[00:03:07] Adam Seessel: Sure, BMP stands for Business Management Price. And it’s basically the sort of compilation of 25 years plus on Wall Street, trying to figure out how to sort through the, all the thicket of data that you’re presented with as an analyst. So I really, after 25 years, kind of figured out that the only three things that matter were the quality of the business.

[00:03:29] Adam Seessel: Number one, the management that was running the business and the price that the stock market was asking you to pay. So BMP for short. Business Management Price. That’s all that matters. And really all that probably ever will matter when you’re investing in anything, whether it’s a public market stock or deciding whether to go into business with a friend or open up a coffee shop.

[00:03:51] Adam Seessel: It’s BMP. That’s all that matters. 

[00:03:54] Kyle Grieve: You mentioned in your book that in the mid 2010s that you altered the price to earnings construct in two material ways. One, you looked out approximately three years for forecasting purposes, and two, you made adjustments to earnings power. If you had to guess how big of an impact these two adjustments have on your performance and your investing process?

[00:04:14] Adam Seessel: Oh, they were huge. I wouldn’t have to guess. I know the numbers. Just to step back for a little bit, I was raised, as I say in the book, as a kind of classic value investor, and by that, I mean, one that put price first. Price was the most important, and that strategy has worked for, did work for a lot of the 20th century.

[00:04:37] Adam Seessel: But, in the mid 2010s, as you mentioned, Kyle, I went through a miserable period of performance. I was buying cheap stocks, and I noticed that the underlying characteristics of the stocks that I was buying is that the businesses that I was buying were in decline. They weren’t cheap in the sense of favorably priced.

[00:04:57] Adam Seessel: They were cheap because their businesses were in secular decline. All of these classic value metrics that I had grown up with, I had to really question the asset value, the replacement cost of hard assets, rail cars and oil rigs and so forth that wasn’t as pertinent in the digital age as it had been 25 years ago.

[00:05:20] Adam Seessel: And even a cheap PE, a cheap price to earnings multiple didn’t indicate good value. It could, it still can indicate good value, but really I learned that of those three variables, BMP, B was by far the most important and price. While critical was sort of a last thing you ought to look at. So really it was a change in mindset from, as I say in the book, moving from a stock analyst where I’m just looking at the numbers to becoming a business analyst, where I’m looking at the business and seeing if it has a rosy future.

[00:05:56] Adam Seessel: And then looking at the management and seeing if they were good stewards of that business. And then finally looking at the price and saying is that a fair price to pay? As opposed to sort of putting the cart before the horse saying, oh, that’s a cheap company I’m going to buy. Because it could just be cheap because it’s best days are behind it.

[00:06:14] Kyle Grieve: One thing that I’ve I noticed that because I started kind of similarly to you where I was only looking at price So I would look for cheap stocks and then you would notice like you said this the quality of the business wasn’t very good And then I I kind of flipped it around exactly the way you kind of recommend in your book When you’re looking at a business, and you’re looking first at business and then at management, will you completely ignore price just to understand the business a little bit better before it?

[00:06:39] Adam Seessel: I try to. I try to not even look at the price when I’m looking at a business. Because I don’t want to be influenced. It’s kind of like if you’re shopping for a… It’s a little different, but the analogy I think would help your listeners. If you’re shopping for an apartment or a house, First look at the house, then look at the neighborhood, then look at the school district and then say is the house worth it?

[00:07:04] Adam Seessel: Is it a good value for the money? Of course, whether you can afford it or not is a separate consideration, but there are times when great houses and great neighborhoods are worth paying for because the neighborhood is going to continue to appreciate. And conversely, there are times when run down houses in run down neighborhoods are not worth the cheap price that you’re paying for it because they’re going to continue to degrade in quality and value.

[00:07:32] Adam Seessel: So the same is true of businesses in the stock market. Now, there are times when great houses in great neighborhoods are wildly overpriced. And there are times when cheap houses in marginal neighborhoods are a great buy, maybe because the neighborhood’s getting better. But if you keep it in, in the context of sort of real estate, which everybody’s familiar with, whether renting or owning, it’s price versus value.

[00:07:54] Adam Seessel: What am I getting? And what am I giving up? And what you’re getting is much more important than, in many ways, than what you’re giving up.

[00:08:04] Kyle Grieve: Moving on to generally accepted accounting principles, sorry, GAAP. You mention a little bit in your book that it’s undergoing some modifications, but it’s pretty slow in terms of catching up to what the digital age is requiring to show value.

[00:08:17] Kyle Grieve: How do you envision GAAP adjusting for changes in the digital economy, let’s say, over the next decade or so? 

[00:08:22] Adam Seessel: Let’s see, I don’t have that power. I’m not on the financial accounting standards board, and I’m not part of the sec and it may be a little technical for your readers, but it is kind of intuitive when you understand that gap accounting was born in the 1930s after the depression, when the government rightly said, we need a better way to have companies report their financial statements so that investors can rely on them.

[00:08:49] Adam Seessel: So that’s what GAAP is, Generally Accepted Accounting Principles. So it’s a standard of principles that all companies must adhere to. And the point I’m making in my book is simply that GAAP was created for the industrial age. And it was created when steel mills and rail cars and factories ruled the economic landscape.

[00:09:11] Adam Seessel: The accounting is very appropriate for heavy industry. But these new digital beings don’t look like factories at all. And so the principles of accounting that are almost a hundred years old now are really sort of obsolete when it comes to capturing the expenses and the costs of a, how Amazon has run, how Google has run, how Microsoft has run, the accounting really doesn’t capture that accurately.

[00:09:39] Adam Seessel: So we’ll see what the powers that be do in terms of catching up to the digital age. Meanwhile, what I decided is I outlined in my book is I’ve got to make the adjustments just because gap is not, God, gap is a 90 year old set of principles that in my opinion have become outdated in many important ways.

[00:09:59] Adam Seessel: So I’ve got to change and massage the numbers in ways that make sense economically to the current age. And by the way, I’m not the only one doing it. Other investors do it, but really the main people who do it are tech companies. Tech companies routinely change their numbers internally for their own consumption, because they understand that it reflects economic reality to change the numbers.

[00:10:22] Adam Seessel: It’s not magical thinking. It’s actually more realistic thing. And so we need to act more like tech companies, or even more broadly speaking, we need to just be rational business people. and not get stuck in outdated ways of measuring value. 

[00:10:38] Kyle Grieve: I know in your book you mentioned for when you’re doing your earnings power calculations, you mentioned a lot of R&D and marketing expenses.

[00:10:45] Adam Seessel: Yeah. 

[00:10:46] Kyle Grieve: So are there other areas of gap outside of those that you think that you’re sorry that you like to adjust for? 

[00:10:53] Adam Seessel: Those are the most important, but I’ll just give you a very simple example that maybe your listeners can understand because it is, accounting is not for everybody. When a company makes a marketing expense, when they spend money to advertise their product, or promote their product, or give promotions, or discount, that marketing dollar has to be expensed 100 percent in year one, as if it doesn’t have anything more than a year life.

[00:11:19] Adam Seessel: Whereas a factory… If you build a billion dollar factory, you can amortize that factory, you can recognize the cost in your profit and loss statement over 20 years, so a billion divided by 20 is a billion dollars. $50 million a year is what you recognize, which makes you look much more profitable.

[00:11:37] Adam Seessel: Company like Intuit, for example, they say wait a sec. Our customers, when we get them on TurboTax or on QuickBooks, they last a long time. Our customers, so when we spend marketing dollars, we’re actually investing. It’s almost like a factory. It’s a long-term investment. It’s not something that the marketing dollar doesn’t have a one year life.

[00:11:58] Adam Seessel: It has say a five year life. So they adjust their marketing expenses and measure how much their marketing expenses is bringing in in terms of revenue. And that’s as much in the weeds as we should probably get, but the net effect is Intuit’s profits are much greater than the GAAP accounting statements would have you believe.

[00:12:20] Adam Seessel: And that’s the same is true of most of tech that R&D is another expense, research and development that that’s, let me spend a minute on that. Used to be in the 70s and 80s, R&D was pure research and completely speculative. So the accountant said we need to expense every dollar of research and development in year one, because we don’t know if it’s going to have a payoff.

[00:12:42] Adam Seessel: We don’t know if it’s going to be like a factory that can churn out stuff for 20 years. And that’s, that was a reasonable position to take, but that’s still the position that GAP takes. And as I say in the book, it’s kind of absurd that gap now is basically saying that every dollar that Amazon spends on their website to improve their e commerce website is speculative and has a one year life, has no value beyond one year.

[00:13:11] Adam Seessel: Every dollar that Google spends on their search engine is speculative and should be written off and, unlike a factory, has no long term value to Google. And that, of course, that’s just, everyone understands that that’s absurd. But these are entrenched companies that are plowing research dollars back into their businesses to make their businesses bigger, their moats wider.

[00:13:34] Adam Seessel: And so of course they have a more than one year life, but Google’s profits, Amazon’s profits, and all tech companies profits by extension that are in this category are penalized because instead of having a five or 10 year life, GAP says, no, you have to expense them all in year one. 

[00:13:54] Kyle Grieve: So you make a point of emphasis that the management you’re evaluating should think and act like owners.

[00:14:00] Kyle Grieve: When you’re evaluating a management team and see that they are thinking and acting like owners, what kind of insider ownership hurdles do you like to use, if any? 

[00:14:09] Adam Seessel: I don’t necessarily need to see a lot of insider ownership. I mean, don’t get me wrong, more is better than less. But on the other hand, as I say in the book, Tom Murphy, a legendary CEO from Buffett’s days, who ran ABC for many, many years, he owned less than 1 percent of the stock.

[00:14:30] Adam Seessel: The point I make in the book, which is really true, and I think people can understand this, your listeners can understand this from their own experience. You don’t need to be an owner necessarily to act like an owner. Certain people are just responsible, considerate people. And they treat your business, they treat your money as if it were their own.

[00:14:50] Adam Seessel: And other people just aren’t, and you need to look for people who are responsible, who treat their money, who treat the business like it’s their own, even if it’s not. That actually is not hard to spot. They give themselves lavish pay packages. For example, they’re taking advantage of being a public company.

[00:15:10] Adam Seessel: They’re, they’re skimming off the top, essentially, if they pay themselves reasonably and don’t give themselves perks like jets and so forth. That’s a good sign. One of the reasons I’ll probably never invest in an Elon Musk company, as I say in the book, is clear red flag, he owned, I think, 17 percent of Tesla or 12 percent or something like that.

[00:15:31] Adam Seessel: And then he went to the board, 5 or 10 years ago and said, geez, I think I need 10 or 15 percent more of the company to really get up out of bed and be incented. So the board just sort of doubled his ownership stake by giving him a huge slug of options. It’s crazy. Like all of a sudden there’s a shareholder, I’m deluded because the board of my company has given the founder two times more ownership.

[00:15:56] Adam Seessel: That was to me a very bad warning sign. Of course, Tesla has done very well after that, but I’m not going to lose sleep over missing Tesla because that kind of behavior is a little, it’s a little weird. 

[00:16:06] Kyle Grieve: So you actually just mentioned Tom Murphy, who I admire greatly. In your book, you have one line that stuck out to me in regards to capital allocation.

[00:16:15] Kyle Grieve: It’s the quote, the goal is not to have the longest train, but to arrive at the station first using the least fuel. So great businesses have high returns on capital, but the fear that investors should have is that competition will come and try to steal some of the profits for themselves. So what are strategies and tactics that management teams and digital businesses will need to use in order to help maintain their profits and stave away competition?

[00:16:40] Adam Seessel: Let’s just back up and look at that Murphy quote because it is a good one. A lot of people in business, they want the longest train. In other words, they want a lavish headquarters and a lot of employees, a lot of people sucking up to them. You should watch for that as an investor.

[00:16:57] Adam Seessel: Right now we’re talking about the M in the BMP analysis, right? The management do they want an empire? Are they empire builders or are they creators of shareholder value? Do they want to have a big train or do they want to get to the station fastest using the least amount of fuel? You want to look for people who are focused on the right things, which is making money and making money for, for shareholders.

[00:17:22] Adam Seessel: And Murphy did that. Terms of tech companies in specific. I mean, the reason tech has gotten so big, so fast. And the way they can continue to grow and the way they can continue to protect their competitive advantage is to do what they’ve done all along, which is innovate. Tech, the digital revolution is the biggest revolution we’ve had in a hundred years.

[00:17:46] Adam Seessel: And it’s come because a bunch of smart people just got together in their garages and started to figure stuff out. Now Google is a huge company. Microsoft is a huge company. Amazon is a huge company. Even the quote second tier companies like Adobe and so forth Intuit are huge, huge multi a hundred billion dollar companies.

[00:18:09] Adam Seessel: Their secret is to just keep doing what they’re doing, not to get complacent, keep innovating, keep iterating, keep producing better stuff for people, like Google got to be where it is because it’s the best, fastest search engine. And then they produced great maps and, great email and a great browser.

[00:18:28] Adam Seessel: They need to keep doing this, keep, keep innovating. Amazon, keep shortening delivery times, keep delighting the customers. Intuit, keep innovating. Once a company starts resting on its laurels and starts milking the business, that’s when you’re dead. That’s when you’re dead. And that’s another reason why price matters less.

[00:18:50] Adam Seessel: Because if you tell me there’s a company that trades for 30 times earnings, but is investing 10 percent of its sales in R&D to keep innovating. And you asked me, just for academic purposes, a company that’s trading for 15 times earnings, but is only putting 1 percent of its money into R&D.

[00:19:12] Adam Seessel: I’d probably incline to the 30 times company because two things. One, it’s not apples to apples. The first company is taking earnings away from themselves today and investing it so that they have more money tomorrow. The second company is milking the business and not innovating and thereby setting themselves up to have poor earnings down the road.

[00:19:36] Adam Seessel: So the earnings aren’t comparable. So that’s one of the many reasons why price is sort of the last variable. You want to say, wow, this is a great company. Wow, they’re really innovating. They’re doing great things for their customers. They’re making life easier, faster, better, cheaper for their customers.

[00:19:54] Adam Seessel: Okay. Their multiple is a little high, but what if I adjusted their multiple so that they looked like an ordinary company that wasn’t investing? And then, sort of play around with the valuation and see if you can get comfortable with it. But once you start, stop innovating your debt, I really come to believe, Kyle, that there are two kinds of capitalists and two kinds of capitalism actually in the world.

[00:20:17] Adam Seessel: There’s the bad kind, the kind that gets publicized in the newspapers and movies, the greedy, short term, and that definitely exists, like a cable company, who loves their cable company? Nobody, it’s a monopoly, they charge you a lot of money, they never innovate, right?

[00:20:36] Adam Seessel: They never innovate, they have mediocre service, their prices go up every year, every time you try to call them up you get, it’s maddening, it’s like living in the Soviet system. Those are the bloodsuckers of capitalism, and I will never invest in companies like that because they’re setting themselves up for their own demise.

[00:20:55] Adam Seessel: The formal economic term for those people is rent seekers. They’re just looking to squat on a piece of property and extract rent from you. That’s the bad part of capitalism. I would put most banks in that category. Banks, cable companies, the list is long. But then there’s a second kind of company that is the good capitalist, where they’re providing a market need.

[00:21:19] Adam Seessel: They’re, they’re producing a good or a service that is, makes life easier, faster, better, cheaper. And in return, they’re getting paid. Like Google is like, all its products are free. Look how much better Google has made our lives. I say in the book that the company that got me thinking about this sort of new paradigm was Hyco, which is in an old industry segment, it’s aerospace generic parts.

[00:21:46] Adam Seessel: It’s generic parts for when aerospace parts wear out on an airplane, they sell at a 30 percent discount to GE and Honeywell and all these other branded guys who are definitely bloodsuckers. GE and Honeywell think, Oh, we have a monopoly on these parts. We’ll just raise prices and stick it to the airlines.

[00:22:07] Adam Seessel: And along came Hyco 30 years ago and figured out we could make parts that are safe and FAA approved, but that aren’t name brand, and we can sell it a 30, 40 percent discount to GE and Honeywell, and it took a long time for them to gain the trust of the FAA and of the airlines themselves. But now they sell to all the 20 major airlines.

[00:22:31] Adam Seessel: They’ve had close to a hundred million parts on a plane without any incidents. And the stock has been a monster and the owners are rich. The shareholders are rich. They have a stock option program. So the secretaries and the machinists on the assembly line are rich. And that’s the kind of capitalism I like.

[00:22:50] Adam Seessel: And that’s the kind of company that I’m going to invest in. One that innovates. 

[00:22:55] Kyle Grieve: So you mentioned Intuit a lot in your book, and how they’re able to beat competition because of their incredible gross margins, and as you just said, with R&D, they obviously spend a lot more on R&D than they do compared to their competitors.

[00:23:07] Kyle Grieve: But as a business like Meta has shown us in the past, the market can react negatively for a time to massive spending in these areas if they don’t see value in it. How do you go about looking at a business’s R&D and marketing history to ensure that they’re spending that money wisely and that it’s returning some form of value?

[00:23:25] Adam Seessel: I mean, it’s pretty common sense, Kyle. I don’t know if I’ve ever used TurboTax, but I know people who use TurboTax. It’s great. I’ve never used QuickBooks, but I know people who use QuickBooks. It’s great. That’s, there’s a demonstrated need for that product. Whereas something like Meta, Meta bet the ranch a couple of years ago, changed their name and said, we’re going to invest, I think it was 10 billion a year in virtual reality.

[00:23:51] Adam Seessel: That just strikes me as highly speculative. I’m not a venture capital investor. I’m not going to invest in unproven stuff that might work. I’m going to invest in stuff that, while early in its life cycle, has proof of concept that it’s going to work. QuickBooks has 1 2 percent market share of its ultimately addressable market of small business software.

[00:24:11] Adam Seessel: Helping small businesses keep track of their bills and invoices and so forth. Meta has 0 percent of the virtual reality market because there is no virtual reality market. It’s common sense. It’s I just thought. I’m not doing it. Amazon, retail sales, North American retail sales, e commerce is about 15 percent of North American retail sales.

[00:24:35] Adam Seessel: That’s just not a very high number. So it’s already established and yet it has a lot of room to grow. Progressive Insurance, which is a tech, really a tech company. It’s an auto insurance company, but it’s really a tech company. It uses tech to, to gain its advantage. It has 15 percent market share.

[00:24:52] Adam Seessel: That number is almost surely going to go up and meanwhile, the auto insurance market grows. Once you find a company with a fairly small share of a large pie, and the pie itself is growing, good things are going to happen over time. 

[00:25:07] Kyle Grieve: There’s a quote in your book on value investing that I really loved, which was, The essence of value investing is to buy a stock when the market is voting on it, and then wait until the market weighs it.

[00:25:18] Kyle Grieve: This made me think that a lot of value investors tend to stay away from optically high priced tech names like we’ve been talking about, but if you know the value of a stock regardless of its price to earnings ratio, all you need to do is wait for that stock until it is either not loved by the market and that drops the price of it, Or is not loved as much as it should be, which you’ve, you’ve used your BMP system to do, and then just wait for the market to weigh it properly.

[00:25:44] Kyle Grieve: So would that be kind of your advice to value investors who tend to avoid tech stocks based purely on price? 

[00:25:50] Adam Seessel: No, my advice to value investors who avoid tech stocks on price is to sort of join me in a contemplation of what’s changed in the world and to join me in a contemplation of how Gap Accounting doesn’t capture what’s going on in terms of tech company value creation and sort of, you have to change your mindset in the sense of tech is where the future is, number one, ask yourself rhetorically, Mr.

[00:26:14] Adam Seessel: Value Investor, Where is most of the economic value going to be created in the next generation? I’ll give you four choices. A, healthcare, B, financials, C, industrials, D, tech. I think it’s obvious to a 12 year old that the answer is D. So most of the growth in the economy is going to come from tech, number one.

[00:26:36] Adam Seessel: And then number two, how is the value of tech not captured fairly? Because as I say in the book, Kyle, Google and Amazon and all these other tech stocks, all of Adobe, Ansys, Salesforce, Autodesk, all these companies, large and small, have always looked expensive from the time they IPO’d to now, but they’ve gone up tremendously.

[00:26:59] Adam Seessel: Either it’s a binary, the answer to why, why have they gone up even though they’ve looked expensive is, is it’s binary. Either it’s a huge shell game that’s been going on for 25 years now, and it’s getting ready to, to break, and it’s going to make the dot com bust look like a tea party, and Amazon and Microsoft and Google are going to go down 90%, because it’s just been air.

[00:27:22] Adam Seessel: Or, the way we’re measuring value has just been wrong. It’s outdated. The answer is pretty clear that the second explanation is true. So you’ve got to really reorient yourself both philosophically and numerically if you’re going to capture the value creation that the tech is generating. 

[00:27:43] Kyle Grieve: Benjamin Graham is often referred to by Warren Buffett and other value investors in reverential terms.

[00:27:49] Kyle Grieve: Do you think the fact that he’s held on such a high pedestal actually does harm to newer investors who get stuck on his asset based evaluation methods? 

[00:27:58] Adam Seessel: I do actually, and I think it’s a very insightful point you make. Look, I revere Graham as much as the next guy. I mean, he invented value investing.

[00:28:07] Adam Seessel: Before Graham, as I say in the book, The stock market was a casino and there was no systematic way to figure out how to invest and beat the market. And one of his early jobs was taking bets. He worked at a, a New York stock exchange registered broker, but it was legal back then a hundred years ago to take bets on the presidential election.

[00:28:29] Adam Seessel: So he took bets from customers on the 1916 presidential election, and that’s how crazy Wall Street was back then. You think it’s crazy now, you can bet on the, they were bookies essentially. So he created a system, what am I paying? What am I getting? Don’t overpay. All these things are huge gifts that he gave to the investment community.

[00:28:51] Adam Seessel: At the same time, he was way too conservative, because he came of age precisely in a very speculative era. He lived through the Depression in the 30s, so paid to be conservative. And so Buffett went beyond him, and started paying higher prices for better businesses. And I think that we need to keep going and even quote, higher optical prices, even though there’s, they’re really not higher prices for shares in tech companies.

[00:29:21] Adam Seessel: So yes, I do think that to put him as sort of a, he’s a saint, he belongs in the value investing canon, but times change, life moves on and our attitudes have to move on too. 

[00:29:33] Kyle Grieve: So speaking of Benjamin Graham in your book, you discuss the evolution of value investing, starting with value 1.0, which was inspired by Benjamin Graham’s asset value approach.

[00:29:43] Kyle Grieve: Then in value 2.0, you discuss Warren Buffett and his brand TV ecosystem, and then you present your BMP checklist for value 3.0. So as entire industries change, the way we evaluate must change as well. But what are some of the timeless investing concepts that continue to thrive from value 1.0 through to value 3.0? 

[00:30:03] Adam Seessel: Let me just set the stage for your listeners by saying, value 1.0 Ben Graham was assets, as you say, and not just assets, but what could they be liquidated for? I own a company, a stock that has inventory of X dollars and cash of Y dollars. And no liabilities and the net assets are worth 100 a share and I can buy the stock for 60 a share.

[00:30:29] Adam Seessel: I can buy it for 60 percent of liquidation value. Beautiful. Because the theory is that the 60 a share will inevitably go to 100 to reflect at least asset value. That’s a very good construct. Buffett said, that is a good construct, but I live after World War II, the U. S. is in a very stable place, the economy of the U.

[00:30:50] Adam Seessel: S. is growing, I want to buy great businesses, so I’m not going to look at assets so much as I am going to look at earnings, I’m going to look at their, their, their earnings, and I’m going to be willing to pay it up. As I show in the book, there’s a chart that shows he was, he was paying higher and higher multiples as time went on, because his conviction that a great business Would grow and would sort of outgrow the high multiple was the conviction that he had was increasing.

[00:31:16] Adam Seessel: All I’m saying is we need to move on to the 3.0 where we don’t focus on earnings, current earnings so much as earnings power, the latent ability of a company to earn money. As I said, when I compared the 30 P.E. Multiple versus the 15 P.E. Multiple, the 30 P.E. Multiple company is much less expensive than it would optically appear because it’s reinvesting to grow its future earnings.

[00:31:43] Adam Seessel: Those are the three constructs. But look, paying a fair price, that concept will never die. Being rational, that concept will never die. Getting good managers, that concept will never die. So there’s a lot, a lot of good still in investing, that’s why I saw the subtitle of the book is value investing for the digital age.

[00:32:03] Adam Seessel: We just need to modify. We just need to modify. It’s not a revolution. It’s an evolution. 

[00:32:09] Kyle Grieve: So in the price portion of BMP, you are looking for a price to earnings of less than 20, implying a 5 percent or greater earnings yield. What is the significance of this earnings yield number? 

[00:32:21] Adam Seessel: The way I look at it is the multiple, of course, is the price over the earning, but the earnings yield is the earnings over the price, E over P.

[00:32:30] Adam Seessel: So if I’m buying something that is earning 5 and the price is 100, the PE is 20 and my earnings yield is 5. So the way I look at it, Kyle, is theoretically, if I own the whole business, I could take out that 5%. I would get a 5 percent dividend yield. on that business day one. Now, in practice, companies retain the earnings to grow or they buy back shares.

[00:32:57] Adam Seessel: So it’s not all dividend out to you, but it’s a good theoretical construct that day one, I’m getting 5%. Even in the rising rate environment, that’s still higher than a government bond, right? Which is anywhere from four to 5%. So I’m getting paid more than the government would pay me. But in contrast to a bond, My coupon will grow.

[00:33:21] Adam Seessel: 5 percent coupon, if it grows 20%, next year will be a 6 percent coupon. And if it grows 15 20%, the next year it’ll be a 7 percent coupon. And then an 8 percent coupon, and a 9 percent coupon. That’s why one of Buffett’s many brilliant insights was to say that stocks are bonds, but they have expanding coupons.

[00:33:45] Adam Seessel: The 10 year treasury is not going to pay me more than four or four and a half percent. It’s not going to grow. It just sits there. But a dynamic business grows. It goes into new markets. It introduces new products. It raises prices. It innovates this. It innovates that. It cuts costs. It buys back stock, which raises my per share earnings value.

[00:34:07] Adam Seessel: The coupons grow. If I’m buying a great business, which I, B is the first part of the analysis. If I’ve decided that the business is great, it earns money the right way, not the blood sucking way. It’s got a huge long runway. It’s got a small market share of a large market. It’s got competitive advantages.

[00:34:25] Adam Seessel: It’s got reasons why it can continue to grow. And I’m confident that that 5 percent coupon can go 6, 7, 8, 9, 10, and in 10 years, it’ll be, the price will have been dwarfed by, the earnings that are out there in 10 years. So 5 percent seems like a good, rough bogey to me. There’s nothing magical about it.

[00:34:46] Kyle Grieve: So given the prevalence of monetization of data and attention these days, do you feel network effect modes are going to be an ever growing area of competitive advantage in the digital age? 

[00:34:57] Adam Seessel: Yes, yes, I think that’s a good insight. I mean, you see it now with AI, right? AI is all the rage, but the only companies that can really do it at scale are the big companies, Microsoft, Alphabet, chief among them, because, they have the cash flow to reinvest.

[00:35:15] Adam Seessel: And I think it’s pretty widely acknowledged that Google has 75 percent of the top AI research talent. That network effect grows there. It’s, it’s not just data, it’s resources and, an AI researcher, like three good Google AI researchers could go off on their own and do a startup. But, they, they, they wouldn’t have cash, they wouldn’t have the resources, they wouldn’t have the computing power, they wouldn’t have the market to sell into whatever application they, they, they created.

[00:35:44] Adam Seessel: So I think network effects and the mega caps are very much benefited and as long as they continue to execute on innovating, they will, they will do well. 

[00:35:55] Kyle Grieve: Outside of businesses such as Meta, Amazon, and Alphabet, are there any other businesses that you think are worth researching more to understand network effects, or can you just get away with studying kind of those, those major ones?

[00:36:06] Adam Seessel: You kind of know a network effect business when you see it. Here again, it’s important not to get too caught up in the theory and just sort of be, be practical about it. Like Airbnb, like they started with their apartment. And it’s called Airbnb because they blew up a mattress and put it on their, an air mattress on their floor of their living room.

[00:36:26] Adam Seessel: It started out with one host and then one guest and then two hosts and two guests and then four and then 16 and network effects. And the more hosts, the more guests, and the more guests, the more hosts, like that. If you keep that in mind, you can see immediately whether a business has network effects.

[00:36:45] Adam Seessel: One begets the other. Virtuous circle. Whatever, however you want to say it. Flywheel. There are a lot of business terms to describe it, but you kind of know it when you see it. Facebook social network. People are on there. That means more people come on there. Which means more people come on there, because it’s a social network.

[00:37:03] Adam Seessel: They’re not hard to spot. 

[00:37:05] Kyle Grieve: So you had a really good breakdown of the contrasts of a financial or stock analyst versus a business analyst in your book. You said, and I quote, a financial analyst believes that the numbers drive performance, but a business analyst knows that the numbers, the ratios and the stock’s performance all derived from one thing, business quality.

[00:37:25] Kyle Grieve: For listeners who are accustomed to looking at investing through the lens of a stock analyst, what would be their first steps into evolving into a business analyst? 

[00:37:34] Adam Seessel: It’s one of the favorite points in my book and one of the really more profound realizations I’ve come to, I used to be a classic value investor, price first, numbers first, quantitative, quantitative, quantitative.

[00:37:47] Adam Seessel: And I just understood that business quality not only dwarfs the numbers, but it drives the numbers. That’s where the numbers come from. Good businesses are going to generate good numbers. Bad businesses are going to generate bad numbers. So General Motors sure looks cheap, but what kind of numbers is it going to be producing going forward?

[00:38:07] Adam Seessel: I would encourage people to just sort of think that way, I don’t know, people have to come to their own conclusions, but for me, I got tired of buying into businesses that look cheap. and just kept going down. Business quality rules, it’s sort of, if we don’t have enough evidence of it by now, I don’t know what more evidence we can have.

[00:38:25] Adam Seessel: So you just need to deeply think about, okay, I own businesses X, Y, and Z, and they’re cheap, optically, but, what is their quality? What is their future? And what numbers are you producing in five years, three years time? Whereas if I bought business ABC, okay, it’s optically more expensive, but what’s it going to look like in three or five years time?

[00:38:48] Adam Seessel: Quality wins. 

[00:38:50] Kyle Grieve: So a new investment that you’ve just made is in Texas Instruments. Could you go through the business and management part of your BMP framework on the business with me to help the audience understand it a little bit better? And then I want to go over the price in a bit. 

[00:39:04] Adam Seessel: Sure. Yeah, happy to.

[00:39:05] Adam Seessel: BMP analysis for Texas Instruments. A good, a good case study. Texas Instruments is involved almost 100 percent in a tech market segment called analog semiconductors. And I learned about this five or six years ago, and it was a real eye opener for me. I always thought that semiconductors were, the chips that went into a memory and storage, Intel and so on and so forth.

[00:39:30] Adam Seessel: And that’s a much bigger industry. That’s digital chips. That’s zeros and ones. That’s digital semiconductors are ones that just manipulate digital data. And that’s a, a huge, it’s a very difficult business, actually, digital semiconductors. It requires scale, enormous fabs costing billions of dollars.

[00:39:49] Adam Seessel: Product cycles change every couple of years. So you see now that NVIDIA is the darling because of their AI chips and Intel is in the doghouse because they missed the transition. So I don’t like that business. It’s capital intensive product cycles go change every couple of years. Scale matters. And the risk of missing a product cycle and becoming a laggard is just well documented.

[00:40:14] Adam Seessel: I mean, Andy Grove, the best CEO in the semiconductor industry, maybe ever, you know what the title of his autobiography was? Only the Paranoid Survive. Only the Paranoid Survive. Do you want to be in an industry where only the Paranoid Survive? I don’t. That’s hard. I’d rather be in an industry where a lazy guy can do okay.

[00:40:36] Adam Seessel: That would be good. But so I don’t like the digital semiconductor industry terribly much. I mean, those who bought NVIDIA because they saw something, I mean, hats off to them. But NVIDIA has to be paranoid now because another product cycle will come. Texas Instruments is not in that segment.

[00:40:52] Adam Seessel: They’re in the analog segment, which is a much smaller segment. It’s maybe a fifth of the size of the digital segment. Analog has means anything that has to do with non binary, non digital, non zeros and ones. Analog semiconductors basically help get real world phenomena into the digital ecosystem so that NVIDIA’s and Intel’s chips can analyze the data, manipulate the data, store the data.

[00:41:19] Adam Seessel: So driverless cars is a great example. There’s a lot of digital chips in there to tell the car what to do. But for those digital chips to work, they have to have sensors outside of the car. Noise, temperature, movement. Those are all analog signals that move in waves. Sound waves, power moves in waves.

[00:41:42] Adam Seessel: Analog semiconductors capture all the non digital phenomena in the world. All the real world phenomena. temperature, sound, noise, and those can’t be shrunk, those semi conductors can’t be shrunk because they’ll lose their fidelity beyond a certain amount. So Moore’s law does not apply. So the ruthless economics that only the paranoid survive economics do not apply to analog.

[00:42:07] Adam Seessel: So that’s great. The other thing that’s great about analog is you can’t have one chip for a hundred applications. The analog chip that regulates the power in the iPhone is different than the analog chip that hears your voice, which is different than the analog chip that monitors the temperature, which is different than the analog chip that helps when you swipe your phone.

[00:42:28] Adam Seessel: They’re all little niche industries. They’re all little niche. I think I can’t remember the numbers exactly, but I think Intel has maybe 50 SKUs, different units. And Texas Instruments has over a hundred thousand, like all little bespoke things. And it’s not an industry where only the paranoid survive, because once you get a good power regulator, or once you get a good sound conductor, it’s probably good enough for 5 or 10 years, so you don’t have to keep iterating, and the product cycles aren’t rapid, which allows an analyst, business analyst, to understand the long future.

[00:43:03] Adam Seessel: And yet at the same time, they’re exposed to all the tech tailwinds, right? They’re exposed to digital drivers, cars, internet of things, anything that needs human or real world phenomena to be translated into the digital world needs analog semiconductors. And of course, we know that that number is just going to keep going up.

[00:43:21] Adam Seessel: So I love the analog semiconductor business, Texas Instruments is the market leader, but they only have 15 percent share, so it’s still a pretty fragmented market, but they’re the market leader. The market grows, I don’t know, 7, 8, 9 percent a year, which is much better than the underlying economy of 2 to 3%, and Texas Instruments grows a little faster than that because they’re always taking share because of their scale.

[00:43:45] Adam Seessel: The top line for Texas Instruments is going to grow 10 percent a year. And then the other thing I love about Texas Instruments as a specific analog business is that they’re the only one that own their own factories. Everybody else has outsourced their factories, are fabless, so they do a lot of work with Taiwan Semiconductor, which is a great company.

[00:44:04] Adam Seessel: But Texas Instruments gains a lot of manufacturing advantages from owning their own factories, because they don’t have to pay a middleman, they’re vertically integrated. So that gives them a cost advantage. So not only do they have the broadest product portfolio, And because of the market share leader, they can invest most in R&D in terms of absolute dollars, but they also have a cost advantage.

[00:44:25] Adam Seessel: I’m starting to tick off, market leader, spend the most in R&D cost advantage in this great niche industry. So I’m loving Texas instruments, this I’m kind of. Going back through my research as I learned all this stuff. So it’s a great business. I think it’ll probably over time, it’ll grow revenues, 10%.

[00:44:44] Adam Seessel: The margins will increase a little bit as they gain scale and leverage, and then they’ll buy back stock. So I think the earnings growth for them per share is probably in the mid teens. Forever. Forever is a long time, but for at least 10 years, so a company that can grow earnings 15 percent for 10 years time.

[00:45:03] Adam Seessel: and has sustainable competitive advantages in this great little niche industry is a wonderful business. The multiple, so that’s, oh, so that’s the business. The management is great. They don’t own a lot of stock, but they’ll quote Buffett, they’ll quote Graham. You go on their website, they have a whole dedicated slideshow to capital allocation.

[00:45:24] Adam Seessel: They understand what drives value. They understand return on capital. They make all their investments based on return on capital. They are interested in getting to the station fastest with the least amount of fuel. They do not want to build a big fancy train. So the management definitely gets it and you just spend a little time on the website and you listen to their investor calls and you’ll see that they are shareholder friendly and investment savvy.

[00:45:48] Adam Seessel: So okay, so my B’s checked, my M’s checked, and then the price. This is a good example of sort of a more ordinary earnings adjustment, but Optically, like this year, they’re going to earn 7 and change and the stock’s 160. So let’s call it a low 20s multiple. So it doesn’t pass my test of 20 and under, right?

[00:46:08] Adam Seessel: But study the market, which I have now for five or six years, you’ll understand that they’re in a, in a lull. See, what happens is customers like automakers

[00:46:18] Adam Seessel: and, and auto and industrial is most of their markets now, auto and industrial. And those guys will order a lot of chips. And demand will grow a lot and then they’ll say, Oh, we’re overstocked. And so they’ll cut back on their orders and then they’ll run their inventories down and then they’ll over order, then they under order, they over order, under.

[00:46:38] Adam Seessel: So it’s lumpy, cyclical a little bit. And we’re right now in kind of getting toward the bottom of where the manufacturers have under ordered. So the 7 and change earnings number. It’s probably a false number. It’s probably too low. Like I, if I just do my numbers and correct for the inventory adjustments, I think they’re going to earn twice that in four years, they’re going to earn 15 or so in 2027, that’s kind of my estimate.

[00:47:05] Adam Seessel: Only thing I know is it’s going to be wrong, but it’s directionally accurate. So if you, if you adjust the earnings to compensate for this inventory correction, it’s trading well under 20 times. So all three boxes check. Great business, savvy management, good price. You have to watch out because, China is a wild card now.

[00:47:26] Adam Seessel: There’s all these trade tensions and, Apple is Apple’s phones are now not being allowed by some government employees. There’s going to be some stuff going on in here, but overall, what I’ve told you is undeniably true. 

[00:47:40] Kyle Grieve: Part of the reason the dot com businesses didn’t work out around the year 2000 was that the infrastructure wasn’t in place to support those businesses.

[00:47:48] Kyle Grieve: As you mentioned in your book, it was the same with cell phones. They became more ubiquitous as the technology got better and the prices came down. What industries or sectors are coming online today that you envision having long tail ones? 

[00:48:01] Adam Seessel: Oh, there’s so many, there’s so many. I mean, AI is all the rage.

[00:48:05] Adam Seessel: I mean, I don’t know exactly what’s going to happen, but it’s going to be big. As I said earlier, it’ll probably be, monetized by the big guys, Microsoft in its office suite, charging money to use AI and Word and Excel Google, it’ll help in their search business. I don’t even really try to bother to count the ways the next big things, I just know they’re going to be big things.

[00:48:30] Adam Seessel: I mean, this year it’s AI, and at some point driverless cars will hit, and then quantum computing is going to hit. I don’t bother ticking off all the ways, I mean, of course I’m familiar with them, but I just… I say to myself what is going to be driving the incremental value of the economy for the next generation?

[00:48:46] Adam Seessel: As I said earlier it’s going to be tech. 

[00:48:49] Kyle Grieve: Adam, thank you so much for joining me today. Before we say goodbye, where can the audience connect with you and learn more about you and your book? 

[00:48:57] Adam Seessel: Kyle, I enjoyed it and you asked good questions and I hope it benefited your listeners. In terms of connecting with me, I mean, here’s the book, all that stuff we’ve been talking about, you can just pick it up on Amazon or your local bookseller if you want to help support them.

[00:49:12] Adam Seessel: And then, look, you can Google me I’m on the web, I’m on LinkedIn happy to chat with anybody, and I’ve kind of figured out how to invest with discipline, using some of the traditions of value investing, but also making accommodations for this new digital reality that we live in. So I’m happy to help others if they want to continue their journey as well.

[00:49:34] Kyle Grieve: Okay, folks, that’s it for today’s episode. I hope you enjoyed the show, and I’ll see you back here very soon. 

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