RIVN - It's All About Liquidity - David Trainer

2023-07-03 06:30:00 ET

Summary

• David Trainer discusses sectors, stocks and investing strategies. For near-term, it's really all about liquidity.
• Looking at the market from a sector level.
• Uber's valuation still extremely expensive.
• David's long picks.

Listen to the podcast below or on the go via Apple Podcasts or Spotify .

David Trainer discusses sectors, stocks and investing strategies.

• 2:05 - For near-term, it's really all about liquidity
• 9:10 - Looking at the market from a sector level
• 15:40 - Uber's ( UBER ) valuation still extremely expensive
• 18:35 - David's long picks

Transcript

Rena Sherbill: David, welcome to Seeking Alpha. Welcome back to Investing Experts Podcast. It’s great to have you back on the show.

David Trainer: It is great to be back. Thanks for having me.

RS: Last time you were on talking to Daniel Snyder and you shared some of your strategy and your background and how you got to investing. So for audience members who missed that, I recommend checking it out for a deeper dive into your background and some of your thoughts on the market, a few months ago.

I'd love if you could update listeners on how you're looking at the markets? How you're thinking about the markets these days late June, pre long holiday weekend?

DT: Yes. I think that for me, despite all the sort of popular narratives about this or that driving the market, I feel like, for the near-term, it's really all about liquidity and how much either the Fed or the treasury are pumping into the economy.

I've seen plenty of charts showing a very tight alignment between, hey, if they're still putting money in, stocks are going to, the animal spirits are alive and well. And when that liquidity begins to be drained or, when the treasury typically tends to sort of back off and the Fed's tightening actually starts to take hold, you see stocks retract.

And I think that's a consistent theme for, really, most of the last 20-years. The long-term decline in interest rates is effectively just put more money into circulation and certainly lower the threshold for what would be a profitable investment, and therefore, made it easier to make money. That's just a lower cost of capital effectively does that.

We've been awash in too much liquidity for a long time. So at some point, there probably needs to be a reckoning. And I think the real question is when and maybe never, who knows, I mean, look, they could potentially kick the can down the road forever. And what we're seeing with the federal deficit and spending and federal debt, is not necessarily a good example for fiscal behavior . And I think a lot of that's mimicked at the consumer level too. So we're in interesting times , who knows, maybe we can borrow forever.

RS: Do you think we're ever going to get out of interesting times? It seems like we're in a perpetual interesting time cycle. What do you think the reckoning if it does come, what do you think that looks like and what do you think it would mean for investors?

DT: I think what this means mainly is it hopes... I think the hope is and because they know this, right, I mean, they understand that if you've got too much money chasing too few good opportunities, right, there's not an infinite number of great business ideas, and we've certainly seen a lot of bad ones get a lot of funding, FTX , a lot of these IPOs that came out several years ago, right? I mean, there's just a lot of been colossal failures, and we're seeing more and more all the time in some of the private equity space.

So there's, sort of, three ways this kind of happens, like, in a very, very simplistic model, Rena, right? You've got, like, you've got -- it goes on forever and never stops. You got it comes to a crashing halt, and it's cataclysmic. And, we have a long - a lot of people lose a lot of money, and a lot of people discourage and don't invest for a long time. And you have something in between where you have more of a gradual unwinding of these bad investments and a gradual, steady, but sure reallocation of capital towards higher returning investments or higher return on capital type of investments.

And I think what the Fed is hoping for is something right there in the middle, to sort of walk the primrose path of, hey, we want to return to a world where people are more discerning about where they allocate capital. And therefore, we can kind of get back to longer term growth opportunities and without creating too much damage. I don't know if it's possible. At some point, people have got to effectively pay the price for putting the hand on the hot stove. I mean, you can't not lose money for putting money in a bad investment.

How we navigate this I think will be honestly the -- is the quintessential question of our time. It will be what defines a lot of financial history and economic history and history books and textbooks, because we live in this new age where people can, sort of, print money, and we're seeing the lengths to which that can go to affect economies.

RS: Based on how the Fed has acted and how you think the history of the market is going to write itself, write with a W, the coming quarters the rest of this year, how do you envision, kind of, macro picture , how do you envision what kind of CPI numbers do you envision coming out? What kind of picture from the Fed do you envision coming out? How are you looking at Q3 earnings ? What's your general take?

DT: I think that, I think, sort of, the consensus amongst the sort of, the more rigorous investors is that Q3 earnings are - or Q2 earnings are still way too high. They've got to come down quite a bit, and that's going to potentially cause some issues. As for, like, the Fed and CPI and those kinds of things, I sort of shy away from some of that, Rena, because, I mean, there's just too much opportunity for some manipulation. Look, we've -- there are many books and studies that have shown since before Nixon, the White House Administration and other regulators have effectively rewritten the formulas for how CPI and other things are measured.

So depending how you slice it, and honestly, depending how the narratives are spun, we've got bad news all the time. The Fed said we're pausing, but we're going to raise rates more later. And it didn't matter what the Fed said. The market, sort of, had its own narrative , and that's all it cared about. And so I've kind of given up trying to figure out what the prevailing narrative is going to be, because I don't -- I can't control. And I think it's hard to predict it. I do think that most of sophisticated investors understand that there needs to be some reconciliation. We hear that a lot. Whether it's from Druckenmiller or Warren Buffett or Charlie Munger or many other folks, right.

We hear it quite a bit and so how it's going to actually unfold and when, I mean, that's the that's the billion dollar question if I could tell you that. We'd be doing this on my yacht, right? If we'd be doing it at all, and so I think that's the tough part, I think that's what makes market tricky. It's what makes our time interesting.

RS: Yes. So speaking of these interesting times, I think part of what is making it interesting are these disruptions across the board. I think every sector you look at, you can see this disruption happening in tech, it’s AI . In finance, it’s crypto and various degrees of successful crypto. But there's so much happening in every sector. What -- do you have favorite sectors to look at or are you more focused on the stocks?

DT: No, we definitely look at things at a sector level. So because we cover so many stocks and that we definitely have insights on the overall market, in terms of just fundamentals and valuation. Now that doesn't mean I can predict when these disconnects will rectify, it just means that we see them, and we can look at them in historical context. But when you look at historical context at the macro level and a lot of things, we're in uncharted territory. So exactly when that territory starts to look or revert to the mean, I am not going to predict.

But, yes, on a sector level, we like a re -- a sort of reallocation into basic materials, financials, and energy. These are some sectors that have been really beaten down, right, whether it’s energy stocks and the ESG, sort of, movement has led a lot of these stocks to be effectively thrown out with the bathwater, because they are fossil fuel related and fossil fuels are going away. And you look at anybody that's done any research in the industry, and it shows that demand for 30, 50-years from now is expected at worst to be slightly lower than where it is today, right? Fossil fuels aren't going away.

EV and green energy sources are coming online, but not necessarily fast enough to offset the actual overall increase in the demand for energy. So as the rest of the world, sort of, gentrifies or continues to gentrify, energy consumption is growing faster than alternative sources of energy are growing. So there's plenty of demand for fossil fuels, that's not going away.

Basic materials, this is the engine that makes the world go. We're so excited about AI and all these fancy technologies that are going to make spaceships to the moon, and cars drive themselves, and cars fly, and machines do all our work for us, that we've forgotten that at some point in time we need the steel to build these machines. We need the manufacturing to keep people fed, to keep people - to keep the systems and bridges and basic infrastructure going. We've got so sort of disconnected, I think, from our roots to these ethereal ideas around crypto and things that we've forgotten, we still got to build the things that make America work or make the world work.

I guess it's all three, right? I guess banks , we just -- we've obviously seen a lot of banks get beaten down. And for a long time, be undervalued, right? I mean, the financial sector as a percentage of the S&P has been on a long-term secular decline and we think it's a bit overstated. And a lot of that's just because you get too much in technology. And so I think those are sectors where we're seeing a lot of opportunity.

We got a lot of long ideas. So I'm not cataclysmic about the market at all. I don't believe in the cataclysmic scenario. I believe in the Fed attempting to walk the primrose path. And I believe in giving our clients in the world, like, opportunities to put money work in the safest places in the market now. And then very -- be very, very clear about avoiding, for sure, what we call micro bubbles or places in the market where we think are just ridiculously overvalued, and will for sure suffer.

I can't tell you how fast or how severe, but will for sure suffer as we -- as I think regulators try to navigate our markets and our economy and our society to a place where we are more discerning, thoughtful, and deliberate about how we allocate our resources.

RS: And what would you designate as these many bubbles when you look at the market right now?

DT: Everything on our zombie stock list. We created a zombie stock list right at a year ago, and it's been a pretty phenomenal performer. Obviously, the second half of last year, the great -- the very beginning of this year, there's a bit of a return to nuttiness, and we've seen it even out quite a bit. But it's a lot of things, I'll run through a few specifics.

RS: And explain to listeners how they get on that zombie list. Like, what the -- yes.

DT: Yes, the zombie stock list is -- are companies that are burning so much cash that they have less than 24-months of runway. So they have, so little cash that they're not going to be able to support their current cash burn rate for more than 24-months. A lot of times, it's just a couple of months, a few months. And then we've seen companies have to raise more capital or cut staff, cut spending drastically.

So it's, first of all, very limited runway, very limited prospects. They'll get bad business model. Almost all of our zombie stocks came from our danger zone stock list. So these were already bad stocks, bad business. But zombie stocks were -- are stocks that we believe will go to zero, because they're running out of money. We're in an environment where raising new capital is very expensive and punitive, right?

I mean, rates are a lot higher. I don't know if you tried to - if you look lately, the mortgage rates are a lot higher. HELOC is a lot higher. Everybody's like, and with the rates being higher, and money on the margin becoming tighter, we think lenders are going to be less likely to lend. Like, if this company's been losing a ton of money and they've just been rolling over their debt do you really want to be in the - hoping that the music doesn't stop when it's your loan that needs to be repaid.

And lastly, they've got a negative interest coverage ratio, so they don't have enough money to cover their interest payments.

So yet another reason why if they do have to borrow more money to continue the cash burn, another reason why lenders would be unlikely to lend or they, if they do lend, will be at a much more expensive rate. So we've got about, I think, 30 stocks on that list, and it's a variety of industries.

So a couple, a lot of them come from the IPO timeframe. But when I think about pockets, it's technology, it's restaurant concepts, it's electric vehicles, certain of those. Everything from Shake Shack ( SHAK ) and Sweetgreen ( SG ) to Wayfair ( W ) to Oatly ( OTLY ), Compass ( CODI ), Sunrun ( RUN ), Uber ( UBER ), Redfin ( RDFN ), Carvana ( CVNA ), Lucid, Rivian ( RIVN ).

RS: What would you say in a sound bite, what would you say about Uber?

DT: I'd say that's a business that, it's a commoditized industry, right? How many taxi drivers do you know that are billionaires, right? Or taxi companies, right? They've been burning cash at a great rate. They can't do it forever. It was the corporate governance there has been horrendous. It was only within the last, I think, six or 12 months that they admitted that their primary KPI adjusted EBITDA was a bad KPI because it did not result in profits, right?

So really until a short while ago, Rena, they were saying to the world, we're doing great with our adjusted EBITDA. And then when the Fed changed its stance definitively about a year ago, a few months later, when all of a sudden the PU world said, oh, it's not just about growth, we know we care about unit economics and we care about profits now how's that for a change in talk, right? We care about profits now.

Well, the Uber people had to come out and say, the Uber CEO, yeah, we're not going to use this KPI anymore because guess what, it was a complete joke. He didn't use those words, but that's the words I would use when you say that a KPI for a business doesn’t have anything to do with profitability or actually what's good for the business? That's a bad thing.

Valuation is still extremely expensive. And, yeah, I just don't, I think they're going to have a really hard time getting any more debt or continue to fund this business, because it's just not a lot of profit to be made.

I mean there's - tell me what their competitive advantage is, for any of these businesses and how hard is it or not hard, how simple is it for other companies to start up and compete? There’s not really major - many barriers to entry for what Uber is doing. And when you ask the bankers, as I have talked to bankers who worked on this deal or the Lyft ( LYFT ) deal, the best they can ever come up with for me, when I say, hey, so what is the competitive advantage? Why should someone invest in this? And of course, this is off the record, right?

Their answer is, well, they can raise more money than other people, right? And I guess when your KPI is a number that doesn't result in profitability and you have a license to burn more money, I guess that makes it in the short-term, a better investment. Long-term, I think it makes it a zombie stock.

RS: Yeah. Sounds a lot like the cannabis sector, honestly.

DT: We got one of those. Tilray ( TLRY ) is a zombie -- on the zombie stock list. They're really well funded. They raise a lot of capital.

RS: Yeah.

DT: So they got a long runway, some of these. There's a lot of bad businesses out there that aren't zombie stocks because their runway is so long.

RS: Fine line. So let's get to some good news. What do you like? What are some of the stocks that you're long that you would advise investors to check out?

DT: So, it's a pretty wide variety. We've written fairly recently on stocks like Valvoline ( VVV ). I think that's a great, good old business. Those instant oil change businesses, it's great, right? I mean it's very profitable, growing, feeding a world where people don't change their own oil anymore.

EVs need maintenance, regular maintenance as well. So they're not going away because oil changes are going away. And by the way, oil changes are going away all that fast. If I think they're still going to be growing for a while. We like some of the legacy automakers.

We think part of the microbubble with the EV startups means that there's an excess amount of capital there that's been effectively taken away from Ford ( F ) and GM ( GM ) and that those firms will leverage what will prove to be the more important advantage, which is scalability, manufacturing expertise into the EV space.

They'll catch up on the technology front and it will ultimately be the scale that they have in place that is very expensive. And so far really, really I don't think Tesla has delivered on. I don't think they've sustainably generated profits at Tesla.

I think a lot of it's false from regulatory credits. And I think a lot of it's false from a really big cutback in R&D and other kinds of expenses that they're going to need in order to not fall behind as fast because they're no longer staying ahead. They're losing market share in pretty much every market.

RS: We just got - and we just had a conversation of Bull-Bear debate around Tesla ( TSLA ) and they were echoing some of those points. So you feel like GM or Ford could overtake them easy in the EV space?

DT: Eventually, yeah. It's not going to happen tomorrow. But this is a big slow moving industry.

RS: Yeah.

DT: I mean think about how long Tesla's been around, right. And, look, Elon Musk is one of the greatest hypesters of all time. I mean, the amount of capital he's raised for that business and what he's been able to do and it's been in many ways great for the electric vehicle business.

Has it been good for society? Have we tried to push too much money into that? And are a lot of people going to lose a lot of money? Yeah, I think so. But does it help change some behavior? That part is good. That for sure is good. I mean, I think, Elon Musk has done some good things and some bad things. It's hard to paint people with one brush. We're dynamic creatures. He's not the savior. He's not the devil.

RS: Well said.

DT: AutoZone ( AZO ) and O'Reilly ( ORLY ), right. Keeping on the car thing. Those have been two extremely successful picks for us and we still think they look good. And again, they’re just great business models, very efficient that people overlook because they're not as sexy.

Well, let's see here, what else is on the list? For sure meme stocks are on this -- a couple of those are on the zombie stock list. Some of those have got a lot of money though. So they're going to be around for a while. When we get into the nuts and bolts around basic materials, Warrior Met Coal is extremely interesting stock.

A lot of people think coal, ESG, it's terrible. But there are two types of coal. There's metallurgical coal and there's thermal coal. Thermal coal is the stuff that does most of the pollution, is used to create electricity, used to create heat, big pollutant. Then there's the metallurgical coal that's required to create steel or use in about 80% of steel production.

And we need steel like it's going out of stock. We need steel to build all the solar panels and turbines. I mean, in fact, steel is one of the most important ingredients in all the green energy infrastructure. We need steel to build cars. We need steel to build machines, and so this metallurgical coal company has just been decimated valuation wise if it's going to go out of business.

And yet it's supplying one of the most important ingredients to one of the most important, I think, sector, we call it sector, but groups of companies, drivers in the world, and that's steel, steel demand, and for that matter we like couple of steel companies, Nucor ( NUE ) and Steel Dynamics ( STLD ). They’re - all these stocks are trading as if their profits are going to permanently decline by 40% or 50%.

RS: And would you put that just at the sector that they're in?

DT: I'd put it, I'd put it like specifically for steel. So basic materials is a bigger picture. I think there's other opportunities similar to that, that are kind of coming back to the theme I mentioned before. We're getting ahead of ourselves on the big picture with AI and things just and robots doing things, right?

But what's building the machines? What's building the robots, right? What do we need for that? We still need steel. We still need steel for all the stuff that keeps the world going in its current form. So and we still need a lot of basic materials for that matter. And so, yeah, I think those are examples of those kinds of opportunities, if that hopefully that answers the question.

RS: Yeah, I think, it does. What are you looking at in the financials?

DT: We like Zions Bancorp ( ZION ). We like Discover Services ( DFS ). Discover, we put that on our long list a few months ago. It's done extremely well. I think I'm not sure on Zion. I think it's still relatively flat. Both of those are businesses that have got great underwriting and good capital cushions.

I also like Schwab ( SCHW ). Schwab's capital cushion and ratios are quite as strong, but it's a more diversified business. And so I think there's some potential near-term pressure on Schwab and having to sort of raise some more funds.

But ultimately, I think, you're going to get -- you're getting Schwab now at a great discount and same as -- same for Zions, same for Discover. They're all trading as if they're, well, Zions and Discover trading as if profits will permanently decline by a huge amount. Schwab is just way cheaper than we've seen in a long time and we just think it's one of the most prime great businesses in the financial sector out there. Similar with JPMorgan ( JPM ). I've said that JPMorgan is safer than an index fund.

RS: Why?

DT: Because I think - when I say index fund I mean like the S&P 500, because the S&P 500 has got so much junk in it right now with respect to technology and narrative driven, speculative driven stocks.

Whereas JPMorgan is just I mean it's big, diversified, best returns on capital in the business. Huge amount of free cash flow. I think the beta on JPMorgan is going to be better than the beta on the S&P 500 and I think through and through, overall, you've just got a better overall profile of the business. If you aggregate all of the -- all the companies up for the S&P 500, you're looking at a free cash flow of around 3%, and JPMorgan's got 6%.

You're looking at higher returns on capital, but not as good at trends in economic earnings for the S&P 500 versus JPMorgan. When you're looking at valuation for JPMorgan, you've got a price that implies a permanent 20% decline in profits.

The S&P level, you're looking at a price that implies a 450% improvement in profits. And the net present value of future profits is 450% of what current profits are. That's what's baked into the price of the S&P 500. Baked in the price of JPMorgan is a permanent 20% decline in profits. So risk reward here is just phenomenally better.

RS: Do you have -- do you have broad thoughts on regional banks and bigger banks, given kind of what we've seen in the market this year?

DT: Nothing too, I think, too revelatory, Rena. I think, the big banks versus the small banks, big advantage, right? That's kind of what's - that's for sure, that the big, big banks don't have the same risk that the regional banks carry.

And I think at the regional bank level, the answer is not, not sexy or exciting, but you got to do your homework. You got to sharpen your pencil. And there are some great opportunities and values out there. And there are some risky ones still.

And I think long-term a lot of this is all narrative driven. I think, when you look at First Republic, yeah, they made some bad investments, but until people started like sort of pulling the flowers up out of the ground to check the roots, right? And like, people to mark things to market that didn't necessarily need to be mark to market. That's just been bad for society, and force some of these businesses out.

And I think what happened with Silicon Valley Bank (SIVBQ) was, you had a phenomenally terribly run business, and they deserved to go out of business, precipitated by some of the very people who got bailed out. So I think we'll probably look to history. We'll probably not to -- look too kindly on all that.

But at the end of the day, this decline in trust in the banking institution to effectively borrow short term and lend long term, which is what they're supposed to do, so people can get yield, the fact that that is now being effectively thrown under the bus as people become so bloodthirsty for higher short term returns and as they see those evaporate in other places where they've been able to get them easily in the past, they're effectively kind of undermining the core elements of trust in society,. that's not a good thing.

RS: Yeah. While being mindful to not put the robot before the cart, how are you looking at tech ?

DT: Very similarly. I think you've got to really just be discerning. Look, I mean, that's a theme that I feel like is overlooked these days. The importance of discernment in everything we do. Allocating all of our resources, emotional resources, physical resources, financial resources, spiritual resources. Right? Emotionally, you don't want to invest a lot in people that will betray you.

You don't want to invest in folks that aren't going to provide you a good return, and that's not a exploitative thing. That means, if you love someone you want to be loved back, you deserve to be loved back. Right? That's a return on your emotional investment. I think the same is true physically. We don't want to go out there and pound our heads into a wall. We're not going to get a good return on that behavior. If we exercise, we probably will.

And I think people need to think about investing in the same way. If you put money into businesses that take it and burn it or reallocate that to Wall Street and executives, you're going to suffer. If you put money into businesses that can take $1 and make it into $1.20, you're going to prosper. As long as you buy that investment at a good price. Effectively the real way is to think about, I need to buy that investment at a price that implies that company is going to take $1 and make it into $0.60, but the company actually takes $1 and makes it into $1.20.

That's what investing is about. Right? You have to buy low expectations, sell high expectations, and that's what makes it a little bit difficult. It's because the expectations play such a role here. And if expectations get abnormally high in a way that just drives the price higher and higher, the self-reinforcing sort of narrative that's based on no real connection to fundamentals, you get in trouble.

So I want to make that distinction. It's not as simple as just putting your money into something that's going to make value, make money. You have to buy it at a price that implies it's going to make less money that it actually makes. That's the point of the stock market. That's the whole mister market analogy. Buy for mister market when he's overly pessimistic, sell when he's overly euphoric. And that's a - that's a dynamic.

But the general underlying theme here is that we as individuals in a free enterprise society are the ones who have to be responsible for allocating resources intelligently. Can't expect anyone else to do that. That's not your money manager. That's not necessarily your fund manager, your mutual fund or hedge fund or even financial advisor.

You got to make sure that they're doing that kind of work responsibly. We can't just pretend that it's going to happen. Because if we do choose to advocate that, we're going to see continued misallocations of capital. And that, I think, ultimately leads to the demise of our society. Because if we keep wasting money, you can't burn it forever.

RS: You think this AI hype, are you likening AI hype to just frothy, frothy companies getting swept up in a narrative ?

DT: A lot of it, absolutely, just like we're seen with every other kind of hype. I mean, look at the fast casual restaurant hype. Hype is everywhere all the time, especially in a world where it can be whipped up and channeled and profited from so easily. Right? I mean, people are selling activity on Reddit to institutional investors. People are selling activity on Robinhood to institutional investors, payment for order flow. Information is currency, and there are big firms that are set up to do nothing but exploit it.

And AI is just another one. Does that mean all AI businesses are bad? No. Again, you got to be discerning . Some AI is positive. Some is great. Some isn't. But Wall Street is going to sell you on all of it, so it can sell you more of it. Right? Just like a car dealer or any salesperson. Do they want to sell you more or less? Do they want you to be more or less educated? Do they want you to be more or less discerning? No. They make money right now by selling as much to you as they possibly can. And I've been on Wall Street and I've seen that's exactly what the behavior is all about.

There have been many books written on that, whether it's Michael Lewis or Nassim Taleb. I mean, they've written books. Like, biography -- biographies on just the personalities, and I've seen it firsthand. They want to make as much money as they can right now. That means, saying whatever they need to say to get you to buy as much as -- as much of what they're selling as possible. And that's part of why I kind of say, look, be discerning, understand what you're up against, realize. These people in Wall Street made lots of money. Why? Because they're good at selling, the best salespeople in the world. We've seen it, time and again.

So understand that if that's who you're up against, do some diligence in making sure they're telling you the truth, making sure that you understand the fundamentals. Don't just trust what you hear.

RS: So what's a good example of discernment in the tech space? What's a good example of that?

DT: Of a tech stock that we like?

RS: Yes.

DT: Let me go through the list here. I'm trying to think of -- Intel ( INTC ) is one that jumps to the top of the screen here. A great stock, really cheap that's just been beaten down for a long time. That has a lot of tailwinds, whether it's the re-shoring of a very important industry, whether it's the growth of a very important industry, in many ways Intel is sort of a pick and shovel for AI. And the continued digitization and growth in data.

Cisco ( CSCO ) is another one of those. That’s like that. And those are two examples I think of being discerning, understanding where there's not a lot of hype and where the underlying fundamentals and economics of the business are good.

RS: What do you think investors would be best served knowing in terms of looking at how much tech is affecting different sectors of the market? How do you think that investors should be thinking about tech influencing different sectors? Do you think that it's specific to the companies, or do you think that there's, broadly speaking, companies getting into different things that aren't going to make sense for them?

DT: I think it comes back down to good management. Right? Is management discerning? Right? Think about that. Investors are the owners of capital. Managers are effectively their agents, Right? Agents job is to grow your capital. Their overriding prime directive is to grow that capital. Take that dollar, make it into a dollar more. Which means they better be discerning about how they allocate your capital. That's their number one job.

If you got a management team that's got a good track record of being discerning, well then you're in good shape, hopefully. Right? I mean, unless they go nuts and all of a sudden, lose it. Right? And how do you measure whether or not they have a good track record of being discerning? You look at the return on invested capital over time of that business. You look at how much cash flow the company has generated on the capital that has been invested with it or trusted with it. That's what you got to do. And that's number one, first and foremost.

The second part of the answer is, I like to say to our team here, technology is every sector now. Right? It's healthcare or basic materials, technology is changing the way they -- if it's not changing the way you do business to make -- to do business better, then you're falling behind. Technology is really everything. Right? So I think that's -- that to me, I think, has been in place for a long time. Honestly, since the beginning of time, right? If you're not using sort of new methods to get better, to do things differently, you don't really have a sustainable business. Right? Because we live in a competitive world. Right?

If there's one thing that we've learned as a society, we know about ourselves, we all want to make money. Right? Everybody wants to be rich, and capitalism is something that can be very effective and also can be very ineffective, but ultimately it taps into this underlying desire to get more for ourselves.

And that means that if you got a way to get a lot for yourself, people are watching, and they're going to copy it. So if you've got a 70% margin, and you're doing well, people are going to come in and say, hey, you know what I can -- I'm happy to take 60% and still make a profit. And then someone comes along, says I'm happy to take 50%, and then someone says 40% and 30%. And let's just say that the threshold for making money is 10%.

Well, that business quickly goes to a point where the margin gets down to maybe 10.5%, unless someone in that business can do things in a way that their competitors can't, then they can generate higher margins.

That's the process of competition. And so you've got to constantly innovate and reinvent yourself, or your -- or the competition will effectively eat away your margin. And technology is one of the most important best ways to do that. Technology and culture.

RS: Culture, like, in the company you're saying?

DT: Yeah. I think culture. I think that is to motivate and attract good people who will do better than folks who don't care.

RS: Yes. Well, David, I really appreciate you getting both esoteric and practical with us. I think a lot of food for thought. I'm interested, you've been with Seeking Alpha for almost as long as I have. I'm curious what your - what you get from writing for Seeking Alpha or maybe what your favorite thing about writing for Seeking Alpha has been?

DT: So, Rena, yes, I think the exposure on Seeking Alpha has been great for us. We used to put a ton more out there on Seeking Alpha. We pulled a lot back because what we do, I think is some sort of very high value add work. But I love the exposure to lots of people. I love the exposure to a lot of different ideas. I love the interaction with people who read articles.

I think it's become a great marketplace for a lot of self-directed investors to get a lot of good research. I think it's really important to remain -- to be discerning, I think, for sure. Everyone gets caught up in certain fads, and we've seen times when some of our articles do extremely well, and then don't do well. It's just because people are moody. But I think what you'll find from our research is that it's very consistent. We beat the same drum. We care about discernment. We care about helping our clients become more discerning, and we're extremely discerning at our own research.

Nobody does a better job at getting to the truth about earnings than we do. That's proven independently by papers from Harvard Business School, Ernst & Young that have been published in peer reviewed journals. And we apply that to our ability to see which management teams are most discerning in our measurement of return on invested capital, which flows into our evaluation analysis, which helps us understand how euphoric or pessimistic mister market is about the stock, so people can make good decisions about buying good businesses at good prices.

And that's what we're going to focus on day in, day out, and sometimes it's more popular than it is at other times. But people can trust that we're always going to stay true to that.

RS: Yes, got to stay with a little traditional success in the face of all these newfangled disruptions. And thanks for spending time with us today and sharing so much of your insights and going deep with us. And here's to the next conversation.

And I always enjoy reading you on Seeking Alpha, and I imagine many people listening do too. So appreciate you sharing your insights with the larger Seeking Alpha community, and thanks for coming out today.

DT: Thank you, Rena. I enjoyed being with you.

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It's All About Liquidity - David Trainer