The One Factor That Explains the Struggles of Value, International and Small-Cap Stocks | Kai Wu

In this episode of Excess Returns, we sit down with Kai Wu, founder of Sparkline Capital, for a fascinating discussion about intangible value investing and its global applications. Kai shares his expertise on using machine learning and natural language processing to identify companies rich in intellectual property, brand equity, human capital, and network effects.
We explore why U.S. firms have historically outperformed many international counterparts, with Kai explaining how the gap in intangible asset investment has been a crucial factor.

We discuss:

How traditional value metrics miss important aspects of modern company value
The four pillars of intangible value: IP, brand equity, human capital, and network effects
Why international markets have lagged the U.S. and how intangible value can help close this gap
The role of AI and machine learning in modern investment analysis
A surprising analysis of global patent leadership

This episode offers valuable insights for investors interested in both value investing and international diversification. Whether you're a quantitative investor or just interested in understanding how modern companies create value, you'll find plenty to think about in this discussion.

00:00 - Introduction and overview of intangible value investing
00:33 - "Value investing cannot be dead" - Key insights on value investing
02:03 - Why traditional value metrics have struggled
04:12 - The four pillars of intangible value
07:45 - Using AI and machine learning to measure intangibles
13:22 - How patents reveal global innovation trends
18:45 - Converting intangible metrics into a portfolio strategy
25:06 - The Amazon example: Why traditional metrics missed the story
29:33 - International stocks vs US stocks performance gap
34:15 - Why US companies lead in intangible investment
39:42 - "It's not about US vs International - It's Tangible vs Intangible"
44:28 - Country and sector analysis of intangible value
50:15 - Discussion of new international intangible value ETF
52:40 - The future of AI in investment management
56:33 - Closing thoughts on AI's impact on financial jobs
59:45 - Outro and where to follow

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