Value After Hours S06 E07 New Constructs’ David Trainer on forensic accounting analysis, AI and ML

Value: After Hours is a podcast about value investing, Fintwit, and all things finance and investment by investors Tobias Carlisle, and Jake Taylor. See our latest episodes at https://acquirersmultiple.com/podcast

We are live every Tuesday at 1.30pm E / 10.30am P.

About Jake
Jake’s Twitter: https://twitter.com/farnamjake1
Jake’s book: The Rebel Allocator https://amzn.to/2sgip3l

ABOUT THE PODCAST
Hi, I’m Tobias Carlisle. I launched The Acquirers Podcast to discuss the process of finding undervalued stocks, deep value investing, hedge funds, activism, buyouts, and special situations.

We uncover the tactics and strategies for finding good investments, managing risk, dealing with bad luck, and maximizing success.

SEE LATEST EPISODES

The Acquirers Podcast

SEE OUR FREE DEEP VALUE STOCK SCREENER

Screener

FOLLOW TOBIAS
Website: https://acquirersmultiple.com/
Firm: https://acquirersfunds.com/
Twitter: https://twitter.com/Greenbackd
LinkedIn: https://www.linkedin.com/in/tobycarlisle
Facebook: https://www.facebook.com/tobiascarlisle
Instagram: https://www.instagram.com/tobias_carlisle

ABOUT TOBIAS CARLISLE
Tobias Carlisle is the founder of The Acquirer’s Multiple®, and Acquirers Funds®.
He is best known as the author of the #1 new release in Amazon’s Business and Finance The Acquirer’s Multiple: How the Billionaire Contrarians of Deep Value Beat the Market, the Amazon best-sellers Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations (2014) (https://amzn.to/2VwvAGF), Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (2012) (https://amzn.to/2SDDxrN), and Concentrated Investing: Strategies of the World’s Greatest Concentrated Value Investors (2016) (https://amzn.to/2SEEjVn). He has extensive experience in investment management, business valuation, public company corporate governance, and corporate law.

Prior to founding the forerunner to Acquirers Funds in 2010, Tobias was an analyst at an activist hedge fund, general counsel of a company listed on the Australian Stock Exchange, and a corporate advisory lawyer. As a lawyer specializing in mergers and acquisitions he has advised on transactions across a variety of industries in the United States, the United Kingdom, China, Australia, Singapore, Bermuda, Papua New Guinea, New Zealand, and Guam.

He is a graduate of the University of Queensland in Australia with degrees in Law (2001) and Business (Management) (1999).

This meeting is being live streamed this is value after hours I’m Tobias carile joined as always by Jake Taylor our special guest today is David trainer from new constructs how are you David I’m great how are you guys doing well welcome back thank you it’s good to be

Back so we’re gonna talk a little bit about machine learning AI uh forensic accounting and analysis where should we start let’s let’s start with what’s what is new constructs new constructs is a is a forensic accounting firm that leverages machine learning to drive a better I think AI for doing

Research uh you know look it came out of the idea that that there’s so much propaganda I saw it firsthand when I was at credit s during the tech bubble so much propaganda when it comes to research coming out of Wall Street coming out of CNBC coming out of

Everywhere that uh you know I felt like someone needed to sort of lean into producing something reliable and worthwhile and I you know I feel like some ways people believe that machine learning and AI is like a magic wand you can just wave over the Internet and get

All you need out of it and trust it and I think we got to maybe take a step back and recognize what it takes to make good research to begin with and and whether or not AI can do that so what goes wrong there then well it’s the the the real issue is

Is the propaganda the underlying source source data so I think one of the first things for me that was kind of an epiphany was being on Wall Street and realizing oh wait a second all these research analysts that I’ve been working with all these years they’re not all made the same the ones

That are cozy with the bankers they maybe have a different agenda and there was sort of no way to misunderstand that when Frank quatron joined credit swi and they got into the tech Investment Banking because before he joined credit s really didn’t have a tech Investment Banking platform then

When he joined it was really really clear like there was just a different focus and you know I think the first thing that’s important for most investors to realize is that you just can’t trust most research if it’s coming from Wall Street it’s conflicted and it’s conflicted in a big way the

Research analysts don’t make money for the firm the bankers do so who do you think decides who gets hired and fired by the way I don’t know how to make that funny thumbs up thing stop you guys see that yeah you did this how does anyone know

How to turn that off I’ve been trying to turn that off for like a month just let it go it looks like it’s emphasizing everything you say great it’s great I think it does all kinds of stuff anyway yeah the machine overlords agreed with you that’s right this is

What I get for talking bad about machine learning watch this is gonna do another one it’s gonna my hands look at that boom uh anyway uh so yeah I think uh you know for me I think we struggle a lot so much right now in society in general it’s

Like are we Discerning about what we what we pay attention to and don’t pay attention to what we trust and what we don’t trust and we lack that in so many ways and I think we see that in politics and we see that in in Twitter and and

Social media in general where people are getting so up said and worked up and and and then are so sort of isolated or or polar in the way they address issues right you’re either like hardcore right or hardcore left there’s no in between there’s no there’s no civil discourse

Around things because people are I think feel like just so polarized and it’s because they’re not Discerning enough about what they’re paying attention to you have to realize that most of what dominates the newswires the TV the research is people who can pay to be at

The top of the list and they can pay to be at the top of the list because they’re making a lot of money doing what they’re doing and and they’re more about making that money than they are about informing you they’re at the top of the

List because they want you to do what they what makes them money wall Street’s a great example you know I mean think about I’ve been I’ve been replaying um a video of quiver the quiver quantitative people put together for us on on Wei workor we were the first to kind of blow

That up but remember all of the propaganda about this great new idea Community adjusted iaah right and and what’s we work worth now almost zero right even the spa that they use to to sneak into a public the public markets is about to go to zero all that propaganda they tried to

Sell that to the market $45 billion valuation and now it’s a zero does Zoom give me an icon for that no look like did you um did you take a look at we were through new constructs we did we did we we were um one of the first to to

Raise a red flag uh it got we we wrote an article was featured in Forbes it was called This is the most ridiculous IPO of 2019 that was there was a lot of competition there was there really was and and and uh and that made some

Headlines we even like a you know that’s and that headline got featured in a couple documentaries people have sent me some screen shares of um of that being featured what was yeah what was the accounting that was kind of throwing up the red flags there well it was it was

It was the community adjusted eaah and how how could we have known yeah that doesn’t sound weird uh and it’s a great example of like of Wall Street crafting a narrative to make you want to buy something that’s worthless and and you know the other thing that was an issue is in the

Footnotes there were a lot of related party transactions that made it particularly bad because we had a lot like you said Tobias there was a lot of bad IPOs in that period but the related party transactions and the conflicts of interests that were disclosed uh were pretty bad you know

Adam Newman paying his family exorbitant fees to cater parties and things like that and think get him him himself being paid a whole bunch of money for the weor yeah he bought buildings and then was like leasing them back or something as part of that

Yeah it was all it was all pretty ugly for a business that was highly unprofitable and then valued so richly uh and the voting structure that was the same with a lot of other IPOs voting structures were very anti-f friendly to public investors you basically gonna

Give them all this money and have no voting power sounds like a great deal it’s very common increasingly common these days seems like every company’s got the super voting shares yes yes so it just kind of gets to like the the point that you know as a

Great example of just how how bad the propaganda can be how far they’ll go to mislead people in order to get them to try to buy something that they want to sell and it doesn’t just happen with the wework it happens all the time that’s the majority of information people are

Getting whether it’s about stocks or politics what do you think about the sside analysts why why are they I mean I obviously they’re trying to get business for the bank which is why they’re often more optimistic than they probably should be but they also seem to be

I thought that the I thought the whole point of that the the change that they made post katron and all those other guys from that period was they had to be sort of independent is that that that seems to have sort of just slowly disappeared yeah no I’m with you on that

One Debi it because the the the Global Research settlement driven by Elliot Spitzer uh not such a famous name anymore Infamous um you know that was the biggest settlement against Wall Street in the history of the world it was $1.2 billion and I think that Wall Street

Probably made about that much money in a week during the tech bubble so you know again and there’s been a lot of Articles written about sort of the the the the how small the fines are and and how that effectively is um it’s an incentive to go break the

Rules because even if you do get caught it’s going to be less than what you made but to your point Tobias on on the analyst that was the fine is that there was huge conflicts and they were getting paid directly by the IPO so I don’t think they’re getting paid directly on the

Proceeds of the IPO but they are for sure getting paid for the proceeds of the IPO because that’s the only Revenue anyway to the firm uh so I think they just can’t be tied their bonus can’t be tied to how well a particular IPO does uh and yeah

You know I think part of the way they do it too is that you know how many how many Silverback analysts you see out there how many so how many analysts from Wall Street aren’t young and sort of vibrant personalities they bring these folks in so young pay them so much money

They haven’t they don’t even understand what they’re doing half the time I don’t think I don’t think they really get that it’s a conflict because it’s not like they’re advertising it at the firm and I know when I was a Critic there were just a couple of older older gentlemen that

Were were analysts but everyone else was was really young I think that’s increasingly the trend intellectual C and fod yeah I mean and honestly I think they’re just throwing so much money at them and they’ve never really understood how the industry works and they they’ll get it

Right away it’s like Dr and Miller hiring those two young Gunslingers at the top of the dot Bo because he knew he was he was too jaded too cynical to to do it himself he needed some guys who’d never been blown up Fearless yeah and then they blew him up

Yeah and he knew it was going to happen and he knew it and he couldn’t stop himself let me give a shout out to uh to to the folks who are watching clearw of Florida first in the house cotour Montenegro Ocean City New Jersey Winter Park Florida what’s up V pariso London

Castleford Hamburg tenanan Belgium Highland Park Illinois Albuquerque Brandon Mississippi mesino what’s up Vancouver Old Ocean Texas Milton ke Sacramento Toronto Highland Park think we got them all over K Nashville someone in Nashville Nashville nice rville Netherlands Rik jvic McMurdo Station Antarctica that’s a good one is that real s

Monica K Samui good for you Thailand jeez that’s a good spread I don’t know why you’re darling in here if you want Co Sami maybe it’s night time so David uh you guys take the financial statements you pass them you’re looking for you’re looking to reconstruct them so they’re

Sort of comparable on a like for- like basis and then you store that in a database that’s that’s searchable is that’s is that new constructs s more to it yeah yeah it’s like you take all these filings and all this crazy amount of data and you know you organize it in

A way that helps you understand profits better than what’s given to you in the filing because you can’t really trust that for a variety of reasons and uh it’s been a problem that’s been around for you know since the beginning of the stock market and the benefit of what of

What the big benefit today in context of today’s conversation is that by doing this reorganization of the data we’ve we’ve got real training data to drive machine learning and AI so that we can you know there are a lot of filings we can parse 100% automatically and so the process of of

Pulling this data out may take a step back um the because the reason that the automation is important is because if you’re going to do this work manually you’re going to read a 250 page annual report and pull out all the data not just the income statement or the balance

Sheet of the cash statement but everything in the footnotes right and that’s the majority of the filing the financial statements are three or four pages footnotes that’s the other 247 right and the nature of footnotes is that you never know if the footnote is going to be on page 2011 or 184 you

Don’t know you have to look at all of them and we have been been painstakingly parsing out the data from these filings for 20 years right so that now we’ve done it enough times and organize the data in a way that we can drive our machine learning with a real

Intelligence around how to categorize and understand the data because we’ve got hundreds of thousands of examples of how to do that and that’s the big distinction I I want us to to Come Away with today for for the audience in particular is that if you’ve no matter how fancy or

Powerful your AI or machine learning engine if the fuel driving it isn’t super high quality then it’s it’s a waste it’s just like just like we’re hearing with chat GPT producing reports based on uh an acccurate data and producing an acccurate results as as a

Byproduct uh you know if if you if you don’t have the good information to drive the formula the calculation you know from the original simple models um to the most sophisticated models the source data the underlying driver of of the data for the model is what matters most and if that’s not

Right then you can’t trust the output no matter how big the engine did you see that New York I think it’s New York Community Bank NYCB that had that stub their toe pretty hard I think they were down like 34% in a day and then might be

Down 50% from the peak did you have a look at that do you know what I’m talking about do you know that filing that they came out and they had the two it had two loans in it that had done most of the damage and to read those

Lines it almost read like there was nothing wrong I read them and I couldn’t figure out what was they”re clearly very cleverly drafted to hot what’s actually happened do you know what I’m talking about yes uh you know that’s but what what we’ve been battling I’ve been

I’ve been doing this work for 25 years and and that was kind of part of the reason I had such an epiphany when I was on Wall Street and putting together hey look at these this Tech Team and what they’re talking about and I’m looking at these filings and I’m seeing how the

Complexity is not just you know it’s not a lot of just a lot of complexity it’s changing every quarter you’d you’d think that the the quarterly report from for one company from one quarter to the next would be exactly the same why would the Auditors want to introduce change and

Why wouldn’t the annual report look just like the quarterly reports they don’t they change it all the time you could look at IBM over its history you know I know at one point they had an income stat with maybe like maybe 10 items on it and probably now there’s 20 I don’t

Know um and so yeah to Tobias the you they’re constantly the lawyers are constantly going through and trying to redraft these things in a way that can walk the line between disclosing what they need to disclose while not raising any red flags because we know with the bank you’re talking about the issues

Have been there for months it just now got surfaced same was true with Enron right it took Jim chanos blowing them up on a call to ask questions and and see things that had been around for a long time it takes them sometimes a while to manifest it

All in the financials then it takes a while for people to dig that up wonder is any is anybody working on an AI that is actually like on the offensive here so you’re like how could we write the most you know get our maximum off fisc without tipping into

Illegal um and then selling that product to a to a corporation they probably are I think that’s what they s black hat they you know the the audit and and the legal firms are probably trying to figure out a way to automate it but that is what they

Sell I think in general for sure uh yes the ability to um you know it’s all about trying to maximize sholder value part of that is to obate that things bad things are going on uh yeah did if those that the new Community Bank when they had that filing

Of those two loans that they were writing down and it looked like the first loan was some they’ taken a big hit from the first loan the second loan looked like it was part of a category of loans that I think that they were saying that we’re going to have to take a

Haircut across the category but we don’t have to do it just yet so we’re not doing it just yet was the way I read it I don’t know if you if you guys seen those sorry I didn’t bring along the slide that had because it’s not a it’s

Not a long disclosure it’s only two paragraphs sort of disclosing these two things I just wondered how you’d deal with that if that was something that cuz they sort of seem to be talking about other the second one being part of a category was it just an 8K that they put

Out I can’t remember exactly what I was looking I think possibly Friday night D yeah I just I was just interested to know how everybody missed it because it was a big a big hit in one go yeah it must have been it must have been an 8K because

We’re showing the last 10 Q was uh well that was for September 30 so that came probably came out before the end of the year this would this would have been last week or the week before yeah was a couple weeks ago uh and so

Yeah we’re not we have not yet got a new filing the the 10K supposed to come out in March so this was probably they were probably forced to surface that news a little early because it was so important what certainly blew the stock price up the market

Agreed yeah yeah you know look I mean um there probably going to be some more blowups yeah well well that’s my that’s that’s my I have this theory that well none of that office has been properly account none of the haircuts that they’ve taken on the office has been

Properly accounted for yet and you’re going to see that through all the regional Banks but all the regional Banks everybody else knows that too that’s why the regional banks are trading low where they are but I’m just interested I was just wondering because I the filing was benign you know was a

Cleverly drafted filing yeah yeah I mean we you know we show that the the free cash flow I mean it had a neutral rating in our system uh and it has for a while uh the free cash flow is terribly negative the valuation looks cheap of

Course um but yeah uh you know the thing about the banks oftentimes is that you don’t get in the 10ks and the 10 Qs the quarterly annual reports you don’t they don’t give you visibility into the underlying portfolio loan portfolio correct you got to go back you got to

Look through some other filings if you can get it at all so it’s also the way they treat it though isn’t they’re waiting for particular it has to hit certain thresholds before they have to recognize it that’s right that’s right especially if it’s held to maturity um versus available for sale those those

Kinds of rules mix it up as well so it’s it’s some somewhat of a complicated issue because these are long-term loans and at some point commercial real estate will come back so to Market to Market at a time when things are ail is is a bit over reaction you know I

Think that’s that’s what H to maturity allows you to do that right you don’t have to recognize it Mark to Market in the interim it’s only if it’s held for sale it you have to recognize that that’s right exactly which that’s sort of it’s sensible it makes sense to me

That you can do that but unless it gets impaired in which case you have to recognize it correct it just makes Bank investing so hard that’s why most people avoid Banks yeah it’s a it’s a completely different set of financials to analyze I mean I remember back in my credit s days

And I was doing this work on a bunch of different companies and when I first started doing this kind of economic earnings as opposed to accounting earnings work they said you couldn’t do it for financials and most of the databases from the from the Legacy data

Providers if you want to look at the S&P they’ll you any kind of financial metric it’ll be X financials right and the truth is you the economics of businesses are are the same universally at the end of the day you go when you boil it down to the essence

Which is a certain level of cash flow generated from a certain amount of capital that’s what any business does anything for a profit you got to hopefully generate either you’re generating a profit or a loss based on some Capital that people gave you in the business maybe you have no Capital but

You get the point that that’s that’s what we’re trying to get at in new constructs always is what’s the cash flow what’s the capital to start for the business and whether it’s a bank or a trucking company or restaurant those Concepts apply and it’s about really unwinding all the accounting jargon to

Get to those Core Concepts and footnotes to get to those Core Concepts with Integrity so people have information they can rely on did you see Muddy Waters um short note on Fairfax I you know someone in our um we have an online community and someone brought that one up last week

And oh man I didn’t look into that that much but I do remember seeing someone mention something about that what’s the any idea ffh doto I think is the that’s the one that I used to pull it up I they might be traded on the pink sheets in the states yeah it’s

F FR HF H I think barefax Financial Holdings che’s probably over that a little bit better do you want to give a little background on that uh on the short report yeah just on Fairfax in that short report uh you know my reading of it was

That you know they were to me it seemed like they were really just mostly complaining about account yeah IFRS accounting standards and how things are marked and you know there’s in all of these things where you don’t have a liquid market for it there’s a lot of of judgment that can

Go into how do you determine what you carry something on the balance sheet for um so I don’t know it kind of seemed like a lot of much a do about nothing to me personally but um you know I mean there’s probably other more things that more substantial to complain about than

The accounting I thought it was a funny Target because it’s one that’s well known by value guys B guys like Fair facts Val guys read financial statements often well it’s had a good had a good run and if you were kind of more of a casual holder and Muddy

Waters comes along and drops something that might scare you out of it then they can cash in a little bit on that you know maybe that might work for them as a strategy but I don’t on any kind of longer term basis I didn’t really think

It was much of anything he got Valiant who got Valiant right on the short because that caught a lot of value guys long I mean there was some big names in Valiant long Amman was long and uh we were early on on Valiant too I remember having um like debates with people on

Seeking Alpha and maybe some zero about about Valiant and I was making the point that their adjusted iaah was not a reliable number I said you can’t pay bills with basically fake iaah can’t pay the bills with that adjusted iaah because there’s no cash and I remember people like

Saying you just don’t get it man yeah you don’t get it man you don’t have to do the math I’m like bro I’m doing the math that’s what that’s the problem that’s the problem is the problem like I’m really doing the math uh and yeah Valiant was um that was a really pretty

Obvious one you know especially with the disincentive with just all stock based compensation Canadian rollup leave it rollup right yeah the rollup stuff has always been that’s a that’s an oldtime Wall Street trick it makes it hard because you gota you got to deal with new financial statements every single

Time with a big acquisition every single time so there’s no continuity yes and they tend to be very well supported by Wall Street because wall Street’s making a bunch of M they like the money yeah right all the way along and they love selling that and as

Long as the acquiring company has a higher PE and they’re buying lower PE companies it’s earning earnings are creative regardless of the economics yeah Top Line can look really good and they yeah so one of my good buddies I was at credit swe s with he

Went over to to uh Goldman Sachs I remember he called me maybe five or 10 years ago and said David man I just realized these rollup things are just a scam I’ve done enough of them now to realize once you’re done and you got no

More to roll up you end up with a business that’s got all these Acquisitions they were all over most of the Acquisitions were overpaid and so they’ve got all this this just a a junk pile of stuff that’s not really been fit together but all the way wall Street’s

Making a ton of money the acquiring executives are making tons of money their comp’s just going up because they’re a bigger and bigger company they got bigger peers to to judge comp against and yeah it’s um you know it’s a great money-making scheme for those that are

In the know but the investors at the end end of the day usually get left hold in a bag well David there’s synergies at the end of the rainbow that are gonna make it all work yeah yeah that’s um great point the synergies are all there

That’s in the 80s there was there was a uh that sort of roll up was very popular they call them entrepreneurs they had their own index the entrepreneurs index and you’ll never get guess how it finished in Australia right this is yeah this is Australia which is why I’m

Skeptical I’m always skeptical of anything that’s a rollup type thing which is why you know probably I miss credit not not credit s constellation for a little while just looks like a rollup but probably probably smarter than your average rollup I mean Burk is a rollup right smarter than your average rollup

Yeah I don’t know if I would classify that I mean that’s an A Serial acquirer but rollup to me tends to be in the same industry specific yeah it’s a consolidation thing where there’s synergies in a highly fragmented industry we’re going to bring these companies together and see all these

Synergies Fairfax is mostly respond mostly rebounded from the yeah Muddy Waters report it’s sort of surprising because I thought the Muddy Waters guys did good work but if they’re just leveraging their reputation to try to make a quick Buck on a short that’s it’s not that’s not a good look they got that

One wrong I think I couldn’t even find it on the site when I went to the site it wasn’t even up like I could only find the the preceding one really so muddy waters already took it down I don’t know I just I just couldn’t find it I didn’t

Look very long I just wanted to see what the meat was see see what they were actually saying couldn’t couldn’t dig it up yeah when I did a Google search I didn’t you know the when on Fairfax the Muddy Waters thing is not in the top on the first page doesn’t have

Any mention of it I think is really strange gu you should be skeptical it’s good to read the short report good to have a look and you know is good people probably need a little bit more skepticism with Valiant but yeah I thought it was it was a little

Bit yeah all smoked no fire interesting yeah I mean I think that’s that’s just another example guys of like just the the propaganda machine the misinformation you know you you just it’s a problem it’s a real problem I think that that and I look at it not necessarily something that means spends

Spells the the the end of mankind I just think it’s part of a a process right like I think I I if if you were to believe that there were other intelligent species and other planets that probably far advanced than ours or whatever they all probably went through the information age right and

They would all tell you that the beginning of the information age is the misinformation age there’s a deluge of data information whatever and in the beginning we don’t have the equipment the uh sophistication the ability to discern between good signal and bad signal so David if you ask a

Hypothetical there then let’s say chat gpts all these llms are trained on kind of quote unquote the internet what percentage of the internet would you call fact versus propaganda that’s a big question Jake I try to only ask the big questions I mean I don’t know 5050 is it that

Good I mean I feel like bad information is lot easier to create than good information right that’s true it’s easier you don’t have to go and look up the facts a lot it’s a real time saer to just all right Fairfax is up on the website it’s been up there five days thanks

Brown marabu for checking that out yeah um I got a good question for you here David you ever seen any companies trying to under report their true cash flows yeah yeah uh that happens quite a bit uh especially during uh bad Economic Times we call it the kitchen sink effect

Oh yeah and the the idea is when look the market is bad you might as well just tank your earnings because yeah if you beat in a market with negative sentiment you’re not going to get any credit for it and the Market’s just kind of beating everything down so you underrate your

Your earnings and cash flows for as long as you can and then when the market sentiment turns you take all the cookies you put in the cookie jar and you throw them on the pile when the market sentiment is positive and you get it you know you you get a multiplier effect on

Positive sentiment on earnings beats on top of the fact that your comps have been reduced as well right so you beat the numbers down and then you can come back higher faster and you got better comps and so it’s part of the way they play the game and you want to time your

Option pool for that you know big bath quarter great Point great point right yeah let start we should uh can we uh Grant a few more options here during this bad time we need to retain all of our management we don’t want people to leave yes yes yeah yeah especially when

Things are looking bad you know bonuses are going to be lower maybe we need to increase our Equity comp yeah so it it does happen it does happen and I don’t know that you know I’m not here to say that every single single companies intentionally manipulating their earnings that’s part of the challenge

It’s not always intentional for all of them but for some it’s a big deal for some it’s a big deal to the negative it’s a big deal to the positive for some it’s accidental for some they don’t really realize because you know you don’t really want a management team that

Pays that much attention to accounting stuff you want them to focus on their business that was a huge red flag for for Enron I mean two-thirds of the organization was employed in the accounting division and all they did was try to figure out ways to manipulate accounting they call it I’m sorry they

Call it the risk management division that’s good I mean the accounting was the product at the end of the day that’s exact that’s the that’s the best way to put it Jake it was the product two-thirds of the organization worked there and that’s what they exactly was the

Product David any thoughts on U I heard David Einhorn interviewed recently and he he says that there’s a lot of red flags with Tesla’s accounting what is what does new constructs kind of see on that front yeah it’s been there for a while and you know we’ve we’ve pointed

Out so many flaws in Tesla for like I don’t know how many years and people just don’t want to hear it uh so we’ sort of you know we we’ve stopped pounding that drum uh despite the fact that you know it feels like every other week I’m like oh the walls are closing

In on this one finally and then it’s up another 50% yeah oh guess hey we’re going to send a rocket to Mars hey let pay attention to that don’t look over here we’re going to March we’ve got a robot yeah I got a robot it can dance oh wait that’s

Somebody in lards oh okay wait a second you know or spandex I mean gosh um the gullibility it feels like is just people want to believe what they want to believe and that’s another thing it’s like not even that people aren’t Discerning they they totally fall in the

Confirmation trap and they will only focus on things that will confirm what they already believe because by the way that’s easier too speaking of what’s harder easier producing good information or bad information it’s a whole lot easier just to say oh you know what I believe in Elon Musk and I’m going to

Focus on all the things that make me make me want to continue to believe and and not look at anything that doesn’t confirm my existing belief set well you just assume you’re missing something that everybody else has figured out and you don’t want to say anything because

You don’t want to be the guy pointing out the emperor has no clothes if you know if in fact they oh really I think it’s the other I think it’s the other way around where you get to feel smarter than everybody else like you figured out something that no one else understands

But doesn’t that mean that isn’t that why you wouldn’t want to stand outside like you don’t want to you don’t stand upon I don’t I think it’s why people are so why it’s such a Battleground stock I think it’s you have both sides that are are feel very

Religious about it I will say this I you know I’ve been I was short the stock at some at some point and I’m highly skeptical of the accounting and I think that it’s worth a lot less than everybody thinks it’s worth but you know it it was in trouble before it raised a

Whole lot of capital through that 20 20 2020 period and it’s probably not that’s probably donut has been taken off the table but driving the car so I recently got one of the cars the cars are beautiful they it’s very thoughtfully laid out it actually makes me angry at the other car

Companies when I drive it because I just think there’s nothing in here is sort of Genius it’s just thoughtful and anybody could do this and they’re not like what are they doing makes no sense I think it drives a lot of the sentiment bu I think that’s a lot of the

Reason you got the Tesla Fanboys because they’re like this is so much better these other guys are idiots they can’t do it uh and I think that you know that that was true for a while but they’re catching up you know I think that these

Other cars I mean at least in terms of market share and sales are for sure catching up and even eclipsing Tesla it might be might be byd is the actual you see byd in the states no not yet they’re not in the US yet are they

Are are the trucks in the US because I thought I read that they had some Chuck trucks that were maybe I don’t know they’re coming they’re coming I mean I think that was I think that was I think it was part of the deal H by the way in

Terms of accounting with Tesla absolutely the biggest and most important one I think is the regulatory credits considered sort of normal recurring profit I don’t believe that they are they’re going to go away because they’re just not going to be able to enjoy those forever you should

Not consider that as part of the sort operating margin of the business because it won’t survive but yeah in terms of the deal with that time they were raising Capital was the in the US markets and they got the capital from from China when they needed it and I and

I believe that byd is done as well as it has uh probably a no small part to robbing some technology from Tesla Jake do you want to do um your your uh veggies absolutely so uh this is um this I think this is kind of a fun one I’m actually a

Little excited about this more than normal all right so life is essentially a game of turning energy into kids and every trait is tuned by natural selection to maximize that evolutionary return on each calorie spent so I thought it’d be fun to look at different strategies in nature and their roic’s

And in this case it’s return on invested calories not Capital so we’ll start with what I think is the most impressive one and this is whales eating Krill and blue whales are you know the largest animals on Earth they weigh you know on average 200 to 300,000 pounds which is 136,000

Kilograms for our non- us or our non-imperial um and krill are these little tiny floating sea creatures that are in the same class of animals as crabs and lobsters Crayfish shrimp and they make up the ma the vast maj majority of the blue whales diet so you have these huge whales and they’re

Eating up to four tons of krill every day which is like 3600 kilograms or 8,000 pounds uh and the whales how they do this is they work together to execute something called a bubble netting and they dive below a sko school of krill and they release bubbles strategically

As a to herd and confuse the Krill into these like piles of krill basically and then they they come through and basically gulp them all up and then strain the water out and then eat the Krill uh and so you might be wondering like I was how much krill can a whale

Eat in a single bite uh and if if a big whale attacks a particularly dense swarm it can swallow up to 500 Kilograms which is 1100 pounds of krill in one go which that equates to eating 457,000 calories in a single giant mouthful so talk about

Yeah talk about binge eating and yeah I do have to assume this is a relatively keto diet um so the whales get back almost 200 times the amount of calories burned in this attempt which a 200x return like seems like quite the roic to me but how

Does it stack up to other strategies in nature so let’s next look at something that’s like quite a bit different which are cheetahs cheetahs spend about three hours per day walking around which uses up about 40% of their energy budget and they chase prey less than two times per

Day and it’s about 38 seconds spent per Sprint to try to chase prey the rest of the time they just lay around napping like house cats basically uh and so they either catch dinner or they give up rather quickly and they’re successful about half the time when they are

Chasing and so a cheetah can eat up to 14 kilograms 31 Pounds at one sitting which is similar to Toby at Thanksgiving uh a group of four cheetah can finish an Impala which weighs between 90 and 150 pounds in about 15 minutes um so talk about really being able to to pound it

Down there um so now let’s transition to humans like how do we do this how how well do we Fair um looking at first at hunting and Gathering the the hadza tribe which is is a one of the most studied tribes because they’re kind of the most hunter gatherer of today’s day

And age um they live in Tanzania and they’re they’re near the serengetti but they live in tribes of call it 20 to 40 people and had a men will burn 2500 calories per day while hunting and it’s mostly just walking around and they’ll shoot these poisoned arrows at giraffes

For instance uh and then spend the next few days tracking the animal as it as it kind of slowly dies and in case you were wondering they’re about 1.3 million calories in a giraffe uh and so for reference the number of the number of calories in a cow is about 430,000 so

You know it’s it’s they’re considerably more calories in a giraffe um so next time you’re ordering off the menu uh but that’s still less than a that that entire cow is still way less than the single giant mouthful of krill that the the cat that the uh whale eats which is

Rather remarkable so anyway if we assume that the typical three-day hunt of 20 hads of men burning 2500 calories per day we get a total investment of about 150,000 calories so and you’re getting 1.3 mil million calories then if you do catch the giraffe so that’s a 9x return

On calories nine bagger pretty good but that’s still an order magnitude below the blue whales 200x so and by the way the hads of men land a big game like a giraffe only about once a month so they would starve if the hads of women weren’t out there executing an equally

Sophisticated and complimentary strategy which is using their knowledge of local plant life to bring home reliable food every day it’s it’s mostly like digging up tubers with sticks um so the you know the men get to feel like Heroes but the women are probably the ones actually

Doing the real work uh so then let’s transition about 10,000 years ago we humans landed on a different strategy than hunting Gathering called farming and today that’s about 42% of our daily energy Supply that comes from cereal crops like rice wheat and Maze and on a per acre basis rice produces 14 million

Calories per acre per year uh that means that an acre produces enough to rice to feed 15 people for a year at at 2,000 calories and you know that’s like bagging 10 giraffes per year roughly uh but you know we should probably ignore kind of the quality of calories between grains

And meat uh I don’t want to wait into that that online battle uh but but for reference uh corn produces a similar 14 million calories per acre to Rice almonds pistachios walnuts Tomatoes wheat barley carrots hay those all produce about 5 million calories per acre so you know it’s about onethird and

Then spinach and broccoli come in at under 1 million uh calories per acre which so so much for veggie segments uh it turns out that there’s actually probably no real reason for us to be growing those things other than for people to feel kind of healthy but um so

Toby you know just to kind of bring this back to the business world if you had to guess like what what roic strategy you know above you know encapsulated by either whales or cheetah or humans would you say kind of most closely matches your own investment

Process W that’s a good question I was going to there’s a good there’s a good comment here from Tyler fary says blue Wells would traded 20 times sales like that’s that’s what’s the appropriate multiple to put on that that strategy that’s a great comment I’m jealous think about it I’m a farmer

Okay how so uh lots of small bits rebalanced regularly just not uh not not relying on a single big hit just trying to get little uh little wins all the time okay that’s good and I mean obviously farming has allowed us to increase the carrying capacity of the

Globe in a for humans in a in a pretty dramatic way um in general I think it we should probably be thinking about how many calories were spending chasing around our investment ideas uh and and what are the Returns on those calories spent um and you know I’ve heard Wes gray call it

Before like return on brain damage and I think that’s probably pretty closely related to this um but David what what do you think about about kind of how you do things and and what that means for kind of the amount of calories that you have to spend compared to the the the

Nutrition that you get back yeah I I think the the nutritional value of uh investment information is kind of what we’ve been talking about all day-to-day right I mean it’s uh the the the raw material The Source data and I think that’s what it’s all about because you

Know if you think you’re eating giraffe meat and you’re really just eating grass right I mean you don’t don’t you know you’re you’re not going to have the results no matter what however people package it I think that’s what wall Street’s good at doing is you making you

Think they’ve got uh selling you a bucket of krill and it’s maybe just sand right uh people need to be able need better ways to discern between uh what wall Street’s selling and what a lot of other sites uh you know these big big retail sites there a lot of

Misinformation so at new constructs we’re just trying to basically we’re Farmers too we’re farming the footnotes to really produce a a more reliable signal for understanding profitability and valuation and it’s a dayby day It’s a Grind it’s not sexy uh I think it’s a very different strategy than the big

Game hunting for sure that’s more speculating to me David got a good question here from Tyler Ferris who’s our our producer nice unofficially yeah the does David have any opinion on chos chos thesis shorting the data center rates to just digital realy trust digital Bridge because their accounting DNA mostly is

Shy yeah you know um we agree with uh with chain in fact he he reached out to me one point um and and suggested I take a look you know back when we were doing our zombie stocks he’s like hey you know take a look at these guys and we did a

Deep dive and we came away with a similar conclusion uh and also feel like you know from a from a strategic competitive position that there may be in a bad spot because so much of the demand for the data centers is moving to the cloud uh and then the big users of

It you know traditionally your Facebooks and Amazon and and microsofts even they’ve they’re doing it internally yes yeah they they’re using their own cloud or they’re going to buy their own they don’t want to go through a third party for security reasons and so uh it’s hard

To see how those businesses are really going to grow uh and and they’re valued very expensively and the cash flows do not look look good so yeah we wrote a couple reports a while ago what was the accounting issue then is it they’re are they under booking depreciation and

Amortization to make themselves look more profitable like they’re the assets aren’t as long lived as they’re saying I mean I’m trying to imagine how you could Goose it I’m trying to trying to remember exactly what it was about too I’d have to go back to look at it for

Sure but just as an example in terms of quality of earnings we’re showing for digital realy Trust economic earnings over the trailing 12 months are negative 818 uh and the accounting earnings are showing $5.98 but you make it up in volume I guess right uh and and there’s been a

Pretty strong disconnect for for quite a long time we’ve seen in the last couple years it’s getting worse the reported earnings are staying flat and the economic earnings are getting worse I think a lot of times when it comes to reach what people Miss is just the size

Of the balance sheet and so when you go back to that old ratio of how much cash flow you’re generating relative to how much capital is going in people tend not to look at balance sheets very often and when the balance sheet takes a when you

Get a ton and ton of capital required this is a bad return on calorie right you Tak taking a lot of calories you’re not getting a lot of energy taking a lot of capital you’re not getting a lot of profit or no profit for that matter uh

And and that’s what happens a lot with the reats and then you know add on top of the the these these um re’s focused on data centers and you gota question whether or not the data center business really even makes that much sense the old the old bull case for the

Data centers used to be it’s high return real estate and once you get the once you get someone in there in a in a rack or if they’ve got their equipment in there then it’s just a pain to move to move all your services so they’re pretty sticky once they go

In but it’s it’s that you know it’s it’s real estate that’s air conditioned and has lots of power and feel like it’s it’s pretty good real estate yeah it’s very specialized but if the that’s a real problem if the if all the big guys are building clouds and going

Internal it’s just like you’re not going to need your own power station anymore you’re just going to get power from the grid right I mean you just it’s it’s so much easier I mean when we we you know we’ve been through that as a company ourselves you know we had stuff in a

Data Center and you know look I mean you want to go make a change you got to like make an appointment two weeks in advance and go through all the security and go in this stuff it’s like or you can just click send it to the cloud it’s like I

Don’t know and you know and the the security you know the budget that Amazon has to spend on on security you know how how does a data center business manage that right because it’s Amazon it’s so centralized data centers you kind of need to have in different locations to

Serve different people you can’t really just bring it all in the one so and it’s just Amazon employees going in there you don’t have to deal with a million employees from different different places that too which makes the security more challenging so yeah good question yeah

And too bad you know I think uh losing Jim chos sort of from the the market for investing is sort of it’s a it’s a Telltale sign man if just how nutty things are this guy’s one of the OG you know Short Selling kind of contrarian skeptical investors out there um we

Don’t need to be running those guys out of business they’re healthy for the market is that what is it it’s not it’s not just he’s made too much money he’s too old he’s so he doesn’t want to do it anymore is it it’s a more related to the

Not even the environment the regulatory environment or the reception I didn’t read I didn’t see like everything he said I just think just thought it was sad I mean I do I do know I follow him and and see what he talks about and and and enjoy what he

Says and I share his perspective on a lot of things and it is frustrating to be right about the numbers for a long time and stocks just go up I mean you got to be pretty Zen as a short sort I think just to be like you just to read

That IR horn filling all the people sum of the time or whatever it’s called that like what I what a saga but I don’t even know I mean that was a he was upset with the accounting of a business development company which is they’re already a little bit of a

Funky thing that took him years right and he was grilled by the SEC for like you he was the bad guy I mean it’s the system is is definitely geared toward you know W helping Wall Street I mean Wall Street makes a lot of money they

Pay a lot of taxes they got a lot of money to to put with lobbyists I mean I know I’ve been down that road too I’ve been to DC and I’ve suggested to the SEC and to the Senate Banking Committee for that matter you know that look we have

Technology that can do a lot of these things that we spend a lot of time doing manually and don’t do very well and how was your how was your IRS audit after after you went to all that trouble fortunately I make so little that I just can’t even make the radar so

It doesn’t matter but yeah no great question right I mean that’s been weaponized in a lot of ways too that’s part of you know any anyway um it’s a tough Market to sell the truth when when you can make so much money selling misinformation you remember that wire

Card that German fraud where they the guys I was the journalists I think the Ft journalists and the short seller got visited by the at least by the German authorities I think somebody scarier than that too yeah that was that’s my my favorite joke to say to my kids is you know

Whenever we see something that’s tough like oh you think you got it bad right and you think about the United States where we at least have some some Independence between different regulatory associations I think in Germany it’s all just one and they all get nominated by the investment Banks so

I mean there’s Fort the wol watching the hen house huh yeah I mean I’m like wow okay that’s that’s tough that’s really tough um that’s a really sort of upside down regulatory environment ours isn’t great but that one’s way worse Bill of Rights is helpful in the

States I think some of the really bad things from happening true um another good one from Tyler does David see a bigger difference between economic earnings and accounting earnings during bull markets or bare markets could the gap between the two numbers be a useful tool to figure out where we are in the

Cycle we do that research we once a quarter we publish the economic versus accounting earnings for the S&P all its sectors we do the same thing for free cash flow uh and we even break it down to return on invested Capital whack no Pat margins and capital turns and uh

Yeah there’s definitely for sure you can you can see the spreads widen and and and widen and narrow uh during different times it’s not always a a great leading indicator I feel like the last few sort of bull markets have just been kind of so I think the biggest indicators there

Is the liquidity being pumped in you can almost see the market go up and down based on how much liquidity is being released at least over the last year I felt like there’s been a lot of people who pointed out like oh by the way bets balance sheet getting bigger oh that’s

What explains the rally uh that’s that’s as big a driver of as anything I think the macr trends are tough to read we look at them a lot and what’s way more fun is look at the individual industry Trends and how different they are because when you get to the S&P it all

Just kind of it gets kind of vanill ised or or or normalized too aggregated I think so I think so and I welcome people to come and take a look at the research and see if they can find more out of it because we don’t honestly we put the

Data together we move on to the next thing we don’t get as much time to to look at our own data as we’d like always but at the industry level and at the individual company level that’s where I think you see the bigger Clues because you can say oh look

This industry you know it’s return on Capital doing great or economic earnings are great better than accounting earnings and another one you it’s the opposite and that’s where you want to go in and dig deeper for both long ideas or danger zone or short ideas where you’re seeing the disconnects at a micro

Level how are the how the mag s look right now and kind of quality since they’re so dominant and market cap and the news and you know we were just having a conversation about the mag 7 or maybe large cap in general yeah you know I said listen um because especially with

The Walmart runup recently Walmart was a focus List stock for us a while ago we took it off the list um not too long ago because it just got expensive and we’re like you know we think there’s better places on the margin to put Capital it’s

It’s it’s gotten rich and here it is making a run and I think the the takeaway from our meeting this morning was look the the board AES reserve the rights to get reserve the right to get smarter they don’t just have to pile into meme stocks I mean maybe they want to pile

Into Walmart right and I think I’d rather than pile into Walmart or Nvidia than to GameStop or AMC and I think they get that too and and so yes Jake the uh the mag 7 are looking really expensive some less thans I’m wondering if the The Citadel blue

Whale already ate all the ape Krill I think that that’s happening for sure I think they’re they’re I don’t know I don’t know I mean some of these some of the some of the meme stocks are are they’re still around but yeah you’re right A lot of them are down 70 80

90% uh and that’s probably put a lot of folks out of business and the ones that are sticking around are the ones more likely to reallocate to something that’s probably going to last a little longer so I I think that that’s that’s that’s going to be another phenomenon

And I think as long as there’s just this excess liquidity just continues to flow it’s going to go chase risk risk assets because that feels like the the easiest way to make money and and um and being Discerning and discernment is going to continue to play kind of a subsidiary

Role because it doesn’t help you to be Discerning if you’re missing out on profits and and people that’s why I think people think David you track economic Book value against which is your estimate of sort of what the earning power of the company is normalized against other kind

Of opportunities right so it’s it if you if you have an e an economic Book value for and you have an aggregated economic Book value so can you compare that to the prices that people are paying so you get an idea for the sort of the multiple

That the Market’s putting on the or the premium for economic Book value over sorry for market prices over economic Book value do you track that over time oh yes we we do that for at the macro level too and you’re right that’s it is sort of one of my favorite metrics uh

Economic book values we we call it the no- growth value so we sort of look at the the perpet Perpetual value perpetuity value of the existing cash flows and the multiple on on that the price you know is is you know gives you a sense of how much growth is baked into the

Stock so you’re trying to turn it kind of into a a bond and then adj like what is then implied based on if you treated that as a bond yes yes yeah it’s a great way to look at it uh and it’s a it’s it’s it’s a net of all

Liabilities too so you you you take it to the bond then you add whatever other claims might be senior to an investor claim so that would be deferred taxes and deferred compensation and option liabilities and pensions and and you know debt in general that often really knocks the economic Book value down

Pretty low and you’ll see some big multiples and that’s just just another way of of measuring risk you know how much the Prof if profits are here today the stock price implies are going to be you know here you know that that’s more risk than profits are here today and the

Stock Mark stock price actually implies profits are going to be a little bit lower you know the stocks that make our long ideal list tend to be stocks that imply imply permanent price decline that’s just low risk you know one of the regional Banks we like is

Zion Bank uh doesn’t have a lot of commercial real estate exposure but it’s trading as if its profits will permanently decline by 60% we were long Nvidia years ago when it’s price to economic Book value was 0.4 uh and its profits its price its stock price was implying its profits

Going to also Fall by 60% we’re like oh that’s cheap it’s a really profitable business this looks like really good risk reward now unfortunately we closed a position long before it went you know parabolic but we right on the front end just got kind of expensive the value investors limit that’s right exactly

Until it got the fair value and then it had its run that’s right that’s right but it’s it’s a good it’s a good way to look at things Tobias I agree uh we’re coming up on the uh on on the fulltime David if folks want to follow along with what you’re doing or

Get in contact with you what’s the best way to do that www.new construct.com or new constructs on Twitter uh but definitely yeah uh best best way to keep in touch with us or follow is is just check out the website we’ve got a lot of really low priced products that we’ve

Added recently where we’re selling off individual company reports model portfolio access um and and um model portfolios for stocks and funds so we do ETFs and mutual funds model portfolios those are some of those are as cheap as nine or 10 bucks a month and then for institutional clients you know if you

Want access to the data and the models and things like that you’re looking at a th000 bucks a month or 4,000 bucks a month on average uh but that basically you know one one one seat at 4,000 bucks a month is worth probably maybe 25 analysts or more yeah I use it that’s

How I use it too it’s better than having an analyst it’s an analyst who doesn’t make any mistakes yeah and you’re covering a lot more companies yeah you get ETFs and mutual funds and you get macro research and individual company research yeah no I think it’s it’s easily worth 25 is

Probably a pretty steep understatement honestly it’s probably worth a team of 100 analysts and that doesn’t even count the technology you got to build to harness all the work that those analysts would do but yeah we we U yeah we’re not making the same mistakes as humans

That’s part of the reason why we’ve got machines to do the work machines are very obedient and they don’t have healthcare costs that keep Rising yes they don’t complain d a train