Michael Mauboussin On Valuing Intangible Assets

Joe Weisenthal (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:16)

And I'm Tracy Alloway.

Joe Weisenthal (0:19)

So Tracy, obviously we've had this extraordinary stock market comeback this year.

Not even really just a comeback, because we're so far ahead of where we started the year despite the pandemic. And a lot of different sectors have rallied, but there's no question that tech, sort of new economy type stuff, however you define it, has really led the way. I mean, the NASDAQ is just having a sort of ridiculous year.

Tracy Alloway (0:48)

Yeah, we've talked about this before, but to some extent it feels like the coronavirus crisis that we've seen this year has accelerated long running trends in a bunch of things. So, for instance, the dominance of online retail, but also the outperformance of the fang stocks and tech in general. It feels like the big just get bigger stocks that were considered expensive five years ago are even more expensive now.

Joe Weisenthal (1:16)

Yeah, and I'm glad to use that word expensive because it sort of does have an implied judgment, expensive, like people are overpaying and people talk about value stocks, which have this implied idea that you're getting a good value, you're getting a good deal, it's cheap. But we have had this phenomenon where stocks with high multiples continue to do extremely well and the stocks that on paper appear to be cheap just seem to get cheaper and cheaper, which is not great if you own them.

Tracy Alloway (1:52)

Yeah, and of course this goes back to the whole value versus growth debate, right? Why has value been underperforming as a strategy for so long? And there is an argument that a lot of this comes down to accounting and the notion that maybe we have outdated accounting rules that don't actually do a very good job of reflecting the world as it is today. And we started out this conversation by talking about 2020 You could certainly argue that accounting rules that were imposed back in the 1970s probably aren't doing a very good job of reflecting what's going on in 2020 in the midst of a global pandemic.

Joe Weisenthal (2:37)

Yeah, it seems like if you're a value investor, if you're a self-characterized value investor, there's sort of two approaches that you can take.

One is to sort of say, okay, we must be at some turning point. There's gonna be some catalyst, maybe some economic regime change, and then value stocks will do better. And then the other approach is just to redefine value and say value has done well if you define value this way and you sort of change your screens so that you can sort of fit more stocks into the value bucket.

Tracy Alloway (3:11)

Yeah, there was a really, there was a kind of funny article from one of our Bloomberg colleagues out recently about a, I think it was a South Korean quant firm or asset manager or something that created a new value-driven ETF, but it, as you said, redefined what value actually was. And on that basis, I think its base holdings ended up being Amazon, Alphabet, and Facebook. So yeah, it's all about the definition, isn't it?

Joe Weisenthal (3:42)

Yeah, that's a very easy way for value investing to do well. Just say, we're allowed to buy Amazon and Netflix and all that. But even still, like, it does raise the question. And, you know, one of the sort of classic screens or one of the classic tests for what counts as a value stock is to look at price to book, so how much you're paying for the company relative to its assets.

But if you only have a conception of assets as being factories and land and other things like that, you are missing sort of, you know, other extremely valuable assets, such as, say, the network of connections that Facebook has built that is hard to replicate anywhere else. It's not an asset in the traditional sense, like a piece of equipment is, but no one would actually dispute that it is an asset.

Tracy Alloway (4:31)

Right. And this is where the accounting rules come in, right?

Why do we put certain things in certain places on an income statement versus somewhere else? Like, why does a factory statement go here, but research and development goes someplace else entirely? Yeah.

Joe Weisenthal (4:52)

So we've talked about this a couple of times in the past, but it continues to sort of gain urgency again, I think, in light of what we've seen in the market this year. So we're going to talk about this topic some more. I'm really excited about our guest. We've had him on the show, I think at least once before. Michael Mauboussin, he is a managing director at Morgan Stanley, but a longtime career in finance, having worked at Blue Mountain Capital, Legg Mason, and so forth.