Anthony Scilipoti: The Bubble No One Is Talking About  ## Metadata - Author: [[The Knowledge Project]] - Full Title: Anthony Scilipoti: The Bubble No One Is Talking About - Category: #podcasts - URL: https://share.snipd.com/episode/2a5c8148-3fa2-41c8-85c8-f7b2a13b2b82 ## Document Notes ## Highlights - **AI Gives Information, Not Insight** - AI speeds retrieval but doesn't replace expert judgment linking facts across statements. - Anthony Scilipoti warns AI gives information, not the insight needed to make decisions. Transcript: Anthony Scilipoti I asked ChatGPT to tell me, what about this? Look for that. Look for that. And there's all the instances of those things. And then I just read it and it's all there. Well, did the AI miss it? Did the AI understand the linkages between each of those sightings? If I'm looking at, for example, I was looking at a company recently and I was looking at, it was capitalizing costs. Okay. This is a REIT. And if it capitalizes costs versus putting them through the income statement, if it goes through the income statement, it makes their operating earnings look poor, lower, and their Net EPS ultimately. But if they put it on the balance sheet, well, you know, that's an investment in the future and everything looks okay. Right. And so there's a gray area. Was it an operating expense or was it a capital item? And so I was, first thing I looked for was capitalized interest. And so it gave me all the quotes and then capitalized costs and gave me all the quotes. So then you think that that's enough, but you have to then, and I, and I was showing one of my guys, this is a, so then let's go to the income that let's actually pull up the statements where It told us to go. Because AI made it faster. I now no longer needed to flip the 300 pages. But it gave me where to go. So now I went there. And now I could say, well, that means if that is what's happened, then we need to look at this other note to see the implications of that. And then we've got to look at the cash flow statement to see how it's actually impacting what ends up being reported as cash flow. And so those linkages come. ([Time 0:08:00](https://share.snipd.com/snip/2adb5ff1-a1f2-496b-a54c-3ba1c0a8f2e7)) - **Cheap Risk Means Hidden Vulnerability** - Low market risk prices signal high systemic vulnerability according to credit spreads and VIX. - Scilipoti sees tight high-yield spreads and benign VIX as signs risk is underpriced. Transcript: Anthony Scilipoti The reason why I think we're in a very high risk situation is because the cost of the risk is priced very low. And that's when the risk is highest. And so how do we look at that? We look at the high yield bond spread, the spread between the 10-year bond and the high yield bond in the US. Okay, that's the non-investment grade bonds. Well, that's the tightest, near the tightest it's ever been, which means that investors are willing to lend money to non-investment grade companies at a spread over what a government Bond is at a rate which is the tightest it's been practically in history. So there's no risk priced into the bond market. And then in the equity markets, we use VIX, which is a measure of volatility of the S&P 500. And that is trading at a benign level. It's not the lowest it's ever been, but it's at a benign level. So in essence, ([Time 0:21:00](https://share.snipd.com/snip/57996e70-ff68-4f17-bb96-a66433971d79)) - **Nortel Report Launched Veritas** - Veritas began after a sell report on Nortel in 2000 that few believed at the time. - Anthony Scilipoti recounts how that report launched their independent research firm. Transcript: Anthony Scilipoti And so that's an independent equity research firm. And then later into also an asset management arm. And all of that started because we wrote a cell report on Nortel in 2000. And people thought we were crazy. And, you know, at the time I was 29 years old, so I didn't realize what I was actually doing. It's amazing when we're young. But you didn't realize the impact of what you were doing. I didn't. You knew the accounting. I knew what I was looking at, but didn't realize that if you drop said pebble into the water, what happens? And then when John Roth gets quoted in the newspaper that we're hurting his ability to raise capital and clients are canceling and, you know, employees are contacting us upset because Of the things we're saying. And it's like, I didn't mean to hurt anybody. I'm just saying the truth, hence the name Veritas. So let's link to what I think some of the linkages from the past. ([Time 0:28:06](https://share.snipd.com/snip/48736910-5280-4c4e-a08d-858cc0ff5d9e)) - **Circular Investments Echo Nortel Era** - Modern AI-era industry relationships mirror past circular customer-supplier financing problems. - Scilipoti points to investments between vendors and customers as repeating Nortel-era symptoms. Transcript: Anthony Scilipoti So you have the likes of the NVIDIAs of the world and let's say Microsoft and you have OpenAI and such, and NVIDIA is investing in OpenAI. And Microsoft is an investor in OpenAI. Microsoft offers cloud services to OpenAI. So it's a customer. So OpenAI becomes a customer of Microsoft, but Microsoft gave it the money so that it could actually pay it back. NVIDIA invests in OpenAI, and NVIDIA is a supplier of chips to OpenAI. So it's all circular, what's going on here. There's a new company that just went public earlier this year, CoreWeave. Who is its largest customer? CoreWeave provides data transaction, analysis on chips, right? It's a data farm for the large AI users, like Microsoft. Its largest customer is Microsoft. Microsoft hasn't invested in it. But NVIDIA supplies pretty much all its chips, while NVIDIA is a large or is a meaningful investor in CoreWeave. CoreWeave goes public. It's trying to close its equity, its financing. On the last moment, NVIDIA buys $250 million worth of shares of CoreWeave so that it could close the deal. These are, you know, JP Morgan gives them a loan so that they could just before they go public and then they go public and repay the loan to J.P. Morgan. Who's one of the lead underwriters? J.P. Morgan. No one's doing anything bad. No one's cheating. It's just these are all the same type of symptoms of things that were going on way back some 25 years ago. All these things don't mean anything. ([Time 0:30:38](https://share.snipd.com/snip/1393e9f3-39d9-435e-aeaf-60831e7089bb)) - **Avoid Embarrassing Losses** - Avoid investments that can cause an embarrassing permanent loss of capital. - Accept short-term volatility but reject companies that can collapse 20–50% overnight. Transcript: Anthony Scilipoti His number one rule is don't lose money. And my concern with don't lose money is any investment requires the absorption of risk. And so if you're not willing to take some level of risk, which means potentially to lose money, you won't make money either. So you don't want to invest from a position of fear. You want to invest, I think, so my number one rule is avoid embarrassing loss. You want to avoid the loss of a company potentially blowing up. If the company might, you know, if it looks like it's a little bit expensive and it might, and it might potentially go down 5% or something or 10% or 20. Okay. You can deal with that. But if you're investing in a company where if something goes wrong, you could wake up one day and it's down 20 or 50%. ([Time 0:40:01](https://share.snipd.com/snip/559f94b4-bac2-46c3-9d5d-356b5025eb86)) - **Read The Footnotes First** - Read the notes before the financials to understand accounting choices and prepare interpretation. - Treat accounting as a language to decode how statements were prepared. Transcript: Anthony Scilipoti First, before you actually read the statements, the notes to the financial statements tell you how the company modified the accounting because it made accounting choices. We decided to account for these type of transactions in this way. So then when you look at the financial statements, once you know how they're prepared, you can better interpret them. Accounting is a language. If I said to you tomorrow, you're going to speak Spanish. Oh, you know, you could do AI and you figure it out and you're going to learn it. But the nuances of the language, an individual who did a PhD that language, they're going to understand way more about the language than you are. The same like reading the financial statements. The more you understand of what went into them and how they're prepared, the better you're going to interpret them. ([Time 0:41:52](https://share.snipd.com/snip/27e137b6-f911-4143-8cb7-4ccdde0e5a77)) - **Three-Stage Forensic Investment Process** - Use a three-stage process: understand the business, spot flammable items, then hunt for sparks. - Verify life-cycle, accounting choices, and control environment before acting on red flags. Transcript: Anthony Scilipoti I like the way you pose the question because it sets up what we've learned over time. The problem with red flags is it gets to your point that you started at before where you don't want to be crying wolf. And so I've learned to temper because you could be wrong. It's not red flags. We call them flammable items. Shane Parrish Okay. Anthony Scilipoti So this goes to our process. It's a three-stage process that we use and we teach because we have Veritas U. And so we teach investors how to make better investment decisions. And so the first stage is you understand the business and the control environment. Okay. Again, understand and understand the accounting that's being used so that when you study the financial statements, everything else, they all make sense. And you understand sort of the structure. How is management compensated? What stage of their life cycle are they at? Because those are all sort of constraints and opportunities within the business. So then you look for a flammable item. For example, companies generating negative cash flow. That could be by itself a red flag in the normal way. This type of, I would call, forensic analysis is taught. Unless you know, so if a company's generating negative cash, it may actually be a fantastic thing. They're investing in an AI startup that is going to be a huge opportunity. And they've shown over time that the return on invested capital is in excess of 20% or 50% or whatever it is. And so they're investing in something. Yes, it's negative cash flow today, but I'm not investing for the cash flow today. I'm investing for the cash flow tomorrow. So you see that as a red flag. You don't invest in it. And unless you understood the first part, which was the fact that where they are in their life cycle, type of business, et cetera, that is now not a red flag. It's just a flammable item by itself. Not a problem. It depends. And then you get to the third bucket, which is the spark. ([Time 0:42:44](https://share.snipd.com/snip/32b22c09-370c-4cc0-a80f-2fb5d2464e3f)) - **Metrics Depend On Context** - Free cash flow and EBITDA are context-dependent and cannot be treated as universal truths. - Scilipoti emphasizes "it depends": metrics must fit the company's facts, constraints, and objectives. Transcript: Anthony Scilipoti Not necessarily. No, I would say no. What do you think of EBITDA? EBITDA is the mother of all disastrous measures. Why? Because of what investors want to believe that it is and that it's something that is cash flow, that it's something that can be compared to total debt. And it is not. It is purely an operating performance metric calculated before interest, tax, depreciation, and amortization. That's it. Joint venture gains? What do I do with gains on investments that I made that I happened to sell this year? What do I do with the charges that I took on that acquisition that I bought this year that I included in my EBITDA, the profits, but at the cost that I associated with that transaction, Should I include that in EBITDA? Aren't those one-time costs? If making acquisitions is part of my business model, they're no longer one-time costs. This gets us back to, we have a course called The Secrets of Free Cash Flow. And that's been our most watched and taught course. And that's because it started, we said it earlier, we said free cash flow is operating cash flow, less CapEx. But it's not. ([Time 0:58:20](https://share.snipd.com/snip/ef2acf3d-80c2-4a2f-9206-44de5571862c)) - **Count Stock Options As An Expense** - Expense stock options on the income statement rather than ignoring them. - Scilipoti argues options distort comparisons and should be counted as employee compensation expense. Transcript: Anthony Scilipoti So I think stock options should be an expense. And if they're not an expense, I borrow from Buffett and even the chair of accounting has said things like this, that if it's not an expense, then what is it? You can choose to pay someone in stock options or you can choose to pay them in cash. So if I pay all my employees, you have the same company, we're a competitor, you pay all your employees with stock options, I pay them in cash, I have a lower EBITDA, I have a lower EPS, your Stock trades higher than mine. Stock price goes down. All of a sudden, all your employees leave, and they want to come work for me. And all my guys are pretty happy. They don't care. So you should include it as an expense. ([Time 1:03:45](https://share.snipd.com/snip/fb59fe15-d289-47cc-bdd5-e1f697d5cab9)) - **Passive Investing Concentrates Momentum** - Index and passive flows concentrate capital into a few mega caps, creating momentum-driven markets. - Scilipoti warns the MAG-7 now drags the index and risks amplify if their growth stalls. Transcript: Anthony Scilipoti Again, you know, the price creates a narrative. And so if indexing works, then why not do it? The danger I think we're having of the index investing, passive investing, is that in essence, all that is is momentum investing. Because it's a, you're buying an index which is market cap weighted. So the money that you're investing is going to the largest market cap companies. Those companies continue to grow. They drag the index higher. There's really two indexes. There's the MAG-7 and the sloppy 493. And so if you look at the earnings expectations of the sloppy 493 for this year, there's virtually no growth. But if you look at the growth of the MAG7, it continues to go higher. ([Time 1:12:23](https://share.snipd.com/snip/a0232f1b-3e08-4cd5-8520-3da572e37255)) - **Judge Buybacks By Pre‑Share Earnings** - Evaluate buybacks by checking pre-share EPS growth and whether buybacks hide weakening revenue. - Watch if buybacks are funded by debt that could become costly when growth slows. Transcript: Anthony Scilipoti I'm not so concerned about the accounting stock buyback. So if you're saying it's an investment though. I understand. Yeah. So I think what they should do is they should look at earnings on a pre-EPS. So look at the earnings that the company's generating before you divide it by the number of shares to is that number growing relative to the revenues. Right. Because now you're seeing, or is it just coming from a reduction of stock price, number of shares outstanding? ([Time 1:17:25](https://share.snipd.com/snip/56e3bce6-827f-4614-893a-df806965b9a2)) - **Design Structure To Match Strategy** - Structure your investing vehicle to align time horizons and avoid daily performance pressure. - Scilipoti notes Buffett's freedom to act comes from owning durable operating cash-generators. Transcript: Anthony Scilipoti Natural agency issues related with money management industry. My investors give me their money so I can make a return that is hopefully better than they could make investing passively. If it doesn't end up being that, decide to take it away from me. And then I don't have any money. Buffett has built a business that generates cash. So he has operating businesses, Geico, Prudalum, et cetera. These generate cash. He takes that cash and invests it when he wants to invest it in the way that he wants to invest it. You know, the average portfolio manager can't do that because they're tied to, they have to, like today in the investment management industry, portfolio managers are measured like On a daily basis. If you're investing in my funds, you can look right now and see how we're doing versus the index every second. Why are you down today? My partner that started the business with me says, I don't know, because there was more sellers than buyers today. I don't know. ([Time 1:22:10](https://share.snipd.com/snip/fbb371ff-2eaf-416b-9d33-bfc2dbba72cd)) - **Retail Trading Amplifies Volatility** - Retail power and easy trading magnify short-term swings and create option-driven momentum. - Scilipoti links retail access, options activity, and market volatility to bigger daily moves. Transcript: Anthony Scilipoti Would say that passive investing has always been there. Okay. What I think the more meaningful, important impact on investing today is the power of the retail. I watched that movie called Stupid Money. It was with Hello Kitty. Oh yeah. Yeah. That was great. Um, that is, you know, these are movies. They're fantastic because, and I love the word fantastic. We haven't said it yet, but because it's something supernatural, it's something that is both good and bad and it changed something. And so what that really exposed is the power of the retail investor. Of total investment is the largest it's ever been. And the other thing that's interesting is that the prevalence of all and how easy it is for the retail investor to have just the same information and maybe even better, I don't know, but To have access to both technical, technical looking at charts, fundamental looking at actual financial information, social media stuff, access to that in any way that I could get At very low cost. So when I started in the industry in 1999, okay, and this think of Buffett, he'll tell you the story of he used to read the financial statements and he used to get the chart, the old charts And look at And no one was doing that. They weren't paying attention, even, even investor in institutional investors. And the retail investor was hardly paying attention. We were just learning on dial up. Oh, I remember. And you could trade, but you'd have to call in your trade, right. And wait in line for someone or, and then it started online, but it was really slow, and you didn't get good information, and you didn't get great fills. Now you have interactive brokers. That platform that you get is unbelievable, and all the other comparatives that are coming up that's empowering that retail investor. ([Time 1:27:20](https://share.snipd.com/snip/4da1784e-13a7-46e9-8da6-23c38f8470d9))