Preston Pysh  06:51

Mike, the thing that I really got away from reading through your book was really it’s like value investing for leadership. They’re going out and you’re looking at all the different people that might work under you as a top manager. And you’re saying that person is adding a lot of value, that person is really taking a lot of my time and not adding much value. And you’re looking at that from like a quantitative and a qualitative piece. And then you’re optimizing it that you’re just getting the pure performance. And you’re maximizing that performance, and you’re maintaining that motivation within your people.

And I guess my question is, how did you arrive at this formula? Was this something that you learned at McKinsey? Is it something you learned back when you were at West Point? Or did it just mature through your life as you just continue to see example after example of going into these different companies?

Mike Figliuolo  07:41

I think you’re spot on in terms of thinking it is value investing, but the one difference here is when I go out and buy a stock, I can’t really change the company’s performance. All I’m doing is betting that I’m buying it at a price where the management team is going to change performance and I got value from it. What’s interesting here is you, as the leader, can and should be changing performance.

If you have an individual who is low performing, but you’re not investing a lot of time and energy in them, if you change your investment strategy, and you work with them differently, you can improve their performance and drive a higher ROI on that investment, which is pretty fascinating to think about, you can change your portfolio’s performance in terms of where it came from. I think it’s bits and pieces of a lot of different experiences.

Victor, my colleague, Victor has a very similar background to mine. He has a great educational background, spent time in government service. He was a *Bain guy. He was a contemporary of mine at Capital One and has had some government service since then. And he and I have been working together at my firm, Thought Leaders, for a while. And Victor came to me one day and said, “Hey, Mike, you’ve written a book previously, and I want to run an idea by you to get your thoughts on if this is possibly a book as well.” And he ran the notion of the leadership matrix in front of me. And I said, “First of all, there’s absolutely a book here. And second of all, I think it’s something that’s going to hit a pain point with a lot of the folks that I coach and train.”

And then Victor asked me to co-author it with him.  So, that’s sort of the origin of it. And as the framework was under development, and we were writing it, I was very much applying it to executive coaching engagements that I was in the midst of or had previously completed, to essentially validate the framework.

It’s sort of the summation of Victor’s 20 years, my 20 years, both in military or government leadership, corporate leadership, and then layering on it our understanding of training and development from the decade or that I’ve been running Thought Leaders.

Preston Pysh  09:48

I mean, I’ll just throw it out there. Having read through this, I was looking at each of these chapters, I’m like,” Man, these guys get it like this is really…” I like how simple the approach is, but at the same time, it’s really got a lot of depth to it. And you can tell it’s been really thought out. And if a person can put that into application and really start thinking in terms of, “Hey, I’m making this investment, but I’m making this continual investment in a person that isn’t going to give me the return back versus, hey, I can do a little bit here. And I’m going to get a much bigger solution or an 80% movement. We like to refer to the Pareto principle, the 80-20 rule all that as much as possible.” But I saw a lot of that in your book, you reminded me a lot of a person that maybe has gone through like Lean Six Sigma and optimization within a company and it was just really a fantastic read.

Mike Figliuolo  10:38

Well, first of all, thank you for the comments. And second, yeah, it is about making those wiser investments. And too many leaders out there will sit there and say, “Well, I want to go out and hire a whole bunch of rising stars and high performers. And that’s how I’m going to have an awesome team.” And the thing is, you’re stuck with the people you get, right? We rarely get a chance unless we’re forming our own company, or were brought in at extremely senior levels in an organization to say, “Well, I’m going to get rid of everybody here. And I’m going to create my own team.” More often than not, it’s, “Hey, welcome to the company. Here’s your team, go.” And you have to play the hand that you’re dealt with.  So, the book really helps leaders assess that team, and then figure out where do I invest? How do I change their performance and get them really delivering at the level that I want?

Preston Pysh  11:29

Yeah, that’s true. That’s true.

Stig Brodersen  11:31

My next question is about bad leadership. And I’m pretty sure that’s something that, everybody experienced either if you were a leader, or if you were an employee, but I think that many people that’s definitely including myself… I can’t be quick to blame others.  So, my question to you would be, how do you personally look back at a situation as a leader and objectively evaluate what you could have done differently?

Mike Figliuolo  11:57

First of all, I think there’s a great deal degree of maturity, for anybody to even be able to do that you have to admit that, “I was wrong, I could have done things differently, my way isn’t always perfect.” And there’s just a level of self-awareness that has to come with it. And if you don’t bring that maturity to it, and the ability to set aside value judgments around, “Gee, I’m a good person or a bad person,” but instead look at it as “Why behave this way? And I could have done this differently.” You won’t get there if you can’t bring that maturity.  So, that’s first is really getting yourself in the right frame of mind.

12:31

Second, is then looking at the situation. And then here’s one of the big insights that come out of the book is many times we look at a given situation and say, “Well, I did this when I lead Preston and here’s how I behaved and it worked out great. Therefore, I’m going to use the same exact approach when I lead Stig.”

And okay, the problem is Preston is not the same as Stig, but I’m applying the same tool in two very different situations.  So, what we try to get to in the book is helping leaders understand, look at the situation you’re in with that individual. And there are going to be different techniques that are appropriate or inappropriate.  So, what that then enables leaders to do when they’re going through that situation of saying, “Hey, there was some bad leadership here on my part.” It allows them to look at that situation objectively and say, “I behaved this way. I did these things, and here was the result. And here was a different way I could have or should have behaved, that would have gotten me a different result.” I really like boiling it down to the level of individual behaviors, because those are the things that you can observe and change.

Preston Pysh  13:36

Yeah. It’s amazing the correlation between just basic leadership and investing and where people might apply one type of technique in the past with investing. And they think that they can just apply that again during the next point in time where they see a similar circumstance and it’s not. And you see the exact same thing on the leadership front. I know and I see that with the different leadership experiences that I’ve had as well.  So, that’s a really good point.

On the first thing that you said, Mike, as far as just being open to the suggestion that “Hey, I could be wrong.”   there’s this billionaire that we study and we talked about him all the time on a show. His name is Ray Dalio and Ray really took this to like an extreme level. Are you familiar with Ray Dalio? I’m just curious if hum.

Mike Figliuolo  14:20

Actually not. So, I’m very interested to hear.

Preston Pysh  14:22

There’s this guy. His name’s Ray Dalio, he’s a billionaire. He runs the biggest hedge fund in the world. And he took that idea to like this total extreme where he basically came up with the idea that “I am most likely wrong, no matter what I say, or no matter what I think.” And he has framed his entire company. It’s called Bridgewater Associates. He’s framed his entire company around this idea of, “Hey, here’s an idea. It’s most likely wrong, and I want you to tell me why it’s wrong.” And then whenever he can’t find anybody who’s really saying it’s wrong for all these, these five different reasons, he’s more of the opinion that maybe he is in fact right. It’s just a really fascinating approach. You don’t really see it in executive leadership too often.

With all that said, that really comes down to my next question and why we’re talking about Ray Dalio as a billionaire. And so, we’re really curious: do you have,e and I know you’ve worked with just countless individuals at the executive level…  So, we’re really curious if you’ve ever had a billionaire, any good billionaire stories that demonstrate this idea of optimizing their leadership capital within their companies?

Mike Figliuolo  15:30

It’s really funny to watch leaders at all levels demonstrate these skills. And I’ve worked with several very senior executives, they didn’t disclose to me their net worth, but I’ll put them in that same sort of stratosphere and just watching them interact in different situations. And I think this is the differentiator is that they can sit there and have somebody come into their office or interact with them. And you see them pause and you almost see them visibly pause and assess, “Okay, here’s the problem that’s being presented to me in terms of this person’s behavior or the issue that they’re trying to solve.” And then you watch an hour later they interact with somebody else. And they do the same thing. And they size up that situation. That pause, I think ends up being that differentiator, because what they’re doing is saying, “I have all these instincts that say, I should apply my tried and true tools and approaches here because they’ve always worked in the past.” And what they’re doing with that pause is saying, “Wait a minute, let me check my instincts for a moment before I act, and really understand the situation I’m in.”

I’m not going to get into, names of those individuals, but the ones who have done it have been true artists with it. And then the ones who don’t and aren’t as successful are the ones who say, “OH, I’ve seen this a million times before.” And they start talking before the person is even finished explaining the situation and they’re going to invariably miss things and I’ve seen them miss things because they’re forming that opinion too quickly, and they’re saying, “I’ve been here. I’ve done that.” But the problem is while the world is different or this situation is different. And that’s where you’re going to miss.

Stig Brodersen  17:03

Mike, I’m really curious about this because, on one side, you were talking about in your book about this formula, you have the quantitative approach in many ways as to leadership, which I find really fascinating. And then the other side, you bring this up about leaders, acting on instincts.  So, I’m just curious, like, in your opinion, what do you think like… how should leaders way like with quantitative approach with, say, instincts?

Mike Figliuolo  17:31

What we like doing is just asking questions, and I don’t want to make it seem like wow, there’s this huge quantitative model behind the scenes that’s driving this. We ask some questions and ask people to do some very simple scoring to get them looking in the right place.  So, as I said, it’s a two by two matrix. We want to get them to say okay, you should be looking in the upper right corner or the lower-left corner based on a few really simple answers.  So, we use the quantitative stuff just more to direct people on the type of situation they might be in.

And then we very quickly shift over to the qualitative judgment based space where okay, does this sound like the situation you’re in? If it is, does it sound more like this? Or more like that? Are these the behaviors you’re seeing? Or are those and it really gets into stopping and thinking about the actual situation you’re in, then that guiding the recommendations on here, the actions that you can take.

In all cases, I think we’re arguing against following that first instinct and saying, look, this type of assessment doesn’t take long to do. It requires you to stop and think about a couple of dimensions, in terms of what you’re having to put into the individual and what you’re getting out of them in terms of results. And just that momentary pause is enough to check potentially a bad instinct to keep you from acting inappropriately in that situation, and deploying the wrong leadership techniques. And instead, that pause lets you say, “Okay, I need to do something different here” or the pause may well say, “Hey, I need to follow my instinct. My first instinct was correct.” But again, we have that moment of validation where we’re saying that’s the approach to follow.

Preston Pysh  19:16

I really liked that point because a lot of these leaders at the top level, they’re very calm, and they’re extremely thoughtful. And I think that that’s the thing that I know I have an appreciation for whenever I’m around a great leader is like you said they just take that pause, they think about it. They think about all the different variables, they think about all the different people that they could maybe access before they just get excited and don’t act in a calm manner. I don’t know. I just find calm being such a key element to success and leadership. And based on your comment, I’m assuming you agree with that, Mike?

Mike Figliuolo  19:52

Absolutely. I mean, and there are very few situations where you have to spring into action with your cat-like reflexes.  It’s like, look unless the building is on fire, it doesn’t,  … you can probably pause and think about it. And very few things require an answer within an hour or within even a day when you’re looking at some of these leadership decisions. You’ve got the time.  So, it’s a mistake to rush it, and instead just spend a little bit of time thinking before you act.

Preston Pysh  20:22

Yeah, I love that. Okay,   our audience is obviously really interested in investing. And one of the things that we did on our Buffett’s books website is we were talking about these four rules that Warren Buffett has in measuring the leadership as being one of those key rules that he has. And what we did on the site. And this might not be the way you would maybe do and that’s why I’m bringing up this question, are we use the key ratio is more from like accounting and from an analytical standpoint to say, if you see these stable results with the current ratio with the debt to equity, and you see a company that over the past 10 years that really managed their finances well, there’s probably good leadership sitting behind that. But I was really curious to know what your opinion as an outsider somebody that doesn’t own this controlling share in a publicly-traded company, what can you really do as an investor to say, there’s great leadership behind that company? What are those things that you’re looking for?

Mike Figliuolo  21:18

So, for me, it ends up being about the way you talk about the business and the way you think about the business.  So, I could very easily see a company that is turning out great financial results that has horrible leadership. And this goes here investing timeframe, as well. But I’ve been in organizations where people just beat the numbers out of their teams, and eventually, the team leaves and you have turnover and eventually, the business hits that point where it runs into a crisis and they fall apart because they don’t have good leaders. And I’ve been in other organizations that drive the same exact ratios, but they’re leading very differently. They’re treating their teams differently. They’re empowering people. They’re making the right investment decisions in terms of investing in their people and investing their time.

I think it can be really dangerous to just look at those financial metrics and equate it to good or bad leadership. I think there’s a correlation, not necessarily causality.  So, for me, I’d much rather get into, if I had a chance to talk to management, and even if you can’t talk to management, a proxy is just reading their earnings releases and listening to their earnings calls and listening to how they talk about their people and the actions that they’re taking. And in the way, they’re thinking about investing in the business.

22:39

For me, running a training firm, one of the best examples I can use to illustrate this point is, I have some clients who say, “Hey, we’re all set to do the training.” And then I get a phone call a few weeks later, and they say, “Hey, we need to defer the training for three months because we’re going to make our numbers for this quarter.” And I   scratch my head going, wait a minute.  So, the training has a positive ROI correct? And the answer is yes. And now you’re telling me you’re going to defer that investment because of some arbitrary number that’s out there set by someone on Wall Street.  So, you’re letting outsiders run your investment decisions in terms of improving your people. And instead, you’re going to defer a positive investment by three months, six months, nine months, however long the organization and I would say, “That’s management. That’s not leadership, right?” You’re letting the numbers drive your business decisions, as opposed to organizations that say, “Hey, we know that we get a return on this investment. We’re going to invest in our people now. We understand there are negative effects, quote-unquote, from a budget standpoint, we’re going to be over on our budget on our spend, but it was a positive investment to make.”

It really ends up being that mindset of how are you thinking about investing in your people? How are you thinking about growing the capabilities of the organization? And where you see organizations… And I’ve seen this many times with our clients over the years, when, for example, we had one client got bought out by a private equity firm, the first thing they did was gut the training budget. They said, basically, no one’s getting trained for the next three years. And we immediately right, we immediately walked away from that organization.

24:21

Now the financial results were like, amazing. Gee, I wonder why. Yeah, but over, those three years,   much talent left the organization. Now that private equity firm didn’t care, because they were going to flip the company in two and a half to three years.  So, their investment horizon, they made it absolutely the right financial decisions. But I’d submit that was management and really poor leadership, they lost much talent from that organization long term.  So, these are the risks, I think of just looking at things purely on a quantitative basis. And instead, you got to look at what are the individual decisions they’re making related to their people.

Preston Pysh  24:59

Well, I think you gave us aa huge nugget there because what you’re really getting at is when you see a business’s leadership turnover, that can be a good thing or that can be a bad thing. And I think a lot of people as investors, especially as an outside investor that has no controlling piece in this, when that management takes that turn, you really got to keep your head on a swivel as to what changes are they coming in and doing and what are they disrupting. If their numbers are really good, that should be maybe some red flags. What are they compromising? What did they do to knock this thing out of balance to make those numbers good fast? And what are they going to compromise on the tail end of that in the long run, because they made those decisions? And that is a really fantastic point. I love that.

Mike Figliuolo  25:43

Yeah, if you can actually get deep enough into their financials and you can pull up their year over year training per associate spend.  , just look at the total number of employees. You look at the dollars that they’re dedicating towards training and development and assuming they haven’t changed any of their accounting principles, or how they’re allocating stuff. If all of a sudden you see that training investment dropped precipitously,   exactly where they’re pulling it from. And I will tell you exactly what’s going to happen is your best people are going to leave that company, the poor ones are going to stick around because they don’t have alternatives. And the good ones are going to go elsewhere because they want to go and go work at companies that are going to invest in their careers and their developments.  So, short term, it’s going to be awesome. But in the three to five-year horizon, you’re going to hit the wall.

Stig Brodersen  26:33

Well, I think that’s a really neat metric you’re talking about Mike.  So, you’re looking at how much they invest per employee.  So, as a stock investor, I never ever thought about using this metric,   that’s definitely helpful for me. I’m just curious, which other metrics could I look at?

Mike Figliuolo  26:50

I think if you get access to any sort of promotion data or hiring data that they’ve got in terms of associates that they’re bringing in versus attrition if they are willing to share any sort of voluntary attrition versus layoffs. And maybe you look at that is what’s the population of the company been? And has that been affected by layoffs? Or has it been just attrition, right?   it’s very different when you shut down a division of 1000 people and the associate basis 1000 less than it was last year, or if there have been no layoffs and the associate basis 1000 associates less than last year, you may have a flight to quality of those higher potential individuals going somewhere else. And that ends up being the canary in the coal mine that things are not going well, and your talented people are departing of their own volition.

Stig Brodersen  27:42

Mike, could you tell us a personal story that could be either good or bad of how you increased your output as a leader, but optimizing your interactions with key performance?

Mike Figliuolo  27:54

I’ve got one individual who I am an executive coach for. He was lamenting how little time he had to spend with his team. He said, “I’m just crushed. I have zero time in the day to work with my team.” And when we talked about what he was doing and some of the activities he was performing were tasks that members of his team should have been doing instead. And when we got into it a little bit more, I understood, he was putting a lot of time into this stuff.  So, he’s making a big leadership capital investment in these people. And essentially, what he was doing was work that should have been delegated, or that he should have been forcing them to do rather than letting them dump it on his desk.

And when we talk through that trade-off, he said, “Well, I don’t have time to train them. It’s just much easier for me to just do it, rather than have to correct all the mistakes that I know they’re going to make if they do it.” And I said, “Okay, that makes sense for today’s workload. But what about over three months, six months, nine months, how much time are you going to spend doing their work for them instead of having the time to train them to do it properly and to force them to do their work by coaching them and developing them?” And that was sort of his epiphany moment that said, “I’m misallocating my leadership capital because I’m doing work I shouldn’t, I need to wean them from my support, and it’s going to be painful, and they’re going to complain, and they’re going to be mad at me because I’m making them do all this extra work, even though it’s their work.”

But ultimately, once he was able to wean them, he freed up a bunch of his time that he could invest in other people and get a higher return on that investment because he was training people and spending more time with his star performers and getting them to the next level of performance. And it was just really fascinating the insight that came from do you understand the investment that you’re making in these people, and he really didn’t appreciate that. But once he changed how he was investing, all of a sudden, there was always an extra time that he had, and he was able to do some awesome stuff with it by deploying that time differently.

Preston Pysh  30:00

I love how you’re talking about the time element because that’s really the most precious asset that every single person has, whether it’s a leader or you look at the time of your subordinates, and optimizing that, and just becoming more fruitful in that little time that you have every single day to make a difference. It is just important. And   I guess the question I got for you, Mike is, in your book, you’re really talking about how to optimize the time of your subordinates. But as a leader, what if you could just name three things that you really think are just important for a leader to really become better at what they do better at managing their people? What three things would you say that people should really focus on to get a lot of value added to their own leadership style?

Mike Figliuolo  30:43

I think one of the first things is you’re not just looking at optimizing the time of your subordinates. What we’re really getting at is how you’re optimizing your own time as a leader and being deliberate about how you spend it.  So, I think the most successful leaders out there understand their calendar, understand where they spending their time and more importantly, why they’re spending it there.  So, that’s first and foremost.

31:05

The second thing I encourage leaders to take away is really understanding the individual situation you’re dealing with.  So, when Preston walks in my office with problem X, that’s one type of situation. When Stig walks in with problem Y, it’s going to be a very different situation. And understanding the individual circumstances is going to allow you to be more effective as a leader to change performance at that very moment.

31:34

I think the third thing is really understanding, as a leader, how people move in this matrix.  So, the matrix is not static. Somebody’s positioning on it is not static. And understanding that when I hire somebody who is a square peg and they’re a low performer, and I’m investing a lot of time in them because I got to coach them and train them and teach them. Understanding that can be a really worthwhile investment because once they are trained and taught, you can spend less time on them.  So, you’re reducing your investment and you’re going to get better results out of them because they now have the skills, all of a sudden, that became a very high ROI investment. And really, because you understood somebody’s trajectory within the matrix and what it gets, what it takes to get them to move to a different performance pattern or level of performance.

Stig Brodersen  32:23

Mike, how do you evaluate this because you were talking a lot in your book and also here during the interview about how to move people’s performance, perhaps also move them from the role that they’re having in the team? Now, how much training should you put into and how much leadership capital should you put into employees compared to perhaps letting them go?

Mike Figliuolo  32:45

Yeah, for me, it’s always a difficult trade-off when you move somebody out of the organization and letting them go. For me personally, as long as somebody’s trying and I’m seeing progress in terms of their results and their improving, or I’m having to invest less of my time in them, if I’m seeing that progress, and I don’t have a burning platform elsewhere that gee, they’re just not progressing fast enough, I’m going to keep them around and keep growing them and developing them, because that’s what the organization is paying me to do is to build better people and build better leaders on my team.

For example, I am really, really good at teaching and training on the podium. But if you gave me an exceedingly complex, financial analysis to do, it’s going to take me a little bit longer.  So, could you change my role from being the financial analyst to somebody who works in the training and development organization?  So, as long as you’re seeing progress, and that progress is at an acceptable rate, you hang on to them. And if they say, “Gee, I don’t want to invest and work any harder,” well, then it’s time for you to go.

Now the point at which you do cut bait, and we encourage people to look at moving somebody on, a lot of times, it’s a motivational issue where the person says, “I’m just not going to try.” It’s like, well, I’ve given you a few months, and you’ve decided you’re not going to try.  So, we’re going to move you on. Sometimes moving somebody on is also a function of you’ve trained them for long, and it’s just clear, they’re never going to pick up this skill. And therefore, you shouldn’t just let them go but instead find a more appropriate role for them within the organization. Can you change their job responsibilities and put them in a role where they can be more successful?

Preston Pysh  34:30

And I think another part that’s important with what you’re saying here, Mike, is if you’re the type of leader that just wants to cut bait, because the person you’re just really quick to let the person go, that sends a shockwave through the rest of the team that you might not necessarily be prepared for as a leader because everyone then is scared. Everyone’s like, “I’m the next guy to go.” Or you don’t know what the third and fourth-order effects are whenever you are just quick to remove this person or this individual that appears to really be a problem for you.  So, I really liked your response. And I think that it’s really thoughtful that you continue to try to work them through because that sends a message to the rest of your team. And that’s what leadership is all about is is building that cohesive team.  So, I really like that comment.

Mike Figliuolo  35:15

Yeah, nothing happens in a vacuum, right? And when you decide to fire someone or move them on, that’s going to be scrutinized. And people leave, they will either say, “Gee, I’m next.” And then you can create that fear and hysteria.

Sometimes you have to remember too that if you don’t move them on, and you have people who know that that person should be fired or move to a different role. And if you’re just going to tolerate it, well, those people are going to get frustrated, right? Because they say, “Well, I’m performing, why does that person get to stick around?”

And honestly, some of the best leaders I’ve worked with, I’ve seen them, takeover teams, quickly do their assessment, identify the people who probably should move on. They then put in place a plan to say I’m going to give this person a chance. I’m going to try to get them to improve and if they don’t see the improvement over an agreed upon and reasonable period and the person isn’t trying, then they move them on and they get them out of the organization. And when you hear people say, “Oh, thank goodness, somebody finally did something about that problem.” It’s the sign of a strong leader being in that role that they stepped up and took action.

Preston Pysh  36:18

It’s all about balance. I mean, what you’re describing is that that fine balance, it’s really hard for a lot of people that are new into leadership is just, you’ve got to find that happy medium between, “Hey, I’m not too aggressive.” But at the same time, “I’m being considerate and I’m building a team.” And it’s really great. I mean, that’s such awesome comments. I love this.

Mike Figliuolo  36:36

Yeah. And that goes back to the like, pause and think. You don’t go in and just start firing people or replacing them. You pause, you think, you evaluate, and you take appropriate action for that particular situation. And that’s why we were passionate about writing the book because we give that guidance as to what you do in each of those situations in very great detail.

Stig Brodersen  37:00

Speaking about books, one of the questions we always like to ask our guest is, can you recommend one of your favorite books to the audience that you think they could benefit from and why?

Mike Figliuolo  37:12

One book that I have always loved, and it’s a very quick read, it’s called “The Obstacle is the Way.” It’s a quick read. And it’s really about understanding adversity, and how you react to it. And it goes back to stoicism in its earliest form. And a lot of it would remind you, Preston, of the time at our Rockbound Highland Gome at West Point, and how do you deal with adversity and what do you do when you’re faced with these insurmountable challenges and how you react to them. And the ability to turn adversity not just into something that you get past but into something that builds you, something that creates new opportunities for you. It’s a really fascinating read.

The first half of the book is really about cases and folks who dealt with adversity and how they dealt with it. But the real reason I fell in love with it was the second half of the book that says, “Here’s how you can do that. Here’s how you can apply those principles to other parts of your life.” And personally, for example, in the past year and a half, I’ve had a couple of heart attacks, which wasn’t fun. The first one was my fault, because of some habits that I had fallen into. The second one was not my fault, because I had fixed all those habits. But in both cases, you look and say, “Wow, that’s really debilitating stuff. And that’s a nasty obstacle.” And I’ve turned it into great interview topics with people. I’ve turned it into coaching sessions with some of the people I’m coaching to help them be healthier. I’ve turned it into keynote presentations and it’s just been something that has become an opportunity for me that most people would look and go, “Oh my gosh, why are you even happy about that?” It’s like, well, I learned something from it, and I turned it around.  So, the book is a great read that way to help people understand how to turn it around into opportunity.

Preston Pysh  39:01

I love it. Stig and I talked about that a lot on the show are just sometimes the things that you think are the biggest detriments in your life, end up being the biggest blessings in disguise. And it’s really hard to see that when it’s happening. I’m sure as you were experiencing the heart attack the last thing you were thinking about this, how this is going to be a good thing for my life? But as you look back at it, and you see what emerged out of that, I love this take on this. I’ve never heard of this book, which is really exciting because Stig and I get a lot of the same books recommended to us via email and online and stuff.  So, it’s really cool. I am interested to look this up. But I love the point, Mike, and it’s something that we definitely agree with you on.

All right, Mike.  So, that’s, that’s all we have. I want to give you the opportunity for our audience. If everyone out there wants to learn a little bit more about you and your book “Lead Inside the Box,” where can they find out more about you?

Mike Figliuolo  39:54

The book has a full dedicated website at leadinsidethebox.com There’s even an assessment on there for assessing how you’re spending your leadership capital and the results that you’re getting. And this back to leaders, pausing for a moment, thinking about the situation. So, the assessment takes all of five minutes. So, that’s a great resource. And then about my company itself. It’s thoughtleadersllc.com. And that’s where we talk about leadership regularly on our blog. We’ve been writing it for eight years now, a ton of great articles on there. And I really encourage folks to take a look there for some good resources.

Preston Pysh  40:32

That sounds fantastic. And I know everybody out there is wanting to improve their leadership ability. If you want to improve your leadership skills, or if you want to learn how to assess management’s leadership ability, if you’re a stock investor, whatever the case might be, there’s a lot to learn as you go there to the sites that Mike recommended. And Mike, thank you much for coming on the show. This has been a fantastic interview. We really enjoyed this.

Mike Figliuolo  40:56

It’s my pleasure. And thank you very much for giving me the opportunity.

Preston Pysh  41:00

You bet. Okay,   this is the point in the show where we take a question from a member of our audience. And this question comes from Jesse Colts.

Jesse  41:07

Hi, guys, this is Jesse Colts calling from New York City, New York. I have a quick question about calculating intrinsic business value. From Warren Buffett’s letters and your show, it’s clear that Buffett is a fan of net present value calculations and even traces that theory back to that theory of investment value by John Burr Williams.

Calculating intrinsic business value is obviously at the center of Warren Buffett’s style value investing.  So, it’s a really important concept. I’ve also heard Mohnish Pabrai lean on this concept heavily. At the same time, I’ve heard Mohnish Pabrai say that he considers firing up excel to be a bad sign for finding an investment, which I think he’s using to convey the point that being too detailed can be a problem. You really want the numbers to smack you over the head when it’s a good investment. That makes sense to me.

But my question is, do you think typical value investors actually fire up excel? And complete discounted cash flow analysis to come to a precise number of intrinsic business value? Or do they more or less put their finger in the air and estimate that number using rough metrics? Thanks very much.

Preston Pysh  42:13

Jesse, I love this question. This is a question that everybody’s interested in. And that’s intrinsic value.  So, I’m going to throw this over to Stig first, and see what he has to say. Then I’ll maybe piggyback on his comment.

Stig Brodersen  42:25

Jesse, I think the best way to really understand the framework of this is to listen to Warren Buffett himself, and he’s talking about his purchase of PetroChina, which it didn’t spring 2002. And, he said that he never asked anyone about, their opinion on PetroChina. He said that after reading the annual report, he said it was probably approximately worth 100 billion, and the market cap was 35 billion.  So, I mean, there you go. You don’t need to do any finer math. When it comes to that, he even says that If the market cap was 40 billion, he would probably need to refine the analysis. But what he also says is that he doesn’t like to analyze with three decimals. I mean, that’s simply not the way to do it. And basically, what he’s saying is that you need to have a margin of safety. Warren Buffett might not be right, that it’s worth 100 billion, it might only be worth 80 billion. And, another thing I really like about this, and this is a great read, and we’ll make sure to link to this also in the show notes is that he’s saying, if you can make a value from the figures, you should probably go on to the next stock pick. Now, and I think that’s another good point. Like if you read the report, and you have no clue what the company’s worth, it is probably not a type of company that you should they should evaluate.

Preston Pysh  43:51

How did that investment turn out for him?

Stig Brodersen  43:54

Well, fantastic. I mean, he invested 488 million dollars, and he sold that stake in 2007, for 4 billion.  So, that’s actually like eight times this initial investment. I mean, that’s, that’s huge.

Preston Pysh  44:12

And that’s not to say that and there’s a, there’s a perfect example that Stig gave you where Buffett made the calculation, it came out to be a good calculation and what he thought was going to happen actually did. Now he does have other picks that he thought were going to materialize into the intrinsic value and they moved away from them. But in aggregate, he’s obviously been doing these calculations for a reason. And they’ve worked for him for 50 years plus.  So, there’s something to this.

Now the thing that I really liked about your question is you referenced John Burr Williams and John Burr Williams. I’ve read his book, The “Theory of Investment Value.” And this is this book was really amazing because this book was written back I believe it was written back in the 1930s. And he wrote his doctoral thesis at Harvard. And the really fascinating thing is in this book he talks about the value, basically calculating the intrinsic value. And Buffett has also read this book that John Burr Williams wrote.

And really what John Burr Williams taught was how to do a discount cash flow analysis. That’s what he’s really teaching in this book. Now, when you read the book, it is highly mathematical, very involved. There’s a lot of calculations in there.  So, I think what your questions really getting at is, is Buffett and these other guys that are calculating intrinsic value, are they really getting that far down into the math when they’re calculating the potential value of the business?

45:33

I would argue that they’re not, I don’t think that they are. I know I’m not personally doing that whenever I’m calculating the value of a business. But what I am doing is I am doing a discount cash flow model. In fact, on buffettsbooks.com, we have our calculator that I personally use for individual stock picks and that is…And the page that I use is the discount cash flow calculator.  So, we’ll have a link to that in the show notes of this episode, if you’re interested in checking that out and using it. We have a video that goes with it.  So, I can show you how I go through, how I look at what the free cash flow the businesses, how I discounted back today’s value that it matches the current market price and I can see what the yield is. I do that for any individual pick.

Whenever I’m investing in an index, I am not doing that I’m really just looking at the PE ratio and taking the inverse to figure out what I think the yield might be, based on the current market prices. But I think that any real hardcore value investor out there is definitely doing a discount cash flow analysis to try to determine what they think the value of the businesses. And I think if you’re not doing that, I really think that you are potentially jeopardizing assuming some risk by not knowing what you think the value of the company is worth.

Stig Brodersen  46:42

And I’m definitely positive that Pabrai is doing the same thing. Now he might not fire up excel, but he’s probably smarter than Preston and I.  So, you can probably do that instead. And I know that Warren Buffett said something like he can do intrinsic value calculation like five or 10 seconds, but basically, he’s doing the same thing. I think that, especially if you’re a beginner in investing, I think it is really, really good to use a calculator, especially in the beginning to see like if you’re on the right path. But clearly, if you’re evaluating a bunch of stocks, just really to figuring out where you should put your focus. I’m pretty sure that pretty soon you would come up with a rule of thumb of where to look.

Preston Pysh  47:22

Yeah. When you look at enough companies, and you see what the free cash flow is, and you can see what it’s trading for. It’s a quick analysis, whenever you get onto and you’ve looked at quite a few companies. But I think for the person that out there, that’s just starting out, that might sound like how is that even possible, but that’s because a lot of people really haven’t put in some hardcore assessments and have done it for years. And that’s why those guys have those quotes where they say I can do the intrinsic value in a matter of a minute.  , that’s how they can do this because they’ve done it many times.

All right, Jesse, we love this question. That was a fantastic question, we’re going to send you a free signed copy of our book, the Warren Buffett Accounting Book. And for anybody else out there, if you’re like Jesse, and you want to get your question played on the show, go to asktheinvestors.com, and you can record your question there.

We’ve really enjoyed having Mike on the show, he gave us some fantastic tips on how to become a better leader, how to find management in your investments that are going to continue to provide value to you as an investor. And we’re just really thankful for him to come on the show, make sure you check out his book, “Lead Inside the Box.” And for anybody else out there, if you forget the title, or whatever, go to our show notes. And we’ll have all the links there you can quickly access them.

Preston Pysh  48:38

We just want to thank everyone in our audience for listening. If you have time, please go to iTunes, leave us a review that helps us out tremendously and we really appreciate when people do that. But that’s all we have for you guys this week. And we hope you guys have a fantastic week.

Outro  50:45

Thanks for listening to The Investor’s Podcast. To listen to more shows or access to the tools discussed on the show, be sure to visit www.theinvestorspodcast.com. Submit your questions or request a guest’s appearance to The Investor’s Podcast by going to www.asktheinvestors.com. If your question is answered during the show, you will receive a free autographed copy of The Warren Buffett Accounting Book. This podcast is for entertainment purposes only. This material is copyrighted by the TIP Network and must have written approval before commercial application.