Adam Parker on Strategies and Valuations

US Equities at Morgan Stanley. Really a master class and how to think about creating frameworks for investing, for thinking about how to apply quantitative research along with macro and fundamental data UH in order to create a differentiated research product. Just absolutely a master class in thinking about stocks, and thinking about sectors, and thinking about where is the crowd wrong and how to come up with a UM very outlier perspective, many of which have been giant moneymakers and

really UH fascinating market calls. I found this conversation to be brilliant and insightful, and I think you will also with no further ado my conversation with Trivariant Researches Adam Parker. This is mesters in Business with Very Results on Bloomberg Radio. My special guest this week is Adam Parker. He is the founder of Trivariant Research. Previously, he was Global director of Research and US equity strategist at Sanford ci Bernstein.

He was the number one institutional investor ranked analyst in semiconductors before he became Morgan Stanley's chief US equity strategist and director of Global quant Research. Adam Parker, Welcome to Bloomberg. Thanks thanks for having me here. I've been looking forward to having this conversation for a while, and I have to start with your very interesting academic background. You have three agrees and stats, uh not just undergraduate at Michigan,

but a PhD from Boston University. And in the middle, you've got a master's in biostatistics at UNC Chapel Hill. Tell us about that. Yeah, well, back then statistics wasn't as cool as it is now. Very so I didn't know thirty years ago I was going to turn into the all the rage and that everyone was kind of one a major in you know, data science and analytics.

It just I was always more of a math guy, and I liked having problem sets and then going and playing sports, and I didn't want to have to read Chaucer or whatever all the other miserable people were doing. So kind of motivated me to be a little bit more analytical. So so, but the question that raises biostatistics is were you always planning on a career in finance or was that you know, that was more of UM.

The biostatistics department was in the School Public Health at UNC, and it's really you know, applied statistics applied that at that age too, uh, mostly medical data, but it was more about learning analytics and you know, programming and UM and you can apply it to anything, complied to anything. So like my my PhD thesis was about missing data UM in a healthcare setting, but as you know, missing data exists everywhere, including a finance so it turned out

to be pretty applicable. So how frustrating is it to you to to see either newspaper headlines or social media where people just lack of rudimentary understanding of basic statistics and probability, you know. I think the big challenges is, as you know, because you're good at this, is taking things that are somewhat complicated and then making them sound

like they're simple and explaining them to everybody. I think the average UM intellect of people watching and reading mainstream media is still in the junior high or high school level. So that's what you've got to resonate with. And I romanticize the investment community is slightly above that, but it probably is less above that than you think, right, So so I love We'll talk about try variate a little later.

I love the name. I wrote a Bloomber column years ago. Um, single variable analysis is for soccers or something like that, And so I have to talk to you about But but let's with all that stat background, how did you get to Sanford CT Bernstein? You know in those days? Um, you know, I finished my PhD um in the late nineties. I you know, I had some buddies that seemed to be getting rich on Wall Street and then I didn't

really know what they were doing. And one of my best friends worked at Sanford Bernstein and and uh, they were looking for somebody to write, um, you know, software and do analysis called quant research on equities. And I interviewed there and I loved it. This bunch of crazy, you know, wild people who were brilliant and um, kind of a little bit a little bit on the edge of being unhinged as human beings. And it was just

kind of my jam, you know. And so, um, you're so buttons up, you don't sound like a crazy but it was. It was effort and enthusiasm or just like getting the PhD berry, it's basically perseverance one percent intelligence. And this was like you get in there and there was just no rules, like find something interesting and write about it. And so for me, you know, there's this database of information on hundreds of stocks and you could

go in there and analyze as it reached conclusions. Oh way, you know along the top market kept name and sure these against it or do this or you know, it just kind of empirically test everything. And there was a bunch of incredibly brilliant people there. So I loved it. Um, I loved the environment, and I didn't I didn't even know what I was getting into, to be honest with you.

And then from quant work at Bernstein were you were you an analyst and Semmi's there all yeah, so I switched to being sem Look at that time, being late nineties into the you know TMT bubble, what seemed cool to young young Adam Parker was being an analyst. Oh man, these tech analysts, they seem that seems like a great job. And Bernstein in those days, you know, you were really an expert you wrote, you know, a hundred hundred un

page black book. It was called on an Industry, and you you could tear apart the p and ls of the companies and you really understood, Um, you know, we spend all our time on six to ten stocks, so you really knew those companies, that management teams, the things that impacted the volatility of the pan l you you kind of became an expert. And so I really want to do that. And I just got lucky that it was semiconductors. Um. I basically just kept going in saying I want to do this, I want to do this.

And the first sector they offered me very was European electric utilities. So much fun. Yeah, and I I really struggled with how I'm going to communicate to them. I'm really on board with the fact that you you you're allowing me to be an analyst, but I can't move to London. Yeah, that's it. I can't move to London. I just I just got engaged or whatever. So I I enabled to sort of convince them, yes, thank you, I'm an analysts, but no, I'll wait for the first

US one. And it could have been anything. It could have been food it could have been I didn't really care. And when Semi get you have you didn't have a tech background. I have been engineering because a lot of the analysts covering Semi's they're they're electric consigners, executor software design. I used to, you know, and and Burnstein's hiring model back then was basically get a mckensey guy who was an expert on an industry or somebody who worked at

one of those companies. I was one of the rare counter examples of you know, um from within. Yeah, I think the PhD and statistics probably helped me. I used to just say, look, I'm probably better accounting the chips and knowing what they are, you know. And and it turned out that in those days would really matter to getting the stocks right was sort of a non consensus in correct view of the gross margins six months forward, and so that didn't really require the expertise on circuit

design and the like. In fact, you know this, but sometimes those the people who work at the companies turned out to be not very good at calling the stock price of the owned company they worked at, because you have all kinds of biases from the people you like, and you don't like and that kind of stuff. So, um, it worked to my advantage, but I think probably wouldn't have happened if I didn't labor through that PhD. So how do you get from Bernstein to Morgan Stanley? Yeah?

So after I did SEMIS for a few years, and

you know, that's a very competitive, you know business. You get up every day and there's a there's a there's a person at admiral and a person that you know, uh, every there your competitors you want to like just you want to make them look stupid on the conference calls, and you want to ask the smartest question and you want to be number one ranked, right, So you do that, and you know very you know, once you get number one a few times, all you think about is like,

am I gonna lose it? There's no joy in repeating as number one, There's only the fear of losing it, right, because then you're like, wait a minute, Like investors don't like me as much as I used to. So you know, I felt like I wasn't really incrementally you know, doing that again wasn't going to drive me anymore. And um, you know I was offered, um, you know, this position to run research at Burnstein, and so I transitioned to be the director of research for a while, which was

attracting and retaining, hiring, firing, that kind of stuff. Management position, not research got me away from that. But the beautiful for a year. But the beautiful part was I then was helping other analysts RAMP and so I got to learn, Okay, I'm gonna lauch the household products guy, I'm gonna launch the capital equipment guy industrial and so in that year I was helping kind of four or five analysts RAMP.

I started realizing like this kind of interesting, I'm kind of I can apply what I know with Sammy's and helped them. And so early in oh eight, at the very beginning of a wait, the strategy and quant research job opened up at Burnstein and that's how I transitioned to being a little bit more quote unquote macro. So I did that for a couple of years, and then I transitioned to Morgan Stanley to be the strategist there. And for people who may not remember this, in the nineties,

Bernstein's uh bevy of analysts were top top. So in oh seven, when I was a director of research at Burnstein. These the data UM Burnstein at twenty three u s and also that were publishing eighteen were ranked in the top three and eleven were number one. That's unbelievable. So it was really a number one machine UM in terms

of the analysts UM that worked there. And you know, I I, you know, was my job was get the five that weren't in the top three in the top three and hire a few more that will eventually be you know, number one in the future, you know. And and then that was in the US, and we also were building a European business too, So so obvious obvious after the fact question. Bernstein was substantial in size, But they weren't you know, Gulman, Saxmom Stanley, Merrill, Lynch. What

was the secret of success? Why were they punching so far outside of that weight class? I think they're you know, um, it was the it was multiple things. But I'd say, you know, you don't have a prime brokerage business, you don't have a banking business. So there was this perception of independence. You hire people who were you know, generally

were you know, experts in the industry. I was an exception, but there were generally people who were running the Mackenzie practice consulting the aerospace companies, and they would be hired to cover Boeing or those kind of things. So kind of the industry now, and I think the Bye side, you know, relied on that is sort of a you know, an external voice. When you interview the Bye side, they tend to not care if the Cell side are good

stock pickers or not. They might blame them if they're bad, but they're never gonna say I rely on the Cell side for their stock selection skills. That's what they're supposed

to be doing. So I think what helped Bernstein gain prominence was the fact that all right, we don't even try to do that at an expert level, just try to help people be smarter about the investment countries and controversies and write detailed, um, you know, sensible issues on those investment convers So that that was that was a business model, and it really worked back through and at least, you know, until maybe ten years ago. So so let you raise such a fascinating question I want to ask

you about. And we're recording this UM late April, after Netflix, which had fallen fifty from its October peak UM at their earnings call, they announced a decrease in subscribers. The stock falls another overnight the next day. There are all these down grades from the major cell side shops, cut cut to neutral, cut to hold, cut to and it raises the question, and I'm sure lay people asked this question to themselves all the time. Hey, the stock is now down from where you told me to buy it.

What's the point of this down grade? Thanks for nothing? Yeah, I mean the south side um defend the entire analysts go okay, yeah, you know. I when I got to Morgan Stanley in I'll answer this one. I got in the late fall of I wondered if the research department there generated any alpha with the recommendations, and so I analyzed they had stored data from three to ten. There's about thirty five stock recommendations that were kind of stored, so you let the statistician loose on the data. And

about half were overweight rated half were equal underweight. So I thought, all right, did the overweights beat the equal underweights? Your exact question, I considered, So I didn't stock down after mark it, and then they downgradeed. You do not give them credit for that being a credit You lack it by twenty four hours. You bade an adjusted meaning

you know, adjustable how much thing to be moved. And it turned out, at least for the observations over seven years, that they had about four percent average um alpha between

the overweights and equal underweights. So I published that as a bar four So in other words, the stocks they liked did four percent they didn't like, And then how did it do versus so that basic indexing, Yeah, well that was kind of a new market neutral, right, So like you overweight longs and your short equal on the weights, and then and then I had a quant model that you know, the long top pointel beat the bottom by nine percent, so I sort of said, look, I think

quantitative stuff probably you know, is a little bit better than fundamental stock. But then the when the last bar was thirteen percent, which was if you only bought the overweight rated stocks at the model light and you only sort of shorted the equal underweights and the model didn't like, you get thirteens. The whole point of this was a combination of something quantitative and maybe unemotional, combined with the

fundamentals would be superior to either discipline alone. And actually i've spent most of my life since then, you know, the last twelve years in that sort of combination sphere. So I think I'm trying to defend it by saying, look, I think there's some value in it, for sure, but there's not value in changing the recommendation after it's happened. My own personal opinion on Netflix, And I'm not a fundamental analyst there, but I did write about it bury

it's interesting. Um, I've had two learning lessons of that. This one applied to one. When things change, you have to admit it, and this one I think has both macro and micro changes. I think the macro would be, you know, everyone bought too many streaming services during COVID, and maybe it doesn't need they're out of their house again, right, and so it's reopening and and And the micro is they've got to think about pricing and maybe charging people

to or not charging the inverse for advertisements. So that's kind of a business model change. And the other thing so maybe you have to say to yourself, well, it's not exactly the same fundamentally. Maybe you know, sometimes I guess i'd answer your question by saying, sometimes the stocks down twenty five but the fundamentals are worse than right that maybe not in this case, but I'm saying in aggregate.

And the second learning lesson I've had from analyzing a lot of behavior on the short selling it and running my own fund is you make more money shorting stocks down from highs than you do add highs. So it's very tough to short stock add a high because you're

fighting positive price momentum. Right, So when the stocks down and then you short it, I guarantee you make more money shorting stocks down twenty from highs than you do at high So it's not necessarily true that Netflix isn't a short here um, But I'm not a fundamental an else, and in that in that case, I'm not convinced that it isn't worse. It's still trades in a hundred times forward free cash flow. It's got a high correlation to low quality and work from home. It's got a high

correlation to negative correlation to inflation. So I don't have growth. You know stocks like that are gonna work, so you know I don't. I don't know the fundamentals. And one of one of my favorite things about having you who is an independent research shop instead of a cell side analyst. I'm not getting a phone call tomorrow from the PR person begging me to take everything Adam said out about Netflix. Can't he can't talk about you can talk. You'd go anywhere.

You could talk about anything that's right without friction. So that leads to another question. How freeing is that that you can actually say what's on your mind and you're not thinking about what Obviously legal is important, but sometimes compliance gets a little over enthusiastic, and PR even more stuff. I would say, you know, I should look this up.

So this this is an exaggeration, but I would say I would say maybe ten years ago when I worked at Morgan Stanley, Um, I think there was fifty thousand employees and ten thousand legal and compliance in ten thousand and I t so that those are some but that's something like that. So look, these are amazing firms, and morganize an incredible firm with great people and a lot of whom are closest. But what I'd say is that there's positive and negative. The big firms have bigness disease,

and the taxes on your time become substantial. Right, you know, you need a bunch of videos to money laundering and a bunch of you know, every firm has this, you know that you know, compliance stuff. You've got a bunch of three sixty feedback M D and E D promotion, the E S G diversity and include the number of things you have to do just time taxes, time taxes. It's a huge tax. And so for me, you know,

it's very freeing. We're not a broken deal or our whole job is to write you know, interesting research that makes people think. We sell data. We you know, create baskets. We do a lot of outsource sort of chief chief risk officer or work where people we signed onto sculture agreements. People send us their portfolios and we we kind of analyze them and try to give them some interesting thoughts about it that aren't in you know, axioma or you know,

things they can get from other other vendors. So, um, it's really freeing. It's it's really freeing. But you know, you know you don't have the resources. Um, you don't get the first class to uh, you know, you know Beijing either, So there's some positive negatives. Wit you're flying commercial, Come on, I always always fly commercial, man, So let's talk semis they've been driving everything from the shortage of

automobiles to inflation. Give us the broad overview from your perspective. Yeah, well, you know, one of the things that is tricky when your investor barri is you know what what a cyclical and what's structural, and you know you can confuse yourself when something sicklal when you think it isn't, and when the periodicity changes, and those kind of things. So uh love, I love all this math talking amplitude. Pity, I'm so excited.

I'm back back in college. You know. I think what you said is right though, that there are kind of an important barometer um for a lot of broader issues. The two things that I'm tracking right now really carefully are a concept called book to bill, which is sort of how much revenue did you ship out versus what is your order flow look like? And is the order

high order flow higher than you shipped out? Book to bill ratio generally that's still above one for most semi conductor companies, meaning future demand looks a little bit better than trailing demand. But that book to bill ratio has come down from maybe one point one five to one point eight to one point oh six so down due to the supply as we finally get you know, supply

catching up, you know, post covid um. So you I think when that if you think about it, it's a weird way to think about it, but there's probably one second where production equals consumption and then you're either about to start overproducing consumption or you know you're about to start underproducing. So I think will get to equilibrium in the second half of this year in really most parts of the semi conductors. Wow, that's that would be a

huge huge windfall fort by cars. Yeah, I think that's right. And I think the second thing that's important related to this is backlog. So you know, one of the things that I think Bernstein was good about and is making you think like you're the CEO as an analyst, so think like your CEO, you know, stepping you know, kind of stepping to the thought process that you're running the company.

So if you're the CEO of any industrial company, auto home appliance, any real business, you've had trouble selling product in the last eighteen months because you couldn't get the supplies you need. So you go to your procurement officer and you say, yo, how about stop bottlenecking my final revenue. So what does that person do. It calls a semi

conductor supply chain. It says, I want two million eighteen months from now, I want two million twelve months from now, and by the way, I want to hundred million twenty four months from now. And you start piling on the backlog so that they know, hey, I'm gonna be there, gonna be there for a while, ramp it up, right, And so that has some interesting contagion in the economy, right because these guys start planning their back law back um, you know, their capacity as if that backlog is going

to be there. One of the very weird parts about the semi connector industry that I don't think everyone understands is there's zero penalty for backlog cancelation. So you and yeah, you and I can if we want to go to Noboot for sushi, we we're gonna pay twenty five bucks if we cancel our reservation. But somehow I can order

two million of silicon and have zero penalty. It's very strange, right, So if you get any whiff that backlog's got air in it, meaning you know, when we get production going consumption. Probably you're gonna call some of them like, you know what, I probably only good for a hundred million eighteen months from now. I don't need to twound a million. But there's zero zero, zero penalty, right, and so I think, um, that's a key. That's why I think backlog book to

bill are really important to watch. And if you get any whiff that some of the backlog is is not real, I think that causes fear. Now we've seen semis come in a lot here because I think people know they're over earning and they can see, you know where we are six months from now, um, and so now I think you're at the point where you're gonna pick winner some losers. In a little bit more, as you can imagine, some of semi conductor business does not have perishable pricing.

So the cancelation, yeah, they have inventorium, but they don't have to cut the prices. So the Texas instruments and all the devices of the world, their products really are imperishable.

Whereas you know some of the microprocesses that Intel an m D make, or graphic processes that that n Video an m D make, or you know obviously Micron with memory like that stuff super perishable, right, so they make excess the pricing comes out a lot, so you'll start getting a little you know, discriminating between winners and losers,

a little bit more in that sector. But I think the broad tenter of your question, barriers backlog and book to bill are are are probably you know, in the top ten interesting more macro barometers for people to focus on. So from a macro perspective, one of the most interesting questions that comes up over and over again is why does it seem to take so long to reopen a

semiconductor fab after a prolonged shutdown? You know, it's a number of issues, but you um may have excess capacity and a factory, but you may take you several weeks to start building it and ramping it up. UM. You know, you may have tools that are idled, you may have tools that are not assembled yet, right, so you're you can't really turn on a dime your production as rapidly

as people think. UM it is is a lot more automated now than it used to be, though in terms of UM you know how it works inside a way for fabrication people in bunny suits. I've exactly so you know, you're you're, you're, you and I are the same vintage. So you know, I've been in the bunny suit in old factories and you know, if you think about they used to talk a lot about yield, and some of the yield was just like people's hair getting in the

stuff or you know, dropping dropping these things on the floor. Um, and so that through multiple exactly now it's all you know, synopsis and cadence and software and the stuff goes on the ceiling on tracks and comes down to the right machine. And I don't know if people can mentally imagine a fab but away from fabrication facility, but they're like the size of a football field and there's ten million dollar machines as far as you can see in every direction.

So it's multiple, multiple billions of dollars, I think. I think when I went to it's been many years now since I covered Semmis, but when I went to one of their state of the art fabs and intel in Oregon many years ago, they had a sign up front saying they had more steel than two Eiffel towers and enough cement to go to Portland, from Portland to Seattle. Like they're big facility, So I think it's just not as easy to like quickly ramp up a bunch of

the capacity as people think. So so that raises a question that UM a lot of people have been asking, which is, how seriously can we reassure manufacturing facilities in the US. Is that a real thing or is that something that the politicians wave their hands about it. But it's so much money and it's so much cheaper overseas, it's not going to happen. I think there's a lot of things that could change. That deglobalization team I think

is real. If I think about what's kind of changed pre COVID to now, probably the deglobalization team you're talking about it is one of the bigger actual changes. You don't need a package and test every chip in Taiwan, and there's some cheap areas here in the US, and I think that's struct really changed. I know Intel's announced some massive was an hundred billion CAPEX play over multiple years to build some stuff in Arizona and other places.

So I think we're gonna onshore more than manufacturing UM, and I think that part's real. Does the national security issue security as well China make are the chips for our F twenty two fighters is potentially and I think there's a yeah, I think there's also Um, there's been diminishing benefits to outsourcing it on the cost front as well. Now maybe that doesn't mean, I don't I don't know if that means Intel is gonna be a good stock.

Right just because they're you know, um, you're gonna spend all that Capex doesn't mean it'll be So let's let's talk about Intel. They've been criticized for lack of innovation, for not keeping up with the in videos of the world or even with Apple and there M one chips. I, by the way, footnote, I got a new iMac in December and the old machine is two years old. The new one is like six times faster. It's insane. The difference between the M one chip and the solid state

you know, no spending drives nothing. Um. So what happened to Intel? How they seem to fall so far behind? Yeah, that's a good question. I mean we looked at I did a research note recently on UM capital spending in R and D. It's in sort of R and D intensity and capital spending intensity meaning relative to sales changes

in that what it means for subsequent returns. And our work shows that Intel has been one of the biggest destroyers or shareholder value of any company in the last twenty years because they spend you know, tens and tens of billions on this stuff and that hasn't really made their stock go up. So if you think about it, has it helped their sales and revenues? Yes, but we

don't really care. Like we're stock guys like I don't like, you know, I want to buy a stock that goes up, I don't really care if the revenue goes up in the stock doesn't. So the stock has gotten cheaper, um, and they've lost shared in major areas. So I I think that, um, you know that that it may be you know's a fruit list, but it may not be a you know, high return on the investment. But maybe it's just good for America. And there seems to be

bipartisan support for that as well. So let's talk about a stock whose price has gone up. Probably the hottest semi for years now is in video. It tell us why their graphics engine is just kicking everybody. But they did a lot of stuff, right, I mean, I'm look, I dropped coverage semiconductors, you know, a dozen, you know, more than fifteen years ago, actually General General seven. So now you're up to data sign yeah, you know, and it's I'm gonna get the like the danger zone of thinking,

I know stuff that's no longer relevant. Dunning Krueger presents. Yeah, so I can tell you about you know, high school in n also, but you know, I think that some of us who have been around the block, you know, probably missed at least the first half of the video because we didn't trust the management team, you know. And uh and I think, you know, a combination of lucky and brilliant you know, not not all brilliant, but graphics and crypto, and they got into a bunch of other

things that really writes it's been a monster. Now it's been reset a lot because the valuation was high, you know, And so I think people realize that these businesses back to my original comments, yeah, the slope has been upward, but they're also over earning at the same time, and so that's why the stocks have come in so much. I think it's probably still a little bit too early, but I think as we get closer to production line and consumption and the stocks correct. You know, maybe it's

time to get in again. And in the world needs semmis. You can't reit produce anything without them. So I'm not I'm kind of kind of a long term bull, but kind of short to medium term. Just feel like this correction needs to, you know, happen. So let's start talking about you sitting on the investment committee at Morgan Stanley, which is about two trillion dollars in client assets. I don't know if it was that when you were there.

I think when I was there it was two. Who knows what this each trade thing, it might be three. I have no idea what that's a lot of would tell us what it's like to be responsible for that much money. Um, look, there was a seven person committee. Everyone on there was hey one seven. There's still a lot of money. Yeah, yeah, I don't know how much

of that, you know, I felt responsible for. I was the you, I was the equity guy that were bond experts, that were for you know, international experts and you know, alternatives experts. But know, fortunately I was there during a period where you know, it's right up. Yeah, I just said and said look, you know, you guys can own whatever you think makes sense. But I'll take twenty of US growth stocks and I'll meet you in five years,

And basically that works. So um, I don't I can look back and say I generally gave good investment advice because I just felt like we were in by the dip mode. You know, it was pretty clear that US equities looked better than the other asset classes. Look, I generally think that stillbury, which is that you know, I'm getting to to an percent net buy back puss dividend. I get, you know, some organic ornings growth of a few percent. So I think the US equity market looks

like a six percent total return AUTORITHM. That look yeah normal, And that looks a lot better than most of these other things. And I never really understood the case for owning. I mean, I got a little bit in trouble back in the day went Morgan Salley when I would say stuff like Europe is great for vacation, but not for stocks, uh, you know, which has by the way, turned out to be exactly acade. Yeah, and we had two year period where it hasn't be good for vacation, But I think

it will be again this summer. But I think generally that's been right, So I don't you know, um, I felt like it's important to um hit on the importance of your equities, but I don't really know, you know, today, I think the problem would be different and more complex. I think, you know, recently you've seen the news fidelities say they're gonna offer crypto for retirement plans, and there's other you know, there's other kind of diversifying things happening,

and I think alternatives. People have a different view now than they did five six years ago, meaning you know, maybe people now realize that some of private equity was a levered uh rates call, and you know, so the private markets have been a little bit more richie value before they become public. You know, it's been some evolution in the last five six years since I've been doing that. But um you know, generally, I think I felt responsible for making clear that US equities had a pretty important

and big place in the portfolio. And I think, is you know better than me, much better than me, how rich you are to start out with really impacts the proper allocation. Of course, the question is that you're trying to create wealth and preserve wealth, and that makes it different huge. So I want to get a sense of what it's like to be on a committee positible not for two or three billion dollars, but for seven trillion dollars. Is it all thirty thousand foot macro view or does

it get more granular? Did you dig into sectors stocks? How? How how specific does that committee get? I think for me, I've always been more about the industries of sectors, the microstructure of the market. And it was hard for me because I had to get had to get higher level because, as you're pointing out correctly, UM, people are just trying to get the mix of equities and bonds correct, their

mix of you know, us versus non us correct. UM. I don't remember how much of that money is qualified for alternatives, but you know that stuff obviously has a bit of a different flavor to it, so it was pretty high level stuff. UM. I'm not an economist, so UM, I didn't really UM get into you know that, UM, there are definitely some other fixing in come people who

focused on that. So I think generally, you know, at least in the last decade, most people thought race were going to back up and they've been wrong until the last six or nine months, so you know they get there. There was sort of pretty easy to like equities over ponds. Yeah, it's very least. So let's talk a little bit about trivariate. Yeah, starting with I love the name, tell us what it means and now you can't. Yeah, it's totally a self

serving name. Um. So look, I was a number one ranked then also have a PHC and statistics, and then I did strategy. So I feel like the three buckets of investing, the three variables investing UM, you know, quant fundamental, and macro. So when I started a hedge fund, UM, I called a Triviria Capital, just thinking that, you know, I'll go tell allocators that I'm kind of considering quantitative things and macro things and fundamental things as part of

my investment discipline. And we ran money a Trivita Capital for a while. It closed down and converted into a research firm UM in the middle of two thousand one, and just kept the name. I had a fancy logo that looks amazing, so I didn't want to repay for a new logo. But uh, yeah, I know, it's just I think we're we're approaching equities from the lens of you know, systematic or quantitative um, some fundamental work and then and then macro. Macro is more about where are

we and what to do about it? Meaning where we where do we think we can pick stocks better or worse? Where should we be able to generate more alpha? Which parts of the market, you know, should we be able to do that right now? Based on the conditions that exist.

So it's we're not doing macro from the standpoint of forecasting rates or dour oil, but more recognizing where we are and saying, okay, in this regime, we ought to be able to pick winners from loses very well within the industrial sector, but maybe not so well in general bowls or things like that. So it's we're looking at those three lenses to try to help, you know, people who care about equities make money. So so let's talk

about the concept of outsourced chief risk officer. Tell us a little bit about what you do in helping firms manage their risk profiles. So when I left Morgan Stanley, I left the cell side. I went to work at a large hedge fund, and part of my role there was to be much more analytically rigorous around risk management UM and then also diagnosed trades to look for patterns

of behavior and the like. So I brought that sort of risk framework into running my own hedge fund and we have UM use that infrastructure now in the research

role to help firm. So I think we signed down a little twentysothing nondisclosure agreements where firms they send us their portfolio, we put it through our framework, and I think they view me as sort of like an outsourced cheap risk officer where we'll talk to them through things that are not things they can get from the standard risk vendors, So things like UM, you know, idisyncratic risk,

and maybe they differ for your lungs versus your shorts. UM. You know, so you your bottom stock picker, but your your lungs are pretty macro and your shorts are pretty company specific or you know, as you know, as you know, very like if risk didn't change, anyone could do risk management.

So most people know their growth value that are large small, they're you know, So we have, like you know, in the last two or three years, think about what's what's changed, and we created a work from home basket and reopening basket, and we look at every stocks correlation to low quality work from home like Netflix or a high quality reopening or whatever, and we kind of see, are you off sides on your long short book on on those things, or even on the long versus the index, or if

you're yeah, stuff like that, yeah yeah, or you can see if they're off sides because they may not really lies. They have UM that bet on as much as they do UM, meaning they're unaware of the correlations. Yeah, maybe unaware the correlations, may be unaware that they've got where the real risks are. So what happens when you run a fund is, let's say you decide, all right, I'm a little bit nervous about my tech exposure a few

months ago. Uh yeah, they're expensive and more worried racer can rise, so I'm gonna sell it, so I think it practice. What happens is the c I O goes to some of the analysts for PMS and said, Yo, give me your at least two or three favorite tech names. I'm gonna I'm gonna trim those out right, and you trim them out, you sell five pips to tech and okay, great, I'm proactive. I got the call right, but it may not be that those names you trimmed with the risky ones, right.

So it's so we think about more from the risk standpoint as much as the exposure um. And there's a lot of so, you know, a lot of that goes in there. So when we do our work, it's a lot of you know, every single name's exposure to UH size, substance, style, dollar rates, spreads, oil momentum, beta, a lot more than just beta. This ownership. You know, we look at filing data from sixty hedge funds that we track to do deep fundamental researcher. We say, does anybody here have high

conviction in the name? Do they own three percent or more of their assets in the name. How does it differrom the broader population of funds? Is there a good and bad crowd? And going on? I mean it's a very you know, kind of differentiated system to try to really help people understand, you know, what the true risk of their portfolio. We we take the portfolio and we say, how did this act in the last ten downturns of

ten percent or more? Where's a different today versus you know that, so maybe you have names that you think are defensive. You own Oracle and your own Walmart. You think you're defensive, but they get much more correlated in the downturns, and they look like in a steady state or all those kind of things that try to help people think through the risk of their portfolio. So you know, I think we're good at that. We do a lot

of like hedge baskets. So you've got a big, long position, you want to take out some of the you know, kind of macro risk of it, so we can create

a basket to help you hedge it. So we do a lot of that kind of risk work to help funds think through um and And I think for us it's great because I think people say, all right, well, I can you know, I can hire hire trivarian and um they can you know, help me once a quarter think through the stuff or a big inflections and I don't need uh um, you know, build a team here

to do do that same thing. Really interesting. So it's I was gonna ask, you know, I know, back in the days when you were Morgan Stanley, you were traveling more than half the year and I I was away for two days and I'm completely disoriented and it takes a while to get my feet onto me. Again. I'm curious, if you find now that you're not doing that sort of travel, do you have the time to step back and think deep thoughts and really organize how you're looking

at the world, not from airports and hotels. How does that affect how you think? So? Yeah, Probably the smartest person that ever worked with was a guy named Marty Leebowitz, who Marty's an amazing human being is early to mid eighties, is the most published person in the history of financial journals. Um you know, worked I think with Mr Bloomberg and at Solomon back in the day, and so just a very connected and brilliant guy. And I think his wife

is a brain scientist. And we went to dinner together with our wives, and I told his wife at dinner that I spend five to ten minutes a day thinking. This is when I worked at Morgan Stanley. And she almost started crying about depressed of a level of thinking

I was able to do. And so all the thinking I had to do was five thirty in the morning to seven in the morning and then seven at night on and on the weekends, which was fine, but it wasn't you know, it's system and it's an amazing firm, but traveling everywhere and and you know, getting fat, and you know, just you know all that stuff. So, um, I think it's freeing from the standpoint of you know, A lot of that was just you know, you're flying to conferences all around the world and and um, it's

a lot of airpoint time. I'm traveling some now, but it's definitely more like one week a month, you know, five six, um, you know, days of year to see you know, clients and potential clients. And I find that great because you want the human connection. Obviously, I'm glad the world's reopening such that people are doing in person meetings. Um, so you want to you want to do meetings to talk to investors. What you don't want to do is you know, fly to Jakarta for one one hour speech

on US equities if I turn on my back or whatever. Yeah. So I think I think the answer to your question is, um, you know, I'm thinking more, I'm talking to investors more often, and I'm doing less you know, kind of push meeting presentation of my you know, my material. So a lot of those conferences Barry were sector conferences. We got a

Team T conference in San Francisco. The first thing of the conference will be I talk about US equities, my view of tech, and the Ansel picture ideas, and then I move on right, so there's no push like that. Now all right about tech because there's a big sell off and I want to evaluate what signals and stocks work after the sell off. For you know, it's it's

margin expansion and cash flow. Or I'll look at fang am as a as a risk factor and say, you know, should you really deviate from that or where should you? So we'll do it where it's timely and relevant, not just because there's a conference every March in Timbuctoo. But it's fascinating that your job essentially is to think at both places. But you could be the smartest guy in

the world if you're constantly running. You don't have Yeah at a moment, yeah, you know, but they look in fairness, I had like nine people in New York and five people in India and my team when I was in Morgan Stanley, and we we do not you know, we're not doing that now. It's not it's not for lack of brain power. It's you as my own personal time.

There's my own personal segmentation. But the team had a lot of smart people working hard, Moore examly and you know, we've got we've got you know, you know, five total people at Triburiant. So we're keeping it tight and um and and and that's because the gating factor is my time and I want to be you know, um involved in what we're writing and doing. So, Yeah, so let's talk a little bit about what's going on in the

market today. Everything more or less seem to have peaked back in October of one, and people are freaking out about how this market is a bear and how terrible it is. What do we eight nine from from the peak that that's barely a draught down? What's going on in US equities today? Yeah, I think that the sentiment feels worse because a lot of people over index toward growth in the previous few years, and a lot of the growth stocks are down forty six if you're in

biotech or software. So I think the headline number is probably less painful than some of the underlying carnage. And I think that explains that disconnect between your high level point and sentiment. Generally, I think I would describe the last six months as huge change in the perception about interest rates into a growth scare, and then we got a war. So that's probably the the the cocktail that

that sort of caused the reset. UM. My own personal opinion, UM is that the perception about rates has gotten too hawkish and that they're unlikely to raise rates um as much as as is now in the price UM. But you know, I don't. I don't know that for sure. But I only say that because as we talked about semiconductors and other parts of the market, it's unclear to me that raising rates will um expedite any of the

supply demand and balances. And cause, you know, if you have a wheat shortage, I don't think you want to crush demand for wheat to the point you get equilibrium. I think you're just gonna have to lift live with wheat. I see gaining share from something else, right, So UM, I'm not sure the FED. I've taken the view of the fete of the smart ones, and so therefore they're not going to purposely create a recession. That seems to becoming more and more of a consensus, and I thought

it was an outlier view. Hey, the FED wants to get off zero and sort of normalize rates, But do we really think they're going to tighten until there's a recession in order to fight inflation? That is not um interest rate based. And I know you're not an economist, neither of mine. It seems a lot. It seems illogically they do that. So I mean, how how is raising rates going to affect we shortage is semi consummate, temparate labor problems that you can't clean hotels, all those things.

So I don't think it will. And I think they'll realize that and move a little bit more gingerly on the path and and so the longer maybe the path will be you know, lasts longer, which is which is fine. I think the consumers are good shape. We did a lot of research on that this year. Um. I think the Ernie souseholds are strong. Yeah, the earning season in April. If you really look at bank earnings and the comments from them, master Trust credit card data thirty data linquencies

went down. Nine linquencies are at an all time low. Retail sales, consumer confidence, wages, um jobs, everything looks fairly good for the consumer. So I'm not saying it couldn't slow material in six months with higher you know, oil at the pump in the light. But I still see the US consumer in pretty good shape. And so underneath that, for me, like what I focus on is all right,

what's what's like along and what's a short? Wow? Like growth staples are incredibly expensive and you know, yet you know, like the value discretionary stocks look cheap, and so maybe I can long sull and short the others or you know. So I'm I think there's a lot, like I'm excited about the long short opportunity within the equity market um

independent of what the FED does here. But I just if you ask me, like what what I think is like where there's the most excess capacity in the financial industry, In an industry with massive excess capacity and every single area of it, I would say the number of people who watched the head and memorize everything they do and have no idea what they're actually gonna do and are never right. It's that that's where the excess capacity exists. Short FED watchers, Oh my god, I would short short

hockey rinks of FED hockey rinks of FED watchers. I'm with you on that. So so let's talk about a couple of sectors. Oil and gas been a huge out performer.

Does this continue? Where? What do you look at? How do you evaluate oil and gas when you have the wild card of the war and the big booming reopening fortunately for us, you know, and and I'm not you know, I'm not like trying to break my own arm and pounding myself on the back, but we had That's been our biggest you know, call since we started the firm a year ago, is to be over with energy. Yeah, and that's why I asked you that. Thanks man, I

mean I can I can only hit THEES pitch. Um you start start spinning it with me, and I'll be in trouble now, you know. For me, Look, I think it's really hard to forecast oil. So what I would back up and say what attracted me to it was what I call a triple crown of quand upward earnings revisions, positive price momentum, cheap evaluation versus history. So I have those three. You start digging in and you say, okay, well, um, let's go talk about it with investors, right, And investors

gave me two sources of pushback. Right, one is, um, hey, they don't say this way, but hey, Adam, like the specter of US gathering assets under this thing called e s G is far too great for us to you know risk you know, yeah, the bigger firms, I think that's the case. And then um, and there's a few of those that that that might be the case for. And then the second group. You know, I'm gonna say it's more in the Hey, Adam, the terminal value of

oil is zero. And that's the part where I really start getting on, you know, kind of unfamiliar with material science and plastics. People don't. There's an old joke about the Saudi prince who said to the American oil company, I can't believe you guys burn the stuff. Yeah, totally. So I'm smiling because, you know, as I pushed the thesis, I think a lot of people just say, look, look, I don't disagree that. As you get I think peak oil demand from the experts, it looks like two something

plus or minus. Right, sixteen of new vehicle sales are either electrical or hybrid. The installed basis eight percent cars are born and then they die. There's no in between. States so you can't. It's a lot of new car sales. You need to get the installed base twelve years or whatever. Right, So I don't see any way pico al demand isn't in you know, in the in the next ten years. Okay.

And and remember you know where we live in our cozy um you know lives here, but five million Indians still deficating the street and three billion people don't have air conditioning, and like it's not like when it's hot out you um, and you've had experienced air conditioning, you decide for the sake of humankind, I'm not gonna see my place like. So that's the demand is gonna be

longer tailed than people think. As you know, toists are good, and a C is good, and wife is good, electricity is good, and so like oil consumption, like the people have been the most protesting, you know, the terminal value of zero argument or people who like fly private and have nineteen houses like their own oil footprints massive. So

I just I don't understand where that disconnect is. And I'm sure maybe there's like a pharmaceutical like patent cliff, where I pay lower multiples for oil as I get five years away from that peak or whatever. I get how stocks work, but it seems awfully early if there's e NPS free cash full yield to get too negative. So I started getting aware it's sentiments negative, UM, you know, and that bullsh really bullish. And if you look at

how a lot of funds work. We did a note last year in June twenty one, UM called E s G E t F s H forty uh nine percent q q q xps sp X two percent E s G. So the the idea was, these things are closet triple ques now that energy is beaten the cues by plus.

In the last six months, we've heard a lot of firms say, well, we're thinking about switching from a sustainability level to buy a stock to a change in sustainability score, meaning if they're improving on the sustainability from people can buy it because you can't handle everyone's cool to buy E s G stocks when they're outperforming because they're on the queues, but when they lagged by fifty it's less cool, right, So I think you could have a flow sting that's

positive for this group. Also, UM, and I know a lot of smart people directly investing in resources and the like you throw this Ukraine thing on, I'd say the one, the one thing, and and you mentioned it earlier, and I agree with it. I can't help but say, you know, I don't. I'm talking about markets when there's massive and horrible human implications, and I it's almost like you feel

awful doing that, but you have to mend. You have to mentally separate for this and and just say, okay, well, sure if we get any announcement of a ceasefire or the Ukraine's winning, all its actually go down in a minute, right, we get that. But I think I'm more in the by the dip mode, believing that demand growth will seat supply growth. Sentiment's negative, their cheap upper revisions positive momentum than I am. It's the end of the it's the

end of the day. So I think it's a pretty bullish set up for a couple of year of view, and it's not just a short term trade. So so you mentioned something that I'm kind of fascinated about. There's been a lot of pushback on E s G, and there's certainly been a lot of pushback on low carbon. Here's my beef with the low carbon portfolio. You're gonna take the SMP five hundred and you're gonna remove all the carbon producers, but you're gonna still invest in all

the carbon consumers. It's the demand that's leading to these people producing carbon. How how does it make rational sense? Well, we're not going to buy oil or natural gas or cold companies, but we will buy all the companies that consume those problems. It's even more than that, I hear you.

And it's even more than that, which is the solar and wind companies consume more energy um than anything else, right, I mean the plastics required to make the wind turbines and move them around and the producing But that's true for any new factory you're jenny, even a coal fire. You know, it takes X number years before their net energy neutral, Right. I don't know if um if you know, it makes sense from the planet's perspective to long solar and wind and short energy as a as a you know,

convestment strategy, investment strategy. I don't think that makes any sense, to be honest with you. So there's a fascinating article in this week's Business Week about the rise of UM wind generation throughout all these supposedly red states. Because when you look at Oklahoma, in Texas, and you look in the Midwest where there's a ton of natural and fairly consistent geothermal movement, the wind and on all this farmland, the wind farms are giant money makers for these landowners. Right,

it's just you know, just out of left. I don't know if it is for the people who produced the actual turbins and move them there. Though you know, you would think g capital who was funding these and ge wind power, that should be a giant home run business, and yet it doesn't seem to be. Yeah, well I don't.

I don't. I think the tenor of your question I agree with, which is um you know, and it's kind of my point to which is I just don't think you can destroy demand, right, like you know, like my point about air conditioning, or you know, look at the entire movement to the Sun Belt that's because of air conditions. But there's conditioning and there's heart, and there's hundreds of

millions of people on earth like this. You know. You know, it turns out that like a toilet is better than non toilet, it turns out that it turns out a BMW is better than a rickshaw. And I mean just go down the line. So like I don't, I don't. So it's gonna take a long time to destroy man demand for oil um and so speak oil. It's at least ten years from now and maybe yeah, and like maybe longer than Facebook US this or they you know or whatever you know, because there'll be something else school.

I'm not you know, I'm not making a fundamental short theason on Facebook. I'm just saying, like, you know, two people talk about the terminal valley for oil, so I won't own the stocks, and like the terminal valley for Facebook is probably oil will last longer than Facebook. I would bet interesting, really interesting. Uh, last question before we get to our favorite questions. We are about to ramp up earning season. How does earning season play into the

sort of research you do? How do your clients look at it um and how do you incorporate new data from you know, the key companies into your mind? Look, it's massive. So what we do is every day, for the top three thousand US equities, we download about five pieces of information and compute about five more and then we store that every day back for twenty plus years. So anytime somebody asked us a question. We can empirically test the distribution of subsequent returns, so hey, what happens

when this happens, we go look and study it. So earnings is huge for us because we're getting balance sheet, income statement, cash flow, you know, ratings, changes in the analysts, downgrades, you know, insider buying and selling transactions, holdings, tons of stuff that's happening every day. Um, and so it changes you know, relative valuations and growth expectations and the like.

So for us that's huge. Um. It Also, we have quantitative models that pretty subsequent stock performance, and the quant models use and ingest a lot of this data to form the forecast. So you know, my view of systematic stuff has always been, um that I romanticize something about the report of piano of the company matters to its ultimate value for the listeners. I think thirty of all money traded is two to five day holding period on price and liquidity. So it's yeah, so it's not you know,

um a ten case and ques being processed. For us, that's a big part of what we do. Um. You know, it comes stay in cash flow, balance sheet, et cetera. It sounds like an inefficiency that a third of the market isn't paying attention to the fundamentals. Well, yeah, I think it's even more than that. That's just two to five day holding period. I think the guys who are doing a microsecond and stuff for a decent chunk of

volume two. So I'm not saying there aren't plenty of really successful people that I've just personally never been intellectually interested in that. And I think what I've learned so far is that you're like going to probably be better at something you like doing than you don't, and so I just it doesn't really appeal to me to do that. I think you can only compete when you have the tech. You know, you need billions of dollars of tech to

be able to compete in the microsecond space. And I think two to five holding is just price the adity, right, access to borrow, access to risk, and and am any other stuff that really isn't about what what we do. What we do is try to find big dislocations and opportunities like energy or metals or you know, when we go into each sector industry, where do we see you know, uh, interesting long short opportunities, So that that has to come

from earning season and the updates there. And I think one of the things I've learned is like you don't anchor right, like you get like we talked about Netflix, like yeah, they told you the business models changing, Like that's not nothing. Maybe the stocks down too much, Maybe it isn't. I don't know the fundamental I as you know, could decide, but what I know is that it changed. So let's stay with that again, and let's look at

technology where there is some dislocations. We're recording this before Apple reports, before Microsoft reports, So how do you look at the entire sector? Is a uniform or can you really segmented winners, losers, riskier valuation? What's the spectrum like in that space which has been clearly driving the market for the past decade. So look, we're more in the UM, you know, kind of maybe bucketing it too much. But

when you think about earning season, a lot of things happen. Okay, did they beat on earnings, did they beat on margins? They beat on revenue? Did they guide to a change in earnings, margins and revenue? Did the stock T plus one tapus three go up or down relative to the

market relatives to the pair group um? Did the implied guidance change because maybe they beat the quarter, didn't change the annual guidance, but the implied guidance is different, right, So like it's like thirty eight things that happened they report, whether you realize it or not. You know, Bloomberg is great, you know, here's what happened on revenue versus what the consensus they beat or not. But like there's there's eighteen things underneath that that happened. What about the cash flow

versity earnings? Was there a disconnect? Wasn't a cruel? Was it capex? Was it inventory? Wasn't intangible? You know, like it's it's like an orgasmic amount of data that's coming in that you're just trying to figure out what's discounted. What isn't so like to me? You know, um, I I think that that's where the data will differentiate between you know, all the all the big tech companies, um.

And then you can also pick up all the trends that are happening like when a second, So when I when I look recently, like transportation data is really rolled over, but industrial activity looks high. That's interesting, right, Like I'm not paying as much now for truckloads and van loads. Okay, so that's new the bank, the bank. Earnings comes in, match trust data comes in, you know, consumer behavior comes in, consumer demand commentary comes in, and you get the tech. Well,

there's a lot of M and A happening. It's coming. It seems like a lot of kind of five ten fifteen billion market cap software companies now look attractive to the private markets. And what's Thomas Brabo doing or what's these guys who are they buying? And wait a minute, now a bunch of companies are below come down a lot. What about you know, biotech? Is there anything coming out of the pipeline there? Because those are an all time low and price to sales and maybe there's innovation on set.

Like there's a lot of trends that happened in every sector during earnings that I think are interesting. Healthcare services, the costs are going up? What's going on there? Because all I know is um, you know, I I pay United Health like seven percent more every single year, no matter what happens, right, So like you yeah, yeah, exactly, So yeah that the single most gangster company I interact

with is United Health. Uh. If people don't realize that's one of the biggest companies in the plot U n H Equity g P on your Bloomberg terminal and shocking yeah, bottom left, upper right. And one of my goals in life is to own enough UNH stock that it can offset the price increases they take on me and my employees each year to get the privet hedge because um, like door number one is hand what we're gonna raise you. You paste twenty grand now and then we won't raise

everyone in your in your employees for a year. And door number two is we're just gonna raise all your employees. That's it. There's no three of Like you get a car, you get a car. But my point is and that's you know, it's kind of joking aside, like you want to look for pricing power. Like one of the biggest investment de bates right now is which companies are gonna have gross margin expansion six months from now, which aren't And is the gross s margin expectation achievable or not?

So you get a lot of data points on where are we logistics, labor, you know, wages, where are we with um you know, input costs, oil, commodities, et cetera.

Who's got the pricing power. Who doesn't you know, I think another interestinct trending earneys barriers, like you know your employee base is a US or non US, because most of the companies are telling you, and it's been subtle and not written about enough that all the wage issues are in the US, right, So maybe that U s non you labor mix is gonna matter for your margin profile. And so to me, there's just you know, so many things during earnings that are um kind of trends that

you can pick up on. And there'll be at least ten or twelve things that happened and you know, kind of mid April through mid May that update you on and increase your decrease, increase your confidence on estimme achievability broadly and then within each industry going forward. So like when I give investiment mice of a lot of it is about relative estimate achievabilities six months from now. So

I think energy, you know, okay, that's somewhat easier. Like the correlation between the change in the oil price and the change and the earnings of the income of the energy sector's point eight. So like it's it's well goes higher, Like they're gonna make more money. But there's more subtle things like we've been a little bit cautious on industrial

machinery and capital goods because the estimates hockey stick. In the second half of the year, we saw the most downward visions of any sector in the marketing industrials and QUA, but the stocks didn't really underperform that much. So there seems to be this disconnect. You know, transportation is rolling over, so I'm trying to figure out, like, why do I have really high increminal margin expectations embedded in the industrial sector stocks, yet you know there's a bit of a

slowdown and Martins have already recovered. So to me, those are the kind of dislocations that you get you should if you're being into actually honest, can increase or decrease conviction on during earnings. So you mentioned intangibles um your old shop, Morgan Stanley has a division called Counterpoint. Michael

Mobison's the had a research there. He did a really interesting piece on intangibles and essentially technology holdings and how much much of the investment community has undervalued intangibles like software algorithms, brands go down the list, copyright patents, whatever, and that everybody has been looking at tech as overvalued for a decade. The market seems to have disagreed with that assessment. How do you view intangibles in that space? Yeah,

so that's that's an interesting question. Um. I'll answer it purely quantitatively, UM, which is um identifying longs and identifying shorts use different signals. If I think about what people have been asking me the most in the last year, people will often say, hey, you know, Barry, They'll say, I want to buy compounders. I want to business that compounds. So we did a lot of research, and we do a lot of kind of frameworks like this at Trey Verry,

where we'll say, okay, well, what is a compounder. Let's look at businesses with consistent gross margin expansion, consistent net income expansion, consistent earnings growth, consistent upward revisions, consistent price momentum. We'll take a bunch of signals and say which is associated with the best subsequent stock performance. And the answer

was gross margin expansion. Okay, So we offer a screen and people can buy a basket of compounders that have consistent gross margin expansion and forecast a gross margin expansion going forward. Seems really important in this regime because of inflation and what we talked about. But on the short side, it isn't margin contraction. The question people were asking me last year was the inverse of compounder, was I want

a short of melting ice cube. That seems to be the cool Wall Street phrase with short melting ice cubes, right, I want to long compounders and short melting ice cubes. So we didn't know what what the heck is a melting ice cube? And is interesting? Is the the thing

that um mattered the most. The two things that matter the most were accruals, which would be disconnects me and anuras in cash flow, which were driven by cappex inventory or intangibles I'm getting to your intangible questions or bad price momentum, meaning actually the stock was just simply bad versus this industry peers. So the short ideas were businesses with the biggest intangible accruals in the last three quarters

that also relatively underperformed their peers. That if you plotted that line versus the SMP, it materially lagged, and if you added on share loss and margic attraction, it didn't even help. So I think the fundamental analysts need to focus on this issue of whether the intangibles capex in inventory are obviously big, but the intangibles are are positive or not. My suspicion from Mobison's work is that there's

some alpha spread in that group. Yeah, and um, I haven't seen I haven't seen that work, but I know he's an incredibly smart guy. So, um, but I'd say, I think when I'm looking for short ideas, I would start with do they have a higher cruel and as a stock acted bad? So you're describing hot stocks that have rolled over? Yeah, in some ways. In some ways, um, either hot that have rolled over, or they had a business model change where they had to increase your cap bacs,

they built inventory and advance of recovery. They did a deal and it's uncertain about what the intangibles they acquired are. Something like that really fascinating, all right, So let's jump to our favorite questions that we ask all of our guests. Okay, starting with and we talked about Netflix before. Hey, we're past two years. Everybody's been streaming all sorts of stuff.

Tell us what's been keeping you entertained? Oh boy, yeah, I'm I'm probably you know, um in in the bottom, you know, decile of culturally savvy people that you'll interview. I actually watched the David Rubinstein Show on Bloomberg. I like that show that counts. I think it's amazing. I think I think he's I think he's amazing. I think that show is incredible. We leave, um, we leave our TV on on Bloomberg TV in our office, and you

know when that comes unbelievable guests. Yeah, smart quass and his perspective is so unique because he's walked in their shoes. He he's running multiviillion company. Not a lot of interviewers bring that ask great questions. So I I like, I like that. In terms of podcasts, you know, obviously yours is incredible. But yeah, but but but I think the truth is I'm not I'm more of a hodgepodge of people refer me stuff. You know. I I interviewed the

freaking Omics guys before. I like them, so once in a while something that they said I think is interesting Jubnor Levitt, Yeah, so interesting guy. So it makes But I'm not really a consistent guy, and I'm definitely not a streamer. But I am. Um, if I look at the Parker Household. We probably paid twelve different streaming services. So I'm i'm I'm a I'm a revenue source, but I'm a high return on revenue for those that's research. So you gotta you can you Yeah, we gotta start

cutting something. Yeah, exactly. So apparently lots of other folks have thought the same thing, and we've seen that reflected and yeah, yeah, exactly. Tell us about your mentors who helped shape your career. Yeah, so if Bernstein again, I think all of them came from Bernstein originally, honestly, so some of the original animals there, So people who followed Bernstein in the nineties and the early two thousands would know some of the minds there. But there's there's so

many of them. But you know, um, people that I keep in touch with still, some of whom are still working on you know, on the streets. So um, you know, so i'd say, you know, probably Marty Leebertz, said Morgan Stanley, and then Lisa Shalott and Mark Mayer and Jonathan Gray and who's deceased but was probably the greatest analyst of all time. And yeah, existing animals there as well. So

there's just so many mentors. I have people who taught me that it's effort, it's enthusiasm, it's creativity, you know, um, and it's a combination of analytics and communication. And you know, I can't imagine a more interesting job than you know, somebody told me once you always want to be talking to people in their thirties because they're not They're not so young that they're annoying to talk to, and they're not so old that technolog gen cool stuff has passed

them by. And I think about the job job I have now I'm in I'm in my early fifties, and I think, yeah, I want to do this for the next thirty years. Like I want to write interesting research and I want to talk the smart, cool people about it, and a lot of them are in their thirties and forties, and that'll be that'll be an amazing place to spend the rest of my life doing so. It's and I tell you, it's you know my shop. You know the guys in my office. It like I am sort of

between the Gen X and the boomers. I have a foot in each camp. And the millennials and the generation the gen wise they're absolutely cutting edge hip. They know everything that's going on, and I just want to avoid that whole okay boomer sort of thing, right, And uh,

it's absolutely true. You know, sometimes experiences anti correlated with success, right, Like you sit there, like I mentioned that in video before, Like I admit, like I meant, I would have missed the first half of the video's appreciation because I was

I was encumbered by irrelevant knowledge. Right, experts are experts in the way the world used to be, right, and so I think, you know, I I see that all the time because a lot of people were negative on the stock market are using Schilder p A or some Grantham view or stuff. You know, something that that was made sense cape and that made sense in the eighties, right when eight of the ten biggest equities were energy

and and you know, capital intensity was higher. And now you look at it, you're like, wait a minute, of all companies don't even have any inventory dollars. Capital intensities an all time low for small one microcap Like I fang m is the it matters not not you know, um, you know mobile or whatever. So it's like a totally different business. So like to say, we're gonna mean we were back to something from foty years ago. Just you're

encumbered by knowledge that's not relevant. And I think the thirties and forties crew is kind of right optimization on the curve. And so I want to be like hanging out with those people, and and what better job than

it would be to do what I'm doing? If I remember, was an Adam Smith books talking about the new Adam Smith, not the original one, about all these funds that would hire young guns as traders because the guys who had the capital and the experience knew they couldn't buy the stuff the young guns were buying and would missed the opportunity. But you need some adult supervision overseeing them. I don't remember I was the money game or one of the places.

But that's why risk management and alpha generation are different, right, Like the c I o's job and often is just some risk management, like you know, what can I tolerate?

What have I experienced before? Maybe some of these guys don't haven't seen a cycle, you know, maybe they haven't seen rates go up or stuff like that, so I need to have, you know, some maybe maybe they don't realize that, you know, following a financial crisis, you don't short highly shorted stocks because they get squeezed or whatever like stuff that you know, some of us were writing about way before January one, because we knew that that was a risk, because we saw I saw that after

the financial crisis, right, So I think that that. But you don't want to be um, you know, the the intractable guy who doesn't adapt, and I think these guys help. You're absolutely absolutely right on that. Let's talk about books. What are some of your favorites? What are you reading right now? Right now, I've got two books on the night stand. I've got um Maria Vanovitch's book, you know, Lessons from the Edge. So she was the US ambassador

of the Ukraine, had incredibly interesting career. Her books, I'm only about halfway through, but it's crazy. Her life is crazy, um and obviously her I haven't gotten to the part of the book where the Trump induced exit happens yet, but incredible experience. You know, I always wondered what these foreign policy people do. So yeah, she's incredible. And then somebody gave me the all In book by Billy Jean King, and I'm definitely gonna read it. Um. You know, she's

had an incredibly interesting life. Also, so I've got a stack and I rolled through. I am one of those people who, um, you know, probably needs to sleep a little bit more and so, um, I try to read to uh, you know, um get a little melotonin. Yeah, kind of. By the way, if you if you like the Billy Jean King book, someone recommended the Andre Agassi book called Open and It's absolutely fast. Yeah. Yeah, I read one of his originally years ago, but I didn't

even know he had another one out. It's his um, it's really his life style. By um. What sort of advice would you give to a recent college grad who was interested in a career in investment finance becoming an analyst? What advice would you give them? Yeah, I guess the two things would be, you know, you know, assuming that they weren't born on you know, third base, or that

they had to like organically earn it. I'd say one would be, Um, you need to differentiate your skill base, and the best way to do this through a computer science So you need to program all of the work we do. Barry is in Python, all of it. You know. You mentioned that you have some cool iMac that works, but I don't care because all of our we only use dummy terminals. All the competent storage is on a jore,

like we don't really care. Um your ability, like the days of like you know, reading k's and like writing up a paragraph. Um, I don't want to say they're over, but like you can process information much more quickly with code.

So like I think you need to have computer science skills now, and I would encourage people to, you know, get some skills and Python or are or you know, um, you know kind of database work because that's I think a growth industry, and um, you know, analytics and data are being you know, important considerations in every major industry. And and and I think in Wall Street in particular, so one computer science and two Like I've always been and people ask me all the time, what should I

do with my career? What advice do you have? And you know, I look, I always encourage people to get more education because I think you can prove, um demographically that the distribution of people who get more education have more wealth right over time. And I think it's probably more differentiating. I know that if I didn't have a PhD in statistics, I wouldn't have gotten the jobs that I had at burned seeing the promotion and market stay on the etcetera. And so for me it's been huge.

And my dad has a PhD from M I T. And he kind of told me, Adam, like, you get the pH d and then the bear cases you're you know, you're one of the most popular professors at the University of Michigan or something like, you know, so like that's

the bearcase. And that's a pretty darn good bearcase. So I encourage the young guys every time get more education statistics, data science, computer science, something that is a differentiating skill because you know, just being like a basic NBA it was like, I like pick stocks and I can read k's and cues like I don't. I think that's just

the differentiating of a skill. Um and and so I think if you can process information and and then you'll there's a bit of a you know, um and I should looking up at how many people get a PC and statistics every year in the country. There's a couple hundred, a few hundreds. So it's not I it's much more. I mean every major department has a few each year, right, So I don't do the math if there's a hundred real departments is a fut year. It's not if only

I had access to a status stiffic. Yeah you do, well, we'll sell you our research it you'll problem And our final question, what do you know about the world of investing today that you wish you knew thirty or so years ago when you were first getting started? Yeah? Oh man, um, so much right because I published two pieces of research for eighteen years and we've started study and learned a lot.

But I guess holistically, i'd say it's a very competitive business with a lot of incredibly smart people, and it's very humbling. So this idea that you know, you're used to being smarter than people because you've got to in math in high school and you're the smartest kid in your class. Like everybody is smart and everybody works hard, and so um, you have to have a you know, a differentiated, um, you know, way of thinking about the world.

I think so, you know, I could have picked an easier industry to compete in for sure, to say the very least, and thank you for being so generous with your time. This really has been a lot of fun. We have been speaking with Adam Parker. He is the founder and CEO of tri Variant Research. If you enjoy this conversation, we'll be sure to check out any of the previous four hundred or so we've done over the past eight years. You can find them wherever you get

your podcasts. We love your feedback and suggestions. Write us at m IB podcast at Bloomberg dot net. You can follow me on Twitter at rid Holts. Sign up for my daily reads at Ridlts dot com. I would be remiss if I did not thank the crack team that helps us put these conversations together each week. Mohammed Rumaui is my audio engineer, Paris Walden is my producer. Sean Russo is my director of research. I'm Barry Results. You've been listening to Masters and Business on Bloomberg Radio.