In This Episode
The past 10 years have taught us that the FAANG stocks – with Nvidia sometimes included in the mix – can do no wrong. After all, they’re the businesses with the greatest technologies, low capital expenditures, and visionary leaders.
They’re seemingly ascendant over the big brand names, as Kraft-Heinz’s 27% drop in one day appears to reinforce. But in this hundredth episode of Stansberry Investor Hour, Dan explains why left-for-dead value investments could be about to have their day.
Then there’s the latest IPO news, as Dan notes a market that’s fed and fueled by ever-rising speculation, triggering large valuations being assigned to profit-free companies. Don’t miss the two Dan’s warning against – an unprofitable vegan company whose filing Dan found fascinating, and Slack, the employee-communications platform just about every Stansberry employee uses.
He then introduces this week’s podcast guest. Morgan Housel is a partner at The Collaborative Fund and a former columnist at The Motley Fool and The Wall Street Journal. He is a two-time winner of the Best in Business award from the Society of American Business Editors and Writers, the New York Times Sidney Award, a two-time finalist for the Gerald Loeb Award for Distinguished Business and Financial Journalism, and the Columbia Journalism Review for the Best Business Writing 2012 anthology. In 2013 he was a finalist for the Scripps Howard Award.
You won’t want to miss his insights into the Fed’s actions’ and their relations to market disasters – and why, fascinating as this question is, it’s also the wrong question to ask.
NOTES & LINKS
- To follow Dan’s most recent work at Extreme Value, click here.
- To read up on Morgan’s book “50 Years in the Making: The Great Recession and Its Aftermath” click here.
01:01: Dan starts off with an allegory of a couple of fish being asked how the water is. The moral of the story: There are things crucial to our existence we take so much for granted, we’re not even aware of them.
3:50: It seems like a long time ago – but Dan revisits the hour, just last summer, when Facebook lost tens of billions of dollars of its market capitalization.
07:10: Most people think of bonds as a kind of hedge against falling stocks. But not so, as Dan explains how often both assets fall together.
11:15: Warren Buffett’s recent comments about index investing against Berkshire Hathaway’s outlook may be a game of expectation-setting, as Dan notes, before providing three reasons Berkshire could keep outperforming.
16:50: Dan warns about the two latest companies on his radar set to IPO – a vegan company seeking to end meat consumption, and the company-communications platform Slack.
28:11: Dan introduces this week’s podcast guest. Morgan Housel is a partner at The Collaborative Fund and a former columnist at The Motley Fool and The Wall Street Journal. He is a two-time winner of the Best in Business award from the Society of American Business Editors and Writers, the New York Times Sidney Award, a two-time finalist for the Gerald Loeb Award for Distinguished Business and Financial Journalism, and the Columbia Journalism Review for the Best Business Writing 2012 anthology.
31:20: Dan asks Morgan about the learning experience of writing his supremely condensed, 5,000-word piece on How This All Happened: The Story of How America Evolved from 1945-2018. “You have to come away from that with something.”
34:14: Dan asks Morgan about the Federal Reserve. “We have this view of them they control interest rates… but really all they do is execute market trades that keep interest rates within one certain range.”
40:47: Morgan explains how the Fed’s actions relate to booms and busts is interesting, but the wrong question to ask, as investors should expect regular recessions instead of trying to read tea leaves into what will cause the next one.
55:39: Matthew S. from the mailbag asks Dan about how Motley Fool, Yahoo!Finance, and other sites can have such vastly different statistics on companies, and how he can know who to trust.
Announcer: Broadcasting from Baltimore, Maryland and all around the world, you’re listening to the Stansberry Investor Hour. Tune in each Thursday on iTunes for the latest episodes of the Stansberry Investor Hour. Sign up for the free show archive at investorhour.com. Here is your host, Dan Ferris.
Dan Ferris: Hello, and welcome everyone to the 100th episode of the Stansberry Investor Hour. I am your host, Dan Ferris. I’m also the editor of Extreme Value, a value-investing service published by Stansberry Research, and we have a really good 100th show lined up for you today, so let’s just get into it. Let’s get into the rant, OK? All right, now I got a little story for you. I find it amusing, I hope you will too, and I find it very instructive.
So, there’s a couple of fish, a couple of young fish swimming along, and they come upon an older fish, and the older fish says, “Morning, boys. How’s the water?” And they just kind of look at him and smile and they keep swimming, and one of the younger fish says to the other after a while, “What in the heck is water?”
And the point of the story – I may have told this story before but not in relation to what I’m going to talk about today, because it’s a really good story.
It shows you that there are probably some things that are extremely important to you, in the case of the story it could even be a matter of life and death, which you take so much for granted that you are really effectively unaware of their existence. The fish are unaware. They don’t know what water is, and yet it’s everywhere around them. It’s their whole world is water. I find this idea extremely useful for investors because we easily get used to things and we take things for granted.
And the first one is, no pun intended here with the water story, but the first one that we take for granted is liquidity. What’s liquidity? Well, that’s easy. That’s just the ease with which you can buy and sell stocks and bonds and whatever else you’re trading and investing in. If it’s really easy to sell something and the price doesn’t move much at all if at all, it’s highly liquid. If you can just go sell 100 shares of something at the market and you’re going to get the price that is the current market price, that is a highly liquid thing.
Obviously, the stock market is a highly liquid thing because you can do that all day long. You can buy and sell and buy and sell and buy and sell and never move the price. You can sell sometimes a million shares or possibly even 10 million. If a company has a billion shares outstanding, you could possibly trade millions of shares without really moving the price at all. So, we enjoy liquidity. We enjoy deep liquid markets for equities worldwide but really in the U.S. we are very deep and very liquid.
The point of this, so what if it’s not there? What does that look like? Well, it looks like 2008 and early 2009, and individual events it looks like Facebook in, what was it, July? I forgot the exact date, maybe 24th or 25th or 26th or something of 2018 when Facebook lost tens of billions of its market cap just in an instant, almost 20% of the stock just down that much in an instant. We’ve talked about that before in relation to risk, but its liquidity is the thing that’s not there.
That means when the stock goes from – I think Facebook went from like $220-something to $170-something kind of instantly. That means there are no bids at $178, $179, $180, $181, and of course stocks are quoted in pennies, so for each one of those dollar amounts there’s 100 other possible prices and there are no bids at any of those hundreds of possible prices from whatever it was, $220 down to $170 just say.
That can be really rough. If you’re taking liquidity for granted and suddenly not there, it’s kind of like the water suddenly not being there for the fish.
So, let’s just think about some things that maybe they’re not so life and death as water is to a fish, but they’re important things that we’ve come to take for granted that I feel a lot of investors have very likely come to take for granted. The first one is kind of obvious, low and since 1981 falling interest rates. The 10-year Treasury or I guess it must’ve been the 30-year, whatever it was, the longest bond that the U.S. government puts out, it yielded like 15% back in 1981, and of course rates have basically been falling and falling and falling ever since, which means that bond prices have been going up and up and up and up.
If you bought the 10-year Treasury bond in like September of 1981, it was the golden moment to retire. Just putting all your wealth in treasury bonds you probably made about 6% or 7% a year since then. So, we have definitely developed an expectation that bonds are going to produce pretty good returns and that interest rates are going to stay low, and that has led us to some other expectations, hasn’t it?
For example, over the past couple decades we expect bonds to correlate negatively with stocks, so we feel like we’re diversified. You got an S&P 500 fund, you got a Treasury bond fund, you’re good. When the stocks go down, the bonds go up, and you’re good. That hasn’t been the case over the very long term, and you could argue, look, you could argue the last couple decades have a lot more to do with what we can expect now than previous to that, and I won’t argue that point.
But you should know and you should understand what it is that you’re taking for granted. You’re taking for granted that bonds are an adequate diversifier for stocks, and I don’t know that that’s necessarily something you should take so much for granted. It’s very possible that stocks and bonds can fall together. When you think what might happen in a time of inflation, hey, there’s another one, huh? There’s another one that we don’t expect.
We’ve just seen low reported inflation for so, so, so long going back again to the beginning of the 1980s. Inflation has just been low, low, low for so long that the reported low and the effects of it have not always shown up the way you might expect. It’s been so low for so long that we just take it for granted, and we take all these things for granted, so we think, well, inflation is low, I can buy stocks. Maybe the valuations are high. Well, that’s because interest rates are low and they’re going to stay low for a while.
So, we just developed this whole recipe of expectations. Like I said, high and rising equity prices is part of that. There’s even subsets of this, right? Past ten years have taught us that the FAANG stocks, Facebook, Amazon, Apple, Netflix, Google, Microsoft, I think Nvidia is being included in that group from time to time, but we just expect these are all the greatest businesses with all the greatest technologies and most of them are low-capex businesses, they don’t require a lot of capital spending to keep them going, and so they’re just the greatest businesses that have ever been created, and they’re going to keep going up and keep producing great returns for long enough from this moment forward that I really don’t have to think about it very much.
Another category Warren Buffett has taught us to think about, wide mode stocks, stocks with wide economic modes, with big competitive advantages, and we associate brand names like Kraft Heinz, which of course I think was down like 28% in one day recently and called that idea into question. The guy who runs the company that controls Kraft Heinz and Anheuser-Busch, he even came out, Jorge Lemann even came out and said, “You know, we thought this was just a no-brainer to take control of these companies and lever them up and cut the cost and that it would be good forever and we never questioned it, but we kind of are.”
In a recent Financial Times article Warren Buffett even questioned whether Kraft Heinz would – he made a comment that kind of implied that he didn’t necessarily take it for granted anymore that Kraft Heinz would be a wonderful business forever. So, we have this idea about these wide mode stocks that is now – the market in fact is even calling it into question. The market isn’t calling into question Google and Amazon because those stocks are just continuing to do pretty well, but it’s calling into question some of these other assumptions.
There was a report put out recently by a guy named Murray Stall who’s kind of a famous value investor at a firm called Horizon Kinetics, and he called some of these into question. He talked about Kellogg and PepsiCo, and he just looked at them, he said, “These things are expensive and they’re priced to continue growing and growing, and we just don’t see how they’re going to grow at all.” It’s a high price to pay for kind of a – even if everything goes right, for kind of a mediocre return expectation. He put Amazon.com in the same group.
So, you need to learn how to think about what you’ve taken for granted in that respect as well. Another thing we take for granted because of the extreme outperformance of the S&P 500 is the idea of indexing. And again, Buffett came out recently and he said he was asked about S&P 500 Index versus Berkshire Hathaway, and he kind of said, “Well, they’ll probably both perform about the same from here.” He doesn’t want to set a high expectation on Berkshire Hathaway stock.
Maybe Berkshire will perform better because it’s probably managed better and probably a higher-quality, more cash-generating group of businesses than the whole of the S&P 500, and you shouldn’t take it for granted that the S&P 500 is going to generate 300% every 10 years. We started from a really low base there in 2009, and of course it’s ripped since then. You should expect the opposite for the next 10 years. You shouldn’t expect it to continue doing the same thing, and people just kind of take it for granted.
I’ll do one more of these, but you’re starting to get the point I’m sure. Gold is dead money. Gold is just dead money. Gold peaked at $1,900 almost eight years ago, and then of course the gold stocks went down in a brutal bear market for four years, kind of bottomed out in late 2015, early 2016, and came off that bottom kind of nicely but haven’t really done a whole lot since. It’s a pretty fair guess that most investors are looking at gold and gold stocks and thinking, “Eh, I’d rather own Facebook, Amazon, Google, etc.”
As a business, if I had to own the whole business and not have the stock quoted every day in my portfolio, I might make that same choice. But let’s face it, the value of your assets, it goes up and down and up and down daily, by the minute. You have to think of these things; you have to. So, that’s what I want you to do. Giving you a little homework assignment here.
What is water to you as an investor? What’s the thing that’s all around you that you count on? With most of you it’s probably liquidity. I’m guessing most of the people who listen to this podcast are more active, trading more in and out of their accounts every day, every week, every month, whatever, than the average investor.
So, I’m going to say that probably the biggest thing you take for granted is liquidity. If it’s ever not there, if you ever go to sell your Facebook or your Amazon and then the price suddenly drops 20% or 30%, that’s going to be a real surprise, and it can happen.
Look, that’s the rant for today. I’m asking you to consider things that admittedly are unlikely to happen. It’s unlikely that your Amazon is going to drop 20% in an instant, but it can happen. We saw it happen with Facebook, and we’ve seen it happen with other big cap stocks. If you just Google “biggest market cap losses in history,” Facebook will be the biggest one, and then I think Microsoft is in the top 10 once or twice, and there’s a bunch of other ones.
So, stocks can lose lots and lots of value in an instant. You have to be aware of that, and you have to be aware that it’s a lack of liquidity that makes that happen. I think it’s no coincidence at all that for example when the short VIX fund failed in February of 2018, it’s no coincidence at all that the stock closed at a normal price and then of course fell completely apart, fell like 80 or 90% in an instant in the after-hours trading where there’s a lot less liquidity. I think the same happened with Facebook. That was an after-hours event, too.
So, you have to be careful with these things. They can really blindside you. Think about the ones I listed and then try to come up with your own, and I’d like to know if you come up with something that we haven’t, definitely write in at feedba[email protected] because I want to know what things I’m taken for granted that I haven’t listed that I don’t know about, too, and I want to share them with other listeners in the future. All right, so that’s the rant.
Let’s talk about what’s new. Well, what’s new in this market is more IPOs. We should expect that. It’s definitely a market that is fed and fueled by lots of speculation, new money coming into new issues. Most of them don’t make any money. So, we have large valuations, billion plus valuations being assigned to companies that don’t make money.
The first one I want to talk about is – we just have two of them recently. A vegan company called Beyond Meat is going to go public. It’s expecting to get a valuation in excess of $1 billion, which is something like 11 times 2018 revenues. It is not profitable. It’s actually I found reading through the filing fascinating. I would definitely recommend going to SEC.gov and looking up the filing for Beyond Meat and read.
One of the interesting things was the letter from Ethan Brown, the founder and chief executive officer. He explains all this really interesting stuff about how humanity came to consume more meat and that was a more efficient way of getting protein, and it helped our brain develop faster, and then we discovered agriculture, and he goes through all this stuff to explain sort of the history of human beings’ relationship with agriculture and meat and how we got to where we are.
He’s got some really interesting stuff, and he says for example they look at the composition and structure of meat to create this meat-like plant-based product, and if you see pictures of this stuff, you can’t tell the difference. They sell these hamburger patties called Beyond Burger. You can’t tell the difference. It looks like a hamburger. It looks exactly like it. You can’t tell.
He says, “We define meat by composition and structure: amino acids, lipids, trace minerals, vitamins, and water woven together in the familiar assembly of muscle or meat.” And he said, “Once they think about it that way, they can innovate toward a solution of not getting this from an animal.” In his letter he says, “None of these core elements of meat is exclusive to the animal. They are abundant in the plant kingdom, and the animal serves as a bio reactor consuming vegetation and water and using their digestive muscular system to organize them.”
It’s really interesting. Now look, I would never buy a share of this because it’s just a typical late-cycle hypergrowth story. The revenue has compounded 133% the last three years, and I doubt it’s worth 11 times sales. It’s not profitable, so we don’t really know what it’s worth. Who knows what it’s worth? But it’s a really interesting letter and it’s an interesting idea that I think probably has a future.
They even cite one time they went into a grocery store in Southern California called Ralphs, which is a subsidiary of Kroger, the big national grocer, and they were the No. 1 selling product in the meat case. So, they outsold meat products. They were like the No. 1 seller. They had no idea. They were just hoping to hold their own, but they outsold basically regular burger, real burger, burger from cows. It’s pretty cool.
So, this idea probably has a huge future, but that doesn’t necessarily mean this company has a great future, and it sure as heck doesn’t mean it’s cheap at 11 times sales. That’s one of the new IPOs. That’s I think the lesser known one.
The better known one is Slack. This has made its initial filing to go public, and it’s expected to go public with a market cap of about $7 billion. The revenue in the last fiscal year, the fiscal year ends in January. I didn’t actually figure this out, so let’s just go $7.2 billion they say here, and the revenue was $400 million, so that’s 18 times revenue. The bigger they are, the more they’re worth, I guess, and of course, it’s not profitable. They lost $141 million last year, and the revenue grew 80% last year.
It’s just the exact same story, and you know where this story comes from, right? The story comes from Amazon. Everybody said, “Well look, we’re not going to wait until we become profitable. We have to go public just like Amazon did, and we just have to keep growing the hyper growth the way Amazon did, and then we’ll have success the way Amazon did.” Well, maybe. Somehow I think being an online retailer of everything and just the juggernaut that Amazon has been is a little bit different than selling plant-based meat products and Slack software.
Slack is used within companies. It’s almost a messaging software where you can see the whole history of conversations. Instead of everything being lost in somebody’s e-mail inbox somewhere, the whole conversation is visible to everybody at any time, and you can divide these things up and you can create different folders and different conversations based on different projects so that everybody who’s on the project can be in the loop at all times.
They explain in their filing that they realized that this product needed to be created. They were doing something else, and they realized what I just explained, how the whole development of a product or project or something can get lost in people’s inboxes. Then you hire new people and they don’t have anything in their inbox because they weren’t in the conversation at all, so they created a tool.
That’s kind of one of the principles that Porter likes to follow at Stansberry. He says we create the tools that we wish somebody would create for us that we would like to see in existence, and that’s why they created this thing. Again, great idea, revenue growing like crazy, but 18 times revenue? When it’s not even profitable, how do you know whether or not it’s worth half that, twice that, three times, one forth? Who knows? It’s really impossible to tell without a stream of cash flow in excess of all expenses and capital requirements and taxes and everything.
So, yeah, lots of IPOs. This next bit I have to tell you I don’t even know what it’s worth, but I can’t help pointing out this little article I saw in the Financial Times that said Masayoshi Son from SoftBank lost $130 million on bitcoin, basically bought it at the top and had to sell out, and he lost $130 million.
The reason I find this interesting is it’s sort of like what if you found out that Warren Buffett lost $130 million in Vegas or something? Would you be scratching your head and thinking, do I really want to own Berkshire Hathaway? That’s the way I would think of it. Maybe I shouldn’t think of it that way, but that’s the way I would definitely think of it, and that’s the way I think of this.
Masayoshi Son, they raised $100 billion from people like Saudi Arabia kicked in like $45 billion, and other people kicked in billions. Apple kicked in $1 billion and other technology companies and other countries, too. They gave them $100 billion to invest, and he’s done things like basically buying Nvidia at the top and losing $1 billion in that when he sold it, and he bought WeWork, this company that basically rents out office space. That’s all they do. They rent office space.
The business is valued in the private market like greater than all the entire buildings where they’re just renting out various floors. I don’t know, it’s weird. It’s a crazy valuation, and it’s not a business idea that looks like it’s special in any way, and yet this guy Masayoshi Son, one of the richest guys in Japan worth Bloomberg says today $13 billion, and he made all his money being early in Alibaba and Yahoo is I think the really big – those are the big ones. Those are where he made most of his money.
Do we know if that’s luck? Probably not. That’s probably a little severe. That’s probably a little harsh. But we do know he’s willing to put $130 million at risk buying something like bitcoin, so I don’t know. I don’t know how to think about this. All right, one more bit here.
Tesla says it may seek alternative financing sources. Said it could seek alternative financing, although it expects cash generated from its business to be enough to fund its investments and pay down debt for at least the next 12 months, but it could seek alternative financing. So, when you hear this alternative financing, think about if you got a wayward relative or something, your brother-in-law or sister-in-law or something. Suppose that you have this wayward relative and their house is totally mortgaged and they’re running out of money, so now they’re getting one of these crazy signature loans against their automobile and they’re selling their stuff and taking it to pawn shops and borrowing.
When I hear “alternative financing” in a company that is just losing money, lost $700 million in the first quarter Tesla did, and really stands no chance of being profitable, I mean the competition is coming out of the woodwork and the products are by companies like Jaguar and Kia and other real car companies – Volkswagen – real car companies that make money selling cars. When I hear this, it doesn’t sound good. It sounds like, oh gosh, every time I hear one of these bits of important news financially about Tesla I think, gosh, Whitney Tilson is probably right. This stock is going to be less than $100 by the end of the year.
There it is. They’ve already got $10 billion in debt, by the way. So, to seek alternative financing it’s like, well, we can’t sell anymore bonds and the bank won’t lend us any, so we have to figure something out. That’s how I take that news.
All right, we got a great guest and let’s talk to him. This is going to be a fun interview. I’m really looking forward to this. Our guest is Morgan Housel. Now, Morgan Housel is a partner at the Collaborative Fund and a former columnist at the Motley Fool and the Wall Street Journal. He’s a two-time winner of the best in business award from the Society of American Business Editors and Writers, the New York Times Sydney award, a two-time finalist for the Gerald Loeb award for distinguished business in financial journalism, and the Columbia Journalism Review for the best business writing 2012 anthology. Wow, that’s a lot of stuff. In 2013 he was a finalist for the Scripps Howard award.
Ladies and gentlemen, please welcome the very accomplished Morgan Housel. Morgan, welcome.
Morgan Housel: Thanks for having me today.
Dan Ferris: So, Morgan, I know of you primarily through your wonderful Twitter feed which I want to thank you for on behalf of all investors because it’s so much fun to read, and I wonder if you would just first tell us a little bit about Collaborative Fund. That looks like your main gig, correct?
Morgan Housel: Yeah, that’s really my main gig. My background prior to Collaborative Fund which I joined about three years ago was a financial writer, which is really still what I do today. For many years I was a columnist at the Wall Street Journal. I was a writer at a company called the Motley Fool, and I joined Collaborative Fund about three years ago. Collaborative Fund is a venture capital private equity firm that’s backing mostly consumer companies, all private, nothing in public markets right now.
It’s really backing young companies in the consumer space with kind of an emphasis around companies that are using their ability to do good in the world as their economic competitive advantage. So, historically there’s often been a distinction between a purely for-profit investment fund on one end and then philanthropy on the other, and it was black-or-white like that.
The thesis of collaborative fund is the idea that with the greater access to information that we have now and that today’s younger generation has grown up with the expectation of, it’s getting harder and harder for companies to hide behind exploitive business models, and therefore the companies that are going to have the most loyal customers, and the companies that are going to attract the best employees are companies that are using their ability to do good in the world not just as a way so that their investors and their employees can sleep well at night, but actually have an economic advantage to attract the best and most sustainable businesses.
So, that’s kind of the core of what Collaborative Fund does, and my role is really just writing about business and investing and what’s going on in the economy in a way that I hope people find enjoyable and not in a marketing way about what we’re doing, but just in a way that gets people excited about business and investing and also raises our profile in the process.
Dan Ferris: Yeah, and I want to tell the listeners if they go to CollaborativeFund.com and click on “blog” up in the righthand corner, they can see lots of your stuff.
Morgan Housel: That’s right.
Dan Ferris: Including your very latest. So, I can’t help asking, I just came onto Twitter today and I saw a piece that I never saw before. It was from last November, and it’s called “How This All Happened: the story of how America evolved from 1945 to 2018” which it looks like you managed to get into 5,000 words. I take my hat off to you for doing that, first of all.
I’m dying to hear what you learn when you write a piece like that. I’ve never sat down to do anything like that. You have to come away from that with something.
Morgan Housel: Yeah. It was a really interesting exercise as a lot of these pieces do. It wasn’t that I already knew the answers and I sat down and wrote it. I got this idea of wouldn’t it be interesting to try to tie together a narrative about how America evolved since the end of World War II through today, and obviously so many things happened to society and the economy and to businesses and technology during that period since the end of World War II, but what I want to – and there’s no way that anyone even in a full-length book could list everything that happened.
There’s always picking and choosing when you’re talking about history. So, what I wanted to do is just say, OK, I’m not going to cover everything that happened. No one can do that. I’m going to leave out a lot of the important details, but what is the narrative thread that ties together some of the biggest events that happened since the end of World War II through 2018? What is just that narrative thread that goes in there?
So, I kind of looked at the evolution of how the war ended, what that did to the U.S. economy, what policymakers put in place to kind of stymie the challenges and the risks after the end of the war where spending and debt had exploded so much to fund the war. What did policymakers do to try to stimulate the economy? What incentives did they put in place that kind of gave birth to the rise of the American consumer, which is really what happened at the time? And then how did consumer spending and the debt cycle kind of evolve over that period, and how did it interact with the rise of wealth inequality?
A big point I make in the report is you don’t have to agree whether wealth inequality is good or bad or whether or not we should do anything about it, what we should do about it. The biggest point is that it happened and it had a big influence on consumer behavior during that period. So, I make a point right up front that this is not an exhaustive history of what happened. This is just a narrative arc of kind of the path that ties some of the biggest events together over the last 70 years.
Dan Ferris: I see, and I can’t help asking you, one of the questions I like to ask people who have spent any amount of time thinking about big macro issues, I like to ask them about the Federal Reserve. My question is, we have this view of them, they control interest rates, but really what they do is they execute some market activity that results in keeping one certain interest rate in a given range.
Morgan Housel: Right.
Dan Ferris: I like to ask all my guests how important is this to you in the way that you think about the world, equity prices, the value of businesses, whatever else that you do for the collaborative fund?
Morgan Housel: I think there’s two points to make here that come to mind. One is in the context of the report that we were just talking about. One of the things that I was not fully aware of when I started writing this report but became very apparent when I started doing the research for it is that the Federal Reserve used to work in coordination with the federal government, with the White House, and there was no explicit or even implicit wall between the federal government and the federal reserve versus the push towards independence today, and people have different views about how independent the Fed actually is, but before the 1950s it was explicit that the Fed and the White House were going to be working together.
So, after the end of World War II when the government had a tremendous amount of debt leftover from the war, it was explicit policy that the Fed was going to say, “We’re going to keep interest rates low so that the Treasury can manage this debt.” That was the explicit strategy that they put forth. So, it’s just a very different world back then than it is today.
To your point about how do I as an investor think about Fed policy, I think no matter where you sit on the Fed spectrum whether you are a cheerleader or you think they’re kind of the boogeyman in the economy or anything in between, I think what matters as an investor is just how sensitive are you to new information, and what time horizon do you put that information on when you’re thinking about your investing decisions. So, do I as an investor think that the Fed has a big influence on asset prices on a quarter-to-quarter and year-to-year basis? Yes of course.
But my timeline as an investor is substantially different from that, and even if I subscribe to the view that the Fed is going to inflate or be the popper of bubbles and booms and busts and whatnot, even if I subscribe to that, does even that have a big impact on my long-term view as an investor over how I’d like my assets to compound over the next 10 or 20 years? And for me personally the answer is by and large no. So, I don’t think those two things are necessarily black and white.
You can admit that the Fed plays a big role in asset bubbles and market prices, but at the same time say I’m still a long-term investor. I don’t think those things are mutually exclusive. So, for me personally, and I keep saying me personally because think it’s different for everyone based off their age and their time horizon and how much risk they’re willing to take, but for me personally as an observer of the economy I think it’s fascinating to watch what the Fed does, but that’s pretty much all.
In terms of me as an investor, that’s where it ends. It ends with a fascination in terms of how they’re making decisions, how investors are reacting to those decisions on a day-to-day, month-to-month, year-to-year basis, but is that going to affect the investing decision that I’m going to make when I’m investing money today with the idea that I’m going to leave it alone and let it compound for the next 20 or 30 years? By and large, no. I know that’s very different for people.
If you are in your 60s and you’re retiring on a fixed income, or you’re 70 or 80 retiring on a fixed income, it’s a very different dynamic than the one I just described for myself. And that point I think it’s probably one of the most overlooked and important parts of economic analysis when people are thinking about their investments, is that there really is no right or wrong answer for a lot of these things. The right answer is what works for you and your personal risk tolerance and your personal time horizon versus this is right and this is wrong. That’s kind of how I would sum up my view of the Fed in context of broader investing strategies.
Dan Ferris: I definitely agree with you. You can’t afford to keep your head in the sand, but at the same time if your time horizon is suitably long enough, depending on the type of businesses you own, you probably shouldn’t react, and that’s what I worry about. I worry about people listening to us and reading our newsletters and stuff are too active and they’re too much focused on what they think the Fed will do and what it’s going to do to their portfolio, etc.
And I might even use a phrase that you used in a recent piece you wrote. I might even say people are playing themselves. They’re fooling themselves because they think that they can do something that they really can’t do. They think they know what the future is going to be. As you wrote recently, we humans have a really bad track record in other words of figuring out what’s going to happen in the future, and I think one of the ways they do that is by assuming they know what the Fed is going to do.
Morgan Housel: Yeah. The solution to that in my mind is rather than trying to predict what the Fed is going to do, and the second level of that is trying to not only predict what the Fed is going to do but how the market is going to react, is to just get to know yourself a little bit better as an investor.
If you have a lower risk tolerance because you are either approaching or in retirement and you don’t have the stomach or the means to deal with big pulldown in equity markets, is to just situation your portfolio accordingly whether that’s in cash or bonds or other assets that lets you deal with the risk, and deal with it in a way that you are expecting it’s going to happen at some point but you don’t necessarily know when, versus trying to predict when it’s going to happen and what’s going to cause it when it happens.
So, I think there’s a big difference and a very important difference between saying I think that the Fed’s policy is going go cause a recession this year, versus saying I think as an investor I’m going to experience two or three recessions per decade. Those two statements are very different. One is a prediction; one is an expectation.
So, we think about booms and busts and whether or not they’re caused by the Fed in my mind is interesting but doesn’t necessarily matter because I’m not trying to predict when the next recession is going to come or what’s going to cause it. I just situate myself as an investor to expect that I’m going to deal with many recessions between now and the end of my investing lifetime.
Dan Ferris: Yeah, I’ve written I don’t know how many dozen times in the past few years, “Prepare, do not predict”, right?
Morgan Housel: Right. I believe in my bones that’s the best investing philosophy to have, but it’s also very difficult and unnatural for people to do, ‘cause when you’re dealing with something where the stakes are as high as your investments, especially your retirement money or your ability to send your kids to college or just your general overall life well-being, it’s hard to kind of give up control of that to this idea that we don’t know what’s going to happen next.
So, I think people with intuition and their incentives is always going to try to predict specifically what’s going to happen next, and to try to predict versus expect. Even though it’s the right philosophy, it’s very difficult to do, but because of that I think this general idea that we’re talking about is one of the most important things that investors should be thinking about and trying to situate themselves around is trying to move your mind frame away from prediction towards expectation.
Dan Ferris: Yeah, I start out every podcast with a little rant for about five or ten minutes, and I was talking today about the expectations, like the things that people learn, the expectations they develop over a period of time. For example, I said people expect bond returns to be pretty good, and they have been pretty good since 1981.
Morgan Housel: Right.
Dan Ferris: And they expect bonds to negatively correlate with stocks, and they have done so for a couple of decades here, but they haven’t always done that. So, what is the rational expectation going forward from here? Equity prices, equity valuations, too. They’re high and we expect them to stay high apparently, and we expect FANG stocks to outperform, right? Facebook, Amazon, Netflix, Google, those stocks.
But I wonder how rational an expectation that is, and that speaks to the preparation, right? I’m not predicting, but I think these things do make it harder to prepare. Maybe I should just ask you, how the hell do I prepare?
Morgan Housel: I think that’s definitely right. I 100% agree with you, but let me bring up two what might seem like counter examples to those points. One is that yes, I would have the expectation that bond returns over the next 20 years will not be as good over the last 20 years. That’s almost a mathematical certainty. But look, if you and I were on this show 15 or even 20 years ago, we would probably be saying the same thing.
We would probably be saying interest rates fell from 18% and now they’re at 8%, if this were like the mid-90s let’s say, 15% to 8%, that’s a big decline. People should not expect that great of return from bonds anymore. But then they fell from 8% to 3%, and people said, “OK, that’s as low as they can go. They can’t go much lower than that.” And then they went from 3% to 0%.
So, even though it’s rational to have an expectation that things are not going to be as good in the future, there is a huge range of outcomes that can still happen after that point, and there have been people who have been betting against bonds for going on 30 years now, and if that was what you were doing, that was devastating to you. Same thing can be said for equity prices. The first time Alan Greenspan used the phrase “irrational exuberance” was 1996, and by any definition he was right.
The stock market was irrationally exuberant by then. It was wildly overvalued by almost any metric, and if you were an investor in 1996 and you bet against tech stocks, you lost everything, because it went on to quadruple from those prices. So, there’s a big difference between having rational expectations about the future versus what should you do about it. That’s I think where the disconnect is. It’s not I have low expectations about future asset price returns. I think that’s a good thing.
I think it gets dangerous when you say I have low expectations about this asset class, and therefore I’m going to short it or avoid it altogether when it’s one of the major asset classes. I think a much better way to do it, and this is the hardest news for people to swallow particularly if you’re approaching the end or past your working years, the real solution to that is if you firmly believe that future asset returns are going to be lower than they have been in the past, then the only real solution that you can put a lot of faith in is to save more money.
And again, if you’re past your working years that’s not an option for you, but then it gets really risky when people say, “Well, if that’s not an option for me then I need to go out and take a bunch of other risks to compensate for that.” And those other risks might pay off, but they might not. That’s just kind of the hard reality that capital markets give to people in that situation. One of the biggest ironies in investing of course is that compounding and future options are on your side when you’re young, but when you’re young you have no money and no savings, and compounding works against you.
You’ve kind of exhausted it all when you’re older and have lots of savings. So, this is kind of like the irony that – it’s an irony, but it’s a blunt force truth in capital markets that people have to deal with, and I think a lot of people that run into the situation where they say again future markets and bond returns are going to be very low, but I don’t have enough money or income to keep saving a bunch more money, so therefore I’m going to go take a bunch of other wild risks.
A lot of those people are taking risks that they absolutely cannot afford, and there’s no easy solution to that. What do you tell someone in that situation? You could either drastically reduce your expenses and your lifestyle, or you can take bigger risks and the downside that comes from that. So, I don’t have any solution to this. I don’t have any silver bullet for what people should do about this, other than I think in general keeping your expectations low is a good thing because then you only face upside surprises from that situation.
Dan Ferris: Low expectations seems like a key to success and a lot of endeavors in life.
Morgan Housel: I think that’s absolutely right.
Dan Ferris: Investing, marriage, etc.
Morgan Housel: That’s right, everything, work, friends, everything.
Dan Ferris: Morgan, I think it was you who said on Twitter once, a lot of financial problems can be solved by saving more.
Morgan Housel: That sounds like something I would say. Yeah, it’s true. There’s always a push towards if you have an investing problem that you’re looking at, how am I going to fund my retirement, or you’re just looking at finance in general, when people say “finance” they generally think investing. That’s what word follows “finance” is “investing”, but the most important part of finance I think is saving.
The reason that it gets kind of swept under the rug and people don’t like speaking about it is because saving is hard. There’s brute force labor that needs to go in it to earn an income and save it, and it’s not any fun because if you’re saving money you’re not spending that money, and spending money is fun for people. So, it’s the equivalent of “Quit smoking and eat your vegetables and go for your run” that you might be told by your doctor. You know it’s true, it’s the best advice, but it’s not the advice you want to hear.
So, what people want to hear is what’s the magic pill, and I think a lot of things in investing are kind of the equivalent of the magic pill, whereas what we should be thinking about is the diet and exercise side of it. I’m sure people who are listening to this might be shaking their heads. That’s not what anyone wants to hear.
But I think if you look at finance through the lens of what has the highest odds of getting me towards my goals, savings has a much higher probability of fulfilling reasonable expectations than do a lot of different investment strategies. And again, that’s highly dependent on age and income and whatnot. There’s a lot of variability in there. But it’s definitely a factor of investing that is scarcely discussed. It’s not discussed nearly as much as it should be relative to the more exciting and potentially lucrative parts of finance like investing.
Dan Ferris: I love the topic of saving. Not only is it the foundational skill, but it informs your later decision. The muscle that you develop by saving is then used later on to avoid risk in investing. I truly believe this. I think the better you are at saving, the better you will be at basically allocating your assets later on in life, and there’s no substitute for it.
Morgan Housel: Yeah. I think to dig out on that, to do well over time financially you need to both get rich and stay rich. Those are two separate and often conflicting skills. I think if you are a good saver, it means that you are probably good at living below your means, and if you’re good at living below your means, you probably have a higher propensity or likelihood of staying rich.
The lens that I’ve kind of looked at it through is if I can learn how to live – I’m just making these numbers up – if I can learn how to live off of half as much money as one of my peers, the I only need to earn half the investing returns in order to keep up with them, to live the same life as they do. Maybe they’re earning 12% on their investments, and let’s say I’m earning 6%. But if they need in any given year twice as much money to be happy, to live off of, then we’re going to be in the same situation. So, that’s kind of how this all ties back to if you keep your expectations low about what you need, I think you’re going to be much more anchored to reality and just be dealing with upside surprises rather than downside losses that you experience during your lifetime as an investor.
Dan Ferris: I love that, upside surprises, minimizing the downside losses. I look for that in equities. You always want that upside optionality with downside protection. You can do it in life as well in a bigger way. So, Morgan, we’ve got about five minutes left here. If I asked you to leave our listeners with a thought, this is the Morgan Housel thought that you are left with today, what would it be? You’ve covered so many topics over the years, it’s hard for me to even focus on just a single one. I’ve loved a lot of your output. I’ve enjoyed reading it. What would you like to leave us with?
Morgan Housel: I think there’s two kind of big points that I’ve really come to really appreciate during my years of writing and thinking about finance investing. One is just how much, as the saying goes, personal finance is more personal than it is finance, and everyone has different risk tolerances. They’ve experienced different things in life giving them a different outlook, a different willingness and ability to take on risk.
And because of that, there might be something that you think that I disagree with, but that doesn’t mean that one of us is smarter than another or that one of us has better information than another. It’s just that maybe you’ve seen the world through a different lens than I have, and therefore you’re going to invest your way and I’m going to invest my way, and I think it’s important for investors to realize that we don’t need to do what is very common and intuitive for people which is argue with other investors who might have different views than we do.
If you find a strategy that works for you then that works for you, and if I have a strategy that works for me then I think we can just kind of go our separate ways. It doesn’t have to be something where people argue about what the Fed is doing or what Congress is doing, what the President is doing, trying to get this idea that there’s one answer in the economy versus, hey, there’s going to be a lot of different views of the economy based off of people’s individual goals and risk tolerances and viewpoints on the world.
I guess what that means for me is over time I’ve become I’d say more tolerant at views about investing in the economy that I don’t subscribe to myself, that I used to view as people who didn’t understand something about the economy, or maybe I viewed them as not as smart as me, and I’ve become more tolerant of views to just say, look, my views are anchored to what I’ve experienced in life, and your views are anchored to what you’ve experienced in life, and we’re all just trying to get closer to reality. That would be my first point.
The second point would be this idea that you are your own worst enemy in investing. A lot of times when people think about risk, they think about what the stock market is going to do to them or what the Fed is going to do to them or what the President is going to do to them. And I’ve often thought a much better way to think about risk is not what the market does to you but what you do to yourself and your own biases and your own misconceptions, your own risk tolerance, your own time horizon. That can be kind of disheartening for people to hear, that they’re their own worst enemy.
It’s actually a pretty optimistic realization. You obviously have no control of what the market is going to do next or what the Fed is going to do next. One of the only things that you can control in investing are your own behaviors, your own biases, and when you realize that the only thing that you can control is one of the most important aspects of investing, that’s actually a pretty optimistic realization is coming to terms with the fact that you are your own worst enemy. It really highlights how much you can control that makes a difference in your investing outlook.
Dan Ferris: Oh, that’s great. That’s a great place to leave us. Thank you for that.
Morgan Housel: Great.
Dan Ferris: Listen, thanks for coming along and I hope you’ll come along and see us again sometime in the future.
Morgan Housel: This has been fun. Thanks for having me.
Dan Ferris: That was a lot of fun. Wow, what a great guy. Now it’s time for the mailbag, so remember that your feedback is extremely important to us. I read them all. I read every single one, and I like to respond to as many as possible. So, you can email us with a question or a comment or whatever is on your mind at [email protected], OK? Now I’ve got a few interesting ones today. The first one is kind of long, so I’m going to give you kind of the shorter version of it, and this is by Matthew S.
Matthew S. first of all says, “Episode 98 hit three topics I’ve been thinking about a lot. Thank you for another thought-provoking episode.” You’re quite welcome, Matthew. And then the rest of his message, basically he’s talking about when I said Yahoo Finance wasn’t the greatest place to get numbers from, and then he said that he looked up a company called Biglari Holdings, and he looked that company up on Yahoo, Seeking Alpha, Morningstar, and Charles Schwab, and he was looking up the enterprise value and the price to book, and they were all completely different on all four sites.
He says, “This problem almost drove me insane a few months ago. It’s discouraging.” And then he said, “Especially when I try to calculate it myself from their 10Q and arrive at yet another number.”
And just to give you an idea of the difficulty he ran into, the price to book values for the same stock on all four sources were .17, .86, .61, and .96. That’s a ridiculous discrepancy. There’s no way that all those people are doing the same calculation. It’s just ridiculous. And the enterprise values that he found were 257, 633, 500 million, and 644 million.
So, look, Matthew, you have the answer in your question. You said, “When I try to calculate it myself from their 10Q and arrive at yet another number” that’s the only way you can do this. I’m sorry, I can’t offer you some free website somewhere that always gets this right, because what they’re doing is they’re filling in this data in a very highly automated way, and each company might be a little different.
Enterprise value is you add the total debt to the total market cap and you subtract the amount of cash on the balance sheet, and that kind of gives you a net debt and equity capital in the business, right? It’s a valuation parameter that some people like to use. So, the way to do that is to go to the balance sheet and find out how many shares there are and look at the recent share price and that’ll give you the market cap, and then you look on the balance sheet and you find out how much debt there is, and you find out how much cash there is, and you plug the numbers in and you do them yourself.
I’m sorry, I realize this creates work for you, but it is the one and only way that you can count on this being right. I use all these services, too. I look at all the ones you named plus others, even Bloomberg that Stansberry pays a fortune for me to have a Bloomberg, and sometimes that doesn’t come out the same as what I calculate, and I always use my calculation, not theirs. Because that’s the one I trust, I’m taking the numbers from the original source and that is the real point. So, that’s what I recommend doing, and good luck. It’s harder work, but I promise you it’s worth it because that’s the only way to get the real answer.
OK, next one is from Jeff K. and he says, “You recommended Altius Minerals, a mining royalty company, on a recent podcast. Have you considered Iconics Brand Group, a brand management company which to me means that they are a clothing royalty company? I ask this because maybe a year or so ago, Porter said that Icon has one of the best business models in the world.
I know they had a rough time for quite a number of years, but they do seem to be getting things straightened out. Steve Sjuggerud might say Icon is cheap, hated, and in an up trend, or that things seem to be going from bad to less bad for the company. One other thing, the company has approximately 9 million shares issued and outstanding, and approximately 2.1 million shares have traded today. I see no news to account for the high volume, but maybe this is just bottom feeding by people who are getting sucked into what Whitney Tilson calls value traps. I think you should contact the CEO of Icon and ask him to be on your podcast.”
Thank you, Jeff. Maybe we will consider that. I have to tell you a story about this company, though. A few years ago I saw a really interesting presentation and the guy presenting was really bullish, and I had known about the business model for years. It was written in Grant’s Interest Rate Observer years and years ago, and I think it did fairly well after that. But then I saw this presentation and I thought, wow, this does look like a really great business model.
I of course did what I always do. I went to my chief research officer Mike Barrett who works with me on Extreme Value and I said, “Can you take a look at this and tell me what you think?” and he came away saying, “Do not buy this stock.” And I think when Porter was talking about it, I thought they had bought the bonds or something. He was talking about it in a totally different respect. It is a great business model, but it turns out that the way the management was running it, it was sort of like a financial scheme. It was like a financial engineering scheme rather than really being careful at picking out the best brands to own.
But you are right, it’s essentially a royalty company, like a clothing royalty company, and it can be very good, but we would have to take another top-to-bottom look at it, or I should say bottom-up look at it. And you’re right, we should probably talk to the CEO and ask him what’s different now than before the stock got murdered and fell apart. But it’s a great question and you’re right, Iconics Brands Group is a company to keep an eye on if only because that business model has such huge potential. So, thanks for pointing that out, and I just wanted to let everybody know about it.
Mailbag number three, here’s Hugh S. “Regarding Tesla, give it a rest already. I get it. I certainly would not be a buyer of Tesla, but neither would I be a short seller. Who knows how much longer this zombie might walk given Elon Musk’s uncanny ability to game the system? Let’s leave him be and go about our business.”
I hear you, Hugh, and I’m certainly – we’ve never shorted Tesla in Extreme Value, and I don’t think we ever will, but I think Whitney Tilson is probably right. I think that we’ve seen the top and from here on, it’s going to get more difficult, and all the news points toward increasing competition, really bad experiences in the service department that customers are having.
Now they’re talking about alternative financing. It’s like one big bad news item after another about Tesla, and you know something, Hugh? I’m sorry, we will revisit Tesla, so you’re just going to have to bear with us.
But that’s it. That’s another show and that’s our 100th show. So listen, thank you very much. Thousands of people download us every week, and I want to thank each and every one of you. You made this show a success, and it is. We’re in the top, I forget, 5% I think of all podcast downloads. That’s week after week, so we’re doing great because of you.
So, that concludes episode 100 of the Stansberry Investor Hour. Be sure to check out the website where you can get all the episodes and they all have transcripts. Just go to the episode, scroll all the way down, and the transcript is down at the bottom. We usually get it up there within a few days of putting the episode up. You can enter your email and make sure you get all the updates. Just go to that same address, www.investorhour.com. That’s it for this week. Thank you so much and I’ll talk to you next week. Bye-bye.
Announcer: Thank you for listening to the Stansberry Investor Hour. To access today's notes and receive notice of upcoming episodes, go to investorhour.com and enter your email. Have a question for Dan? Send him an email at [email protected] This broadcast is provided for entertainment purposes only and should not be considered personalized investment advice. Trading stocks and all other financial instruments involves risk. You should not make any investment decision based solely on what you hear. Stansberry Investor Hour is produced by Stansberry Research and is copyrighted by the Stansberry Radio Network.
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