The following are links to some of the topics mentioned in this episode:

Where the Money Is

Gravity Capital Management

Adam Seessel on Linkedin

ChatGPT

OpenAI

New Bing

Nathan’s Hotdogs

Hello and welcome to The Way I Work, a podcast about how people get work done, brought to you by Rigby, a staffing and services company based in Zurich, Switzerland.

If you are looking to hire or to be hired in Switzerland, let us know. The best way to do that is by sending an email to contact@rigby.ch. We'd be happy to help.

Today, we are joined by Adam Seessel. Adam is the founder and managing member of Gravity Capital Management, a firm in New York.

Prior to starting Gravity, Adam worked for Sanford C. Bernstein, Baron Capital and Davis Selected Advisors.

Since beginning a record of stock market performance while at Davis Fund in the mid 2000s, Adam has beaten the S&P 500 index after fees.

He's also a regular contributor to both Barrons and Fortune magazines and is the author of the very enjoyable book ‘Where the Money Is’.

Adam is a value investor who synthesises old-school financial principles – so, return on capital, dominating your market, moats, free cash flow etc. - with new economy principles.

Adam, thank you for joining us.

Daniel, thanks for having me.

Adam, growing up in New Jersey, was it always clear to you that you wanted a career in investing in finance. What got you started on that journey?

No, not at all. I thought from the time I was, gosh, a teenager or earlier that I was going to be a journalist and a writer the whole time.

You know, I didn't major in journalism, but all my internships and so forth in college were in journalism. I got a newspaper job right out of college and was a journalist through my twenties. So finance was very far from my mind. I wouldn't even say it never crossed my mind, but when I was turning 30, my wife and I were going to have a family and journalism paid terribly even back then. And this was before the internet. The hours were terrible as well. And I wanted something more stable and more lucrative as I was getting ready to have a family.

So I had buddies who'd gone onto Wall Street at the height of the '80s bull market. And they said, look, being an analyst and being an investigative reporter, which is what I was, are very similar. It's just that the methods are different. You have to learn accounting, which I did. And then the aims are different. Journalism is trying to tell the truth and help democracy function, which I enjoy doing. And money management and stock analysis is trying to make money for people, which it turns out I also enjoy doing.

So in many ways, like the book that I wrote that you read, it was sort of a synthesis of my first career with my second.

You know, in this series, we're looking at how people work. Could you tell us what's a typical workday looks like for you?

Sure. Fortunately, unlike journalism where there's so many deadlines, it's pretty tranquil.

As I say in the book, money managers aren't compensated for their output, for their productivity. They're compensated for the quality of their ideas.

Very important that, you know, as a money manager, I stay centered and sort of focused but also relaxed. So, you know, when I'm in New York where I work, I, you know, get up, I read my newspapers, I watch the news on television, then I go into work.

And a typical day is basically, you know, a mixture of sitting here reading financial statements, and, you know, trade magazines, trade publications in the industries that I follow.

So a lot of reading, a lot of research, you know, reading online and so on and so forth.

And then talking to people, you know, so later today, I'm talking to a new company that I haven't spoken with.

You know, in journalism, I mean, one of the many reasons that the career change was not that hard is it's very similar in the sense that you have a network of sources that you build up over time. So now I've been doing this 25 plus years, so I have a very good network of sources. So I'm talking to them, talking to companies, talking to suppliers, talking to competitors. And then of course, you know, I try to get out on the road to actually meet companies and actually see how things work. Because when you're behind a desk in New York city that that is not often a good way to understand how the real world works.

So either I'm at my office reading or talking to people on the phone or I'm out and about doing research on companies.

I think you've just come back from some time on the road, right, Adam?

Yeah, I just came back from two weeks on the West Coast visiting data centers. So that's a good example, Daniel, of what I do. I get out there and Peter Lynch used to say, "Kick the tyres", like on an automobile. So, as a money manager and an investor, it's very important that you get out and see what's actually happening.

Yeah. And you quoted Bruce Springsteen in saying, "Those jobs are gone boys and they aren't coming back." Do you worry that with the rise of AI, even more of the jobs that we've grown up knowing about will now go away?

I think it's inevitable that AI will replace some jobs. On the other hand, I'm not in the alarmist camp, because the history of human civilisation and progress and technology has been, every now and then, we have these big shifts in the economy, like we are having one right now, with tech. But before that, we had the industrial revolution. And then we had the McCormick threshing machine, which displaced a lot of rural workers. We always think it's the first time, but it's never the first time.

What did the Bible say? There is nothing new under the sun? So we've always had disruptions and dislocations like this.

What ends up happening, Daniel, is civilisation finds new ways to put workers to work. So farm workers were displaced when you needed 20 hands to thresh and then you had a McCormick thresher. Well, those guys ended up going to the city to work in the manufacturing economy. And then when we got more automated, it turns out you ended up needing more overseers to watch the machines.

And productivity - the great thing what happens about productivity is if you can produce more with the same amount of workers, that generates wealth. And if that wealth translates into higher wages for workers, they can afford more to buy more stuff, which generates demand for new stuff, which creates new jobs.

So I'm not a big catastrophist, because I see this in the the stock market where every crisis that I've been through, you know, the narrative is always the same, the world's going to end, you know, it doesn't matter whether it's the financial crisis or the dotcom bust or 9/11, you know, or COVID, pick your crisis. You know, the narrative is always that, you know, ‘this is it’. And it's never the case. It's never the case.

So yeah, I think we're going to I think we're going to muddle through although not a considerable dislocation for those people who are blue collar workers. And I think we need to pay attention to those folks politically and figure out how to make it to the other side as fast as possible, so to speak.

And have you had time yet to form an opinion on whether breakout AI technologies like GPT might disrupt search in particular, and pose a threat to companies like Alphabet?

Yeah, I have had time to think about it. Of course, Alphabet, as I say in my book, is a big holding of mine, so I better have thought about it.

It's interesting because Google is way ahead of ChatGPT. They've been doing this for many, many years and throwing billions and billions of dollars (at it). They've been much more secretive about it than OpenAI has been.

And Microsoft frankly used it as a publicity blitz, which I don't blame them. I mean, they've got three or four percent market share of search in Bing. So what do they have to lose? Throw some spaghetti against the wall and see what sticks.

But it's turning out, it's becoming pretty clear to me that chatGPT is not helpful in search for a couple of reasons. First, it's not integrated into the internet. It's a static pool of information. I believe the last ChatGPT refresh was December, 2021. So its data is current up to a year and a quarter. So it's like 18 months behind its knowledge. So I don't think it's going to help search much.

It's just a giant repository of knowledge that can synthesize that knowledge pretty quickly. I think where it'll help is in the tools that we use.

So I think it's going to help Microsoft a lot with Excel and Word, you know, helping people write stuff, helping people do spreadsheets, helping people program coders, it's going to help them.

It's going to short circuit or shortcut a lot of processes that we now spend a lot of time doing. It'll just help us move us along. So I think it'll enable a lot of productivity tools. And I think Microsoft will get paid for it, but they won't get paid for it in search. They'll get paid for it in their office suite.

You know, I have personally spent a lot of time trying to build tools, in Excel in particular, and learn things like Power Query and how to write all these long complex formulae. And then along comes this tool. And you can ask it to give you a formula to do different things and it will do it in seconds. It's amazing!

Right. So, you know, from a commercial perspective, you know, we should expect Microsoft to come along and say, "Hi, you know, we're doing a lot more for you, so we're going to raise prices." And I think those prices will stick for two reasons. One, there that the value proposition has gone up, so I don't think anyone would complain. Like, "yes, you've made it more valuable to me and I should spend more."

And two, where else are we going to go?

Yeah, they have a virtual monopoly. So quite bullish on Microsoft.

Do you still believe that the Jeff Bezos quote "treat Google like a mountain, you can climb it, but you can't move it" holds true?

I do. Yeah, I do. Search is such a good business and people People are habituated to it and they're already using a lot of the AI stuff in the background. I tried the new Bing search with chat GPT integrated in it and it's still not as good as Google search as far as I'm concerned. Plus, people are habituated to Google search. It works. They know it. And if it ain't broke, don't fix it.

A bit of a different question - you mentioned once when you were speaking about Amazon that every time you receive a delivery, it feels like it's your birthday. Have you had any especially interesting finds there lately?

That was a body of mine, not me. I can't claim credit for that quote!

Well, let's see. I'll look at my search history of Amazon or my order history. Let me go on, see what I've got. I mean, it's the Emporium, you know? So I've got shampoo and conditioner, I've got protein powder. I've got some multi vitamins, a couple of books, coconut water, New York magazine. Yeah, I mean look, you know, it's easier, it's faster and it's cheaper than retail, you know physical retail shopping. So, you know, why wouldn't I do it?

Right.

And, you know, people think that Amazon is so mature because it's because it's already so huge. But do you know what percentage of online sales or e-commerce is as of the total US retail sales?

Yeah, it's still a tiny fraction. Isn't it 15, 20% or something like that?

Yes, it is 15%. That's right. So, you know, what's that number going to be in 10 years?

And then you know, Amazon is integrating, vertically integrating, and you know delivering more and more of its packages. Two thirds of its packages now are delivered by Amazon, two out of every three Amazon orders are delivered by Amazon. Amazon is actually a larger shipper now number of parcels than FedEx if you can believe that.

Yeah. You know, in your book you mentioned that GAAP accounting was created in the wake of the depression to standardise accounting and that these rules were written for the industrial age. They weren't written for the technological age. Could you give us an example of how GAAP accounting might not be fit for purpose today in the technological age?

Sure. Well, yeah. I mean, those of your listeners who are interested in finance and accounting should definitely pick up the book, available on Amazon I might add, because it does talk about these sort of things. It talks about how the early 21st century, whether as investors or as accountants or as just human beings, we haven't really wrapped our heads around how tech has changed our economy and how it's enormously valuable.

Obviously, the stocks are enormously valuable, I don't think we quite understand why.

And one of the main reasons I think people still are amazed at Amazon's run, for example, is that I think their average PE ratio over the last generation since they've been public has been 150 times or something like that. Whereas the average stock is 15 times.

So the stock has been 10 times more expensive on a pound-for-pound basis than average, and yet it's vastly outperformed the stock market. So how can that be? Even now, it's multiple is probably 100 times.

Its e-commerce earnings last year on a reported basis were virtually nothing. Whereas Walmart's margins, which is their best physical comparable stock, or Walmart's operating margins are sort of 5 or 6%. So is Amazon, which operates online, less profitable than Walmart? No.

The answer is no. And there are two reasons for it. And I'm going to get to GAAPa County here in a minute. But the first reason is that Amazon is spending a lot of money through the P&L for future projects, like spending billions on their moon shots like Project Kuiper, which is this ambitious effort to put up a bunch of low level balloons and connect the internet to Africa and difficult parts to reach in the world.

Now, Bezos is a capitalist, so he's not doing this for fun or for the goodness of his heart. He thinks he can earn a return, but there's no money associated with those losses. So they're spending a lot through the P&L on Moonshot projects, which depresses their profitability. That's the first point.

The second point, that goes directly to GAAP accounting, is even on projects that clearly have a multi-year life, Amazon is spending through the profit and loss statement, and they're required to expense those dollars 100% in year one.

So for example, all R&D spending, virtually all R&D spending for Amazon and other tech companies is expensed immediately. Whereas a factory has a 20-year life. So if you spend money on a factory, you can write that off 5% at a time, so to speak. Whereas if Amazon spends money to improve its e-commerce website, only a fool would say that has only a one year useful life, right?

Every dollar Amazon spends to build its advantage, to build its moat in its e-commerce business has a clearly a more than one year life. You can argue is it three, is it five, is it 10. But conceptually, there's no way they should have to write off those expenses 100% in year one. And yet they do.

So that's how GAAP penalises. It penalises both the sales expenses, sales and marketing expenses, and the R&D expenses that these tech companies are doing, that clearly have a more than one year life, but GAAP requires you to write them off in one year.

So for example, if I could just expand on that point. For example, like a lot of tech companies uses this, you know, this metric LTV:CAC (Customer Lifetime Value (LTV) to Customer Acquisition Cost (CAC)), which is basically trying to figure out If we spend a dollar on marketing, how much are we going to get back over the lifetime of that customer?

If I spend a dollar to acquire you as a QuickBooks online customer Daniel, they think historically speaking they've gotten three dollars of revenue out of you for that dollar of acquisition cost, and if that comes on that $3 at a 20% margin, that's 60 cents of profit that they've gotten for spending a dollar in marketing, which is a 60% return, right? Which anyone would do. It as an excellent return. But they have to go through these calculations, which are non-GAAP, because every dollar in marketing that they spend is is is expensed immediately. They don't they're not allowed to capitalize it.

But conceptually, they think of it as an investment because it is. And yet GAAP doesn't capture that.

So GAAP is sort of, in my opinion, outdated in a couple of really material ways.

You know, we were thinking of using some of it into its products here, but they're not available in Switzerland. Do you think they'll ever crack international rollout?

You know, it's been hard for them. It's been hard and it's hard precisely because, you know, the products that they design are so complicated and so geared to, you know, individual geographies, whether it's, you know, the US and their tax prep or..

Sure.

And then there's the language problem. So they've been rolling out products in English-speaking areas like the UK and Australia and stuff, but yeah, they have had trouble internationally. So I'm not surprised to hear that they're not available.

I mean, we use MailChimp. Were you happy with that acquisition by the way?

You know, I'd say that's a question mark. So we'll see if that works out. Credit Karma was a huge homerun. That's going to be a huge homerun. MailChimp, not so sure. Let's see.

Mm-hmm. We'll see.

You mentioned once that there's a commonality between businesses as varied as, say, Nathan's Hot Dogs to Amazon to Alphabet. Could you tell us what you mean by that?

Yeah. I mean, Nathan's Hot Dogs, which I own, has a market cap of $250 million, and the Amazon and Alphabet, which I also own, have market caps of $1 trillion.

So, and Nathan's Hot Dogs is a pretty old economy, and Amazon and Alphabet are not old economy, but they both dominate their markets. They all dominate their markets. And that's what I look for in a business. You want to look for a business that's a battleship. And so, some battleships play in much smaller theaters of war, so to speak.

Amazon has 40 to 50% market share in e-commerce. Google has a 90% plus share in search. And Nathan's has not so much a dominant share in market share because they're kind of a niche provider, but they're the really, along with Hebrew National, they're the only branded hot dog in America. And the CFO used to call them, the CFO Nathan used to say, "We're the apple of hot dogs." And what's interesting is they don't even make hot dogs. They license their name to a beef and pork producer who pays 11 cents on the dollar for every dollar of hot dogs. The pork producer and beef producer sells, they pay nascent 11 cents. So it's totally asset light, you know, royalty model.

And you know, I think Ralph Lauren gets 6% on its name. So the Nathan's name is almost twice as valuable as Ralph Lauren. So there are so few hot dog brands out there.

So I look for dominant companies that dominate their business, whether they're large or small.

Mm-hmm. You know, Adam, this has been really interesting. I think we could spend the whole day talking, but we'll include links in the show notes to your book and to some of the other things that we've spoken about.

Could you tell our listeners where they can find out more about you?

You know, you can Google me if you'd like. I mean, everything's out there. You know, I've done a whole bunch of podcasts. I write occasionally for Fortune and Barrons and MarketWatch.

So, I appreciate you having me on. I enjoyed it.

Yeah, likewise. Thanks, Adam. All the best.

All right, Daniel, take care.

So there you have it. A little bit of insight into how Adam Seessel works. You can find links to some of the things that we spoke about in the show notes. We'll be back soon with another episode, But until then, if you're looking either to hire or to be hired here in Switzerland, let us know by sending an email to contact@rigby.ch.

Lastly, if you enjoyed this episode, please help us spread the word by taking a moment to rate and review the way I work podcasts in the iTunes store. It really does help.

So thanks and until the next time.

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