Why Wall Street is Wrong About Superstar CEOs

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20:28Andrew:Yeah, awesome. I agree. And so when you think of, of you, you talked about almost comparing or Warren Buffett being the measuring stick, if you will, the, the wall street measures other CEOs against. against um i'm not even going to try to say his name because i always butcher it but microsoft ceo would definitely be be one i would think obviously not warren buffett anywhere close but he's definitely someone that has met the market i guess you could say as being a good ceo but then there are other ceos um what's the guy's name that that i used to beat up on dave about i I can't even remember Darcy.

21:21Andrew:Yeah. And I don't actually care. Just Dave was so strongly that I just, every chance I could poke the bear, you know? Yeah. Jack Dorsey, like just burning, burning and burning more capital as David would describe it. Do you think that that's a fair way to measure a CEO? or do you think like as you were saying like it's ceos are a bit overrated but i mean he said the standard the standard is the standard for a reason so do you think it's a fair measurement

22:04Stephen:yeah i mean i do i do think it's a great measurement so i see what you're saying like ceos who burn capital should definitely be held accountable and they should understand that not Not only are they, they're just ruining it for everybody. They're ruining it for the company. They're ruining it for employees. They're ruining it for shareholders. It's going to trickle down to customers. It needs to be held to accountability. You know how I like to look at the stock market. I like to look in things as probabilities. And when I build a portfolio of stocks, I want them to have the best odds, basically.

22:42Stephen:I don't know which one's going to pop off, but I just want enough of the winners in my camp. So I know at least a couple of them will carry the portfolio. Because of that, I think for me as an investor trying to decide whether is this guy Warren Buffett or is he the other antidote to Warren Buffett, that's not like a worthwhile experiment to me because I don't think I could I could I don't think I could have spotted Warren Buffett in 1965 and said yeah that's the guy maybe I could have maybe I could have um but I have noticed like there's other CEOs who talk like Buffett does and they they say all the right things and some of them do have good track records but some of them don't and so it's like it is a hard game to play like oh i'm gonna evaluate the ceo i don't like that ceo i'm not gonna invest or i like the ceo i'm gonna invest i think it should be a factor i just it's just one of my pet peeves is i think it's an overrated factor and i think um you take a company like a coca-cola i think the bigger and the more mature a company gets the less of an impact a capital allocator will have um a good capital allocator like the uh the benefit of being a good capital allocator reduces the bigger and the more mature businesses um and so i forgot where i was going with that but that's kind of that's kind of like uh my hot take i guess

24:18Andrew:i mean that's fine because i totally butchered the question but you still understood it so thank you um when it comes so you you were talking like you know it's more important to you to find red flags um and a ceo's personality uh what would some of those red flags like instantly be for you so um you know obviously burning through cash is one um but but it's like having a strong weird outspoken personality is that would that be a red flag to you or would uh you know i mean we we've seen ceos in the past who don't have the cleanest record if you will is that something you pay attention to um do you try to find like do Do they have a specific moral compass or moral fiber type thing?

25:16Andrew:Like, what is it exactly you're looking for?

25:21Stephen:I try to look at everything as factual as I can. And then, like, I don't want a CEO who's just going to brush off the bad or the threats. One of the things that we've learned, Caden Critchison has written a book about this. And if you've been an investor for any amount of time, you already know this, but there's a book called The Innovator's Dilemma. And it talks about how, especially in technology, the up and coming companies are almost designed to take the market share from the companies who've been around for a while. So if I'm listening to a CEO and they're completely brushing off the threat of whatever technology is obviously around the corner.

26:09I think Progressive Corporation CEO is a great

26:13Stephen:example of somebody who did this very well. So I own Progressive Insurance. It's been a great investment for us. It continues to grow like 15 % a year. They're absolutely killing it. When you talk about best in class in the insurance industry, I feel like Progressive Insurance should to be up there every single time. And an analyst asked, Trisha is her nickname, but she's the CEO, asked Trisha about autonomous vehicles and like, how do you think about the threat of autonomous driving and all of that? And I thought her answer was very measured. It was thoughtful. And she didn't make any like crazy confident guarantees, but she also didn't sound like she She was like, they weren't preparing for it.

26:58Stephen:So like, I liked the way she answered it. And that gave me confidence as an investor. She sees the potential threat. She's not overreacting to the potential threat, but she sees it. They're taking measured action. And she's also not brushing it off. Like there are CEOs, you'll hear them just kind of, you know, if she laughed about the threat of autonomous vehicles, I think that would potentially be a red flag in the CEO, but she didn't do that. so that's the kind of thing for me like in the squishy the squishy skill of trying to figure out if a ceo's going to be good for your portfolio or not that's that's one of the things i look for

27:39Andrew:no i think that's um i need to go back and read what her answer is because i'm actually really curious to her answer to the question because that is a very valid uh valid question um you know the and i could totally be wrong and if i am wrong please correct me uh i feel like wall street loves a visionary far more than operational yeah oh yeah 100 percent uh but one of the and while i i would never say that warren buffett was not a visionary I feel like his operational expertise far outweighed his visionary acumen, I guess. So do you agree with the operation side of what a CEO does is undervalued compared to the visionary side?

28:41Stephen:Yeah, I hate to say like something we've been saying for a long time. It depends. But really, like the life cycle of a business is really going to determine, I think, what skill set works and what life of a company. So the younger a company is, the more in growth mode it is. I think the visionary is very, very key. And then as you scale up and you get to a size where, okay, we're not trying to build the next big thing. we're just trying to steward what's already been built, then I actually think a visionary in that case can do a lot more harm than good. And we've seen it. We've seen guys like Steve Jobs.

29:29Stephen:Back in the days of Apple, he got booted from his own company and he don't know what he did. I know he started Pixar and then came back to Apple and actually helped Apple with a turnaround story. And then when they handed the reins to Tim Cook, who's very operational. It was Tim Cook right up there with Warren Buffett. Tim Cook was the operations guy to lead Apple to become such a wonderful investment that it was for Warren Buffett. So I don't know, did Steve Jobs learn some operational things to kind of balance out his visionary tendencies when he revived Apple? That's a hard question to answer, but I do think to try to answer your question, I think the visionary matters more the younger the company is, but the operational matters more when we're talking about big companies.

30:23Stephen:And because of the type of investing we like to do, where it's going to be safe, we know if we need the money, it's there, right? For the most part, we can sell. Then, yeah, I think you have to be very careful with certain CEOs. And honestly, that's what's kept me from companies. Some of the biggest companies that are out there now with like wild growth stories, some of the best stocks that we've seen, you know, NVIDIA, Tesla, even Amazon. I think they're like the visionary needs to at some point turn into something more matured. Because like how much more once you've taken over a market, how much more of that market can you take?

31:07Stephen:And then you just have to start over and do it again. but when you're a certain size like you can't just build an ice cream shop and then think that's going to help your grocery store empire but a visionary kind of has to do that right so I don't know I've been proven wrong so far on like NVIDIA, Tesla, Amazon but I do think at some point the visionary thinking needs to shift to something more operational because I just don't see how it's sustainable to just keep grow, grow, grow at their size

31:39Andrew:no i think that's a very good point and for me and again i am not the brilliant mind that you are but for me it's a lot of the visionary scares me because the it's not been proven yet you know so a good example of that's amazon you know but i don't remember how many years but i It was over a decade where they were in the red. They weren't profitable for a long time. And then all of a sudden, it's one of the biggest companies in the world. Okay, so great story. In 2008, I think, is when Tesla went public. I'm not sure. Yeah, that sounds probably right. Somewhere around there. And I had a giant signing bonus for re-enlisting.

32:36and i was deployed at the time so um it was tax-free as well and i don't i think it was

32:44Andrew:twenty thousand dollars maybe forty i think it was twenty thousand dollars and that's how bad this story ends is because i don't even remember how much it was but imagine if i had been smart and invested in tesla when it ipo'd that that entire stack like bro i i would be like you wouldn't even know who i am because i'd be rubbing shoulders with elon right now on the board of tesla right but it's like that that whole idea is just you you got it like you said you got to be super super careful uh with the visionary because it's it's hard to pick it's almost like maybe not quite as risky as the IPO, but you, you gotta, you gotta be 100 % confident that your research is, is solid.

33:36Stephen:Uh, did you ever hear of Nicola? I think, was it Nicola? There was a electric vehicle that went public. They hadn't sold a vehicle yet, but they went public and the guy had like a great story about, um, how this, this electric vehicle was going to take over and become like the next tesla and uh they ipo'd and then it it was just a disaster yeah i can't remember the name of it wasn't nicola i don't think it was nicola no i don't remember what it was but i know i know what

34:09Andrew:you're talking about definitely yeah and if i remember correctly they were pretty dope looking cars like the concept cars i remember them looking pretty cool yeah it's it's tough because like i

34:22Stephen:I don't want to like dance on the grave of other people's dreams, but it's just the math, the math shows that to your point, like it's very hard to pick out these visionaries ahead of time. The numbers are against you. So like you said, I guess make sure you've done your research or just be okay with, Hey, I'm going to ride or die with this visionary kind of thing.

34:46Andrew:Yeah. And to be perfectly clear, like we're not, like Andrew said, we're not trying to dance on, on, and even say that it's not a good idea it's just you know we're in the business of compounding our wealth growing our wealth and warren buffett's number one and number two two rule or what don't lose money don't forget rule number one exactly and so i mean to us it is these visionaries while you know jobs or um amazon like whatever like it's great what they've done and i love what they've done and i look back i'm like man i wish i would have bought tesla stock but one i was young two i was dumb um i can't tell you where that money went um but monster huh monster cans cans probably well yeah we'll just leave it a monster sure um but no it's you just got to be careful because the last thing we want to happen is for you to have to start over you know if you're my you know i'm middle-aged i'm 40 you know worst thing i can imagine is losing my portfolio and having to start over because i took an unnecessary risk yeah um even though it might pay off but i mean man the the worst words in the world i've ever heard is i got a sure thing

36:22Andrew:are there any any green flags you the like if you see the ceo say or do or is there anything that you're like, oh man, yeah, totally. I'm sold.

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39:03Stephen:I like to see managers with good track records. And in transition, I like to see managers that carry on what's been started. So you don't know this yet because I'm still writing it. But for the March value spotlight issue, I wrote about how the CEO there has taken the previous CEO who was more visionary type. He created a really cool vision for how this company was going to improve their technology. So he's taken that, added to it, and maintained the same values that got them to success and continued that forward. So I like to see that. That's something that came to mind that I saw just in this week.

39:47Stephen:um keeping keeping keeping what was there and then adding their own flavor to it um flavor being a hint that was a a double for those of you who know what stock i'm talking about

40:05Andrew:is there a company that you own where you're like i don't like the ceo but i love the business and the ceo is whatever he's not gonna hurt it yeah um

40:20Stephen:I don't know if I want to say what the stock is like sucks

40:27Stephen:fair enough fair enough but uh I don't know like um so there's two right now that are like I'm watching them maybe I'm going to sell them but I still think there's some juice left to squeeze there and I think the business has just been in a great spot um and has a a track like a runway for continuing to grow so i'm watching those um trying to think if there's others like there's there's companies where i just i don't worry too much about what the ceo does and and as long as you don't see like a huge cash well we just spent 20 billion dollars on this you know as long as i don't see it i honestly don't think about what the ceo is doing or even what their name is because i know enough about the business that everything's kind of going to

41:16Andrew:be smooth sailing i'm more of the crocs uh camp um even though they're ugly and i don't understand for a single second um just how they got as big as they are being as ugly as they are i mean i know they're comfortable don't get me wrong i don't i wear my crocs all the time but it's just they're so ugly dude like how i just it doesn't make sense so you you have a

41:46Stephen:pair and you love them and you don't understand why other people would have a pair exactly like

41:50Andrew:it just it blows my mind it really does it doesn't make sense but they're just so ugly and i think that's a great vision like a not visionary i guess lesson but um adaptation i guess uh evolving you know because i mean crocs can only go so far like you can only make an ugly comfortable shoe so many ways and um rather than trying to reinvent what they're doing they just like you know what our ugly shoes have these ugly holes let's make these ugly things to fit in those ugly holes and we've created an entire new market and man i i think my crocs are the only one that i've seen recently that don't have those on them it yeah i don't have anything on mine and i know you do you you're an adopter what are they called the jivets huh

42:58Stephen:gibbets gibbets such as again like it's so dumb but you know how much they sell for too like if you go to a croc store to buy one no it's like five bucks each something like that what yeah for a little thing and then a lot of people like to get like two three four of them i think they sell them like four for 20 or five for 20 or something yeah you spend a lot just on those

43:24Andrew:to deck out your shoes yeah but i mean it's it's just it's a great just example of what a visionary company can can do because it's like they realize like okay we've pretty much hit the ceiling of what our brand is like how can we make it even better and what about airpods what about airpods

43:52Stephen:some other thing right like they they didn't know apple pretty much tapped out smartphones so they're like okay how can we continue to make money from an iphone they come up with airpods which work perfectly on iphone and become like your perfect accessory um people don't think of apple as like being innovative but they've they've added airpods they've added apple tv they've added um iCloud all of these things and it's like being visionary kind of like you're saying but without

44:29Andrew:reinventing the wheel awesome so i think that's going to uh wrap us up uh do you have any final thoughts you want to throw out there Andrew well i'm curious uh did i sway you in one bit on

44:43Stephen:the ceo being an overrated concept or am i just off my rocker at this point i'm misunderstood

44:50Andrew:it and when you said it initially i misunderstood what you were saying um because like i said my mind instantly went to they're the leader like they have to you know steer the ship but right when you broke it down especially when you're like the visionary versus you know the the systems or not the operational i think it's a it just shows that much more how awesome warren buffett was as a ceo that he was able to switch from visionary to operation back to visionary when he needed to back to opera like he he just seemed like to me just kind of fluidly switched between what he needed to when he when he needed to and to make the most profit um so i apologize for misunderstanding you i guess um but no i i think i agree with what you're saying um i just it's not what popped in my head when you initially said it does that make sense yeah yeah it makes a lot of

45:58Stephen:sense so what do you what do you think the takeaway is for a beginner who's looking at stocks ceos things like that what's what's something tangible i can take away today

46:09Andrew:i think for me andrew is just don't buy into the hype um we have there are a lot of ceos out there um i won't name names um electric cars that's all i'll say they're just very loud very in front of the camera very controversial um and i definitely know people that will just buy a stock just because they like that person and from this conversation i've definitely learned like that that's not a not a solid strategy um to be spending your money especially if it's your retirement or your your kids college funds or things like that like you don't want to bet the house on a personality you need to bet the house on things you can actually measure so i think for the beginner it's just you have like sure look at the ceo that's fine but at the end of the day you really have to look at um what what what can we take away from that ceo to learn more about the business rather than just the personality of the ceo does that make sense oh yeah yeah 100 yeah be careful out there don't be don't rely on cnbc and with that uh dropping of the dime uh we're gonna go ahead and wrap it up um again thank you so much for listening to uh this episode of investing for beginners i am steven morris he is andrew sather and we will look forward to seeing you next time in the meantime never ever ever forget invest with a margin of safety emphasis on the safety we'll see you all next time bye

48:01Stephen:you've been listening to the investing for beginners podcast all show notes can be found on our website at e investing for beginners.com to master the basics of stocks in seven days Sign up for our free email series at einvestingforbeginners.com slash newsletter. Until next time, have a wonderful day. The information contained is for general information and educational purposes only. It is not intended as a substitute for legal, commercial, and or financial advice from a licensed professional. The hosts may own positions in the securities discussed. Review our full disclaimer at einvestingforbeginners.com.

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