise. They can't make the payments. It's done.

[B]

And they weren't required to reserve or put away in reserves any amount of.

[A]

Well, if it wasn't on the balance sheet, then investors wouldn't have noticed that there was not enough assets perhaps to cover. And why? The implication to Arthur Anderson, which I think is important, and then it's near and dear to my heart is, you know, the auditors at Arthur Andersen that were working on the file, they ended up signing off on all these things. Well, when essentially the proverbial hit the fan, all of a sudden they were asking questions and the regulator asked for the working papers of the auditor, the papers of which they would support the audit work. And they knew perhaps that they didn't do enough work, so they shredded the documents. So all of a sudden they became guilty because of their actions. And so it was found in the courts upon appeal that Arthur Anderson was not guilty. But that was way after the fact because Arthur Anderson was already was brought to its knees and it was over. I became a scapegoat for everything wrong with accounting at the time. And look, change needed to happen. Arthur Andersen was around the world. All the partners were folded into the other firms.

[B]

What are the limitations on audit?

[A]

The limitations? Yeah. Well, the limitations are you're hired to be a independent, to give your independent opinion and attest that the financial statements present fairly in all material respects, in accordance with some set of accounting standards and or standards that's associated with a contract, for example. And the challenge is time, because you have to do this quickly, pressures on costs and essentially think about it this way. It's like I tell you, look, I just prepared my report card. I got an A. I now hand it to you and say, look, it's an A. And if you say that it's an A, I'll pay you X amount of money. So look at your situation, you come back and say, well, it's actually not an A. It's kind of a B plus. How much am I paying you again? Yeah, what do you mean it's a B plus? Do you think that question that way. I answered that question. Couldn't have been this way or the other way. And it ties into so many things, AI and so forth. Business is judgment. People run companies, they don't run themselves. The decisions associated with a business transaction end up being reflected on those financial statements, which. But when the group that's making the decision in the business to do something, well, then they come back to the office and show up in the accounting department and say, hey, we just did this. You know, can you guys figure out how to account for it? And all of a sudden the accountants are like, oh, what do I do now? How do I do this? Because then they. And by the way, when you do this, I want it presented as, you know, as bright as possible so that our investors and all our stakeholders are really excited by the results. Like, don't present it badly.

[B]

You said a lot of people don't read the footnotes or the financial statements. Is that changing in a world of AI where you can sort of like download the financial statement, pop it into AI and say, what do I need to know?

[A]

I think it's actually exacerbating the situation.

[B]

Oh, spend a few beats on that.

[A]

Because now read the financial statements, Anthony. I just put it into AI. I asked ChatGPT to tell me, what about this? Look for that, look for that. And there's all the instances of those things. And then I just read it and it's all there. Well, did the AI miss it? Did the AI understand the linkages between each of those sightings? If I'm looking at, for example, I was looking at a company recently and I was looking at, it was capitalizing costs, okay, this is a reit. And if it capitalizes costs versus putting them through the income statement, if it goes through the income statement, it makes their operating earnings look poor, lower, and their net EPS ultimately. But if they put it on the balance sheet, well, you know, that's an investment in the future and everything looks okay. Right. And so there's a gray area. Was it an operating expense or was it a capital item? And so I was, first thing I looked for was capitalized interest. And so it gave me all the quotes and then capitalized costs and gave me all the quotes. So then you think that that's enough, but you have to then. And I, and I was showing one of my guys this, I said, so then let's go to the income. Let's actually pull up the statements where it told us to go because AI made it faster. I now no longer needed to flip the 300 pages, but it gave me where to go. So now I went there. And now I could say, well, that means if that is what's happened, then we need to look at this other note to see what, you know, the implications of that. And then we got to look at the cash flow statement to see how it's actually impacting what ends up being reported as cash flow. And so that those linkages come. The AI makes me get to the answer perhaps more quickly. But it's my. If I don't already know where I want to go, then AI just gives me information. But that information doesn't help my decision if I didn't start with where I want to get to.

[B]

And it sounds like that information doesn't help your decision if you don't know the second, third, fourth order consequences 100%.

[A]

This is, I love it. If that's where investors go and that's where they're going, everything's going to AI. The, the bottom level of being an analyst, the junior analyst is, is going to be replaced by an AI. The one that said, find me all the references of, you know, where the company capitalized costs that the AI can do. I get it. But you need someone with experience to know what, which of those references matter and to what that means to the business. And this brings about a number of challenges because, well, if that junior person doesn't learn, doesn't get on the inn, on the ground floor. They'll never learn to be able to make all those connections.

[B]

And the only way to learn is sort of like being in the weeds and not being in AI.

[A]

Yes. In fact, it ties to so many things with my own children I've seen growing up. When we went to school and we were in elementary school, we would be, you know, we'd have to do the math tables and recite them. Yeah, two times two is four and so on. I remember I was struggled with my, with my 9 times table and then my 12 times table. And so I had to memorize them and get them going. But then my children came along and they were using a calculator and apparently that was okay. I went bananas. I said, you're not going to use the calculator. You need to learn it without the calculator. And then you can use the calculator, which is the same with AI. You need to understand how the financial statements are prepared, understand the linkages, develop mental models so that when the AI gives you information you can, you can digest it and make decisions.

[B]

Reminds me of this funny story. When I started university, I ended up in first year calculus. And for whatever reason the professor who was supposed to teach that class couldn't teach it. So the dean of the math department took over. And on the first class, in the first like minute, he said, there'll be no calculators in this class.

[A]

Oh.

[B]

Nobody of course listened to him because graphing calculator, you're like, oh my God, this makes my life so much easier. Would show up to the final exam, which is like I think 80% of your final mark.

[A]

Yeah.

[B]

And on the front page it's no calculators. And he did not grade that on a curve. And it was not pretty for most students.

[A]

I taught at University for about 14 years at York and truly one of a very fulfilling time in my life. And I still love doing guest lectures. I remember I would always start the, you know, I would go over the outline and I, and I would tell the students, I said, so assignments are due at the beginning of class. If they're handed in after the 8:30 start time, it's a zero, it's a zero. And invariably at some, whether it was the first and usually the first or second assignment, somebody would show up and hand it in late. And I would say it's a zero.

[B]

Yeah.

[A]

And they would whine and say it's, how can you do that? And you're so draconian. And I said, well, you Think in the real world when an RFP is required and you've signed with the contract with a client that they demand the report by 9:00am on Monday and you show up at 9:05, how's that look? And somehow it's okay. So it wasn't okay in my class. And ultimately I think you, you build respect because people see that there's a rule and it's followed and then people have respect for the rule.

[B]

There's this sort of like weird dichotomy I think with students right now. Dichotomy is probably not the right word. There's this weird path where students are coming out and they're more powerful and capable than ever because they use AI by default. And so they can get more output than somebody who's maybe been in their career 15, 20 years. And I use my 14 year old as an example. You know, in a world where he never had to show up to work, he's a mid level employee at most companies based on output, you never saw him. He can give you the exact same output that a mid level employee is going to give you if everything goes right. But the minute something goes wrong, he doesn't quite understand all the nuances and AI, I guess the race for him is will AI catch up quicker because he uses AI by default. And I sort of think about this as making a recipe right. If I pull out a cookbook and I make a recipe and I do everything perfectly, you wouldn't be able to tell the difference between me and the chef. Like the food, maybe it's not plated as well, but it's going to taste great, it's going to taste the same. You'd be like, this is amazing. But if something goes wrong, if the oven's too hot, if I don't stir enough, I don't put enough salt in, I don't know why it didn't go right. But the minute a chef, the chef who created that recipe, who's got all the experience, who did the, you know, who's made it hundreds of times, they taste it, they're like, oh, your oven said 375, but it's actually 350. You stirred this too much, you let this boil you, they instantly know what went wrong. And I wonder if in a world of AI, that's the nuance. And I was talking to Steve Schwarzman about this in a different context, but he basically said, you know, a lot of the analysts coming up, they know the numbers, but they don't know what the numbers mean correct.

[A]

Experience teaches you judgment. And you talk about this in your book. It's all about the mental models. I believe that strongly the experience teaches you what the numbers mean, as we've spoken about. And when you have experience, you say, I've seen that before. And a lot of the things I see happening today link back to things I've seen when I started my career over the last 30 years. And I think that's something that the AI can't quite do unless you tell it where to look, because it doesn't know the link to it that I'm thinking about.

[B]

Right.

[A]

But if I, if I can make the initial stage, it can help me get there quicker and more accurately. But if I don't, if I don't already have a model of what I'm looking for, it's not going to get there.

[B]

What are you seeing today?

[A]

We're talking now equity markets. Is that. Yeah, I think we're in what seems to be, and I hate calling things bubbles, but I think we're in a period of extreme euphoria where the numbers, the fundamentals and fundamentals is thrown around in the investment industry, like the word love is thrown around among humans. The fundamentals. Well, someone looks at the chart and sees that it did a double bottom. Well, that's the fundamentals. And someone else says that they're looking at the RSI or some other things, or someone else says they're just looking at cash flow or someone's looking at the multiple related to earnings. And those are the fundamentals. Well, historically, and if we follow what Buffett says, the company is the present value of its future cash flows. And how do you develop those cash flows? Well, you need to do a forecast on what's going to drive the business. And so that's what I think the fundamentals are. And so when a company today is not generating much in free cash impact negative, and yet the market wants to trade it at a multiple of its revenues, well, then the company's valuations is extracted from its current fundamentals and trading based on some future expectations. I've been asked, you know, if you could have anything, what would it be? And I'd say tomorrow's newspaper because then I'd know what was going to happen and I would be able to invest on that. And so we're all trying to do the most, the impossible, figure out what's going to happen tomorrow. And all I know is I've seen that when you read and speak to investors and they say that the numbers don't matter and the financial statements no longer matter because this is changing the world. I say, well, I've seen this before. I saw that Nortel was changing the world, and Lucent and Cisco and 360 Networks. They were building out the infrastructure of the Internet that we're using today. But those companies don't exist anymore. They built what they built, and that still exists. But they no longer exist, either bankrupt or folded into other companies. Cisco still exists today, but has never traded at its historical valuation. And yet it's a, it's, it's a multiples bigger than it was back then by earnings and by revenue.

[B]

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[A]

That's right. And I think right now the reason why I think we're in a very high risk situation is because the cost of the risk is priced very low and that's when the risk is highest. And so how do we look at that? We look at the high yield bond spread, the spread between the 10 year bond and the high yield bond in the U.S. okay, that's the non investment grade bonds. Well, that's the tightest, near the tightest it's ever been. Which means that investors are willing to lend money to non investment grade companies at a spread over what a government bond is at a rate which is the tightest it's been practically in history. So there's no risk priced into the bond market. And then in the equity markets we use vix, which is a measure of volatility of the S&P 500. And that is trading at a benign level. It's not the lowest it's ever been, but it's at a benign level. So in essence what investors are saying is there's no risk, everything's fine.

[B]

Isn't that the age old wisdom of don't fight the Fed though? For sure the future is pretty clear, at least in the short term. What the implications of that are I don't proclaim to know. But interest rates are coming down. I mean all the governments want interest rates down.

[A]

Right? They want interest rates down because debts have continued to balloon in a period which has been relatively buoyant by historical standards. And interest rates, they perceive interest rates are going to go down, that's going to keep on the buoyancy. Well, the central bank and if you followed Powell, despite all the pressures coming from Trump to cut rates, I mean Powell is going to cut rates because he's concerned about either the employment situation, right. Or the economic situation more broadly, or political pressure. There's supposed to be a separation, you're right, but it seems like he's actually noticing that because now all of a sudden we've seen some more strain in the employment market. And that I think is what's leading him to believe, okay, now it's time probably to start cutting rates.

[B]

What happens when we cut rates and markets are at all time highs?

[A]

It could become a situation of where you sell the news because everybody was moving the market up in anticipation of it happening. Because the belief is as we, when we cut rates, we provide more lower cost capital to companies. They put that capital to work and it generates return. Every company is only as good or as stable or as strong as its customer base. And if we're seeing that the customer base of, you know, let's call it the average Joe and I call that Joe Sixpack. He's a buddy of mine. We all have a buddy, Joe Sixpack. And so if Joe Sixpack is struggling then ultimately how is everything going to trickle down and create growth?

[B]

You know, I have a hard time reconciling this right because the territory, the boots on the ground is a lot of people are struggling. Seems like more people than at least in my adult lifetime with the exception of maybe the 2008 financial crisis. And we have markets at all time highs and we have inflation, core inflation actually going up. And we also have governments with high unemployment pushing interest rates down. And we have this really, I don't make macro predictions but we have this really interesting setup. And then on top of that, just from how I sort of approach things, you have the great investor of all time who has built up, I don't know, the largest cash, what's, yeah, 400 billion by now or 350 billion, his largest cash holding as a percentage of market cap. I think ever I struggle to reconcile all of these things into some coherent.

[A]

View of like the, the thing about the markets and companies is they'll continue longer than you and I will be alive. And so when you're investing it just depends on your horizon. And I think what's happening today is investors have learned, and rightly so, that every time the market falls it rallies back. And I like the comment you made Shane. I'm not here to predict markets. It's a fool's game. I don't know, I wish I knew. Then I just buy futures and make tons of money or short them. But what instead I know is I'm looking at the underlying companies and except for some of the Mag 7 that are growing the earnings, the smaller and mid caps are not. When Walmart is telling you that there's a problem with its sales forecasts and Target is struggling and Lululemon can't sell the same number of pants and Starbucks considering to changing some of its pricing and some of its business model. You know, this is Joe Six Pack and Stevie Weinbach that stepped up from Joe Six Pack. You have Stevie Weinbach in the middle and I think they're the Ones that are struggling. And so it tells me that this can continue and markets can continue going up for any number of amount of time because it's a function of how much liquidity is in the market as well. People have, are if investors have lots of cash, they'll continue to invest. The people that you're seeing that are making the most money today are not those that historically, in general, I'm speaking, the ones that you hear about that have made money historically. We talk Ray Dalio, you talk about, you mentioned of course, Warren Buffet. And there's a quote that I learned over time and it says during raging bull markets, knowledge is superfluous and experience is a handicap. Because if you have the benefit of knowing what happened in all the other blow ups, you know how painful it could be. But if you've never experienced it and every time something went wrong, it just rallied back like nothing happened, well, you think it's going to continue.

[B]

I guess the argument against that is this time it's different. Which is what we always.

[A]

Which is the most dangerous words in life and in finance. One day I want to write a book that marries finance with life because it's one and the same.

[B]

I remember this interview Alice Schroeder did. She hasn't done many interviews. And one of the most illuminating things that I remember from that interview is that Buffett, when he was looking at patterns, he wasn't trying to identify what's different. This time he's trying to focus on what's the same. Yes, talk to me about that.

[A]

And so what I see is the same. We actually put, I transitioned the forensic accounting knowledge and skill set into what is today Veritas. And so that's an independent equity research firm and then later into also an asset management arm. And all of that started because we wrote a cell report on Nortel in 2000 and people thought we were crazy. And at the time I was 29 years old, so I didn't realize what I was actually doing. It's amazing when we're young, but you.

[B]

Didn'T realize the impact of what you were doing.

[A]

I didn't.

[B]

Like you knew the accounting.

[A]

I knew what I was looking at, but didn't realize that. If you dropped said pebble into the water, what happens? And then when John Roth gets quoted in the newspaper that we're hurting his ability to raise capital and clients are canceling and employees are contacting us, upset because of the things we're saying and it's like, I didn't mean to hurt anybody. I'm just saying the truth, hence the name Veritas. So let's link to what I think some of the linkages from the past. So at the time you had Nortel and you had Cisco and you had Lucent and they were building out various components, parts of the Internet and what they would do was they needed customers. Well, the customers needed to raise money because if you're going to build infrastructure, you're not going to generate cash flow for some time. So they would raise money from equity holders and eventually get some debt. But the powers that be at Lucent and Nortel would also offer them. So they would say buy this $10 million worth of product and why don't you pay me over some extended period of time. Oh, and by the way, we'll give you a line of credit so that you need 10 million from us of cable, but you can also, you need to buy some routers from Cisco. You know what, we'll give you some line of credit so you could do that because Nortel could borrow money, had a great balance sheet, could raise money, whatever. And so that's what was happening. Well, ultimately when the equity market started to wobble and there was no one left to continue to make sales to. Right. Well then now all of a sudden Nortel didn't get paid on its debts and the wheels came off. And then the 360networks and JDs UniFace and ET cetera, that were the customers of the big three that I just mentioned, they went by the wayside. And so what ended up sort of. Now let's take that and think about what's happening today. So you have the likes of the Nvidias of the world and let's say Microsoft and you have OpenAI and such. And Nvidia is investing in OpenAI and Microsoft is an investor in OpenAI. Microsoft offers cloud services to OpenAI, so it's a customer. So OpenAI becomes a customer of Microsoft, but Microsoft gave it the money so that it could actually pay it back. Nvidia invests in OpenAI and Nvidia is a supplier of chips to OpenAI. So it's all circular what's going on here. There's a new company that just went public earlier this year, coreweave, who is its largest customer. Coreweave provides data transaction like analysis of on chips. Right. It's a data farm for the large AI users like Microsoft. Its largest customer is Microsoft. Microsoft hasn't invested in it, but Nvidia supplies pretty much all its chips. While Nvidia is a large or is a meaningful investor in coreweave. Coreweave goes public. It's trying to close its equity, its financing. On the last moment, Nvidia buys $250 million worth of shares of Corweave so that it could close the deal. These are, you know, JP Morgan gives them a loan so that they could just before they go public and then they go public and repay the loan to J.P. morgan, who's the lead, one of the lead underwriters, J.P. morgan. No one's doing anything bad, no one's cheating. It's just these are all the same type of symptoms of things that were going on way back some 25 years ago. All these things don't mean anything. Nothing means anything until it means something. I say the things that we're talking about right now, these little things, if you will, in the time of 2000, just like we talked about Enron, that didn't have the disclosure. So the key wrinkle to everything I brought up and that's why now I want to take it to the accounting is the financial statements of Nortel didn't show that long term loan as a part of current assets. It showed it as part of long term assets. So when the simple calculation of current ratios they would only take, well, current assets. And so this long term asset that wouldn't show up as part of the liquidity calculation, it also wouldn't show up as part of operating cash flow. And if it's not part of operating cash flow, then operating cash flow looks better. And no one would look at long term receivables and what they would because they're taught in their CFA how do you calculate free cash flow, Operating cash flow, less capex. But this is the problem with when you just create and invest by ratio. The ratio needs to be adapted to the company, the life cycle, the industry, the business model. If the company's selling things at a long term receivable over a period of extending beyond what one operating cycle but it's part of its normal operations that should be part of operating cash flow. And in fact after, after Nortel FASB changed the rules and then long term receivables became part of operating and short term and, and, and current assets. And that's something we wrote about. We said this is wrong, you need to. The free cash flow is actually negative because this number needs to be shown. So they're extremely vulnerable to something going wrong if the customer can make payments. And today, now let's look at the accounting today. Nvidia would make that investment In Core Weave, it's such a small, meaningless dollar amount to the balance sheet of Nvidia that the amount of disclosure is irrelevant. It's a related party now. We only own 5%, so that's not material to Nvidia. And the dollar amount to Nvidia's total balance sheet is also immaterial, so it doesn't matter. But if this is happening over hundreds of transactions where it's making investments like this in its own customers, then what ends up happening? If all of a sudden it runs out of the ability to get cash, or the customers end up having problems selling services with the chips that it buys, then kind of things start to fall fall apart Introducing the Remarkable Paper.

[B]

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[A]

So you're about to make a trade based on a friend's text, but which you do you listen to is it? We could buy a house in Tulum, get optioning those options. We could lose everything. Or let's do a little research, get your head in the trade and make the investment decision that's right for you. Learn [e-mail] TradeSmart don't we always invest.

[B]

In our customers as businesses though? You give them payment terms, you allow them to extend. You know that's an investment in your customers.

[A]

Again, it is fantastic business savvy you want? If I'm trying to create a new paradigm which is AI, then in order to foster that paradigm I need to invest in it as the key player in it. And what ends up happening if you see that my name as a key investor and a leader in this industry is making an investment in this company. Well, then what does everybody else do? Warren Buffett tells you he's buying something, what does everybody do? They go buy it. Well, if Nvidia is buying something, what do all the private equity firms do? Looking around. Oh, that's a good one.

[B]

There's another one. It's on query of tensorweave, like the AMD equivalent, which is private now, so I'd imagine they would all pile into that.

[A]

You got it.

[B]

This Nortel report, I want to come back to this for a second. So you drop this report and you happen to be correct. What responsibility. Remember the Superman quote? With great power comes great responsibility.

[A]

And Spider Man.

[B]

Spider Man, Spider man, yeah, I love that quote. And I wonder about these things. Like when you're right, it's great. But what about when you're wrong?

[A]

And that's one of the things. We're celebrating our 25th anniversary this year, and I developed 10 rules, investing rules. They relate to life as well. But one of them is being negative. Sounds intelligent.

[B]

Hmm.

[A]

Being negative, typically is looking at facts. It's looking at numbers. It's presenting them to you in a way that says, wow, that seems really compelling. If I want to sell you something that is, you know that. So that's the negative side. If I want to sell you the positive side, well, then I got to sell you the dream. AI is going to change the world. People are going to be, are no longer going to need to work. It's going to replace jobs, margins are going to go higher. There's going to create, you know, it's going to improve health care services, all the phenomenal things that could potentially happen. And so you'd see that. And then you're willing to invest. You're buying a dream. But if I tell you. Yeah, but a lot of this is based on all these intricate transactions where there's no disclosure about you go. That doesn't matter. Anthony. Look, we're changing the world, buddy. I like to say none of these things matter until they matter. And then when they matter, they matter a lot. You know? With great power comes great responsibility. You're right. This should not be interpreted as I'm telling that something's going to blow up. I'm just saying that there are some linkages, things we've seen in past euphoric times. Things could continue for any number of periods. I don't know. But we're getting to a point, as I said earlier, where there's very little cost to risk today.

[B]

What are the 10 investing rules.

[A]

Oh, now you're going to put me on the spot. I don't remember all of them.

[B]

Why don't you give me some of them?

[A]

The number one rule, and I borrow this from Warren and so if he ever, he's not going to pay attention to listen to me. But I did reach out to him. His number one rule is don't lose money. And my concern with don't lose money is any investment requires the absorption of risk. And so if you're not willing to take some level of risk, which means potentially to lose money, you won't make money either. So you don't want to invest from a position of fear. You want to invest. I think so. My number one rule is avoid embarrassing loss. You want to avoid the loss of a company potentially blowing up. If the company might, you know, if it looks like it's a little bit expensive and it might, and it might go, potentially go down 5% or something, or 10% or 20, okay, you can deal with that. But if you're investing in a company where if something goes wrong, you could wake up one day and it's down 20 or 50%, that's the one you don't want to have in your portfolio because investors will never invest with you again. And you'll also be scarred because people make investments. This is why it's so difficult to be a long term sound investor, because emotions get in the way, which is one of my rules. Emotion has no place in investing. Another rule is don't trust management. I'm sure there's many management teams and I run my, you know, we're a operating business, private company. And it's not that they, you know, you, you shouldn't trust anything they say, but, but again, it's a mindset. Everything you do is about how you present your mindset going in. And so if you go in with the mindset of don't trust, then you'll be curious, then you're going to ask questions. It's not that you think that they're bad people. I didn't say they're bad people. I said just don't trust, verify and then trust. And then another rule would be that you have to read the notes to the financial statements first before you actually read the statements. The notes to the financial statements tell you how the company modified the accounting because it made accounting choices. We decided to account for these type of transactions in this way. So then when you look at the financial statements, once you know how they're prepared, you can better interpret Them Accounting is a language. If I said to you, tomorrow you're going to speak Spanish, oh, you know, you could do AI and you figure it out and you're going to learn it. But the nuances of the language, an individual who did a PhD in that language, they're going to understand way more about the language than you are. The same like reading the financial statements. The more you understand of what went into them and how they're prepared, the better you're going to interpret them.

[B]

What are the red flags you look for?

[A]

I like the way you posed the question because it sets up what we've learned over time. The problem with red flags is it gets to your point that you started at before where you don't want to be crying wolf. And so I've learned to temper because you could be wrong. It's not red flags. We call them flammable items. Okay, so this goes to our process. It's a three stage process that we use and we teach because one of our, we have Veritas U. And so we teach investors how to make better investment decisions. And so the first stage is you understand the business and the control environment. Okay, again, understand and understand the accounting that's being used so that when you study the financial statements, everything else, they all make sense and you understand sort of the structure, how is management compensated, what stage of their life cycle are they at? Because those are all sort of constraints and, and opportunities within the business. So then you look for a flammable item. For example, companies generating negative cash flow, that could be by itself a red flag in the normal way. This type of, I would call forensic analysis is taught. Unless you know, so if a company's generating negative cash, it may actually be a fantastic thing. They're investing in an AI startup that is going to be a huge opportunity. And they've shown over time that the return on invested capital is in excess of 20% or 50% or whatever it is. And so they're investing in something. Yes, it's negative cash flow today, but I'm not investing for the cash flow today, I'm investing for the cash flow tomorrow. So you see that as the red flag. You don't invest in it. And unless you understood the first part, which was the fact that where they are in their life cycle type of business, et cetera, that is now not a red flag. It's just a flammable item by itself, not a problem. It depends. And then you get to the third bucket, which is the spark. And so you're always looking for a spark. Because let's use that same negative cash flow. Well, if all of a sudden a new competitor comes into that company's operating space, okay. And is able to take market share, now all of a sudden that negative cash flow is a problem. If you notice in the financial statements, when you look at that negative cash flow, the company's taken on very expensive debt. Again, very expensive debt by itself doesn't mean anything because if the potential return on invested capital is higher than that cost of capital, it's all good. But if a new peer comes in play now, all of a sudden that model may not work. And now you have a blow up. In my podcast, the Fact Finders, I interviewed an individual who we've used before, this private investigator, and he's the one that got me onto this way of this mental model. And he says if the CEO beats his wife and runs stop signs, kicks his dog, doesn't get along with the neighbors, probably could be a problem. But that's not going to show up in the financial statements. That's not going to show up in any interviews. You got to kind of follow things that are going on. What does that organization stand for? How are they operating? What are their values? But not just what they write down. The culture and the values are not what you read on the financial statements and in their press releases. We wrote about Valiant. We said, sell Valiant. Okay. We're the only sell on Valiant in 2012, 2013. The company didn't blow up until 2015. Okay. But they, and they would talk about their integrity and their, you know, how they were changing the world with the drug reformulations they were doing and so forth. But if you look deeper, they were just manipulating the accounting and changing the pricing on, on drugs and creating a fraudulent network of online pharmacies.

[B]

Valiant's a good one because there's a lot of well known investors in that.

[A]

Yep.

[B]

How did so many well known, well respected investors go wrong? People who are known for their due diligence, people who are known for their legwork. I don't.

[A]

I sat with them, talked to them before the case before. It's a situation where someone is such a masterful spinner of a story and is.

[B]

Are you talking the CEO?

[A]

Yes, the CEO and the management team. So you had Mike Pearson and was executing and you know, he comes where he came from, a great pedigree. He was not taking a salary and everything was tied to the stock price. You know, he was, you know, tirelessly working in the company and he'd proven because what ends up happening is price creates narrative. So all of a sudden you don't believe it day one, but then you see that they made an acquisition. It didn't seem like it was going to work, but then it works and the stock price goes higher and then they do something else and it kind of seems a little bit strange. And then they change their accounting and they change the way they present their non GAAP metrics, which is things we noticed. Like that's another huge flammable item. The company says, you know, they're reporting their, they use an adjusted EBITDA and they calculate it in a certain way. And then the following year they calculated a different way. Well, that's a non audited number. It's whatever management wants. And you know, the markets just believe it. And so that's something that Valiant was notorious about but didn't matter because the stock price just kept going higher. And as the stock price keeps going higher, it's very difficult, okay, in the money management industry when you're underperforming, it is so difficult to stay the course. You saw this in the financial crisis, that movie about, you know, the big short. Like those individuals became clients of ours. Like I know Porter Collins, if he ever listens here, and Danny and so forth. Like we befriended each other during this time of madness. And afterwards it was like they were crazy. Like you end up looking at yourself going, I'm crazy, I'm seeing this and nobody cares. It becomes so difficult when you're on the other side. Now you're trying to make money and raise money from clients because investors now are saying, well wait a minute, you're up 5 or you're down 5, market's up 20, you don't know what you're doing, what are you doing? And you know, it's hard because that's how you earn your living. That I think becomes the problem. And with Valiant it just went on for so long. And you need to look at the market conditions at the time because the people are running a business but the business is operating in a certain economic environment. Well, you had brand new bond market activity. QE. No one ever heard of QE before the early 2010s, the bank, the central banks were buying long dated bonds to keep interest rates low. Well now all of a sudden what does that do to a company like Valeant that's growing through acquisition and needs capital? Well, they could borrow money at very low rates. And if that's the case, then their irr cost of capital et CETERA the hurdle rate is very low, so they look really great. All these transactions that may not have made any sense in other time periods when risk free rates were not in the 1 or 2% range, all of a sudden they make sense. If I had to go back in time, we should have said buy Valiant at the beginning because we had studied Biovail. So Valiant bought Biovail. Biovail was a Canadian company that was run by Eugene Melnick. And we wrote a cell report on that company in the early 2000s. And the company ended up being a figment of its former self. But it had something, it had some formulations of drugs which were long dated in their release. So they would buy a drug and then repurpose the formulation so there'll be slow release, et cetera. And they also had phenomenal tax structure where they were set up in Barbados and Barbados is like heaven. So the more money you make as income, you pay a lower percentage tax. Imagine that. So what Valiant did was they bought that structure when they bought Biovale. And so that allowed them to extract all the cost of tax. So many interesting things they did. They set up their head office in Quebec province in Canada. French speaking. Well, the case, which is one of the largest pension plans in Canada, right. Their mandate is not just to make money for its pensioners. Okay. And this is the Cibel pension fund and I think second largest in Canada behind cpp. And one of their mandates is to invest in Quebec based companies and foster growth. It's a phenomena. I used to think it was a problem, but actually I've changed my way. I think CPP should do the same. CPP should be encouraged to invest in Canada. The US pension plan should buy. US companies encouraged to do that Anyway, so in this case you set up in Quebec, you know, you got a set flow of capital that's going to come from this Quebec based pension plan. And I remember meeting with the, with the leaders at the case at the time talking about this and they're like, we don't want to own it. We agree with you, Anthony. We're worried about all this stuff. But these are the subtleties that you need. Like every again, when you see it's a flammable, you didn't even know that was a flammable item. Unless you know from the first page, oh, they're set up in Quebec. And you go, well, why did that happen? Which is part of the mental model of being curious to say nothing happens without a reason. If you notice something and you go, that seems really weird no one else does that. And most people just say, well, it's okay, it doesn't matter. Well, actually that's what matters is complicated.

[B]

Just in general, like a red flag for you. I remember Buffett and Munger got entailed with something with the SEC in the early 70s, I think it was. Their structure was just, it was legal, it was rational, it was not transparent if I recall correctly. It was incredibly complicated and they ended up simplifying it, but they weren't doing anything wrong.

[A]

So again, I've sat with management teams and you go through their 10k and then you see a list of all their operating subsidiaries and you see the different places that they're operating. Again, the thing about investing today is there's so much pressure on the analysts to cover more stocks. The money management fees today are a few fraction of what they were even a decade ago.

[B]

Right.

[A]

So the companies that are doing the investing, the fixed cost of doing investing, like paying the audit, doing the back office, all that stuff. Yes. It's come down a bit, but it's still there. Yeah. All that's been squeezed is the cost of the money management. So they're having to look for shortcuts. And that means just give me the number, Anthony, just give me that one number. I just want that one number. And then you get the one number the management gives them and then they just accept that and move on.

[B]

I was talking, and I'm not going to mention who I was talking to a well known CFO once about earnings management.

[A]

Yes.

[B]

And they said, you know, we would call analysts after the earnings call and we would, you know, legally, but we would definitely lead them to what numbers to expect for the next quarter even if we weren't. And we would sometimes manipulate that if we wanted to. And I always thought that that was a bit nefarious. But I mean, this is how people work and how the world works.

[A]

And so just being, you know, to. I think you asked the question, is being complicated a problem? Well, it's just why is it happening? And you go back to nothing happens without a reason. Then you point to some company operating in the British Virgin Islands that's listed on the list and go, what does this company do?

[B]

Yeah.

[A]

And management starts sweating and so why are you asking that? I don't know. You have your answer before you ask a question.

[B]

Do you get to a point where things are like too complicated, people don't even know what's going on. Like, it always starts with like this one thing makes sense. But over, you know, 3040 years, you end up with this structure that nobody even internally probably understands.

[A]

You know, they interviewed Andrew Fastow, who is the CFO of Enron, and he's done many an interview on this. Also, because when we do our training, we have a few of these interviews that we quote. And it's. Companies don't start out as being crooked. They have to convince someone to buy a product okay. Or a service. So money comes in to the company in some fashion or time, and then gets converted into something that adds value. The problem becomes outside stakeholders come in and say, well, I need you to make X because you want my money. Well, I'll give you my money so long as you give me this return. Well, that works until there's a problem. And now there's no CEO that wants to disappoint. So it's very simple. The CFO comes to talk to me. I'm the CEO, and he says, look, I know, Anthony, we were going to make a dollar, but we're coming in at 95 cents. And I say to him, you get back to your room and find me five cents. Yeah, you like your job? You like your kids going to private school. You like your stock options, how much they're worth. You see all these employees we have, we give them stock as a part of their compensation every quarter. Like that's a problem. We can't disappoint. And then it starts.

[B]

And it starts slowly.

[A]

It always starts slowly.

[B]

And look, that was what Andy said in, I think, correct. Those interviews, like, you know, it started with a little bit, and I figured next quarter I could bring it back.

[A]

And it's just, you know, that's the thing. Life is a dangerous thing this way, whether we've pushed something even in life. Right. You know, well, look, if I smoke a bit or drink a bit or tell this little lie, you know, no one notices. And I'm. I'm. Okay. Well, then maybe I do a little bit more of each one of those things and no one notices, and then it's all good. Right? But then switching gears a little bit.

[B]

Do companies that report free cash flow on their press releases or in their financial statements tend to outperform?

[A]

I don't have that data.

[B]

What would be your guess? It's not a common metric to report.

[A]

My guess is I would say not necessarily. No. I would say no.

[B]

What do you think of ebitda?

[A]

EBITDA is the mother of all disastrous measures.

[B]

Why?

[A]

Because of what investors want to believe that it is and that it's something that is cash Flow that it's something that can be compared to total debt and it is not. It is purely an operating performance metric calculated before interest, tax, depreciation and amortization. That's it. Now what runs into a problem is, well, what do I do with stock options? What do I do with joint venture gains? What do I do with gains on investments that I made that I happen to sell this year? What do I do with the charges that I took on that acquisition that I bought this year that I included in my ebitda the profits, but at the cost that I associated with that, that transaction? Should I include that in ebitda?

[B]

Aren't those one time costs if making.

[A]

Acquisitions is part of my business model? Oh, I agree with no longer one time cost. This gets us back to. We have a course called the Secrets of Free Cash Flow and that's been our most watched and taught course. And that's because it started. We said it earlier, we said free cash flow is operating cash flow, less capex. But it's not. It depends. Every answer that someone asks you, what should it be? Well, it depends.

[B]

Depends on the company.

[A]

You got it. How should I calculate it? Well, it depends. What decision do you need to make? You always start with the facts before you think about a transaction and how you're going to account for it. It's all about the facts, the constraints and the objectives. Right. The facts determine what did I sell, what did I buy from who, at what cost, under what terms, etc. So those are the facts. Broadly then I have the constraints. Well, I'm a private company who uses the statements or just me and my partners? Who cares where I put it? It's less, less important. But if there's an outside onlooker on this, well now it matters because they're looking at it. I now have outside investors, I have debt, I have a debt covenant. All of those things. I'm public now, I have the sec. Those are all constraints. I operate in the us, I got fasb, pcaob, I operate in Canada. I have ifrs, I have cpab. And the last is the objectives. I want to sell my business this year and my business sells on ebitda, buddy. I'll tell you how I'm going to account for it. My business investors want free cash flow. I'll tell you how we're going to account for it. It's those three points. When I teach accounting, I teach those three things.

[B]

That's fascinating. I want to talk stock options for a little bit. You brought that up. I want to come back to this, like, how should investors think about stock options today? And then how would you change accounting rules to better account for stock options? Two separate questions.

[A]

But seen, you're good.

[B]

I hate them personally in public companies, however, I understand why companies want to use them. I mean, my take is if you look at most buybacks, they're just covering up stock options.

[A]

Correct? Very good.

[B]

So that's an expansion.

[A]

I think that stock options, what they do, it comes down to human motivation. So if I am going to compensate you on the stock price, then you're going to make decisions that move the stock price. In my early classes when I teach, I always say that economy and economics reality is way over here as far as I can see with my hand. And the accounting is way over there as far as I can go with my hand. Because if, for example, you know, I'm going to take a very simple manufacturing company because everybody understands that we make pens, we drive pens, we're making a thousand pens an hour, and I sell the pen you sell. You know, today we made, you know, over eight hours, we made 8,000 pens. One of my salespeople sells a thousand pens. Well, how do I calculate the cost of that thousand pens? Do I just take the 8,000 pens that I do and divide, take 1,000 over 8,000. That's the total cost. And then that's what I allocate, right? The reality is I sold them a thousand pens and it was the last thousand. Do I stop the press, figure out the cost of that last thousand? Do I average it? Do I, even though I sold them the last ones, do I calculate the cost of the first thousand, which may be a little bit higher because there were some setup cost to change my machine to make the thousand all of those three options, I gave you a business reality for what the accounting is fifo, lifo, or average cost. So the reality is I sold them the last thousand. The accountant said, well, we want to show high margin, so we're going to use average. And that's all good. That ties that point. But I want to get to your question because I don't think I got on a sidetrack. And I want to answer your question about stock options. So I think stock options should be an expense. And if they're not an expense, I borrow from Buffett. And even the chair of accounting has said things like this, that if it's not an expense, then what is it? You can choose to pay someone in stock options or you can choose to pay them in cash. So If I pay all my employees, you have the same company. We're a competitor. You pay all your employees with stock options. I pay them in cash. I have a lower ebitda, I have a lower eps. Your stock trades higher than mine, stock price goes down. All of a sudden, all your employees leave and they want to come work for me. And all my guys are pretty happy. They don't care. So you should include it as an expense. Taking this one step further to, and why I brought up reality and accounting is that as an employee at any level, even the CEO and cfo, sure, the things they say, the things they do will affect markets, perception of the company. Perhaps in the near term, perhaps in the medium term, but in the, in the longer term, in the, in the fullness of time, the results will prove what's going to happen. But the management and the guy on the shop floor, even the sales manager, may have no impact on what actually happens in the stock price. Yesterday, Powell cuts rates, so that moves the company's price. All of a sudden, as an employee, I'm better off or worse off, but I had no effect on that. I had nothing to do with that. A new peer enters our business as a new competitor. I have no effect on that. All of a sudden, GDP slows down. My business isn't even affected because the GDP is tied more to consumption problems. My business is a B2B business that's totally outside of being affected by current g GDP movements. And my stock price price falls. I had no control over that. So I think it, it incentivizes what I think the wrong thing is and makes people make potential decisions which can manipulate the stock price, which may or may not be good for the company.

[B]

So do you adjust, I guess, for options, you just consider them an expense?

[A]

Yes.

[B]

I think that, you know, options are. Are super interesting because a lot of companies that report profits aren't actually profitable if you factor in the stock options. And I had a friend who actually put me onto this about 10 years ago, and I was visiting his factory. He doesn't give a stock options. I was like, well, how do you compete? He's like, well, I mean, I hire the best people and they tell me they have stock options at their company and it's a public company. I'll give you the options on their company.

[A]

Oh, on their stock.

[B]

On their stock. Not my company or my stock. And I'll pay you in cash and I'll give you a cash bonus. And so this is how he recruited all the best people.

[A]

Wow.

[B]

And one of the interesting things about this was after that meeting, I was like, I wonder where if I went fishing, like you talk about fish in a pond, right. And if I could increase the ratio of what I'm looking at to be solid. And so I looked for companies that stopped stock options, and there's not many of them, but when you find one, it's usually like a good place to start looking for an investment.

[A]

Yeah, that's a, that's a good point.

[B]

What do you think of other incentives and inside companies such as, I don't know, like, what else drives sort of like a lot of either good or bad incentives. Like, what do you. If you only had access to financial reporting, management reporting, conference calls, like, what are the things on the calls that you would look for? What are the things I'm going to look for?

[A]

Okay, so to answer your question is about what incentives do I think make sense? Well, you look at what the key measures of success are for the company and do those align with investors interest. So investors care about the company's longevity, its ability to generate cash, its ability to grow and sustain itself. And if the company's incentives aren't linked to that. So if they're not tied to, you know, cost control, if they're not tied to driving revenues from an organic standpoint, not just from acquisitions, if they're not, you know, if they're, if they're tied, if they're driven by acquisition but with no care to what's going on on the balance sheet, that's a problem. I would say, you know, it's not easy to say that. Just, I hate, I'm sorry, but one, here's the one thing and it's going to work, but I think it's one. Where is it consistent? Did it change? Did a company say, you know, we're going to pay management on X performance metric? If they hit it, they get 100%. If they don't, they get some graduated scale. Well, then management doesn't hit it and they change the, the metric and management still gets a bonus. I think that's a problem.

[B]

Oh, totally.

[A]

Because now what that does is it says that everything's okay and, you know, it's hard again. Now I'm a board. See, the more you learn and the more experience you have, you understand more about what you don't know and that there's a lot of things to learn. Well, the board is making these decisions and everybody say, oh, the board's bad. And boards are bad. It's like, well, no, the board wants to retain the CEO. And oftentimes, you know, that could be a very significant personality. And that personality may, you know, there's other companies that want that individual to work there, so they have to retain them. And oftentimes money is retaining. That's something that becomes a problem.

[B]

What is the role of the board?

[A]

The role of the board is to embrace the position and the viewpoint of the shareholder and. Or the stakeholder. We always, always focus on the shareholder. But stakeholders, stakeholders, employees, customers, the communities the company works in, the competitors, and embrace each of those and ensure that the company is making decisions or that the executive is making decisions in the best interests of those stakeholders. Oftentimes they just focus on shareholder value. Well, what is shareholder value? Is that just something that we can calculate on the financial statements or calculate into the stock price? Or is that that they've built a vibrant employee base that is growing and everyone has a great culture that regardless of what's going to happen in the stock price, they're going to get through it? Are they focused on, you know, in the communities in which they operate and ensuring that they sustain themselves? Because if they're just milking that community or that environment, wherever they're working, well, then what happens when they've finished milking it? Is that business going to be able to continue? And so it's something I've spoken on before. So I think it's more than just shareholder value calculated that way.

[B]

How do you think most board members get selected?

[A]

Oftentimes by relationships going back to humans run companies.

[B]

That's correct. I'm going to ask you to be on my board if I like you, think you're going to agree with me.

[A]

And look, we have a board. We also have a board and our foundation. And I want to bring on people that are going to make us better. That might mean that some conversations are not always. Yes, Anthony. Yes, Anthony. I actually don't want that. Even in my own partners and my own employees. I welcome. Please come in. The door's open. Tell me what I'm doing wrong. We're not going to get better. I'm not going to get better if someone doesn't tell me I'm doing something wrong.

[B]

That is an uncommon view, but it's.

[A]

The only way to progress, I believe. I'm not saying that we're going to decide what you said, but I want to hear it. If you don't, and then. And the danger they say, well, if you listen to it and then don't do anything about it, then it's like you disregarded it, I said, no, you listen to it and you go back to the person, thanks for the input. Here's what we've decided to do as a result of what you've said.

[B]

Yeah.

[A]

And then they feel like they were part of it.

[B]

What do you think of the rise of indexing? I think it's. What are they? I don't know the exact stat, but a huge percentage of money now is, is passively invested in ETFs of one form or another. And we've never seen this concentration invested in, say, blindly. Because I mean, indexing works though. And it works, it has worked over a long period of time.

[A]

Again, you know, the price creates a narrative. And so if indexing works, then why not do it? The danger I think we're having of the index investing, passive investing, is that in essence, all that is is momentum investing, because it's a you're buying index, which is market cap weighted. So the money that you're investing is going to the largest market cap companies. Those companies continue to grow, they drag the index higher. There's really two indexes. There's the MAG7 and the sloppy 493. And so if you look at the earnings expectations of the sloppy 4.93 for this year, there's virtually no growth. But if you look at the growth of the Mag 7, it continues to go higher. And so I think the danger is that if that reverses, I'm not saying it's going to reverse, but if that slows, then all of a sudden what's been dragging the index higher will drag the index lower in the same veracity because they are the largest cap. So if one of the large, if Microsoft were to miss, and I'm not saying they're going to miss anything, but if the earning growth slows, all of a sudden the stock falls.

[B]

Well, we saw this in April, right? We saw this huge drawdown in a very short period of time.

[A]

The thing about those drawdowns, because each of the drawdowns, that drawdown occurred because Trump put together a tablet, he came down from Mount Olympus, brought down a tablet, right? I have a picture of it that I use in my presentations and showed how much the tariff he was going to charge on all these countries and that created immediate fear in the market, right? Costs of companies were going to go up, transactions were going to go down, revenues get hurt, margins get hurt, stock prices get hammered. But what the second, third level thinking on that is, but wait a minute, these haven't been enacted. There's still time. Maybe they don't happen. And if they don't happen, well, maybe all this drawdown doesn't mean anything. So it's like an exogenous impact on the market. It wasn't something that the market fell on itself. What I think would cause a downturn similar, more like what happened in 08 or even in the early 2000s. People forget that in the early 2000s. They say, oh, the 2000 crash. Well, actually, the market was lower in 2003 than it was in 2000. But everyone thinks that it happened in 2000. It actually didn't. It began. It's like that's when it started, kept going for years. And the other ones have been relatively fast. Even in the financial crisis. That one, actually the peak was in 07, in September 07, that was the peak. And the bottom was March 09. That's a lot of pain. That's 18 months of pain. If you look at what I think could make this one be a longer one. If something were to occur is it comes from earnings slowing down and earnings growth slowing down, that would be something that would take longer to repair. Especially when a lot of the earnings are interconnected, as I talked about, because the companies are dealing with each other.

[B]

It's not like one thing you can, you know, you have this band aid, you rip it off. It's like the slow.

[A]

Yes, yes.

[B]

Reoriented.

[A]

You know, we've seen there. There's meaningful changes that are going on here. Right. Like Lululemon is trading at a low, much lower price today than it was last year.

[B]

Let's talk about stock buybacks. Share count doesn't necessarily go down, but buybacks are happening.

[A]

It's the same as stock options, in a sense. And the disparity between reality, economic reality, and what's going on in the accounting. So when you buy back stock, the company is making a investment in a security, which it partially has control over what it does, but it doesn't have full control over what happens to that investment value. Whereas if it takes its cash and buys an operating asset that expands its current production, and if it's already generating a meaningful return, then that return should continue and expand. So to me, it's a point that says I have no other investments in my business that would generate a return higher than my cost of capital. And so I'm going out and buying my stock. And I think that is very risky.

[B]

How should investors look at that or account for that?

[A]

I'm not so concerned about the accounting, stock buybacks.

[B]

So if you're saying it should invest in.

[A]

I understand. So I think what they should do is they should look at earnings on a pre eps. So look at the earnings that the company's generating before you divide it by the number of shares to see is that number growing relative to the revenues. Right, because now you're seeing or is it just coming from a reduction of stock price, number of shares outstanding. And if the company's taking on debt, here's the classic example, the company borrows money to buy back stock. Why? Because it's such a highly perceived value company and generates cash, it can borrow money at a very low price and invest it in its own stock, which has historically generated a greater return than how much it has to pay in debt. Well, this works until it doesn't. Because if for some reason the business changes or just slows its growth, which could be just a natural evolution, like part of this is the law of large numbers. Okay. And if this happens, then all of a sudden that debt doesn't go away. And what looked like a very low cost is now a meaningful cost. That doesn't leave. And I look at Apple and this is what concerns me. Revenues aren't growing minimal and yet it generates meaningful cash because it has a brand. People are still willing to pay 8, $2,000 for a new phone. There's a lot of competitors and I'm not sure that that will continue forever at the same rate. In fact, it's already slowing. And that debt that they've taken on to buy all back all those shares to generate that EPS growth, that could end up being a problem if they instead took that money and went out and bought businesses, operating businesses within its network that would ensure its sustainability. And it's been doing some of that, but continually do that. Imagine if it just kept the cash and all of a sudden a business that it always wanted to buy suffered a bad quarter and it bought it. It's very difficult when you have a lot of cash. Cash is king. Cash is power. We've been talking and again it goes to one of my rules about being negative. Sounds smart. If the market falls or suffers some kind of setback, you shouldn't be concerned, you shouldn't be scared. In fact, I did a trip to China, life changing practically earlier this year. I'd never been before. And when I went to China, if you go and I met with analysts there and taught them our training process and when they look at their screen, stocks that are down are green, stocks that are up are red. That's how you should Rejig your screen. In fact, I've called FactSet and Bloomberg and see if we can change that. Because if you look, wake up every day, and everything's red. And you like, we lived this in 08, right? It went lower and you thought, okay, I'll buy some now. And then it went lower too early 2000. And then it went lower until you don't know what that feels like until you go through it. But imagine if every day it was green. You go, oh, this is interesting. And if every day it was going up, it was red. You'd go, hmm, I'm not sure. Is this okay? Is everything okay? It might be, but it's just. Everything's a mindset, right? They talk about, you know, the habits, right. Developing habits and that. And of course, that famous book. I love that. And, you know, you want to do small things, right? Develop. I put your shoes over there. So you remember to put them on there. And then put beside the shoes something that you need to shine the shoes right there. That way you shine them before you leave.

[B]

Why do you think so few people? Like, everybody talks like Buffett, and then a situation like 2008 comes along and people were paralyzed. He had cash, but he wasn't paralyzed. Why could he act? And other people.

[A]

To me, it's, it's, it's, it's goes back to something we've already touched on, and that is the natural agency issues related with money management industry. My investors give me their money so I can make a return that is hopefully better than they could make investing passively. If it doesn't end up being that, they decide to take it away from me, and then I don't have any money. Buffett has built a business that generates cash. So he has operating businesses, Geico, pr, the Loom, et cetera. These generate cash. He takes that cash and invests it when he wants to invest it in the way that he wants to invest it. The average portfolio manager can't do that because they're tied to. They have to. Like today in the investment management industry, portfolio managers are measured, like, on a daily basis. If you're investing in my funds, you can look right now and see how we're doing versus the index every second. Why are you down today? My partner that started the business with me, he says, I don't know, because there was more sellers than buyers today. I don't know any number. And someone that tells you they can know exactly why unless there was some announcement. And even when there was an announcement, it was the interpretation of the announcement that led to the stock price falling, not the announcement itself.

[B]

One of the things that we've sort of hit on here without naming it is how important structure is to investing. Part of the reason that Berkshire was able to do that and Buffett was able to act is that. Or Buffett's able to do what he's doing today as he controls so much of the shares. So he's got the structure to enable the strategy to play out. Whereas, if you think about it, you know, there's many times during Berkshire's long career where an investor, an activist investor would have come in, demanded they return capital, demanded they take on debt to buy back shares. And the structure that's enabled so much success has also prevented that. I think about structure a lot in terms of not only being positioned, so having cash and, you know, being the master of your own fate or. What did Buffett say? I never want to rely on the kindness of strangers.

[A]

Yes.

[B]

Especially when I need them.

[A]

Yes.

[B]

And so, like, I think about that, and I think positioning. Anybody looks like a genius when they're in a good position, and even a smart person looks like an idiot when they're in a bad position. And then you think about structure and how that aligns with the companies and what you're trying to do. And, you know, like, it's similar to how I invest. I don't have a fund. I don't have outside investors. Why? Because I don't like that structure. I don't want to answer to other people. I don't want to. And if I want to save up money for three years and do nothing, then I can do that. And if I want to chuck 80% of it into an investment, I can do that. So the structure enables my style of how I proceed with investing. And I think that those are very underrated when we think of public companies, because you have a structure mismatch.

[A]

So that's the first thing you look at is the structure and the control environment.

[B]

Yeah. And so you have shareholders who have increasingly, you know, it's gone from years to probably seconds, quarter, seconds, whatever you want to call it. Now, the average CEO tenure is very short. And I sort of, like, maybe the analogy is bad, but I think about this in the context of sports. Right. Like, if I'm a head coach, I'm going into an 0 and 17 team in the NFL. I'm going to take risks and I'm going to do things that may or may not work out, but it's not going to be status quo. And I could leave the situation worse than I found it. But what I'm not going to do is just try to make it incrementally better.

[A]

I think your analogy is fantastic. And it's why I played hockey and football in my life. And I love hockey. Big, huge Leaf fan and watch, watch the games and so on. But I watch more NFL. I will watch teams that I have zero interest in watching. And not because of the, not because the betting, but because any. It's one game. They only play 17 games. There is one semifinal game and if they lose, they're done and their career could be over. Because the NFL career is so short.

[B]

Yeah.

[A]

And so whereas in hockey you got seven games. Like, okay, guys, you know, second period, we're down five. Okay. It's game two. We're good. Okay. Like we got this. Settle down. Let's get ready. We play in a couple of days.

[B]

So what I see happening in these situations is like the new coach going into the bad team will overspend on free agents. They will leverage the future, put themselves in a bad position salary cap wise in five years.

[A]

Yep.

[B]

And it's almost under the assumption that I'm probably not going to be the coach in five years. But this will make us immediately better. I can show tangible progress and I have a hope of. But I've screwed myself from year five to 100%, you know, forward.

[A]

We talked about the impact of passive investing. I would say that passive investing has always been there. Okay. What I think the more meaningful, important impact on investing today is the power of the retail. I watched that movie called Stupid Money. Was it called with hello Kitty?

[B]

Oh, yeah, yeah. That was great.

[A]

That is. You know, these are movies, they're fantastic. Yeah. Because. And I love the word fantastic. We haven't yet said it yet, but because it's something supernatural. It's something that is both good and bad. And it changed something. And so what that really exposed is the power of the retail investor. And today the retail investor as a component of total investment is the largest it's ever been. And the other thing that's interesting is that the prevalence of all and how easy it is for the retail investor to have just the same information and, and maybe even better, I don't know. But to have access to both technical, technical. Looking at charts, fundamental. Looking at actual financial information, social media stuff, access to that in any way that I could get at very low cost. So when I started in the industry in 1999. Okay. And this. Think of Buffett. He'll tell you the story of he used to read the financial statements and he used to get the old charts and look at them. And no one was doing that. They weren't paying attention. Even institutional investors. And the retail investor was hardly paying attention. We were just learning on dial up.

[B]

Oh, I remember.

[A]

And you could trade, but you'd have to call in your trade, right. And wait in line for someone. And then it started online, but it was really slow and you didn't get good information and you didn't get great fills. Now you have interactive brokers. That platform that you get is unbelievable. And all the other, all the other comparatives that are coming up, that's empowering that retail investor. So this is creating a significant short term focus. There are day options, okay, traded all the time. Someone told me that in Tesla there's more transactions on options than there are in dollar value on the actual stock.

[B]

Interesting.

[A]

The option market is. We could do a whole discussion on all the subtleties of the stock market that people don't know. When an option is sold, someone has to sell it to them. Well, that's typically the broker, the market maker sells that option. They try to sell it off to somebody else, but if they can't get the other side, well, they stuck holding it. Now most options expire worthless until they don't. If something actually happens and the price rises on the stock and you've bought calls, now the broker needs to sell like, needs to act to make that money to pay you for that option. And typically they're gonna start acting on the stock itself to hedge themselves. They'll buy the stock because if your calls are going up and the stock, because the stock's going up, well, I want to buy the stock so that I'm hedged. As the calls go up, I'm also hedged with the stock price moving. Well that just creates more momentum for the stock price to go higher. And so that I think is also causing big swings like, you know, we're looking at, on a daily basis during earnings season, stocks move like it used to be 1 or 2%. Now we're looking at 20% moves in a day. Oracle move 20%. That was like on. I don't recall the exact number, but that move, those were valuations of entire companies.

[B]

It was almost 40%.

[A]

So you think about that. And yet we're in a period of AI. We're in a period where there are drones now for Oracle's business, drones might not help but think about Lululemon drones looking at what's being sold what's being where traffic is, you have access and you can buy access to credit card data, you can talk to suppliers. There's all these expert networks that you can talk to, like individuals working in the industry or used to work in the industry. They'll give you all this inside but not inside type information. And so yet all of that is happening and Oracle Stock Price moves 40% on news and we have access to better and supposedly better information than we've ever had. How does that make any sense? If we had better information, then you know what, stock prices on news would hardly move. Everybody would already have known it'd be fully priced in. Correct. So therein lies the interesting point where they think that AI is going to beat us as investors. I say bring it. It's all good. Bring it.

[B]

It's just a tool. We're still human.

[A]

It's a tool. It doesn't have judgment, it doesn't have the ability to make decisions on past links unless that link that it drew. But you don't even know what link it drew.

[B]

Well, as of today, I guess the potential is that it's, it supersedes individual and collective intelligence. And so it gets to a point where it's able to do that. I guess that's the maybe. Yeah, we'll see. Yeah, that's a great place to end this. We always end with the same question, which is a life question for you and a personal question, but what is success for you?

[A]

Success is achieving something that I can share with those that I love and care about. My family and my friends and my, and my employees and my customers. I think that's the success, whether it's in sport, it's achieving something that I can share because if I can't share it, you know, I learned a quote long ago that happiness can only be shared from my late pastor, Priest Paul Cusack. We'll give him a shout out. He was awesome. And so if you can achieve something and share it, then it's real success. And I think winning has to be something that is everything. You have to be focused on achieving something, then nothing else can get in the way. Big shout out to that book, Winning. I'm sure you looked at that book from Tim Grover, that's such a pivotal study.

[B]

This is a great way to end this conversation. And thank you so much, Anthony, for taking the time today.

[A]

It's my pleasure, Shane.