On today’s show, we’re bringing in a very special guest…
His investing roots run so deep, his family was the subject of the book, The Davis Dynasty: Fifty Years of Successful Investing on Wall Street.
This week, Dan invites Chris Davis onto the show.
Chris is the chairman of Davis Advisors, an independent investment management firm founded in 1969 with over $23 billion in assets under management. Since its inception in 1969, the Davis New York Venture Fund has outperformed the S&P 500 in 98% of 20-year holding periods. In fact, 4 out of 5 Davis equity funds have been the market since their inception.
Chris joined Davis Advisors in 1989 and now has over 3 decades of experience in investment management and securities research. He’s even previously been recognized as Morningstar Domestic-Stock Fund Manager of the Year in 2005.
During their conversation, Chris shares his philosophy on how discipline in your investments is key to building wealth over time. And why his strategy has produced outstanding results in just about any environment – including periods of inflation, recession, rising and falling energy prices, rising and falling interest rates, and bull and bear markets.
Chris gives a ton of incredible insight from his decades of experience managing money using real world examples you likely haven’t heard anywhere else.
Listen to his discussion with Dan and more on this week’s episode.
1:45 – Dan encounters some research on commodity prices over time that leads him to a troubling conclusion, “This could be the beginnings of the Inflationary 2020s…”
4:20 – This week’s quote comes from The Little Book of Market Wizards… “In our interview, Kovner mentioned that he had tried to train about 30 traders, but only 5 of them turned out to be good traders. I asked him if there was some kind of distinguishing characteristic between the majority who weren’t successful versus the minority who were. One of the key differences…”
6:10 – On this week’s interview, Dan invites Chris Davis onto the show. Chris is the chairman of Davis Advisors, an independent investment management firm founded in 1969 with over $23 billion in assets under management. Since its inception in 1969, the Davis Fund has outperformed the S&P 500 in 98% of 20-year holding periods.
10:29 – Chris explains how his father always stressed the importance of financial literacy, and how that helped set his path in life. “I was just hooked on the idea of compounding…”
16:01 – Dan and Chris discuss value investing today, “I think the term value investor tends to speak more to somebody who has a valuation discipline about what they’re buying.”
21:56 – Chris shares some wisdom that many people don’t realize when it comes to value investing… “lower prices increase future returns…”
27:41 – When the market is roaring, Dan asks Chris, how do you deal with clients who may encourage reckless investing behavior?
31:16 – Chris explains why he doesn’t use profits alone to measure success. He says that measuring client outcome is more important.
34:56 – There’s a logical fallacy many other advisors in the industry are making. Chris calls them out and says, “It’s a breach of duty.”
41:41 – Chris gives an incredible example of how you show a client the difference between price and value. “Imagine you have a dream client, and they have $1 trillion dollars to invest…”
48:50 – Chris shares a sector of the market that he thinks is extremely undervalued and presents a great opportunity over the next 3-5 years… “Oh my God! Why are these so cheap?!”
54:29 – Chris leaves listeners with one final thought… “People always sound smarter when they’re bearish. It’s always the skeptic who points out how the world is going to ruin that is considered a sage, but when you really look at the data… the world continues to get better.”
59:24 – On the mailbag this week, there’s a common theme. One listener asks a follow-up question about the idea of a quantum computer derailing Bitcoin. Another gives their two cents about fractional reserve banking, a topic previous guest Mark Yusko discussed in length. And another asks how a value investor like Dan could like Disney right now. Dan gives his two cents and more on this week’s mailbag.
Announcer: Broadcasting from the Investor Hour Studios and all around the world, you're listening to the Stansberry Investor Hour. [Music plays] Tune in each Thursday on iTunes, Google Play, and everywhere you find podcasts for the latest episodes of the Stansberry Investor Hour. Sign up for the free show archive at investorhour.com. Here's your host, Dan Ferris.
Dan Ferris: Hello and welcome to the Stansberry Investor Hour. I'm your host, Dan Ferris. I'm also the editor of Extreme Value published by Stansberry Research. Before we get into today's episode, don't forget, Trish Regan is now part of the Stansberry family. Check out her podcast, American Consequences With Trish Regan. The link will be in the description of this episode. Today, we will talk with Chris Davis of the Davis Family of Funds. Chris is a third-generation Wall Street legend. I cannot wait for you to hear what he has to say. Take notes. I promise you'll be glad you did. This week in the mailbag: bitcoin, the Federal Reserve, inflation, the U.S. dollar, gold fractional reserve banking – there are all kinds of stuff in there.
In my opening rant this week, I'll just say a few things about inflation, and then we're going to get into the interview with Chris Davis. I want to spend plenty of time with him, so I'm going to keep my rant short. That and more right now on the Stansberry Investor Hour. Very short rant this week. I want to make plenty of time to talk with Chris Davis. Though I couldn’t help mentioning a single word: inflation. I think it's probably nowhere on most people's radar screens. They got the Federal Reserve telling them, "Oh, you know, we're targeting even higher inflation because we can't even get to the level that we want to get to." Right?
And everybody thinks inflation is dead forever, and they're not anticipating it. However, last week, I opened my Wall Street Journal – front page of the Website, right in the middle – and right up top was five-year chart of iron-ore prices. And I had to do a double take because that's just shy of a four-bagger, right? Like a 300% gain over the last five years. And I knew it was up, but I just hadn't seen that five-year chart in quite a while.
So real quick, I thought, "Well, what do the other metals look like?" And we know silver and gold are up versus five years ago. But also, like, lead, copper, zinc – they're all up, too. All the charts are... they're not as up and to the right as iron ore. But all those prices are higher. They're higher throughout this year, and then they're higher versus their level five years ago when commodities bottomed out. So, you know, we could be seeing a resurgence of inflation. It's another trend that I think is on nobody's radar screen that you should prepare for. And preparing for it is actually not that difficult because you should be doing these things anyway, right?
There are three things. You want your stores of value to get outside the dollar: your gold, your silver, and bitcoin, right? You also want to own any kind of a business that has a good long-term competitive advantage, which also earns high returns on capital. Those high returns on capital will help you beat inflation. And the other great thing you could do is own a stock like Altius Minerals – which I talked about a dozen times – which owns royalties on the production of these metals that are rising in price. And it owns like iron-ore royalties and copper royalties – all this stuff that's risen in price this year. You know, and as I'm talking to you, the stock is hitting 52-week highs.
So, that's really great. You know? Do those three things, and I think you will be prepared for inflation. But even if inflation doesn’t happen, you'll be doing the right thing anyway. That's the beauty of those ideas. You should be doing them anyway. I think they'll treat you well over the long-term even if we don't get a huge inflation over the next five, 10 years. But if we do, man, they'll be off the charts. Now I just want to read my quote of the week, which came from a book called The Little Book of Market Wizards from our recent guest, Jack Schwager, that we had on a couple weeks ago. Great interview.
In The Little Book of Market Wizards, he's talking about an interview he did with a trader named Bruce Kovner. And he says, "In our interview, Kovner mentioned that he had tried to train about 30 traders, but that only about five of them turned out to be good traders. I asked him if there was some distinguishing characteristic between the majority who weren't successful at trading versus the minority who were. One of the key differences Kovner highlighted was that the successful traders were disciplined in sizing their positions correctly. 'A greedy trader always blows up,' he said.
"The larger the position, the greater the danger the trading decisions will be driven by fear rather than by judgment and experience. You have to trade within your emotional capacity. Otherwise, you will be prone to getting out of good trades on meaningless corrections and losing money on trades that would have been winners." I highly recommend all the Market Wizards books. Every single one of them. Market Wizards, The New Market Wizards, Hedge Fund Market Wizards, Stock Market Wizards, The Little Book of Market Wizards and Unknown Market Wizards. There are like six books. There are a bunch of books.
But it's an incredible education in trading, and that's just one little slice of what you're in for if you read these books. All right, man. Let's do it. Let's talk to Chris Davis. [Music plays and stops] My listeners know they need to secure their savings for the future. And after working with my friend and publisher Porter Stansberry for nearly two decades, I've seen him make one incredible investment call after another over the years. So that's why I wanted to recommend Porter's one critical move you must make with your money. You can get his full take on the subject by visiting www.newamericancurrency.com. Don't miss out. [Music plays and stops]
This week's guest is Chris Davis. Chris Davis is chairman of Davis Advisors, an independent investment management firm founded in 1969 with more than $23 billion in AUM. He is a co-portfolio manager of the Davis New York Venture Fund, Davis Large Cap SMA, and Davis Select U.S. Equity Fund (ticker DUSA). The Davis New York Venture Fund has outperformed the S&P 500 Index in 98% of rolling 20-year holding periods since its inception in 1969. Wow. That's very cool. 10,000 invested in the Davis New York Venture since inception grew to $2.6 million, versus $1.5 million for the S&P 500.
He is also the portfolio manager of the Davis Financial Fund and the Davis Select Financial Fund (ticker DFNL) and is a member of the research team for other Davis portfolios. Chris joined Davis in 1989 and has over three decades experience in investment management and securities research. He has been previously recognized as a Morningstar Manager of the Year. As chairman, Mr. Davis focuses on maintaining the culture of research, performance, and stewardship – we're going to talk about all that – that has characterized Davis advisors for more than 50 years.
The result is four out of five of Davis equity funds have outperformed their benchmarks since inception. Boy, you can't say that about many fund companies. I'll tell you. All have low fees and count Davis among the largest shareholders with over $2 billion invested alongside shareholders in the funds they manage. Prior to joining Davis, Chris worked at Tanaka Capital Management and State Street Bank and Trust Company. He received his MA from the University of Saint Andrews in Scotland. Chris Davis, welcome to the program.
Chris Davis: Well, thanks so much, Dan. It's good to be here.
Dan Ferris: Well, I have to ask you, having read that introduction, if you played much golf in Scotland. Are you a golfer?
Chris Davis: This is a very sore subject for people that are golfers. [Laughs] They're sort of outraged. And they're even more outraged because, as a student at the University of Saint Andrews, you are considered a local, and you had certain golf privileges that you were given as sort of a student pass, if you will. And so, many golfers I know are furious that I didn't take advantage of it. But it is true. I'm just not a golfer, and I'm not really from a family of golfers. I think we have too much ADD for that sort of activity.
Dan Ferris: [Laughs] OK. Well, I'm not a golfer either. So, you know, you haven't offended anybody around here. Having said that, my first question is, how old were you when you first decided that you were going to be in the finance industry? Like in the womb in your case, I would assume.
Chris Davis: Well, funnily not really. In fact, my other head is sort of an amazing philosophy about investing, which is, he felt – you know, I don't know if you remember, Dan, the Peter Lynch book, One Up on Wall Street.
Dan Ferris: Oh, yeah, know it well.
Chris Davis: There was an aspect of that my father really embodied, which is he felt that everybody had a responsibility to understand the fundamentals of investing. He felt like there were so many charlatans and there was so much misunderstanding about investing that a lot of people were basically ignorant or innumerate or illiterate about what investing is, right? I mean, you see it all the time when you meet sort of people on the street. They have no idea.
And his view was that it's a basic thing that people should know, in the same way you know basic health care and hygiene. And he felt like understanding the basic principle of being responsible financially of saving and investing that he wanted all of his kids to have it. My dad had six kids. And so, growing up, he always felt that we needed that sort of literacy about what it is to invest. And he always made it interesting and engaging and exciting. You know? He saw investing and the pathway to investing very much the way it might be if you were trying to teach somebody about speaking a foreign language.
Instead of just saying, "You know, here, you have to memorize these verbs," he would take you to that country and let you see people living and speaking the language. And you have a different understanding. He was like that about business. He felt that to understand investing, you have to understand that stocks aren't pieces of paper that squiggle around and newspaper quotes. And they aren't things that people should, you know, bet on hoping that they go up and that they represented real ownership interests in real businesses. And the story of businesses – you know, the stories of the entrepreneurs and the inventors and the franchises and brands and... you know, it all sort of made sense to us.
So I think I grew up knowledgeable about investing. I grew up with this idea, you know, that I would always be investing my own money, that I wanted to sort of be a responsible steward of the money that I had and the money that I earned and the money that I saved. But I didn't really ever think about myself going into the investment business until, actually, after university. So it was quite a long time where I was familiar and engaged with it, but I never thought of it as a professional calling.
Dan Ferris: OK. Let me frame this a different way. How old were you when you made your first equity purchase for your own account?
Chris Davis: Oh. Well, that's [laughs] – I was pretty young. You know, it's interesting because my father had a great lure for us, as he said that any dollar that we were willing to invest in a stock, provided we wrote a little one-page report that we had done some work on the company – we gave a rationale – that either he would match it or he would cover our downside. You know? He sort of lured us in with this idea that, well, this seems like we have very little to lose and plenty to make. And so, I think my first stock, if I remember right – this is going to sound very unlikely. But it was an insurance company called the Associated Madison.
And by the way, I was probably, you know, 12 or 11. But the reason wasn't that I really knew much about insurance. I knew that my grandfather had made a lot of money investing in insurance stocks. I knew there was this guy out in Omaha that seemed to do pretty well in insurance. And so, there was something about insurance that I probably knew that was more than the average 11-year-old. But what really excited me about Associated Madison was that the CEO – I was always interested in the personalities – and the CEO was a guy named Tsai. I think it was Gerry Tsai.
And he had been a portfolio manager. I think he had originally been at Fidelity. And he had been passed over to run Magellan Fund in favor of Ned Johnson. And so, he went out on his own. And I think I was sort of excited about this young guy. You know? And the idea was, he recognized that an insurance company in some ways, as of course Warren Buffett did most famously, that there's a huge value in an insurance company if the management an generate greater investment returns. And so, he bought this company at a very low price, and I was excited about this young hotshot manager that I had heard my father speak about. So I think Associated Madison was my first.
And I think it did pretty well. I don't think it did huge, but I think, you know, I was just hooked on the idea of compounding. I was so hooked on the idea that every dollar that I could put away young, you know – the younger you put it away, the power of that compounding when you get out further was so much determined by when you started that I was very anxious to get started. And so, I think that was my first one. And as unglamorous as it was and as little as I knew about insurance, I did love the idea of this sort of guy who at the time was sort of a rock star in the investment business that my father sort of admired. And so, that's how I got there.
Dan Ferris: Very interesting. Gerry Tsai is one of the – it's one of the classic tales of Wall Street excess. I think it was the Manhattan Fund that he ran during like the go-go '60s era.
Chris Davis: Exactly right. Exactly right. He came out as this hot growth manager. And of course, my father was quite a hot Go-Go manager at the time, too. I have a picture of him with sideburns that I loved to tease him about. You know? And it's funny because, really, the whole evolution of a value investor – we now think of it as something different from growth. And, of course, it isn't, right? Businesses that grow profitably are more valuable. And I think the term "value investor" tends to speak more to somebody that has a valuation discipline about what they're buying.
In other words, they're not buying based on chart patterns or momentum. They're buying based on valuation discipline. And with that mindset, companies that grow are more valuable. But they can be more risky because you need to look farther into the future about what's going to happen. And I think typically that's how this sort of separated it as if it were two different types of investing. But my father, you know, was buying growth companies in the '60s and the '70s and the '80s and the '90s. And, you know, in our portfolios, we've always had companies that would be considered growth companies. But we're buying them and evaluating them based on the same discounted cash flow, IRR sort of calculation that we would for a business that is growing more slowly or not growing at all or even liquidating.
Dan Ferris: So Chris. Were either you or your father Shelby or grandfather Shelby... were you guys ever at any time in your career a Graham and Dodd-type value investor doing book value and that type of thing?
Chris Davis: Well, yes. I think throughout all three of our careers, there were times that we bought businesses where we felt the margin of safety was so dramatic based on sort of a sum of the parts type of calculation. And I would say some of them worked out well. But by and large, they are not your big winners, right? If you buy a dollar for 60 cents, you have the wonderful appreciation of that 60 cents going back up to a dollar. And so, there's great value in that.
But on the other hand, if you buy Amazon at – we bought, I think, our first Amazon in the $30's. You know, it's not a matter of, well, it might go up 50% or 80% or even double. You had the possibility to really own a compounding machine. And the value of that is partly sort of the huge tax efficiency, right? You continue to have that investment build and build. And then, part of it is the risk reduction that you don't have to find another great business, right? [Laughs] There aren't that many of them.
And so, I think about some of my grandfather's biggest investments. And I'll use one of the iconic examples for us – was Tokyo Marine and Fire. He bought Tokyo Marine and Fire when he assessed that the entire equity value of the company was less than the market value of the headquarters building in downtown Tokyo. So in many ways, that was a Graham and Dodd, you know, investment. But it wasn't a cigar butt investment. In other words – what happened of course was, it leveraged play on this fabulous growth of the Japanese economy. And that's what made it, you know, a 10-bagger, a 50-bagger, a 100-bagger. You know? It was the fact that the underlying business was a very good business.
And so, I would say although we can all point to examples in our career of buying that dollar for 60 or 70 cents and hoping like hell that sucker liquidates or, you know, that management does – there are as many mistakes as there are successes in that. Because that 60-cent dollar, you know... I can pull up three examples in my mind right now. And every one of them is a scar of buying a business at a steep discount to book value and then have that book value implode. We think of book value as completely secure, and of course, it isn't. The book value is just determined by historical cost. You know, many things have are worth far less than historical cost.
The old saying in the restaurant business is, "The first owner doesn't make money." It's the second owner because he basically buys the restaurant at 40 cents on the dollar. Well, that is true in all sorts of businesses. It was true for more than a generation in oil refiners. A guy named O'Malley was a spectacular operator. And I think he started and sold three separate refining companies. By the way. It might even be four. But I think it was three – where he simply would wait until there was just blood in the streets in the oil industry, and then he could go out and buy these refiners at sometimes 5 to 20 cents on the dollar.
So somebody had built some dam refinery for, you know, let's say $50 million. And that refinery could only earn $1 million. And so, you know, the people that built it were getting wiped out. So they turn around and sell it for $5 million. By the way. These numbers are not far off. I mean, as a percentage. Obviously, I'm just using round numbers to make it easy. But then O'Malley – I think his name was Tom O'Malley – would come around, pick this thing up for $5 million that was earning $1 million, and he'd get a 20% return. And this is one of the fundamental aspects of investing where there are so many people that just lose their damn mind. You know, lower prices increase future returns. Lower prices increase future returns.
And yet, buying banks when they were down 40% in March – people think you're crazy. You know? They want to go into what hasn't gone down... what has stayed up. And this is why I'm so just viscerally appalled by momentum investing, right? Momentum investing – a company has positive momentum if the price keeps going up. And the theory is the more the price is going up, the more attractive it becomes because it has more positive momentum. Well, it's asinine.
By the way, it's asinine even if it works. [Laughs] Because how can you look your client in the eye and say, "Well, it worked for so long. I figured I'd just, you know, jump on the wagon"? You know? Buying the same business at a higher price – it reduces your future return. It doesn’t increase your future return. So O'Malley did that with refiners, which I also thought was sort of a spectacular mindset. And of course, it's what we try to do in stocks. You know? We try to buy that thing at a discount to what it's worth. But the idea of buying, you know, those same refiners – O'Malley could buy them and operate them.
And then, of course, when everybody fell back in love with the refiners, then all the majors would want to buy them. And he would sell them sometimes for 120% of replacement cost because somebody would say it's so great to be able to get in the business and have the capacity right away while everything is good. So, you know, he had the ability to buy at a discount, sell at a premium. But it's dangerous to do that when you're not buying the whole company because it's very infrequent that management, when they're running that crappy business, is really that interested in liquidating it or selling it because, of course, they're putting themselves out of a job.
And here's where investing in partial ownership interests of companies – this is where it diverges from buying the whole company. You know? We always say our mindset is to operate as if we were buying the whole company. But the difference is, when you're dealing with those cigar butts that net... and you buy something at 50 cents on the dollar – for that to be realized, that discount to be realized, often the company needs to sell or liquidate. And it's a very, very rare CEO that is willing to do that. [Laughs] Right?
As I said, Tom O'Malley did it two or three times. But very few do. So in my career, a number of my significant mistakes have been buying something at an enormous discount to book value and having it be a disastrous investment because, ultimately, either the book value collapsed or was diluted, and management had no interest in a sense capturing that arbitrage.
And so, you know, I would say over our careers, the pure Graham and Dodd approach, the cigar butt approach... if you're only buying a partial interest in the business rather than the full business, unless there's massive M&A happening, unless you're in the time of the predator's fall where a lot of those things got forced – companies got forced into play – it's a tough way. And there's no great investor I know that would say, looking down at the biggest winners that they've had, that they had anything to do with the pure net sort of approach.
Dan Ferris: I see. Chris, you said something very interesting. You talked about momentum, and you said it was difficult to look your client in the eye and tell them that you're going to keep buying something just because you're jumping on the bandwagon, it's worked this long, etc. That's an interesting comment to me because it's been my experience, not having been – I managed a small amount of money for a few people very briefly and decided it was just not for me.
But other than that, no experience. But it's been my experience talking to people in your business that it's more likely that they'll get in front of a client, and the client will look at them and say, "Why aren't you buying everything that's going up, that's making all my friends rich?" With $28 billion of AUM and all your history going back to your grandfather in this business, I can't believe you haven't had many of those conversations. No?
Chris Davis: Well, absolutely. But sort of the fundamental, important truth in our firm... is that recognizing that often client behavior is as important a determinant of long-term client outcome as investment results, right? Those two things multiply each other. We've recognized those as different factors. And we've also believed that it takes different skillsets to solve for each one of those factors, right? We're wired as a firm with this sort of unemotional, analytical, somewhat contrarian approach.
But we are certainly very driven by evaluation, discipline, and so on. And so, what we would say is volatility minus emotion equals opportunity, right? We love volatility. Now, the second part of that equation is that client that you described saying, "Why didn't you own this thing that went up?" And worse, "Why did you own this thing that went down?" One of my favorite managers of all time and one of my favorite human beings was a fellow named Bob Kirby. He was a legend of the capital group, and he really was a kind teacher to me and a mentor. And I used to go and visit him. And he used to say, "You know, whenever I meet with a client, they always want to talk about the three W's: what went wrong." [Laughs]
And so, the way we addressed this – and I really owe this to my father. My father, in some ways, is a little bit of a loner. I mean, he loves people. He's wonderful with people. But the idea of dealing with clients was not something he was particularly interested in. So we built our firm in partnership with financial advisors. And our view was that the financial advisors' value can really, really stand out if they are able to manage and modify client behavior, right? In other words, save the client from themselves. Now, you think about what it takes to create, you know, a – what were the two lions in front of the New York Public Library? They were named Courage and Fortitude. You know?
I feel like the advisors, and particularly the advisors that we've had the privilege to partner with over 30, 40, 50 years, have really been those advisors that aren't looking for the hot commission or to push the client the way they want to go, right? The No. 1 rule of sales: Give the customer what he wants. You know? Push her the way she wants to go. That's crazy in a profession like financial advising. So we have, in a sense, developed relationships with those advisors that really I think – like those lions – see themselves as providing their clients with courage and fortitude.
And so, we're proud of that relationship because we're in a sense dealing with an informed professional intermediary who then is dealing with that end client who's saying, "Wait a minute. What about putting a little Tesla in here?" And, you know, "When are we getting in that? And what the hell are we doing with this Wells Fargo? You read the newspapers? That's a dog." So in a way, we do have clients that come directly to us from time to time. And of course, we have family and so on. But the vast majority of our clients come to us through a financial advisor that has built a relationship with us based on research and knowledge of what we do and how we do it based on trust developed over decades.
And I think that really enables us and gives us the luxury to be able to avoid the nonsense of window dressing and momentum. You know, it's always a discouraging reality – and I really think, Dan, you touched on a really deep, dark secret, which is that managing other people's money is viewed as a business instead of a profession. In a business, you sell a product to a customer, and you measure success on profits, right? We invest in a lot of businesses, right? I love businesses. In a profession, you provide a service to a client.
And if you wanted to measure success, you can't do it with profits. You have to do it by referencing a client outcome. Now, what I mean by that is, if you wanted to determine who was a good doctor and you said, "I'm just going to pull all their tax returns and look at their income." There may be a correlation. But it's going to be a weak one, right? What you need to do is look at patient outcomes. And if you want to measure who's a wonderful teacher, if you want to measure who's a wonderful lawyer, you have to look at student outcomes, at client outcomes. That is deeply true with financial advisors.
And the best financial advisors measure their success by looking at that client outcome. And that client outcome still may be less than the investment return generated by the investment universe that was offered to that client. In other words, you know, if you think of the investment return multiplied by a behavior factor, that behavior factor – if I remember right, over the last... I think I even have the number here. Let me see. Yeah, this happened to be through March 2020. This was 20 years studied by Dow Bar. It said that the market had returned about 6.1%. The average fund had returned about the same, slightly lower. I think it was 6.12% and then 6.1%.
But the average investor got 4.3%. So almost 200 basis points per year less. And that lost return, that 200 basis points – that wasn't fees. It wasn't hidden expenses. It was nothing like that. That was the cost of emotional investing, right? And what it means is, they got in after markets went up, they got out after they went down. They hired an investment manager after a wonderful five-year period, and they fired him after a bad five-year period, right? So their behavior took it away. Now a great financial advisor, they go to work thinking, "How do I reduce that penalty?"
And they may get it to zero. They may even get it positive, right? Hey, I've got clients that trust me so much that when the market's down, they get in more, or they're willing to hire a manager who's got a wonderful long-term record but has been underperforming in recent periods. Right? But that is a big, big ask that even simply reducing that penalty has huge, huge value. And so, when I look at the worst managers and the worst financial advisors, on the other side, of course, they're running their lives as if they were a business.
You know? Push them the way they want to go, tell them what they want to hear. "They want Tesla today. I'm getting them Tesla. They want Zoom. I'm getting them Zoom." And of course, over time, those advisors in the short run are going to have huge flows, right? Because people are going to love that they're right in the hot spot. But over time, the value of that client's assets that they hold is going to shrink. And so, over time those advisors – I think trying to take that shortcut – sort of washout. And you're human. You can understand how this happens.
But it really is so destructive. And investment managers do the same. I've seen investment managers as they approach the end of the quarter sell out of things that were in the headlines or went down a lot. And of course, they're selling them after they went down because they don't want them in the quarterly report. And they're buying things after they went up because they want the client to see what was the hot star. And it's understandable, but it's a breach of duty. It's a breach of duty.
And so, I feel very, very proud that we've been able to build a relationship with this subset of advisors that has really – they've grown their businesses. They've ended up in that corner office because they did it the right way. And now, they have their clients, and they have their client's kids. They have their client's grandkids. And a lot of doing it the right way means telling the client exactly what they don't want to hear, right? That you have to cut your spending, or you have to say, "I'm going to try to not discourage you from investing in what you want to invest and what you want to invest in."
And those are difficult conversations – I will tell you this, though, Dan. You know, if you really want a practical piece of advice on this, we talk about this client, the example of the client you mentioned, as if they're some retail hick from the boondocks that doesn’t know anything about investing. I will tell you a true secret. I sit on some very fancy investment committees of some very fancy charities – or I have sat on them. And what I would say is these sophisticated investment committees made up of significant, substantial, successful people do exactly the same thing. Exactly the same thing. They want to get into, you know, Venture Capital after an unbelievable period in Venture Capital. They want to get into, you know, market-neutral hedge funds after they've read about what a rock star some guy is in the paper.
They want to get into private equity, you know, after periods of huge returns. They want to get out of public equity. They want to get into bonds. Whatever it is, it's the same tendency. And the really practical advice I have – and I've implemented this, and I promise you it works so well – is a piece of advice from Ben Graham. And it was simply systematic investing. It was the idea of, you know, for the retail investor it just simply means, "Just invest a little bit every month." Right? And that way, you're buying more shares when prices are lower. You're buying fewer shares when they're up."
But my grandfather and my dad used to call it time diversifying. But what you're really doing is you're taking emotion out of it. But the way this works with the sophisticated investment committees is I say, "Wait. You want to, you know, fire a manager that's got an unbelievable long-term record after they've gone through a bad period?" Well, OK. I'm not going to win by trying to fight that. I'll try, but... So I say, "I'm going to ask for two things. I'm going to ask, one, that as a committee, we keep track of how the fired manager did in the years after we fired him. That's like belching at a dinner party. That is a very unpopular exercise. Dalton's especially never welcomed that.
They never want to report back to the committee on how the fired manager did because, in most cases, the fired manager then goes on to outperform because you're firing them after the bad period. So one is, keep track of the fired manager. And the second piece of advice is to spread the decision over time. If you want to fire that manager, I say, "OK. We're firing the manager. But we're going to take 1/12 of the capital away this quarter, and we'll take 1/12 next quarter, and 1/12 the quarter after that, and 1/12 the quarter after that. And so, after three years we will have taken that manager down to zero.
And you want to hire, you want to put money into the hot Venture Capital deal now? All right. Well, let's spread it out over some number of years." You know, three years, two years, four years – whatever you can do. But it is amazingly effective for reducing that behavior penalty, that timing and selection penalty. And I really can't recommend it highly enough because this is not just, you know, a retail investor idea.
In fact, in many ways retail investors – especially through 401k plans – have learned this secret of disciplined, systematic investing dollar cost averaging over time. And it works hugely, hugely well. The only market where it doesn’t outperform the lump sum payment is if the market only goes up. You know? In a world of volatility, and pretend you're starting when markets are high, taking that emotion out by spreading the decision out over time is a hugely practical piece of strategy.
Dan Ferris: Yeah. I've not heard that before. That's smart. And it's amazing that you [laughs] can get anyone to do it.
Chris Davis: Well, usually I don’t. Usually what happens is they fire me from the investment committee, and they put me on the development committee. That's how they punch you when you're on the board of a nonprofit. They put you on the development committees, so you go asking friends for money. So anyway, I'm not on many investment committees at the moment because I do tend to make myself a little unpopular with these approaches. But I do think they work.
Dan Ferris: Well, it doesn’t surprise me that you're not on many at the present moment because certainly the stock market has done incredibly well for 11 years. And even off the bottom in March, just soared out of sight... you know, it's an understatement to say there aren't a whole lot of great values around right now, I think. So you must be – this must be, I'm going to guess, kind of an out-of-favor movement among some clients for you. No?
Chris Davis: Well, I'm going to take the other side of that, Dan. I think what's so incredible about this market right now is, the market simultaneously seems to have a bubble and a depression in it. And it is an incredible bifurcation that does remind me a lot of the late '90s. I mean, let me just give you some numbers to think about. Like, if you were to take – let's say the S&P 500 up... the end of November I think it was up 14%. Take out five stocks, it was 5.8%, right?
And the spread between growth and value, market up 14% – right? The Russell 1000 growth is up 32%. The Russell 1000 value is down, right? A 33% spread, right? That is an incredible difference. Now let me give you a concrete example of what that looks like. So I'm just working on our annual report, and I've been sort of putting this together and noodling with how you show a client the difference between price and value in a market like this because just like you said, "Oh, the market's up a lot. You know, if you're up less than the market, what are you doing wrong?"
You know, how do you show that you could be right about the value of the businesses you're picking but that the prices don't reflect it? So here's my example for you, Dan. Tell me what you think. Imagine you have a client, like a dream client. They got $1 trillion to invest. Right? So you got a trillionaire client. And you say, "All right. I'm going to give you a choice. Your goal is to build generational wealth. You've made a lot of money. You want to compound it over time. Well, listen. There's some really sexy, exciting stuff in the market today.
"So for mostly $1 trillion – it's technically $967 billion – you can buy 100% of these companies: Shopify, Spotify, Tesla, Square, and Zoom. OK? $967 billion." Now I say, "That's strategy one. That's hot. It's exciting. All those companies are all all-time highs. They're booming. They're hot growth companies. Now, for the same amount of money..." – actually $956 billion to be precise, but let's just round it to $1 trillion.
For the same money, I say, "Well, you know, you're interested in generational wealth building, capital preservation. That first group is a little exciting. But how about instead you buy 100% of J.P. Morgan, Intel, Raytheon, Wells Fargo, Applied Materials, Bank of New York, Capital One and Carrier?" Right? So there you have eight companies that have incredible records of leadership, durability through booms and busts, ups and downs. That first group of companies for the $1 trillion, you get $38 billion of revenue. In the second group of companies, you get $426 billion of revenue.
Now, revenue's not the same as value. But it is a measure of the company's relevance in our society, right? So that's like 12 times as much revenue in group two as group one. But it's the earnings where it gets exciting, right? That first group in aggregate is losing money. In fact, I think Tesla was just raising some capital recently, right? So that first group is losing money. It doesn’t mean that they aren't going to be wonderful companies and so on. But you've got companies that have not gone through a down cycle, are losing money, have $38 billion of revenue and I'm paying almost $1 trillion for them. Group two, you've got companies – many of them in their fifth, eighth, tenth decade. They've gone through wars and recessions and booms and busts.
They're all, in various ways, leaders. They're durable. The same $1 trillion, you get $94 billion of earnings after tax. $94 billion versus a loss. So you just say to the client, "Look. Forget stock – the stock prices of these two groups are the same. The market caps are the same. The question is, one, do you want the one that is making $93 billion a year?" – which is almost a 9% return, cash return for these durable businesses with strong balance sheets, proven records, leadership positions – "or do you want to have a -$1.2 billion for this group of companies because we think they're going to grow a lot?"
Well, if I was the client there, I'd say, "Well, you say they're going to grow a lot." Let's say they grow 10 times from their size today and they go from losing money to making a 25% after-tax profit margin, which would be wonderful, right? We would all say, "That is a very high profit margin: 25% after-tax profit margin. If they did all that, they would still be earning less than that second group earns today."
So I look at that and I say, "Look. Are we in a high market? I don't know. I have no idea about the market. But what I know is, there are some great values out there. And financials really, to me, is at the top of the list. And I will spend as much time talking financials as you'd like. Obviously, there are a number – that list of group two companies I gave you is, of course, a big, significant percentage of our client portfolios, right? So I'm talking my own book.
But I just look at that and I feel... you know, I was talking to my father a couple of weeks ago. And he said, "I'll say this about this downturn. This has been about the highest conviction downturn I've ever gone through in that we have a lot of conviction about the businesses and the performance of our businesses." You know? Bank stocks are down 13% this year. And yet, if you were to take our bank holdings in aggregate, I think they earned $57 billion for the first nine months of 2020. By the way, that includes like everything we know, the reserve builds, all that: They still aren't $57 billion, right?
So the idea that that group earning that money is down 13% with the growth index up 30%, I feel like there's a lot of opportunity in this market. And so, I don't really have a prediction for what the S&P does or whether it's high or low. You know, you could argue it's not all that high compared to interest rates and things like that. But what I know is, within that S&P, there are companies that to us look incredibly attractive on an absolute basis, right? That portfolio I gave you was generating almost a 10% earnings yield after tax.
So that's an attractive absolute return but looked staggeringly good on a relative basis. And so, when I say wildly bullish... I never feel wildly bullish. [Laughs] What I would say is, I feel deep conviction in the value of what we own and the fact that that value was tested in this environment, right? The banks just went through the biggest jump in unemployment, the biggest stock market declines, the biggest GDP decline since the depression.
And yet somehow, our bank companies still managed to earn something like a 9% return on equity even after upfronting – with that life of loaning accounting change – all of the losses they expect on all of the loans they have on their book for the life of the loans. So that's a pretty powerful place to start. You know, these banks – our banks have 12% tier I capital today in the midst of this, right? That's 25% more than what is required. So I feel like I can look ahead and see an environment – whether it starts next year or three years from now or five years from now... I don't really care.
What I see is a world where people look at these banks and say, "Oh, my God. Why are these so cheap?" They've been tested. They're resilient. We've got 3%, 4%, 5% dividend yields. We've got share shrink, which is going to certainly start up in the new year I hope. If not, it'll start the year after that. But the likelihood of shrinking shares at least the same amount – 4% or 5% a year, which is what they had been doing.
You know, in a world of near-zero interest rates and where things like utilities trade at 20 or 22 times earning or consumer products companies that haven't grown at all in a decade are trading at 20, 25 times earnings because people love that 3.5% dividend... I think we are in front of what really – you know, I like to say I feel like our fund is sort of spring-loaded that way. And so, I love the way that we're positioned. And I like that we've been able to generate absolute returns in this environment. And if our relative returns are lagging a bit, well, that's all right. As my father once said to me, "That's the seeds of future performance."
Dan Ferris: OK, Chris. You asked me what I would think of your example. And maybe I'll wait till you publish it. But I'm going to steal it, just so you know. [laughs] I'll attribute you, but I'm going to steal it.
Chris Davis: Well, do it. You absolutely can. And of course, you can do the same example in all different ways. I've seen people just look at the market cap of Berkshire versus the market cap of Tesla and just put those on a page. I mean, you know, there are all different ways of showing you really are in an extreme tail of two different markets. And in the year 2000, I mean, there were. A lot of managers I knew – I mean, including us. I mean, the market went down 9% or 10% in 2000.
And if you had predicted that in '99, you would've said, "Oh, my God. The market's overvalued. I better go stand on the sidelines." And you would've said, "Yeah, next year, the market was down 9% or 10%. I was right." You know, we were up 9% or 10% in 2000. And a lot of managers we knew who had really lagged in the late '90s, I mean, were up 20% and 25%. There was a lot of opportunity to buy stocks in '99 that did great even though the market itself didn't do so great. And, you know, we aren't optimized to any one part of the cycle.
Obviously, we own companies like Google and have owned them for many, many years. And we've trimmed them. You know, this has been a year where we sold – I forget the number exactly, but I want to say we've sold more than 25% of our shares of Google and Amazon, which we had owned for many, many, many years and continued to buy the companies that I mentioned in that group, too. But we still have some of those what I would call "growth stalwarts." Right? Because in this growth value thing, Dan, you know, people say, "Oh. What about growth?"
Well, in the growth category there are what we call growth pretenders, and there are growth stalwarts. And the companies I mentioned in group one, they may or may not be growth pretenders. We'll find out. They're certainly speculative growth, and they are certainly not stalwarts because they haven't been tested. Companies like Google, Facebook, Amazon, I mean, certainly are growth stalwarts. They generate huge amounts of cash. The amount of cash they generate continues to grow. The amount of cash they generate relative to their market cap, especially adjusting for what we would call discretionary spending, is very, very significant.
So within the growth category, there are growth stalwarts that look to be still relatively attractive. I mean, we've sold some. But there definitely are a lot of these... And then in the value category, just like you said with the Graham and Dodd – you know, the nets earlier – there are value traps, and there are speculative values. What I mean by speculative value is the sort of company you buy where if we get a steep recovery in the first half of next year, you're going to make a fortune.
But if it gets bumped off to the second half, you're going to have to do a financing and might be out of business. So [laughs] that's speculative value. It's risky. But if you get it right, you're going to... And then, there's resilient value. And that's, you know, the companies that I mentioned – the financials, the applied materials, the carrier, the Raytheon – you know, these are companies that I think are resilient value. And so, even within those categories, we see a lot of risk and a lot of opportunity.
Dan Ferris: Fair enough. Yeah. I hear you because we are – in the newsletter I write, Extreme Value, I'm a little bit shocked. Like, I look at the market from the top down, and I think, "Boy. I hope we can find something." But then we look from the bottom up, and we don't know what to recommend first. Because there are plenty of really good businesses that are generating real cash profits that nobody seems to care about. But Chris, we've actually been talking for a while here. But I do have one final question for you. If you could leave our listener with one thought today – and even if it's something you've already said, feel free to reiterate. OK? But if you could leave the listener with just one thought today, what would it be?
Chris Davis: I think it would be to recognize that people always sound smarter when they're bearish. It's always the skeptic who points out how the world is going to ruin that is considered a sage. And yet, when you really look at the data whether it's... and almost any outcome, whether you think about nuclear arms or ozone depletion or hunger or deaths from disaster or you look at literacy rates and Internet access and girls in school and harvest rates and so on, the world continues to get better – and that doesn’t mean there still isn't a long way to go. It doesn’t mean we're Pollyanna.
But I think people get so absorbed in the negativity because that's what sells, right? You know, I remember a very iconic old newspaper editor saying to me once, "You know, we got a simple rule for the front page. If it bleeds, it leads." Our brains are wired to be sensitive to bad news. Evolutionarily, it helps us to overweight potential negative things. But it really hurts you as an investor. You know, I think just over my career, we've gone through Vietnam and assassinations and Watergates and bear markets and oil shocks and stagflation and the Russian bond default and the dot-com bust and 9/11 and the financial crisis and the Great Recession and the Euro crisis and COVID-19. You know?
In every one of those moments, people view it as an excuse or a reason not to invest. And even aside from investing, just in their own psyche, they lose track of this incredibly good news: That there is nobody today in any group that really wishes it were 50 years ago. And that's true in almost every dimension. The world has gotten better and continues to get better: in the ingenuity of humans, the capital system, the way it's worked, the way it's unleashed innovation and technology. I feel like my one piece of advice would be not to give in to that environment of pessimism – to instead understand resilience, durability, and look at the data and you'll see that you've been right to be an optimist for the last 50 years. And I think you will be for the next 50 years.
Dan Ferris: Excellent. Thank you for that. Man, I'll tell you something. I just feel like I want to talk for two more hours. We have got to have you back at some point.
Chris Davis: You made it easy. You know? [Laughs] The time flew by. I was really glad to be here.
Dan Ferris: OK, Chris. I guess it's bye-bye for now. Have a great day and have happy holidays, you and your family.
Chris Davis: All right. You, too. Thanks for all that. Bye-bye.
Dan Ferris: Wow. So just in case my faithful listeners have not heard of Chris Davis before, like, the Davis family – going back to the early 20th century, sort of early to mid-20th century – is one of the great... I mean, there's actually a book by a guy named John Rothchild called The Davis Dynasty, right? So this is some – and Chris, who we just spoke with, is the third generation, OK, of the Davis investment dynasty.
So I made a joke about – before we start a recording, I made a joke about Warren Buffett or something. I forget exactly what I said, but it's not crazy to talk about Chris in the same breath with Warren Buffett because his family has been in the investment business for so long, and they're so good at it – you heard the stats I read at the beginning of the interview. Anyway. I hope you took notes. If you didn't, listen to it all again and take notes. And check out their website, too. Davisfunds.com. There's a lot of very good reading there. Very good reading.
All right. Man, I'm pumped. This was one of my favorite interviews ever. I'm so glad we got Chris Davis on the program. Let's check out the mailbag. [Music plays and stops] My colleague and friend Dave Dave Lashmet is on fire right now. His average closed pick this year alone has returned 187% – almost triple your money. Today, he's got a time-sensitive $13 stock pick that he believes is set to explode. This is an opportunity you don't want to miss. Listen to Dave's take along with all of his evidence on the stock over at investorhourtech.com. Check it out. [Music plays and stops]
In the mailbag each week, you and I have an honest conversation about investing or whatever is on your mind. Just send your questions, comments, and politely worded criticisms to [email protected] I read every word of every e-mail you send me, and I respond to as many as possible. And I'll have to tell you something, folks. We are getting very close to the point where I won't be able to make that claim anymore because you guys are so good. You're good correspondents. More people are writing in than ever. And you're writing longer e-mails.
So write in. Maybe let's all make a concerted effort to keep them short so I can continue to say I read every word of every e-mail you send me. But it was pretty close this week. [Laughs] I just kind of squeaked it out reading every word of every e-mail. So we got a lot of stuff here. And I won't read every word of the ones that wrote in because they were all pretty long. But I'm going to start with one that we did last week, actually. So this is Brad. And Brad wrote in, if you recall, about bitcoin.
And he was talking about quantum computing. And he was suggesting that when quantum computing really gets cooking that they'll be able to sort of sabotage bitcoin and hack their way into it. And he was asking for commentary on that. And last time, I let our guest Mark Yusko sort of substitute for me in the answer to the question. But I also shot an e-mail to our crypto guru, Eric Wade. And he sent me back a really thoughtful response that I just have to read. Eric says, "Of Brad's e-mail" – which you can hear... I read a bit of it last week. It's just all about quantum computing and bitcoin. OK?
And Eric Wade says, "What a great letter. Sincerely. Quantum supremacy is the four-minute mile of computing. When the quantum technology not only works but works well enough to solve a problem that regular computers can't solve in a reasonable amount of time. The thought is, once that is achieved, everything after that is just better and better." He said, "The rest of the e-mail, thoughtful, intelligent; is a good mind-opener." And then, he talked about bitcoin as a store of value. He says, "First, bitcoin is a store of value and a speculation and a technology and a messaging system and a decentralized network and can be used as a currency."
So he's right. Brad, the fellow who wrote in, is right – and then some. And then, he talks about Rai stones. Those are those big, round stones that they have on Easter island that they used to use as currency. Like, they're gigantic. I can't imagine them being used as currency. So Eric says, "Are Rai stones currency? Yes. Store of value? Sure. They rarely come on the market, but there's one on sale right now for $40,000. But any wise investor would immediately question the wisdom of using Rai stones as a currency because of logistics, which is a valid point.
What I'm getting at is, just because bitcoin is volatile and speculative doesn't mean it can't be other things. The difference is, the exchange rate fluctuations are shifted to the bearer. Accept that and it starts to look like real estate or other variable stores of value. As for quantum algorithms, another valid point. The traditional answer to that is, 'Yes, it's possible that quantum computers could crack a bitcoin private key.' Notwithstanding that, a party with quantum power may choose to attack other targets first: Bank of America, Facebook, New York Stock Exchange, etc. Another argument is that bitcoin should be given some credit and agency, too. Who says bitcoin or cryptos will sit idly by and let themselves be overrun by a technology everyone sees coming?
Yes, bitcoin changes slowly, but it can change. It's possible that bitcoin could defend itself faster than a realistic attack would materialize. I don't say that lightly either. In the meantime, people with passwords shorter than 64 random characters would see their privacy fall long before bitcoin does." And then, he has a little Emoji winking. You know? So he's kind of advising you to have a password longer than 64 random characters. That was his whole answer. I'm going to just let Eric's response stand, and I'm going to move on to the next question.
Next comes Matt O. And Matt O. actually has a bone to pick with Mark Yusko, who, last week on the podcast, was saying that fractional reserve banking is a good thing, "It's one of the eight wonders of the world. When it's done right, you're lending against an asset that has cash flows to pay you back. It's a beautiful thing..." And Matt O., he wrote me a longer e-mail than I can read. But he says, "Fractional reserve banking is not, as Mr. Yusko implied, necessary to facilitate lending." Then he says how it could be done otherwise. And he really just – he says, "Fractional reserve banking is a blight on society that serves to primarily benefit bankers and, secondarily, borrowers via suppressed interest rates at the expense of savers."
So like I said, it's too long to read, but I'll go to the end. He says, "Blight though it is, I will admit that fractional reserve banking is relatively benign in its magnitude and will agree with Mr. Yusko that central banking and the central banks government-granted monopoly-powered issue fiat currency are far more impactful and damaging scourges on society. I enjoyed your interview with Mr. Yusko and agree with the vast majority of what he said, but I just couldn't let his praise of fractional reserve banking pass unchallenged. Best regards, Matt O."
I'm not going to argue with any of that, Matt. I'm not sure I'm the biggest fan of fractional reserve either, and I agree that there are ways to have fully reserved banking and still have lending work as a business. Next is Mike K. And Mike K. says, "Hi, Dan. I really enjoyed the discussion you had with Mark Yusko. The information and opinion was great. I think what put him over the top of many of your guests is his speaking ability. His delivery was at pace where I could follow along easy, and he didn't assume the listener would know each of his points.
So he prefaced them with brief examples. For example, what the Lindy Effect is. Also, as the moderator, I appreciate you letting Mark get his points across without interjecting. This is your show, but you didn't feel the need to dominate it, which unfortunately is how many hosts treat their show. They make the show about themselves and don't let the guest have a free flow of information. Excellent episode. Mark K." I agree. I love that episode. Mike K. Sorry, Mike. I agree, Mike. Mark is a great – he's a great talker. Period. I just want to listen to that guy talk. I want to wind him up and let him go. You know?
So I just ask a few questions, and I know he's going to school us, right? And I agree. Part of the thing on this show is that I want to get really good guests who you really want to hear from, and I want to let them speak their piece. I've done maybe, I don't know, five or six spots on regular television like Fox News and stuff. And it was frustrating because you take half your day, you drive into town, you go to a studio, you sit around waiting, and then you get in front of a camera, and you wait, and you wait, and wait some more. Then all of a sudden, you're on. And you're part of a five-minute spot, and you get 30 seconds. And they always cut you off, and sometimes – my last time was... one of these people made kind of a remark I didn't like.
And I thought, "Why am I sitting here waiting to take abuse from some talking head on Fox? This is ridiculous." So our podcast, the Stansberry Investor Hour, is the antidote to that stuff. And before we actually started recording our interview today, we were talking with Chris a little bit. And he said, "Wow. I'm so glad that I can just come onto a show like this and talk, because" – you know, exactly what I just said. You can do these television spots, and they cut you off. So yeah. You're right, Mike. That's what we do around here. And we do it on purpose because it's the right thing to do.
Next comes Elsa G. Elsa G. says, "Dear Dan. I'm a Danish fan. I see you as a value investor. I cannot understand that you can recommend Disney if the vaccine has come. Disney has gone up all-time high despite that the theme park is on low capacity and the cruise is shut down. I know that they have their new streaming service, but it's not a money-making business, and the subscriber could fall after coronavirus. I think everything positive and much more is built into Disney. Could you please recommend one or two brokers for bitcoins and tell how you self-secure your bitcoin? For example, with a cold wallet. Best regards. Elsa G."
For the moment, Elsa, I don’t have my bitcoin in a cold wallet. But that is my plan: to do that. It's just to get it completely offline. As far as recommending brokers, look, I don't recommend. I'm not going to recommend. For now, I'm using Coinbase. I've heard good things about it. I've heard bad things about it. So far, I haven't really needed any great customer service out of them. So I have no complaints. But, you know, what I know about them more than that is really not very much. That's all I have to say about that, Elsa [laughs]. Sorry.
As far as Disney is concerned, you could be right. It could be all – you know, the theme parks capacity is really low. Maybe people won't get back on cruise ships very quickly. Maybe they won't crowd back into theme parks. I happen to think that there is a sense of pent-upness that is probably bigger than anyone understands right now. And that sense of pent-up desire to get the heck out of the house to go somewhere and do something I think is huge. We'll see. You make good points, Elsa. Could be all in the stock price.
You've heard me talk about equities being extremely expensive, and I'm really worried about a crash or a bear market or whatever, worried about paying too much for businesses – even good ones – today. Yeah. It's not a bad point. I'm just tending to be on the other side because I think that there will be a kind of dramatic return to these things once people are allowed to leave the house again, to put it simply.
Next comes Mark P. And Mark P. has two questions. And he says, "There are two macroeconomic questions that befuddle me. And I am certainly not an economist. One, you advised a whole plenty of cash because the very expensive stock market these days and your increasing bearishness. Yet at the same time, we also hear that the dollar – being a fiat currency – is being devalued at a rapid rate. Money supply, M2, has increased by almost 25% since the beginning of the year. So isn't cash trash? Why would I want to hold the U.S. dollar when its value is being eroded like no other time in history? No. 2 question: Might the increased supply of money be precisely why the market can be valued higher this time relative to GDP or sales? In other words, is this time in fact different because of the unprecedented money printing and the expectation that it will continue into the indefinite future and likely only accelerate? Would love your thoughts on this. Thanks, Mark P."
Second question, first. No I don't think so. And look, the money printing goes into security buying, right? Fed prints money, buys security. And we've talked about this many times. That's actually a deflationary thing because it swaps out an income-bearing asset, takes it out of the market, and puts bank reserves in there. And the same reasons why interest rates are zero and they're doing all of this swapping out of new currency for debt securities are the same reasons why the reserves just build and build, and the lending just isn't there – the spending and lending just isn't there yet.
So my answer to the second question is no, basically. [Laughs] The first question, you know, isn't cash trash because it's being – there's a lot of it being printed? Well, maybe for other currencies, that's true. But right now, at this moment, for the U.S. dollar, I don't know that that's necessarily true at all. Like, the answer to the second question bears heavily on this one. If there's a deflationary trend here based on all this printing and security swapping, you're going to get a stronger dollar before you get a weaker one. And to get the weaker one, the printing is not sufficient. It has to be lent and spent. The velocity has to rise, and we're just not anywhere near there yet. But, you know, I think we will be eventually. Father down the road, I think we definitely will be.
Last question this week is from Jason C. He says, "Hello. I really enjoyed your most recent podcast about bitcoin. My wife and I are subscribers to both your podcast as well as Stansberry Research. And I have been wondering if bitcoin is still considered a buy even though it is above the max price that is listed in the Innovations Report. We bought some bitcoin when the price was much lower but are considering our options as we have more to invest than it looks like. It would be a good place to be if the price is right. Curious about your thoughts. Jason C."
Two things, Jason. Thank you for writing in, first of all, but two things besides that. The Stansberry Innovations Report is not my newsletter. So you're going to have to check with whatever the Stansberry Innovations Report says to get their view on things. And I'm not going to say anything more than that. That's it. So their maximum buy price is not mine. I view bitcoin, oddly enough, similar to the way I view gold. It's a store of value, and it's an exit from fiat currency. It's an exit from the U.S. dollar. The point is to get your money outside of that currency regime.
Sometimes I call it the financial system. Sometimes I call it the currency regime. But it's all the same. Stocks, bonds, cash, traditional banking – the whole bit. Getting your money outside of that is what you're doing in my view when you put money into bitcoin. And I think you can just – you know, to me it's like gold. It's a form of savings. So I don't really care what the price of gold is because in relation to the future price of the fiat currency, the U.S. dollar, and the euro, and the yen, and all the rest of them, I think that gold and bitcoin are going to be higher relative to this.
So yeah. You won't hear me saying bitcoin is too expensive or even gold is too expensive. At some point, I might say, "Boy. Everybody really is in love with this idea right now. So I'm not as in love with it." Right? Sentiment. That would be a comment on the sentiment and, you know, just the current state of the market, right? Anything can get too frothy. Anything can get too popular, including these stores of value. I hope that's enough of an answer for you because that's all I have for you, Jason. It's a good question. Thank you for it.
All right. That's another mailbag, and that's another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as I did. If you want to hear more from Stansberry Research, check out americanconsequences.com/podcast. Do me a favor. Subscribe to our show on iTunes, Google Play, or wherever you listen to podcasts. And while you're there, help us grow with a rate and a review. You can follow us on Facebook and Instagram. Our handle is @InvestorHour. Also, follow us on Twitter where our handle is @Investor_Hour. Have a guest you want me to interview? Drop us a note at [email protected] Till next week. I'm Dan Ferris. Thanks for listening.
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