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One of the earliest lessons that
many of us have learned since 

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starting investing is to invest 
in Innovation, to seek out the 

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most Innovative companies in the
market and Center, our 

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portfolios around those 
companies. 

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After all, some of the most 
Innovative companies throughout 

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history have been pretty 
impressive companies. 

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We have ones like apple and 
Tesla. 

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Highly Innovative companies 
making new products pushing the 

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world in a New Direction and 
they attract investors 

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attention. 
Not only that but they've also 

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had very good. 
Good returns. 

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This leads a lot of us to look 
for companies that are highly 

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highly Innovative but the truth 
is a little bit different when 

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it comes to investing. 
Innovation, doesn't matter. 

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That's a harsh reality, 
Innovation doesn't matter. 

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I say that with a caveat it does
matter in some instances but not

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in the way that you may think. 
And that's what we're gonna be 

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discussing in this episode of 
the Joseph Carlton show when 

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Innovation matters. 
And when it doesn't, now I first

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want to dress this Charles 
claimed the Innovation doesn't 

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matter a lot of you might think 
that that's a provocative 

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statement and that I can't 
possibly believe that's true. 

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Well, for the most part, I 
believe that, that's mostly 

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true. 
A lot of people cite examples of

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Highly, Innovative companies 
have had good returns like 

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Tesla, for example, highly 
Innovative. 

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And if you invested in it 10 
years ago, you've done really 

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well. 
But there's a lot of other 

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companies that I could cite as 
counter-examples companies that 

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I consider not Innovative at 
all. 

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All Costco. 
Being one of them Costco for the

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past 20 years, has not made any 
significant Innovations, they've

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done minor improvements, they've
improved their Logistics, 

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they've gotten better at opening
up new warehouses. 

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There's some things that you can
call subtle Innovations but 

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Costco hasn't done anything, 
groundbreaking anything 

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disruptive and looking at Costco
over the past 20 years, it has 

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been one of the best investments
rising up since its all-time in 

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1986. 447 percent. 
It's pretty good returns for 

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company that largely doesn't do 
much Innovation Costco keeps its

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business model. 
The same. 

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That's what they're known for 
having consistency being the 

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same. 
They do the same old principles 

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year after year after year 
treating employees well paying 

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them. 
Well treating customers. 

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Well having a great return 
policy and offering Shoppers a 

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great experience that's all 
they're doing. 

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In fact Costco keeps things so 
much the same that they haven't 

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raised the price on their hot 
dog drink combo for. 

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The years, the company Remains 
the Same all the time but it's 

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been one of the best investments
and this is true throughout a 

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lot of different companies. 
I can name a few different ones 

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off the top of my head, Texas 
Roadhouse is another example. 

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What does this company really 
innovated over the past 20 

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years? 
If you ask the company they'd 

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say not much not much as change 
they offer good value, good 

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portions and good service, 
that's what they're known for 

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good value, good portions and 
good service. 

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That's the same thing that 
they've done for the past 20 

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years. 
We look at this company and even

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over the past 10 years. 
If you include dividends it's 

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out performed Google since 2004 
is given eight hundred and 

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forty-three percent. 
Not including dividends this 

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company has crushed the market, 
crutch the queue and it's done. 

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So without much Innovation, 
there are so many companies that

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haven't done any substantial 
Innovations at all over the past

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decade and they're doing and 
credibly, well as stocks. 

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So the first piece of evidence 
is very clear if Innovation were

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a requirement for great returns.
Then why are there so many 

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companies that aren't really 
Innovative? 

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That have such good returns. 
It shows it Innovation is not a 

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requirement for great returns 
and if investors narrow their 

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search to only Innovative 
companies, they're going to miss

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out on potentially a lot of 
great Investments. 

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Now, moving on to the second 
piece of evidence here, not only

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our companies not required to be
Innovative to be good 

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Investments, but in many cases, 
highly Innovative companies are 

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terrible Investments. 
Let me give you a couple 

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examples. 
One of the best Innovations. 

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It's happened over the past 100 
years, is the innovation of 

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commercial airline travel. 
Think about that for a moment, 

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think of a world where we don't 
have commercial airline travel 

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where we have to travel by train
car or boat to get to one 

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continent to another may take 
weeks for everyone to be able to

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travel easily by air is a 
massive Innovation being able to

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go from one part of planet Earth
to another part in a matter of 

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hours is a massive Innovation 
yet these Open. 

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He's that offer this product 
commercialized at Mass scale are

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not good Investments. 
So one of the most highly 

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Innovative things that's 
happened over the past 100 

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years, which is commercial 
airline. 

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Travel is one of the worst 
Investments. 

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We look at an example here, like
a Delta Air Lines. 

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We can look at the all-time 
returns of this company. 62% 62 

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percent returns since 2007, with
a ton of volatility as well. 

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And then more importantly, when 
we go down to the actual 

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financial ratios of Company, 
they are terrible. 

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Let's look at the Returns on 
Capital employed. 

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It has terrible financial 
ratios, terrible. 

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Gross, margins, terrible, 
operating margins, terrible 

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profit margins are lines are 
terrible Investments and I'm not

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nitpicking, one particular 
Airline here we can search any 

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of them. 
JetBlue, for example, this is 

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another one supposed to be even 
more Innovative than Delta 

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Airlines. 
We look at this investment and 

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it's down 47%. 
All time since 2002 Airlines. 

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Cross the border awful 
Investments, even though they 

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offer consumers, one of the best
Innovations of all of humankind 

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and this isn't exclusive to just
the airline industry this 

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follows with a lot of different 
companies. 

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For example, we can look at 
Spotify Spotify so far has 

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proven to be not the greatest 
investment, it's up a little bit

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year-to-date but looking at the 
grand scheme of things. 

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Since 2018, it's down to 
percent. 

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So it hasn't really given 
investors any real returns since

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IPO the company has been around.
17 plus years. 

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So Spotify is an older company 
that's never really produced a 

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lot of profits. 
Most of the cash flows that it 

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produces are eaten up by 
stock-based compensation. 

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This is a company that's not 
very profitable and it runs into

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the very same problems that the 
airline industry does. 

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The operating margins are very 
low, the profit margins on. 

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The company are very low and 
that's perplexing because 

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Spotify is an Innovative 
company. 

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Look what they've done with 
their app. 

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It's incredible. 
The algorithms and the mixes 

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they put together all of the 
different Different features and

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the user interface, nobody can 
claim that Spotify. 

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Doesn't innovate this company 
innovates all the time. 

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They're always layering upon new
features. 

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Changing things, improving 
things, improving their 

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Discovery algorithm. 
Unfortunately, for Spotify, all 

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of their Innovation is work on 
behalf of a different company, 

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which is universal music group. 
So, Spotify finds new customers 

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they innovate, they do lots of 
different things to grow their 

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customer base. 
And then after Spotify, does all

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of that hard work to create this
great. 

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User interface and experience 
for customers Universal music, 

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group, and other labels are the 
ones that get the reward. 

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They're the ones that 
economically benefit from the 

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relationship, they own the 
music. 

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So, everything spotify's doing 
benefits them and what has 

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Universal Music Group done? 
In terms of innovation over the 

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past 10 years, can you name 
anything a single Innovation? 

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That Universal music group and 
these other companies have done 

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it stuff you might be able to 
name one but they're not nearly 

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as Innovative as Spotify. 
Bye. 

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But they're the ones that have 
so far benefited the most, and 

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that's the secret here. 
That should be the takeaway. 

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It doesn't matter whether or not
a company innovates. 

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It matters whether or not they 
can keep the economics of their 

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Innovation, whether they can 
capture the economics. 

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In the case of Spotify, they are
a highly Innovative company, but

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they have not been able to 
capture the economics of their 

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Innovations. 
Another company captures it, 

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which is universal music group, 
and the other labels Spotify 

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innovates. 
These companies capture the 

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economics of their Innovations, 
and this is happening all the 

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time, put another way, an 
Innovative companies, only a 

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good investment if it can 
capture the economics of its own

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Innovations. 
And the best investments, the 

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absolute best ones are the 
companies that can capture the 

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economics of their own 
Innovations, and capture the 

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economics of other people's 
Innovations. 

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When a company is able to do 
that, it is an incredible, 

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incredible investment. 
And I have an example for you, 

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Apple's a company. 
That not only captures the 

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economics of their own 
Innovations, but they capture 

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the economics of other 
companies, Innovations. 

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And I want to show you how they 
do that. 

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This is the product category 
chart and I'll blow it up here 

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for you. 
We have the Mac, we have the 

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services, we have the wearables,
which are things like the Apple 

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are tagged the earpod. 
The Apple watch, then we have 

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the iPad and the iPhone, every 
single thing. 

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The Apple sells, whether it's 
the Apple watch or the air pods,

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or the iPads, every single thing
they sell, they make a fortune 

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on. 
They charge a very healthy 

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margin. 
They make a killing on it. 

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When they create something new, 
like the new are pods are the 

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are tags. 
They capture the economics of 

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those Innovations. 
No other company does other 

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companies might create phone 
cases and they might in some 

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ways benefit from Apple's 
Innovations, but Apple largely 

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is the one that captures the 
huge majority of their 

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Innovations. 
So they have that checked off 

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the list, but Apple does 
something more than capture the 

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economics of their own 
Innovations in the service. 

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Revenue. 
Apple has figured out a way to 

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capture the economics of other 
companies. 

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Innovations. 
How do they do that in the 

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service Revenue? 
Apple charges a fee for every 

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single company that sells in-app
purchases or subscriptions in 

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the App Store. 
So, not only do they sell their 

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devices and make money on 
selling them. 

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But once you have the device, 
you have to go through the App 

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Store and the App Store, Apple, 
shaves off a profit. 

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And that profit is part of the 
service Revenue. 

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It's a huge part of it. 
So you think about the companies

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that have to do business through
People you have gaming companies

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consider all the various Mobile 
gaming companies that innovate 

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and innovate creating new 
levels. 

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New characters, new skins, they 
have to hire employees. 

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They have to Market it, they 
have to try to sell it and 

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spread their game on social 
media and everywhere to sell 

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their game. 
These are Innovative companies, 

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creating new gaming experiences 
creating entirely new 

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developments. 
And while all these gaming 

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companies are working endlessly,
creating new Innovations, Apple 

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benefits they shave off 15 or 
30%. 

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They are taking the hard work 
from other companies 

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Innovations. 
This is such an incredible 

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thing. 
That apple is manufactured that 

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many companies like epic games 
founder. 

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Tim Sweeney have sued Apple 
because he realizes that he's 

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doing all of this work to create
epic games in the crepe 

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Fortnight to create new levels 
and season passes. 

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And apple makes a bunch of money
from his work, they shave it off

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with their in-app purchases and 
season passes, Apple benefits 

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from all the work that Tim 
Sweeney does with his games and 

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from every other game developer 
that works through the Apple App

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Store and it's not just Mobile 
gaming industry. 

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You can take match.com any 
company that has mobile dating 

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apps has tons of in-app 
purchases, all of those. 

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All of those contribute to 
Apple. 

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So, as match is innovating and 
creating new mobile dating apps,

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and experiences, and algorithms 
to match people, they're working

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hard with thousands, even 
millions of employees. 

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They're benefiting Apple in the 
process. 

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Apple benefits both ways and 
that's part of the reason this 

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company has been such an 
incredible investment. 

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Now, you might be sitting there 
saying that Joseph this Seems 

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unfair. 
In fact, it seems ridiculously 

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unfair. 
Why should Apple this massive 

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company be able to benefit so 
much from all the hard work and 

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innovations that other companies
do. 

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And to that, I say that you're 
right. 

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It is unfair, in many cases, 
business relationships are not 

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completely fair, I would say 
that the case of Spotify doing 

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all of this work. 
So the labels can benefit is 

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also unfair. 
It's not a representation of 

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which company is really 
providing the most value, but 

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that's how the world works. 
And Is not about determining 

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what's fair and unfair. 
It's about determining. 

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What companies, a good 
investment which one makes money

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which one is found out how to 
capture the economics of their 

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own Innovations, and the 
economics of other people's 

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Innovations, in the case of 
Apple. 

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They've done both, they've 
mastered this craft of capturing

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economics. 
So to put this more thoroughly 

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innovation in, and of itself, 
doesn't matter. 

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But being able to capture the 
economics of a given, Innovation

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matters a lot. 
So investors would Be better 

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served to instead of focus on 
finding companies that are 

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highly Innovative focus on 
finding companies that are the 

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best positioned to benefit 
economically from a given 

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Innovation. 
And in many cases, they're not 

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the same company. 
I'll give you an example of what

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I'm looking at. 
Right now, we know that there is

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chat GPT and it's highly 
Innovative. 

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It's being invented by Microsoft
and Google and these different 

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companies, the large language 
models and the Machine learning 

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behind it. 
This is incredible attracts. 

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A lot of eyes and To Google and 
Microsoft but there's other 

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industries that are going to 
benefit from this Innovation 

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immensely. 
Maybe even disproportionately 

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high compared to Microsoft and 
Google alone. 

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This might not be the first 
thing that comes to mind when 

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you look at what's going to 
benefit from artificial 

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intelligence, but consider it 
for a minute. 

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Now, I believe that quick 
service restaurants, fast food 

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places are uniquely positioned 
to benefit disproportionately 

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from the Innovations in Ai. 
And I think it's going to come 

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down to the amount of employees 
that they can replace with. 

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Nai engines software Engineers 
with Windy's have been working 

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with the search giant Google to 
tweak its large language model 

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for key words and phrases 
specific to the menu or during 

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the company's milkshakes are 
known as Frosty's for example 

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but some customers might refer 
to them as milkshakes. 

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Other Wendy's sling includes 
biggie bag is also being 

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integrated into the chat Bots 
vocabulary. 

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So here we have wind, he's 
working with Google and the AI 

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chatbot that they created to 
integrate this into the menu. 

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Drink where it can versus back 
and forth with you. 

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It has to be trained 
specifically, with some of the 

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sling at Wendy's, and there's 
other little nuances, they have 

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to take into account. 
It talks about the fact that 

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there's other people talking in 
the car, there's background 

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music. 
There's the exhaust or loud 

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engines. 
There's indecisiveness with 

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people changing their minds. 
The bot needs to be trained for 

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all of that, the whole drive 
through ordering experience, but

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I think it will happen. 
I really believe that AI is 

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going to nail this. 
It's going to be so good at 

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taking orders from fast food. 
And this fits in with my overall

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thesis of fast food restaurants 
that they're basically vending 

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machines for hot meals. 
That's all they are. 

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They're not there for social 
interaction there there for a 

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quick meal with the least amount
of friction possible. 

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If Wendy's is successful in 
integrating this Innovation into

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their business model, this could
be a massive game changer for 

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both Windy's and the entire 
quick service restaurant 

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industry. 
A massive Game Changer consider 

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the fact that for every single 
Wendy's location, one single 

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location, they probably have to 
have around two to three 

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employees. 
On hand to take orders, that's 

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how many they have to schedule 
for, to take orders. 

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So, we take the amount of 
restaurants that Wendy zones, we

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times that by three, and that's 
the amount of employees that 

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they could potentially reduce 
with this simple Innovation. 

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A massive employee reduction, 
further reducing the head count 

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increases the margins of the 
company, the margins of Wendy's 

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goes up, the profitability goes 
up. 

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It makes a company much more 
attractive to investors so this 

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00:15:25,700 --> 00:15:27,700
could make it. 
So a low margin industry 

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suddenly becomes a higher 
margin. 

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Industry. 
So fast food restaurants. 

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Like Wendy's is an industry that
I'm studying and looking at 

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00:15:34,500 --> 00:15:37,200
right now because I think there 
is going to be massive 

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Innovations in the future. 
I have a watch list that I call 

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00:15:40,300 --> 00:15:42,900
a quick service restaurants and 
it's a lot of what I think are 

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00:15:42,900 --> 00:15:46,100
the best fast food restaurants. 
And I'm going through and trying

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00:15:46,100 --> 00:15:48,800
to figure out which one could 
potentially benefit the absolute

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00:15:48,800 --> 00:15:52,900
most from, if this type of AI, 
ordering becomes commonplace. 

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Because in my opinion, it's only
a matter of time. 

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I do not think that 10 years 
from now, there's going to be 

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00:15:58,700 --> 00:16:00,800
humans taking your orders. 
At McDonald's. 

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I think that's going to be a 
thing of the past. 

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You will be talking to robots 
when you order at McDonald's 

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already when you go in the store
you order from a kiosk. 

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So McDonald's has fully signaled
that they want AI to take your 

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orders. 
So what does it do to 

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McDonald's? 
If every single person working 

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00:16:17,500 --> 00:16:21,300
the window working? 
The ordering is replaced by a, i

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00:16:21,600 --> 00:16:22,800
what does that do with the 
margins? 

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That's a question that I want to
answer the same thing for 

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00:16:25,500 --> 00:16:28,900
Chipotle, for Domino's, for 
Starbucks for Wendy's for 

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00:16:28,900 --> 00:16:31,900
Wingstop. 
For Burger King for Taco Bell. 

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What does it do to all these 
companies? 

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00:16:33,800 --> 00:16:36,400
So I am studying fast food right
now because I do believe it's a 

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00:16:36,400 --> 00:16:39,500
category of stocks that will 
benefit dramatically from these 

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00:16:39,500 --> 00:16:41,800
Innovations. 
But overall, that's my thoughts 

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00:16:41,800 --> 00:16:44,000
on Innovation. 
I hope you enjoyed this episode 

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00:16:44,000 --> 00:16:46,100
and diving into these type of 
deeper topics. 

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00:16:46,200 --> 00:16:48,100
Let me know if you like this 
type of video and I'll see you 

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00:16:48,100 --> 00:16:48,700
in the next one.