In This Episode
This week’s episode is all about stories, including a dive by Dan into numbers and statistics, and which ones to disregard in a world where the vast majority of data is just noise.
For instance, the private equity firm KKR’s bid for a record-breaking acquisition is capping a pattern that we really haven’t seen since 2008. It’s a $57 billion acquisition, or more than $70 billion if you include debt to be acquired, but Dan shows why those numbers are actually distractions to the much bigger story and historical warning at hand.
Dan then gets to a book and investor podcast that even reaches billionaires that he says everyone should check out, before getting philosophical over a recent life event that had him turning to the wisdom of tech entrepreneur Paul Graham. “My job is finding the right words, but they fail me a little compared to what Graham has to say.”
NOTES & LINKS
- To follow Dan’s most recent work at Extreme Value, click here.
3:36: Dan shares a life-and-death story of people relying too much on data and technology to make decisions before getting to Robert Shiller’s book Narrative Economics, which argues we need more stories and fewer numbers and equations to navigate the world.
6:44: Warren Buffett has said you can’t invest based on past growth, but past performance can tell you something, Dan argues. “In short, I think that knowing the story behind a company tilts the odds in my favor.”
14:26: Private equity firm KKR’s bid to buy Walgreens for around $57 billion would be the biggest leveraged buyout deal in history – here’s a story going beyond those numbers on what the deal signals for markets.
19:23: Dan gets into Elizabeth Warren’s attack on a sector employing 6 million people. “I don’t think a free economy works the way Warren implies.”
23:30: Dan relays the spate of epic private equity deals leading up to 2008, and the frenzied rationale behind them. “We can leverage these things to the sky!”
33:34: A “life is short” moment for Dan last week got him thinking about how one should live, which technology entrepreneur Paul Graham has three specific recommendations on. “My job is finding the right words, but they fail me a little compared to what Graham has to say.”
41:30: Dan addresses a mailbag comment from Shane F., who provides a deep dive into not only last week’s guest Michael Covel’s interview on the podcast, but also his published works
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.
Hello, and welcome to another episode of the Stansberry Investor Hour. I’m your host Dan Ferris. I’m also the editor of Extreme Value, a value investing newsletter published by Stansberry Research. OK, today it’s all me, folks, and I have a lot to say, so let’s get to it. I’m going to start with a little story, and stories are a big part of what we’re going to talk about today.
So, there is a small village in the French Alps called Chamonix. A local climbing guide in the area named Blaise Agresti tells the story of a man who climbed 9,000 feet up nearby Mount Blanc. Partway up the mountain there’s a little shelter where climbers spend the night on their way to the top. Just before he got there, the man in the story turned onto a fork in the trail that wasn’t used very often, and it took him up a gradually steepening and narrowing ridge. He then fell 1,000 feet to his death.
Agresti, the guy telling the story, says 20,000 people use this same path every year. All you have to do is pay attention. There’s no way you’ll miss the shelter. But he says the man had a small GPS device with him, and Agresti thinks the man was probably paying way too much attention to the GPS and not enough to his surroundings. Agresti says, “If you’re a mountain guide and you use only technology, you will die. You don’t see that crevasse and you can’t adapt to reality.”
Agresti tells another story of a Norwegian explorer named Fridtjof Nansen who tried to get to the North Pole for four years in the 1890s. At one point, Nansen left his team of explorers behind him and he forged ahead on his own with just his sled dogs and he had some other equipment including a couple of watches which he needed to calculate longitude. If you’ve never read a book called Longitude by Dava Sobel, read Longitude. It’s a great little story. It won’t take you long, and it’s a great story.
Anyway, so Nansen’s watches broke, so he couldn’t calculate longitude. He’s out in the frozen wasteland by himself. He never reached the North Pole, but he made it out two years later after wandering around because Agresti says, “He was able to locate his position himself. We’ve lost these abilities.”
So, these two stories are part of an article about economics called “The Man Who Wants to Ditch Math” by Steve LeVine. You can look for it at medium.com. It’s about how economist Robert Shiller thinks economics is too mathematical, it’s too divorced from reality. That guy was paying attention to his little math device and he died because he wasn’t paying attention to his surroundings.
In Shiller’s new book titled Narrative Economics, he says economists should study the impact of stories. That’s the way human beings operate. They process the world in terms of stories. Shiller says, “There are some economists who think that the economics profession should be a mathematical discipline. To me, economics and other social sciences are part of a big picture. If we are trying to stay in the mathematical world, we may become irrelevant.”
Now, you may recall last week’s guest Michael Covel, five-time author, trend-following trader. Covel made it very clear he’s completely comfortable knowing absolutely nothing but the price of the commodities and securities he trades. OK, you might also recall we discussed Jim Simons, probably the most successful investor who ever lived who made something like 66% a year since I think 1998, which is absolutely incredible. It’s better than Soros, better than Buffett, better than anybody.
Simons is also a quantitative investor and doesn’t care about anything but the price patterns that he finds. Far as anyone knows and as far as we can tell from interviews that Simons has done, he’s a very secretive guy. Now, I realize Covel and Simons are finance guys, they’re investors, and Shiller is an economist, but the disciplines are too closely related, and the parallels are too hard to ignore.
To me, it’s utterly fascinating that these two closely related disciplines seem to be moving in opposite directions, or to be more accurate, it seems like they need to move in opposite directions, right? Mathematical economics has been a total failure. Levine’s Medium article showed how badly economics has failed. Globally, international monetary fund economists predicted only four out of 469 recessions around the world in the last 30 years, four out of 469.
I mean, you’d think after 169 they would’ve got fired our something. Private sector economists predicted just five out of 153 between 1992 and 2014. I hope there’s a lot of turnover in that profession because they’re all failing miserably. They should be getting fired right and left. Shiller says this is because the leading indicators they rely on are backward-looking, not forward-looking. I’ve said the same thing about financial statements. All the numbers are history. They’re in the past.
Warren Buffet famously said you can’t invest in the growth of the past. No matter what you buy, even if it’s treasury bills, you’re placing some kind of a bet on an uncertain future. But mathematical investing at least for the new breed of quantitative investors out there has not been a failure, it’s been a raging success. So, I’m like, OK, where does this leave us normal people?
I mean, for me, I care about stories, I do. I want to know the stories of people like Steve Jobs and Warren Buffett and the outsider CEOs in William Thorndike’s book called The Outsiders which I highly recommend, awesome book for investors, and I want to know the history of companies I recommend in the Extreme Value newsletter. In fact, in a current issue I spend the first 25 or 30% of the report just telling the history of the company that we recommended just to get you up to where it is. It kind of went off the rails and got cheap enough for us to recommend it in the first place.
So stories tell us how companies and entrepreneurs got where they are right now, or up to a certain point, right? Whether you buy them uncritically, whether you just buy the story wholesale without thinking about it critically or whether you bring some more insight to the table, that’s a separate thing, right? But just because some particular individual might not understand how to interpret financial stories doesn’t mean they’re not important is what I’m saying.
Studying the past can definitely give us insight into the likely future of the companies we invest in, in the stock market, which we then hope will give us insight as to where their valuations and share prices are going. It’ll help us make money, to make it real simple. In short, I think that knowing the story behind a company tilts the odds in my favor as an investor. I don’t think the quant’s success means that stories are not important and that people like you and me can’t use stories to make money in the stock market.
Am I wrong about that? Well, maybe. Certainly, as a value investor, the stories I’ve been telling haven’t been going screamingly well for much of the last ten years. We’ve done actually pretty OK compared to the way value has gone for the last ten years. It’s been a lousy time for value, simply put, and I’ve noted that many times on the podcast.
You could say, well, maybe I’m too enamored of stories, and I did read a book some years ago called The Storytelling Animal by Jonathan Gottschall, and he says early in the book “Story is for a human as water is for a fish, all-encompassing and not quite palpable. While your body is always fixed at a particular point in space time, your mind is always free to ramble in lands of make believe, and it does.”
So, stories are all-encompassing and not quite palpable. In other words, story is so deeply embedded in who and what we are that we can’t tell where we end and story begins, and I can’t help thinking that means that stories are a fantastic tool for us even as investors. Now, I know it’s sort of logical and rational to say, “Well, just because humans are made to hear and tell stories, Dan, doesn’t mean stories are important for investors. The quants have proven that, right?”
Well, maybe. I think they’ve proven you can do a lot in financial markets with mathematics, advanced mathematics. But what is mathematics? A lot of this advanced stuff is really theoretical and doesn’t necessarily correspond to – it wasn’t created to correspond to reality. Somebody might later discover a correlation with reality, but a lot of it, mathematics, was just created by humans as a kind of story that they wanted to develop about relationships between numbers and other mathematical entities like shapes and imaginary numbers, negative numbers, whatever.
The question still stands, where does the quant success and Shiller’s realization that math has failed economics leave us as investors? I think it does a couple things, and I recommend you read that Medium article, that medium.com article that I mentioned. First of all, I don’t think you can separate stories from numbers unless you’re Jim Simons or one of these other quants, and there is kind of a neat book by Scott Patterson called The Quants that tells the story of other folks besides Jim Simons. Unless you’re one of these folks or something like them, you’re not going to do what they do, and you’re going to be competing. They’re very short-term kind of traders, and you’re going to be competing head-on with them.
And stories I think for investors imply a longer timeframe, and I think you can get an edge over other people just by using a longer timeframe, and that’s where the stories come in. Investing is very complicated. You can’t separate the stories from the numbers. There’s some complication to deal with there. I keep mentioning this book by Howard Marks, The Most Important Things, partly because he says there are no less than 18 most important things in the book, right? Underscoring the insanely complex nature of financial markets and of investing itself.
So, there’s no way to be a great investor, like a long-term thinking, fundamental-minded investor, without knowing the numbers. You need to know a company’s financials but knowing what the financials are isn’t enough. The quant investors aren’t just mathematicians, they’re very good mathematicians. Unless you’re great at advanced math, you’re not going to compete with them, so you need to know more than just the numbers. You need to know the story behind the numbers.
What is the meaning of the numbers? What does it mean when a company has really thick gross margins or really thin gross margins or inconsistent versus very consistent margins? You've got to ferret the meaning, the story behind all this stuff. Humans trying to get away from stories is like fish trying to get away from water. I don’t think you can do it, so use it, right? And you can learn. Here’s what you have to do. Here’s the important thing.
We live in this constant avalanche of information. Most of it is noise. The overwhelming majority of it is pure noise, and the more information we get, the more noise, and the smaller percentage of really important stuff relative to the noise. So, you need to get good at figuring out what the really important storyline of a given company or commodity or country or whatever it is you’re investing in really is, and you need to be able to do that. I’m not saying it’s easy or even that everybody can do it, but I think that’s what you can do.
That’s how you can use this insight about stories and avoid having to compete with people like Jim Simons, and avoid succumbing to that poor hiker who apparently we think, we don’t know but we think was paying too much attention to the numbers and not enough to the story of, “Be careful. You’re way high up on a mountain.” You've got to use your intuition and learn history and learn stories.
I keep telling people to read history because I think at this moment it’s a good time to study the history of market crashes and crises and things that happen after long bull markets, for the obvious reason that we’ve been in a long bull market. That’s what I have to say about that.
Let’s talk about a story that is kind of current right now and see if we can glean some insight from it. I think this is a story amongst all the noise that you should focus on a little bit, OK? So, KKR, the private-equity firm, wants to buy Walgreen’s the pharmacy company. If this deal happens, it’ll be around $57 billion, or if you include all the debt it’d be around $70 billion, it would be the biggest leveraged buyout deal in history.
Right now, the biggest deal in history was KKR and TPG’s purchase of a Texas utility company called TXU. It was a $31 billion deal back in 2007, the tippy top, right? They thought natural gas prices were going to go up, so they levered up and they bought the company and eventually it went bankrupt because a little thing called the financial crisis intervened and crushed the price of everything including natural gas and they went bankrupt.
So, the WBA deal is just very roughly twice the size of that TXU deal, and Steven Schwarzman, CEO of Blackstone, the private-equity firm, says the deal is a stretch right now. He says, “You could raise the debt but would have trouble raising enough equity to do it right.” And since the goal of many private-equity firms, not all of them but many of them is to lever up their assets, I would’ve thought the opposite, right? I would’ve thought the equity would be the easy part because there’s less of it and the debt would be the more difficult part, but yes, only slightly more difficult in the current environment.
So, just prior to last week’s show, podcast listener Gary D. forwarded us a marketwatch.com opinion piece that said, “The KKR Walgreen’s bid was a huge sign of the top of the bull market.” The article said Walgreen’s already has $15 billion in debt, so it’s already a levered company, and then he said, “Well, look at the leveraged loan market” and leveraged loans are loans to companies that are already indebted, right? Hence the term “leveraged loans.”
And that market is already huge. It’s huger than it’s ever been. It’s like $3.4 trillion globally, and the covenants on leveraged loans have been deteriorating, covenants on the protections for the investors buying the loans. There are ETFs and things. Lots more people own these loans probably than realize they own them.
So, in other words, there’s more of this debt than ever and the quality is falling, which is a typical end-of-cycle development, right? Finally, the article points out that politically it’s a bad time to do a big PE deal, citing presidential candidate Elizabeth Warren’s recent screed against the private equity industry, which was also posted on medium.com. Warren said, “Sometimes the companies do well, but far too often the private-equity firms are like vampires bleeding the company dry and walking away enriched even as the company succumbs.”
Well, kind of. I mean, that certainly happens, but the vampire thing is not quite accurate for a couple reasons. First of all, sellers choose buyers, OK? If KKR succeeds in acquiring Walgreen’s, it’ll be after the board approves it and after the shareholders vote on it and after it passes Hart-Scott-Rodino antitrust waiting period, and after a bunch of other stuff. But really, the point there is sellers choose buyers. Prey doesn’t choose its predator, so to cast the entire industry as predatory, the entire PE industry, is wrong, I think. I bet most prey would not choose to be preying at all, right? Most deer would not choose to be shot by hunters or eaten by wolves.
So, that’s one thing. Sellers choose buyers. Second, like private-equity firms aren’t all the same. You can’t paint them all with the same brush. I hope she doesn’t get to do her plan. I hope she doesn’t become the President I should say and get to do this plan that she wants to do of regulating private equity. Some of these firms use little or no leverage. Some of them buy and hold for a very long time. Painting the entire industry with the same brush is just not good. Some of the ones that lever up and do the traditional thing the outcomes are quite good. It’s also worth noting that Warren herself reports that PE-owned firms employ 6 million people in the U.S.
Employing 6 million people is usually a politically good thing. For some reason now it’s bad, I don’t know. And of course, Warren has a plan. She’s got one of these facile top-down political solutions to a made-up political problem that not all private-equity deals work out well. I don’t want to get too political because among other things it’s a waste of life, but there’s an underlying thing here. I don’t think a free economy works the way Warren implies. Most people will tell you that a free economy provides these incentives and rewards, and Warren mentions fiddling with incentives and rewards in her plan for how to fix private equity, but I don’t think that’s really how it works.
I don’t think it’s about incentives and rewards. The rewards are certainly there, but a free economy, what it does is basically you get out of people’s way and it provides a much larger number of opportunities to get lucky, make a discovery, write a hit song, cure cancer, start the next amazon.com or the next Berkshire Hathaway or the next whatever. It lets people move about freely so that they can kind of bump into each other and bump into other ideas and bump into success. So, there are huge rewards for being successful, and yes, it requires a lot of work and focus.
I’m not saying it’s just pure luck, but you can’t really predict it, right? It just happens. You work and you work and some people work, and they don’t meet with success... and some people work, and they do. It can’t really be planned. Think about it, is Taylor Swift the greatest musician on earth? She’s certainly the most successful, and is she even the best female songwriter in the world? You mean to tell me in a world of 7 billion people there is not another young girl writing songs that are every bit as wonderful and catchy and whatever people want in a song as Taylor Swift’s songs?
I don’t believe this. I don’t believe it for a minute. I think Taylor Swift worked hard, and yes, her parents moved her to Nashville when she was young which certainly helped her. A lot of things went in her favor, but the outcome is something you could not have predicted, especially the magnitude of the outcome. She’s just worth hundreds of millions. The economy isn’t really what people like Warren represent it to be, and I don’t like them fiddling around with it. I don’t like them fiddling around with and discouraging, she wants to discourage speculation she keeps saying.
You shouldn’t do that. Sure, a lot of speculation doesn’t work out well, but a lot of it does things like cure cancer and things. Sorry about the digression there. I couldn’t help myself. The bottom line of this Walgreen’s buyout is I think the MarketWatch opinion piece might be right. I think it could be a – whether or not it’s a sign of the top, I don’t care about that. I’m not predicting tops. You know me, right? I’m just pointing out that it’s a typical thing that happens at the end of a long bull market. It gets the spidey senses tingling, right?
Enormous record-breaking PE deals are exactly what you expect to see in the final stages of epic bull markets. Of the top ten PE deals of all time, eight of them happened in 2006 and 2007. Let me see, let me count this, seven, seven of the top ten happened. They were all like $20 billion and higher including that TXU deal that happened in 2007, and seven of the top ten happened basically near the top of the market right before the financial crisis, the top of the housing bubble.
Hilton Hotels was one of them. That was in 2007, and EOP, Equity Office Properties, that was in 2006. That was a real estate deal. Otherwise First Data, Alltel (finance technology and telecom). Heinz, Heathrow Airport Holdings – sorry, Heinz was 2013, Dell Computer was 2013 – HDA Healthcare...
I guess my point here is that they weren’t just real estate deals. They were just big deals because when security prices, especially when stock prices go way, way up, that’s the equity that you can bring to the banker and say, “See? Look at all this equity. We can lever this thing to the sky.” Never mind that there’s all this equity because stocks have surged for ten years and gone to what I would suggest are largely overvalued heights.
So, you get near markets, lots of people love to borrow money and lever up and take big risks, right? That’s the story. The potential acquisition of Walgreen’s is exactly what you see near the end of big bull markets. That’s it in a nutshell. I can’t be Jim Simons... maybe you can. Hey if you’re a math whiz, go for it, man. But I can study history and I can learn which stories are the most important ones for investors.
Having said that, I’d like to move on and relate a personal story before we move on to the mailbag this week. This story is called “Life is Short.” I had a big scare last week and it’s actually still ongoing as I sit here talking with you. Just over a week ago, my 92-year-old mother fell, breaking her elbow and wrist and pelvis, and my 94-year-old father was beside himself.
I’m one of seven children that my parents had. They’ve been married 70 years and they have seven children. They’re my heroes. They’re epic heroes as far as I’m concerned. But in a rare turn of events, none of the other six who all live within a few hours’ driving distance of my parents, like none of them could be there, so yours truly had to hop a redeye and fly cross-country, and then drive three hours to their house and to the hospital.
Thankfully, things aren’t as bad as I first thought. I initially thought the pelvic fracture was inoperable. They were telling us they weren’t going to operate on the pelvic fracture, and I thought that was because my mother has COPD (she has trouble breathing). In reality, though, it was because the fracture wasn’t severe enough. Apparently, you can fracture your pelvis and walk around. It’s painful, but it’s not what I thought.
Still though, you tell me, how terrified would you be if your 92-year-old mother were stuck in a hospital bed with three fractures? It’s like your nightmare, and it got worse very briefly. At one point, this nurse comes in and says, “On your X-rays there was a slight touch of pneumonia.” Holy crap, right? A 92-year-old in bed with a fracture getting pneumonia is not good. It’s like your nightmare scenario. Turned out the nurse was wrong, which really ticked me off, and the doctor came and said, “Oh no, the X-ray is clear. It looks really good.”
So no pneumonia, thank goodness. But for most of my first day there, her breathing was terrible. It took them all day to figure out that her pain was so bad, she needed more pain medication... and then the breathing went back to normal. And then the nurse says, “We occasionally give people morphine just to chill their breathing out.” It’s like "why didn’t you do it before?" I’m sure you have a story about dealing with hospitals. I’m sure you can relate.
And it’s worse. Some of this stuff is my mother’s own fault. She’s been in and out of hospitals because she won’t do a few simple things that I don’t want to get into, and being in the hospital weakened her, and then she had to go to rehab to get her strength back, and she fell in rehab because she got up and walked to the bathroom by herself – which she wasn’t supposed to do. Frustrating.
They come to give her medications and she’s kind of fussy with them, and she’s being a pain in the neck, I have to say. My wife told me one night on the phone when I was there last week... she says, “You’re just like her. You do what you want. Nobody can tell you anything.” I kind of pride myself on my ability to change my mind when it’s the right thing to do, but I had to admit there was some truth in what my wife was telling me.
I don’t know. Bottom line, it’s hard to be optimistic because my mother is 92 and she’s got a fractured pelvis. She’s not able to move around. She’s got some other problems going on that they’re trying to fix, except for the fact that she raised seven kids and she’s been married 70 years and she’s 92. She’s smoked for decades. She has COPD and she’s still here. So, maybe it’s hard to be anything but optimistic, I don’t know.
This was a mortality moment for me. Life is fleeting, and it had me thinking,,, and it just begged the question: "How should one live if life is short?" Technology entrepreneur Paul Graham – who is somebody I think you need to know about if you don’t know about him already – has some ideas about this topic that are worth considering. So because life is short, Graham says, you should do three things...
First, eliminate as much bullshit as possible. Some of this will be obvious, but some of it will trick you by looking like important stuff. Graham identifies a potential tradeoff that can help you in this regard, and he says, “There has always been a stream of people who opt out of the default grind and go live somewhere where opportunities are fewer in the conventional sense, but life feels more authentic.” Places where there’s less bullshit.
Second thing he says you should do because life is short is seek out the things that matter. One of the things he says, if you have small children, they kind of force you to seek out things that matter because they’re always tugging on your sleeve and they matter a lot, so that helps. But he offers a tool for ferreting out the frauds out there and figuring out what matters.
He says, “One heuristic for distinguishing stuff that matters is to ask yourself whether you’ll care about it in the future. Fake stuff that matters.” In other words, things that don’t really matter. But he says, “Fake stuff that matters usually has a sharp peak of seeming to matter. That’s how it tricks you.”
So what he’s saying there is when stuff is faking you out and it doesn’t really matter – but it looks like it’s important – it won’t matter for long. It’s got a very sharp peak. You quickly get past that peak – all of a sudden, it doesn’t matter. So try to look past that and see if you think something will matter to you in the future. It’s not easy, but I think you can do it. I think it’s emotionally hard. It’s probably technically easy, but it’s probably emotionally harder to say "oh, this thing doesn’t matter, and I’m just going to forget about it." Usually you’re going to tick somebody off by saying that, right?
I almost didn’t fly out to my parents’ this past week. I almost stayed home, but once I got there I saw my father’s confusion and worry. He’s 94... he moves kind of slow, too. It just made me realize how stupid it would’ve been and that – this is something that matters, right? We drove back and forth to the hospital for a few days and he told me all these stories... his time in high school. He and my two brothers and me, we all went to the same high school in Maryland which was founded in 1845. It’s been around a long time. It’s kind of an old Maryland institution of sorts.
He told me about that. He told me about his time in the battle of Okinawa during World War II, and he told me about his years as a star college athlete and a law student and a lawyer and all this other stuff. I mean, I could hardly believe – even if it was only several minutes before I booked this redeye flight – did I consider not being there, you know? It’s just stupid.
So, finally Paul Graham says the third thing you should do because life is short is savor the time you have. Now, I’ve gotten better at this, I think, because I stop work, or I try to stop work every day at 5:00 p.m. I’m successful most days. No matter where I am or what I’m doing I put it down, and it’s hard when your business is all between your ears, right? It’s all about ideas and numbers and insights and things. It feels fleeting, so when you’re on to something you don’t want to stop at 5:00 p.m.
But I just try to make a note of where I was and get back to it the next day, and I refuse to work on Saturdays anymore. And the funny thing about all this refusing to work after 5:00 and Saturdays, I’m more productive, not less. By taking a hard break, I’m more productive. You may recall many, many episodes ago we had my friend Aaron Edelheit on the program, and he wrote a book called The Hard Break that got me doing all this stuff. I read his book, I was like, "Oh jeez, of course I’m going to be more productive if I stop and smell the roses for 24 hours at least on Saturdays and 5:00 p.m. every day."
And I play the guitar every day, which I haven’t done for years, and that feels really good. I just stop and look around more than ever before. A big part of my job of course is finding the right words, but they fail me a little compared to what Graham has to say, so I’m going to let him do some heavy lifting here, just one paragraph from his piece called “Life is Short.” If you just Google "Paul Graham Life is Short," it’ll take you right to his blog and right to this piece, and you should read it. I think it’s really good and I think you’ll enjoy it.
He says, “If life is short, we should expect its shortness to take us by surprise, and that is just what tends to happen. You take things for granted and then they’re gone. You think you can always write that book or climb that mountain or whatever, and then you realize the window has closed. The saddest windows close when other people die. Their lives are short too. After my mother died, I wished I’d spend more time with her.”
My mother is still alive. That was Graham talking about his mother. The mention of Mom in the story with the Graham piece kind of hit home, of course. I have to admit, I feel a sense of regret about some things – like I wish I’d made a serious attempt at a career as a performer when I was younger. I was into music and acting and stuff. Even though I realize now the odds of making a living at it were worse than I thought back then. I thought they were bad back then... I think they’re worse now, but I still should’ve done it. I should’ve gone for it at least for four or five years or something.
But the first time I took the stage as an actor after grade school was age 36. A director in Baltimore there, one of the local directors, saw my first performance. It was the smallest role in John Steinbeck’s play "Of Mice and Men." I had, whatever, six lines in the whole thing or something. And this director told me, “You’re the most natural actor I’ve ever seen.” And I was like, "Oh, wow, that’s really cool," and I didn’t think much of it. I wish I had thought a little more of it at the time because she was actually pretty sharp, and she knew what she was talking about. She was not a spring chicken. She knew what she was doing.
And I did a few big roles, but I never really got past the whole community-theater-doing-it-for-free kind of thing. Never got really truly serious about it. I had a bunch of good gigs as a musician. I was a guitar major in college, and I played the mandolin on stage in an opera at the Kennedy Center under the direction of Placido Domingo. That was a thrill. Opening night right after the performance, he looks me right in the eye and says, “Bravo.” Really chilling moment. Great moment for me.
And it’s all really distant now, but I feel like I didn’t honor whatever modicum of talent I truly possess, so I encourage you to do it. I encourage everyone to do it. Tell your kids and grandkids and anybody you know. Encourage them to do what they’re good at. But look, hey, whatever I did it brought me here and this is a pretty good place, and I’m grateful to you. It’s been very rewarding to have thousands of people downloading my words every week and the words of our guests and just engaging in a mostly really reasonable, fun, intelligent conversation about where we stand in the markets and what to do about it, and where we stand financially and otherwise, right?
So, anyway, thanks for indulging the personal story. I’m sure you have similar ones. Maybe you can write it in the feedback – [email protected] – and relate a little bit. Having said that, let’s check out the mailbag.
Dan Ferris: Hey guys. Real quick, I just want to tell you something. As host of the Stansberry Investor Hour podcast, I also enjoy listening to other podcasts. It helps me figure out ways to make the Stansberry Investor Hour a better experience for you.
One podcast I really like is called We Study Billionaires hosted by Preston Pysh and Stig Broderson of theinvestorspodcast.com. It’s the biggest investor podcast on the planet, enjoyed by thousands of listeners every week. Preston and Stig interview legendary billionaires like Ken Fisher, the billionaire you’ve seen on TV, Jack Dorsey, founder and CEO of Twitter and payments company Square, and billionaire investor Howard Marks whose book The Most Important Thing I’ve recommended dozens of times.
Sometimes Preston and Stig spend a whole episode reviewing lessons learned from billionaires they’ve studied like Dell computer founder Michael Dell, tech industry maverick Peter Thiel, and macro trader Stanley Druckenmiller. Before starting the We Study Billionaires podcast, Preston went to West Point and Johns Hopkins, founded an investment company, and his finance videos have been viewed by millions.
Stig went to Harvard and worked for a leading European energy trading firm. They’re smart, experienced investors who know the wealth-building secrets of billionaires better than anyone, and their listeners love it, and I’m one of those listeners. Head over to theinvestorspodcast.com and check out We Study Billionaires with Preston Pysh and Stig Broderson... theinvestorspodcast.com... check it out.
Dan Ferris: So, not much in the mailbag this week. Again, I love the mailbag. It’s where you and I have a frank conversation about investing. It’s just you and me. You write in with your comments and questions and I do my best to answer as many of them as possible. I read every single one of them. No longer reading the Russian spam, but I read every single thing you send me, and you send them at [email protected]
Like I said, not a whole lot this week, but one of them was kind of long but kind of good. It is from Shane F. Shane F. is in the financial industry, and he says, “The Covel interview was great, even if it was a little painful at some points. Michael is a better writer than speaker in my opinion, although I have tremendous amounts of respect for his patience for questions after all these years. I mean, he has written it all down and explaining again and again and again especially to those who are probably skeptical at best,” I think he’s talking about me, “is not something I would consider easy money, which you guys discussed.
I thought his comments on that topic were particularly compelling and man, he sure did say without saying that actively trading is one of the most laborious forms of work out there. Sitting and looking at every tick of a currency pair is not something many would call easy money. I’m one of them. Forget that. Anyway, Complete Turtle Trader,” That’s one of Covel’s books. “The Complete Turtle Trader is one of my all-time favorites. I must confess I’ve never read any of the editions of Trend Following, but I plan to.
I’m really surprised that Mr. Covel didn’t bring up the section from Turtle Trader called simply 'Random entries,' and then he’s got this one passage from the section called 'Random entries' highlighted. This is from Michael Covel’s book and he says this trader named Eckhardt, Eckhardt witnessed many systematic traders spending a great deal of time searching for the good places to enter. He cautioned against it. ‘It just seems to be part of human nature to focus on the most hopeful point of the trading cycle. Our research indicated that liquidations are vastly more important than initiations. If you initiate purely randomly, you do surprisingly well with good liquidation criteria.”
Actually, Covel did mention that. We talked about how some traders have done really well with a random entry strategy, but they have such iron discipline on the exit that they make money over time. Shane F. continues. He says, “My favorite part of the entire book, I reuse this with more frequency than almost any trading wisdom out there, it was the most recent screenshot in my Slack messages, ha, ha.”
And then he’s got another quote from the book, I’m not going to read the whole quote, but it basically says this big company Cargill has thousands of people all over the world learning everything you can learn about the price of soybeans, so you’re not going to compete with them, so just follow the price action basically is the point of the quote. And then Shane F. finishes up, “Also, I shared the episode with my team and captioned it simply ‘mandatory.” Thank you, Shane.
“I really wanted Mr. Covel to answer the question what are some of the best trend following rules that are working together whether being used by you or others, and if you can’t give that away, is there one from recent history that you can share? Thanks, Dan. Keep up the great work. Also, can’t wait to read about Jim Simons. Doesn’t get cited nearly enough in my opinion, Shane F.”
Well, Shane, that email speaks for itself. Thank you very much. You’re never going to see Simons cited a whole lot because the problem is Simons never talks about anything that’s working now, and it didn’t surprise me that Michael didn’t talk about stuff that was working now. If I didn’t make that point last week I need to make it now because that’s everything to these guys. Whatever is working now they need to keep doing it because, and what Simons will tell you is a lot of this stuff works very briefly and it’s all really short-term oriented. It works very briefly for a short period of time and it doesn’t work anymore and they’ve got to find something else.
So, in this book about Simons, I don’t even know if I’ll read it, although it’s probably a good story, but it’s not going to tell you about anything that’s working. It might tell you some things that don’t work, but it won’t tell you what’s working.
So, I only have one other email. It’s from Bernie B., and Bernie B. says about last week’s episode, “The jury was still out on the format change until today. I have concluded that I prefer things the way they were. I really came to appreciate the rant and the little news segment that followed. Both contained content that I did not get elsewhere.” And then he says, “Was that politely worded enough? Best regards, Bernie.”
Yes, it was, and it’d like to hear from more people about this because the jury is not out. It’s really kind of up to you at this point. If you like the old way of doing rant and news and interview and mailbag every week in that order like we used to do, please tell us. Comments, criticisms, politely-worded please, and questions. Send them to [email protected] Also, I want to do a little hat tip to Gary D. who wrote in last week and he criticized share repurchases and private equity leveraged buyouts. He even forwarded a story I told you earlier about the Walgreen’s deal, and I hear you, Gary.
The criticism of share repurchases is simply that corporate managements create these share repurchase programs and then they grant themselves a gazillion shares and sell into the share repurchase, and that really looks kind of shady to a lot of people. I don’t know that it is.
Nobody sets their own compensation. The CEO is set by the compensation committee. So, what’s really going on there is a kind of roundabout cash bonus, but it of course does have the effect of increasing the share count. I don’t know if these programs really have a significant effect on share counts. Net net, if a company is a big share repurchase, their share count is probably going to fall over time, but obviously some amount of the shares will be owned by the management.
So, I’m on the fence about this. I think people might complain a little too much about share repurchases and don’t understand them completely. It’s mostly a rather benign thing. The way it goes wrong is simply if you pay too much, right? If the business is worth $50 a share and you’re buying back shares, mopping them up for $40 a share, you’re creating value for the remaining holders of the stock.
So, if you’re paying $60, you’re destroying value. I think that’s really the important thing to watch with share repurchases more so than anything else because most of the shares that are repurchased are not from management exercising options. Most of them are just existing shares, so I’m going to guess, I haven’t done research and I haven’t back tested or any of this stuff, but I’m going to assume until further information comes my way that the bigger impact is going to be when you bought them and how much you paid. Did you buy them at the top and pay way too much, or did you buy them near the bottom and get a good deal?
And the private-equity leverage buyouts, look, I don’t know if this is a bad thing for society. I don’t think, look, if a company borrows a ton of money and buys a business and they pay themselves these huge dividends, literally they’ll borrow $50 million and pay themselves a $50 million dividend. Well, they own the company and the sellers chose that buyer. Now, of course, the sellers were exciting you could say, and that’s a separate conversation, but I would be surprised if overall the private equity industry were really bad for U.S. corporations.
I’m open to the possibility and I agree the business model in the traditional levered model doesn’t look good, and there are some bad outcomes, but one of the bad outcomes that Elizabeth Warren listed in her article was Shopko, discount retail chain based in Wisconsin that went bankrupt in 2018. Now, a discount retailer going bankrupt in 2018, you tell me what the bigger impact was. Was it that they were involved with private equity?
I’ll tell you what, a whole bunch of other retailers went bankrupt in 2017, 2018, that were not involved with private equity. So, you tell me what the real story was there. Is that an example of how private equity is really horrible or is it an example of retailers struggling in a highly competitive environment, especially discounters struggling to compete with Amazon, and even Walmart and others, Costco, whoever.
So, the data points these people are choosing and the arguments, I think it’s more complicated. Certainly, like we said, not all private-equity firms are the same. Some don’t use any leverage at all. Did you know that? Yeah. All we know are the big stories that appear in the press about the KKRs and the TPGs and other people using lots of leverage. All their bets don’t turn out bad, OK? So, painting an entire industry with a bad brush like that in broad strokes, I think it’s problematic, and it’s typical of our time. It’s the political impulse.
Everybody wants to redesign the world in their own image and likeness. Elizabeth Warren wants to remake capitalism, which works just fine without her involved at all, but she wants to do these top-down fuzzy warm sounding solutions, and I don’t think you can do that. It’s hard too to criticize broad swaths of activity like share repurchases and private equity leveraged buyouts. It really needs to be done on a one-up basis, and you can’t just swoop down and declare it all good or bad, OK?
That is another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as I did. It’s my privilege to come to you this week and every week. You can listen to all of our episodes and get a transcript for every single episode at www.investorhour.com. I want to emphasize I got another question this week about transcripts. There is a transcript for every episode. If the current episode doesn’t have one, check back in a couple days and it’ll be there.
Just go to www.investorhour.com. Click on the episode you want and scroll all the way down and that’s where the transcript is. If it’s not there at that moment it'll be there soon. There’s one for every episode, and I know some people would rather read than listen because they can do it faster. That’s fine. You can enter your email on the same page to get all the updates for future episodes.
So, thanks for listening once again. I’m honored by your presence and I look forward to talking to you next week. Bye-bye
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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