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Announcer: Broadcasting from Baltimore, Maryland and New York City, you're listening to the Stansberry Investor Hour. Tune in each Thursday on iTunes for the latest episode of the Stansberry Investor Hour. Sign up for the free show archive at investorhour.com. Here is your host, Dan Ferris.

Dan Ferris: Hello everyone, and welcome back to another episode of the Stansberry Investor Hour. I’m your host Dan Ferris. I’m the editor of Extreme Value, a value investing service published by Stansberry Research. Okay, let’s get to it. Time for the weekly rant.

This week’s rant hits on a theme that will be familiar to readers of the Extreme Value newsletter, of which I’ve been editor since 2002 when it started. The theme is really simply that all real investing is value investing as far as I’m concerned, otherwise you’re just trading ticker symbols with price tags. I’ll get into that later in the rant. Here we go.

So, are you bullish right now on the stock market, or are you bearish right now on the stock market? Maybe you’re somewhere in between. If you’re bullish, it means you think the stock market will go up probably in the very near future. That’s what most folks mean by it. Bearish means you think this market will go down again in the very near future. So, being bullish or bearish means you think you know something about the future about where stock prices are going to go.

Being bullish or bearish kinda looks like an attempt to predict the future then, doesn’t it? Looks that way to me, and there’s usually some action associated with your bullishness or bearishness, isn’t there? People make real money decisions based on their bullishness or bearishness. A lot of people, maybe you do this, sit in front of their computer screen for some amount of time each day looking at the price charts of various stocks, and they believe that they can glean these patterns on charts that tell them about the imminent price movements in one direction or another.

They’re wrong the overwhelming majority of the time, right? And they’re very likely engaging in naïve technical analysis. That term is a trader guy I know on Twitter named Mike Harris. It’s more like what people do when they’re doing this, looking at these charts, it’s like what happens when you see Albert Einstein’s silhouette in a cloud, or when you see Jesus on toast, right?

Every now and then in the news, some crazy little segment on the news, they’ll show someone who pulls a piece of toast out of the toaster and there’s a little burn pattern shaped like the face of Jesus.

It’s all the same pattern seeking and pattern recognition, really pattern creation, in that mushy thing between your ears. And I’m willing to bet many of the thousands of people listening to my voice right now spend a lot more time indulging their belief that they can know the future with some amount of certainty than they’re willing to admit. I bet most people base their buying and selling of stocks on their ability to predict the price of those stocks over some period of time. They think it’s going to go up, so they buy it.

And I’ll go one step further. Isn’t it true that most so-called investors and individual or professional, institutional, mom and pop, whatever, are really just bottom pickers? They all think picking stocks is about picking out which ones are going to go up a lot starting right now, and they believe that when stock prices fall, “Oh well, it means I was wrong.”

Now, if all you know is the price, and your whole game is to try to pick stocks that go up in the near term, it is certainly true that you’re wrong if stock prices go down in the near term. If that’s the game you’re playing, that’s the way it works, and if you’re good at predicting things all of this is OK and you’ll make money. You’ll be great. Little problem with that, though: Nobody is any good at predicting anything, absolutely nobody. Nobody is good at predicting securities prices, nobody.

Last June, billionaire investor Paul Tudor Jones said, “I think the stock market has the ability to go a lot higher at the end of the year. I can see things getting crazy particularly at year-end after the midterm elections,” to the upside crazy, right? We know how that turned out. In 2015, real estate mogul Sam Zell said, “There’s a high probability that we are looking at a recession in the next 12 months,” and by association recession, stock prices fall, right? Of course, we know how that turned out.

There’s a guy named Morgan Housel over at Motley Fool who did some research a while back. I think he works for CollaborativeFunds.com now. According to a November 2015 Washington Post article, Housel looked at the average S&P 500 stock index forecast by 22 chief market strategists of the biggest banks and brokerage firms on Wall Street from 2000 to 2014. This is the A team, the crack squad, the dream team, the people who make millions of dollars a year for saying things like, “The market is going up 10% this year.”

So, quoting from the article here, on average, these annual forecasts missed the actual market performance by an incredible 14.6 percentage points per year, not 14.6 percent but 14.6 percentage points. “It is also noteworthy,” Housel added, “that from 2000 to 2014 the 22 strategists on average did not forecast a single down year ever. During that period, the Nasdaq crashed 78%, and the Great Recession sent the major averages down 57%. The strategists failed to anticipate any of it.”

There’s no such thing as an expert in predicting which way the stock market is going to go, and they were off by 14.6 percentage points. If they said the market is going up 10%, it went up 24.6%. If they said it’s going up 1%, it went up 15.6% on average. They’re terrible. You know why? Because they’re human and nobody can predict it.

Let’s look at this another way. Remember how you felt in 2002 near the bottom of the dot-com bust? Were you buying stocks hand over fist telling all your friends that the market was bottoming out, stocks are just too cheap, buy them, buy them, buy them, did you say? No. Or were you terrified, yeah, and purchasing replacement underwear every five minutes? Yeah.

How about October 2007? That’s when the market peaked before the financial crisis. Now if you’ve honest with yourself, you’ll admit you felt great, you thought stocks would keep going up right along with all the billionaires and experts. We know what happened. Market fell 57%. How about late 2008, early 2009? Were you predicting stocks would bottom out and start on a new decadelong bull run? No, you didn’t, and neither did anybody else.

In fact, if you’d have said that, if you’d have shown up for work in your professional financial career and said that at that time you’d have been fired. OK, how about when gold hit $1,900 in 2011? Did you feel like buying more or you feel like selling? How about late 2015, early 2016? Were you buying gold and gold stocks like crazy?

Tell you what, a partner of mine and I tried to raise money from some very sophisticated wealthy people in London for a mining stock fund at that time. These are people who made tens and hundreds of millions of dollars in mining and they weren’t having any of it. They wouldn’t touch us. They wouldn’t touch mining stocks. They wouldn’t hear about it. It was one of the great moments to buy mining stocks in the last couple decades.

I can do this all day, but just face it, you can’t predict anything. Your predictions are more likely to lose money than anything else, OK? And you don’t have an ability to look at price charts and figure out which way prices will go. That’s a random strategy. By the way, the casino loves you. That’s a random gambling strategy and the casino of Wall Street loves you for doing it because you’re totally fooled by the randomness of these chart patterns and cocktail chatter and you generate tons of commissions and fees. They love it.

But that’s what most people do. They’re not investors at all, they’re like traders. They’re trading securities. They don’t even know about securities, they know ticker symbols and price tags. I seriously doubt most people know anything about what they’re doing in the stock market. They know the price of everything and the value of nothing. They’re like Will Rogers, the old cowboy comedian. He said, “I buy stocks that go up. If they don’t go up, I don’t buy them.”

OK, I’m sure somebody is thinking, “Wait a minute, Dan, you’ve been telling us that you’re bearish for a long time, so aren’t you guilty of predicting things and saying you know which way prices are going to go?” And it’s true, I’ve been bearish pretty much since mid-2017, and I continued warning people that stocks were overvalued right up to the September 2018 top, and there was a three-month 19% correction that bottomed out on Christmas Eve.

Now, as I’ve said nearly every single time I’ve ever discussed my bearish position, it was not a prediction. I was not looking at charts and figuring out which way prices were going to go in the next 10 minutes. I was not predicting that stocks would fall in some particular period of time, though I do and have occasionally cited how similar circumstances in the past have led to market declines of 50%  or more.

OK, well, if my bearishness wasn’t a prediction and I’m sitting here telling you I was right to be bearish, what gives? What’s going on here? Well, I was right to be bearish and it was OK to be bearish because stocks had reached exorbitant valuations. Exorbitant valuations is just another way of saying assets were priced to deliver crappy returns for the next several years. That’s all that means.

If you pay $100 for a business that earns $10 a year, you’re buying at a valuation of 10 times earnings. That’s a 10% earnings yield. That’s pretty cheap for most businesses and really cheap for most good publicly traded businesses these days. Let’s say the same business is trading on the stock exchange for $300, 30 times earnings. Well, that’s a little more than a 3% earnings yield. That’s pretty crappy.

Last October/November you could’ve made more than that buying 30-year Treasurys, and they probably have less risk than most stocks, most of which are garbage, right? The point is, it matters how much you pay in relation to the value of the thing you’re buying. If you pay too much, you’ll lose money, and that’s true even of the highest quality assets. Yes, I’m on this again. He’s on this again. I’ve said it many times and I’ll keep saying it because right now that’s my job.

With stocks bumping up near all-time high valuations and they were at the most expensive they’ve ever been in August and September 2018, my job is still to warn of the risks of paying too much. Sure, there are bargains out there. There’s always a bargain somewhere, but overall in the stock market, it’s my job to warn you about the risks here. When the market falls 50-60%, it’s my job to pound the table and say, “Don’t worry about it, just buy.” We’re not anywhere near there.

And this advice that I’m giving about warning and risks, this is low-hanging fruit in my business because just about nobody ever does it, so it’s easy to step in and be the one guy. Most managers, analysts, market prognosticators, people on TV, whatever, they’re really bullish near the big tops and they’re really bearish near the big bottoms. They all know the price of everything and the value of nothing.

You can’t know where the price is going. It’s stupid to spend your life focused on that. But you can know the value of a business right now and where that value is likely to go over the next several years no matter where the stock price goes, and you can assess the attractiveness of a given opportunity based on the difference between the price and the value. So, "be a long-term value-oriented investor" is the best advice anybody can give you right now as far as I’m concerned.

If you don’t want to have the back half of your anatomy carved off and served to you on a platter in the next couple years, you better learn something about the value of assets and about the movement of cycles in the stock market and in the credit markets. They’ve been moving one way for a long time. They tend to kind of stop and then move the other way after that.

So, the idea of value investing has sorely underperformed for a decade. I promise you that won’t last, and nobody is going to ring a bell when it changes. So, look, the advice here, and I always give negative advice first because what not to do is what the real pros use to get an advantage. What they don’t do is at least as important as what they do do. So, if you want to start becoming a much, much better investor right now, first follow my negative advice and stop sitting around worrying about the little dippy movements here and there in the prices of stocks.

Stop trying to predict a future that you can’t predict. Stop checking in your account every five minutes. Sell every stock you own that you just bought because you think it’s going to go up next week. That’s stupid. Stop obsessing on price when you know nothing about value, and the positive advice is to start learning how to understand the value of a business. If you don’t know that, you have no business in the stock market anyway as far as I’m concerned.

Be a value investor. This is the time. At the big tops and bottoms, that’s the time to really learn a lot about value if you don’t already know it by then. OK, that’s the weekly rant. Write in and let us know what you think. Are you a value investor? Do you do something else? Let us know. There’s more than one way to skin a cat, I realize that. This is just my view.

OK, let’s just move on and talk about a few news items this week, or even last week. Let’s talk about this business of the proposed ban or regulation on stock buybacks. Sens. Chuck Schumer and Bernie Sanders put an opinion piece in the New York Times almost two weeks ago, I guess February 3, and they said that the government should take measures to limit share repurchases because corporations are spending too much money on share repurchases and they’re not spending enough on higher wages and all kinds of other things, paid medical leave, retirement benefits, working training, whatever else, and therefore, corporations need to learn to direct resources back to these things and away from share buybacks.

They also threw this other point in there about how stock buybacks benefit very few people. They don’t benefit the vast majority of Americans they said because big stockholders, people who own lots of stock, tend to be wealthier. So, nearly 85% of all stocks they say are owned by Americans that belong to the wealthiest 10% of households, like this means anything, like that’s a big surprise. I don’t know what they think they’re trying to do with this by pointing this out.

So what? Rich people own a lot of stock, and stock buybacks tend to benefit those who own stocks. There’s no there there. There’s no argument there. So, what, what rich people do? Are rich people evil? I think there’s an underlying tone here that’s saying whatever benefits rich people and doesn’t benefit other people is really bad for everyone, and that’s just not true.

So, this whole argument that you should spend money on all these other things before you spend it on buybacks is just stupid and wrong and not how life works. Here’s how buybacks work, OK? Buybacks are a choice that corporate capital allocators have. They can invest in the business. They can pay off debt. They could buy back stock. They could pay dividends.

The geniuses Schumer and Sanders also want to limit dividend payments for the same reasons. So, buybacks, are they bad or good? Well, they’re neither. It depends on the company. It depends on how much they pay for the stock. It depends on a lot of things. But the main thing that you need to know as an investor is this: If a company can invest in its business, if it can put capital to work in the business to get a good enough return, it should do that. If it can’t do that and the stock is a good enough deal and it’s not too expensive, why not buy it back?

Let’s say the stock is really cheap. A buyback is probably a better decision. Let’s say that the stock is really expensive. A dividend is probably better. The way it works out in practice is that dividend payments are seen as a more sacrosanct and a regular thing that shareholders are kind of owed over time. They’re seen as less discretionary generally speaking. The buybacks tend to be thought of as a use of residual cash, so they can go up and down in any given year.

Really, there’s not a whole lot more than that to it. Whether or not a company ought to buy back its stock and whether or not that benefits whoever it benefits, these questions are bad questions and these guys don’t have any answers to anything. This whole thing is just stupid. If you’re investing in the business you’re investing in the business. If you are paying out money to shareholders, it means you can’t invest anymore in the business. You don’t see any opportunity to invest in the business.

All this stuff about paid medical leave and all that, well, they offer all these things. Corporations offer all these things anyway. They offer competitive wages. If you don’t like the wage, you can quit and go somewhere else. This whole argument is typical kind of political – I won’t say socialist because I don’t really care if you’re right, left, center, whatever. It’s just pure political thinking. It’s an attempt to get people whipped up into a frenzy and do something really stupid that would screw up the economy.

It would screw up the economy to have politicians telling people how to allocate capital. Corporate capital allocators are good enough. They’ve done a phenomenal job over time. The stock market was up like 1.5 million percent in the 20^th century, Schumer and Sanders, you morons. They’re doing fine. They don’t owe anybody anything as far as more paid medical leave or wages. Anyway, you get the point.

Wow, that particular issue really got me excited, didn’t it? There’s a few other things going on. We’ve talked a lot about Tesla. We’ve had two Tesla short sellers on the program, Mark Spiegel and Chris Irons. Those episodes were really well received. A lot of people wrote it and said, “Wow, I really liked that.” So, if you haven’t listened to them, please do, if you’re interested in Tesla.

So, the latest news on Tesla, and I have a quick correction to make. I talked about Tesla in a recent episode and I said that the chief operating officer left after a month on the job; chief accounting officer is what I should’ve said. They lost their longtime CFO, they lost the chief accounting officer after a month, and the head of human resources went on leave and just chose not to come back. So, when the rats are leaving the sinking ship, who leaves next? Well, shareholders, and that’s the news I have in front of me here.

T. Rowe Price cut its stake in Tesla just about in half in the fourth quarter, and now it owns less than 9 million shares. It owned well over 17 million going into the fourth quarter. Of course, T. Rowe is an investment company, so they probably have the stock in lots of different accounts and funds and various vehicles. That decision there strikes me, and I don’t know what funds its in. I’m not going to go look, but it strikes me that to cut just about half of all they own, that seems like that decision is coming from on high unless there’s one fund that owned it all.

And it makes sense, you know? They shouldn’t be putting people’s money into that company, unless they advertise it as a super-duper-duper risky thing.

Another company we’ve talked about from time to time is Under Armour. Their fourth-quarter earnings in sales beat estimates. The stock has kind of been swinging all over the place, but they made no changes to their 2019 outlook. North America they say is still a weak spot. Growth is coming from overseas.

Of course, Porter likes Under Armour. He likes the brand and he thinks it’ll be around for a long time. I haven’t liked it as much just because the financials haven’t looked so great to me. I’m OK with not buying something when it’s not making money and waiting until it makes money to get into it.
So, you know, there’s just a few items going on. That stock buyback thing is the one that really, really kind of jumped out at me this week. I meant to mention it last week and didn’t get to it.

You should explore the meaning of stock buybacks, and there’s a paper actually that you can access online. It’s by Credit Suisse. It’s called dispersing cash to shareholders, frequently asked questions about buybacks and dividends. It was put out in 2014. It’s by Michael Mauboussin and Dan Callahan from Credit Suisse. I don’t know about Callahan, but I know Mauboussin has moved on. He works for another firm now. It’s just got some common-sense stuff about share repurchases and what they are and what you can expect.

And I’m sorry, they’re not the political issue that everyone wants to make them out to be, they’re simply not. It goes without saying that people buy back a lot of stock at market tops and they don’t buy much back in market bottoms. They’re human beings, OK? Stock buybacks aren’t a miracle. It’s just something that corporations do to return money to shareholders, but it shouldn’t be a political issue at all.

All right, listen, we have a really special guest today. His name is Richard Smith and I want to introduce him to you right now. It’s time for our guest. His name is Richard Smith, and he’s been around the Stansberry world for a long time. He’s the founder and CEO of TradeStops, a web-based stock tracking and alert program that synchronizes and tracks online portfolios to empower individual investors to enjoy managing their own investments.

Richard earned a PhD in math and systems science, and even he had to learn the heard way that it takes more than intelligence to win in the game of investing. He spent the last 10 years researching and developing algorithms and services that give individual investors the tools they need to remain in their personal investing comfort zone and to succeed. Welcome to the program, Richard.

Richard Smith: It’s great to be here, Dan. Thanks for having me.

Dan Ferris: You bet. I had a fantastic time I have to say at the recent Bull/Bear Summit with you, and I just want to thank you for inviting me to that. It was actually a blast to interact with all those smart people.

Richard Smith: Dan, I thought you were one of the stars of the show, man. You really blew me away, so thank you. It was great to have you there.

Dan Ferris: That’s very nice to say. So, before we get into what we did on the Bull/Bear thing, tell me a little bit about how your odyssey. Where did this start? Where did TradeStops begin?

Richard Smith: Well, it started with my own experience as an investor. I’m working on my PhD basically in math and computers. I’m helping researchers and scientists be more honest about the uncertainty in their own models, and the stock market is going crazy. It’s 1999 and I think, hey, how hard could this be? I get in. I triple my account in about 12 months, and then March 2000 rolls around and the rug gets pulled out from under everybody including me. It was a very disorienting experience to say the least.

So, that certainly piqued my interest. My research work was already focused on data, and the stock market was certainly a data-rich environment where you can’t find the answer. There’s no one answer in the stock market. So, it was a perfect space for me to apply my graduate work and just pursue my personal interest in investing. And then I met Stansberry Research, got to know some of the leaders here including Steve Sjuggerud, learned about trailing stops, and that started what’s been a 15-year odyssey now of figuring out how to help myself and other individual investors like me really succeed in the markets.

Unfortunately, that’s not the norm. Most investors don’t succeed in the markets. That seemed worth dedicating time and energy to, to figure out how successful, intelligent people who aren’t full-time financial professionals can still participate in and succeed in the markets, and that’s been my passion now for the past 15 years.

Dan Ferris: And the world is a better place for it. Just so listeners know, a trailing stop, if you’ve never heard of this before – first of all, if you’ve never heard it before, you’ve probably never read a Stansberry publication because they all use them. Trailing stop is when you decide that you’re going to sell if a stock is a certain percentage below the high (usually) closing price after the time you bought it.

So, if you buy it and it goes from $10 to $20 and you have a 25% trailing stop, and the thing goes to $14.99, you’re automatically out. Basically, Richard has focused his career very wisely on the part that nobody thinks about which is selling, when to sell.

Richard Smith: Exactly, Dan.

Dan Ferris: Was this like a conscious decision, or did you just kind of wander into this trailing stop thing? Did you say, “I don’t want to do buy research, I wanna do research into when to sell,” or was it just kind of an organic thing?

Richard Smith: If I pat myself on the back for anything it would be recognizing the importance of an intelligent sell strategy. People have known about trailing stops for a long time, and I learned about them from guys like the guys on the Bull Bear Summit with us last night, Steve Sjuggerud, Alex Green, but I think it was the first one to really connect the trailing stop strategy with this Nobel Prize winning economic research from Daniel Kahneman and Richard Thaler showing that we have this terrible bias of loss aversion, right? We don’t like to lose.

And so, when it comes to positions, investments that are losing for us, we want to put more money into them and take more risk and kind of dig our hole deeper, right? All to try to get back to breakeven. But then when we’ve got a winning position, loss aversion manifests as wanting to take our profits off the table. We don’t want to lose our profits, so we end up really digging big holes for ourselves when we’re losing, but we also end up taking our profits off the table when we’re winning, right?

So, that was just what I saw in my own investing. By the way, across many, many different strategies that I would explore about how to be a successful investor, all the books I’d read, the software I’d buy, the newsletters I’d subscribe to, and yet I would still experience the same pattern over and over again of kind of having some losers get away from me but never having winners get away from me. So, I was at least smart enough and humble enough to kind of look and go, boy, that seems like it’s not working. Unfortunately, it takes most people 10 years to figure this out.

I hope that I’m helping people shorten that learning curve, figure it out a little earlier, and then trailing stops work, even a simple trailing stop, because it limits your downside, limits your losses, but it also just as importantly un-limits your upside, un-limits your winners, and I think that’s so important. I think people really don’t appreciate that. For me, it was simply a matter of, I don’t want any big losses. I want some big gains. I’m going to sort of reverse my psychology of how I’ve been investing so far, and I found that even a simple trailing stop could do that for me.

And then I took it another step. I evolved the algorithms. I came up with what I called smart trailing stops. Then I added a momentum component to it, and I’m looking for a system that helps me get on board long-term trends rooted in good investment ideas from guys like yourself and Steve Sjuggerud, right?

I want to make sure that the things I’m investing in have been vetted by smart investors like you and Steve and Alex and some of our other panelists, but then once I’m in, I want to let the market work for me, and that’s really what I’ve designed my systems to do and what my software helps other investors do.

Dan Ferris: You know, Richard, you started out talking about an intelligent sales strategy. I would probably even take the word “intelligent” out because most people don’t have any sales strategy at all. Just having any kind of logical sales strategy like you would use with a trailing stop system, it’s 10,000%, it’s immeasurably better than what most people do, which as you point out is based on pure psychology. They get in, they’re either up or down, and then they behave in these crazy ways that the Nobel Prize winning guys you mentioned have written about.

Richard Smith: And Dan, it’s not just retail investors. There’s an incredible paper out in December of last year. This was the Chicago Booth School of Business, Carnegie Melon University, MIT, Sloane School of Management, documenting that the weakest link for professional investors is also their sales strategy, and found systematic biases with professional investors that reduced their alpha in the markets when they sold not around earnings calls, right?

If they’re looking at, hey, what really happened with this company? It was an earnings event. We learned new information. We decided to sell. That was fine. But when they sold in between earnings calls, mostly because either the stock had gone up too fast or down too fast and they made a gut level decision to sell, this research found that even professional investors really impaired their performance by selling without a strategy. They’re human, too.

There’s so much information available to investors today, right? There’s lots of information, lots of tools. I think tackling the behavioral dimension of investing is really the next frontier, and I think that technology can help us do that. I think that quantitative strategies can help us do that. But I think more and more people understand what I realized 10 years ago, which is that hey, getting great information is necessary, but it’s not sufficient. You also need great discipline, great habits. You need to adopt the habits of great investors and be a consistent investor in order to really be able to capitalize on the great information.

Dan Ferris: Well put. Couldn’t have said it any better. One of the guys on the Bull/Bear Summit from last night was Alex Green from The Oxford Club, and he has a really great analogy.

Richard Smith: The analogy is as an investor you’re growing a garden, and what most people do is they pull up their roses and leave their weeds, whereas what you need to be doing is pulling up your weeds and leaving your roses, right? So, most people end up with a garden full of weeds, meaning their losers, and not a garden full of roses, meaning their winners. That’s exactly what loss aversion does.

Dan Ferris: They actually water the weeds by buying more, right?

Richard Smith: Yeah. Throw fertilizer on those weeds, absolutely. People have an aversion to sort of buying stocks as they hit new highs, right? People want to buy them as they hit lows, time the bottom perfectly, time the top perfectly. It just doesn’t work. And you want to invest in companies that are actually making money and that are making you money, right? But instead we sell the companies that are making us money and we put more money into the companies that are losing us money.

It’s a pretty ridiculous habit. Investing in stocks isn’t the same thing as like buying T-shirts. You might want to go to the discount rack and buy a cheap T-shirt, but that’s not the way it works in investing.

Dan Ferris: It’s just insidious. It’s insanely difficult to develop this if you don’t have somebody telling you about all of this and explaining it to you, you’re highly unlikely to – most people are just never going to figure it out. They’re going to be banging their heads against the wall.

One of the good things about this, a lot of our readers have on our recommendation they’ve read about Jesse Livermore and the basic idea behind Livermore was let your winners run. Cut your losers short and let your winners run, and trailing stops are a system for allowing that to happen, are they not?

Richard Smith: Absolutely. There’s different styles of investing, Dan. I know you’re a deep value investor and you have a deep appreciation of the effort to find companies at a discount to intrinsic value. Of course, that’s what Warren Buffett has done in his career. I love finding great value opportunities myself. I just think that most of the people who are investing aren’t really cut out to be Warren Buffett. If you want to be managing your own money, holding stocks for even three to five years is quite an accomplishment if that’s your average holding period.

So, I’m looking for that sweet spot where people can use research like yours to find great value opportunities but then use a little technical support including momentum and volatility to make good decisions about when to buy, when to sell, and how much to invest. I think that’s a sweet spot for a lot of people out there who want to be self-directed investors but don’t necessarily have a 20-year buy-and-hold horizon.

Dan Ferris: Yeah. Good point. Most people can’t hold through a long weekend. Richard, I have to tell you something, this has been a long time in coming. It’s kind of a big announcement and I made it yesterday in the February issue of Extreme Value which usually comes out on a Friday, but I got the flu and we had to delay it. So, we finally put it out yesterday and there’s a section in there called trailing stops in Extreme Value, and it basically says we’re going to start using trailing stops on all our new recommendations.

And this publication, I’ve been doing this since the fall of 2002 and I’ve refused to use trailing stops. And you did some work some years ago that showed that I’d have gotten better results with trailing stops and I thought, you know, I can do better, I can do better, I can do better, and I haven’t been able to improve upon that. So, I’ve started using trailing stops in Extreme Value. If it weren’t for you, I never would’ve done that, so I thank you and Extreme Value readers thank you, and if they don’t thank you, they should.

Richard Smith: Well, that is a milestone, Dan. I’ve known you for 15 years. I’ve always had tremendous respect for your work, so wow, that’s a big deal. I’m very honored. That’s great.

Dan Ferris: Yeah. We’re just trying to get better at selling, and this is – it was just such a no-brainer logical first step. And if we find something better, great, but this is the place to begin.

Richard Smith: Let me tell you a little bit about something that I’ve personally come to, Dan. I give myself 20% discretion in my portfolio. So, with 20 percent, say two out of 10 of my stocks, I’ll allow myself to use something other than a trailing-stop strategy because I do believe there are times when if you have really high conviction about an investment you can break the rules, right?

Dan Ferris: Yep.

Richard Smith: But I just think that 80% of the time you need to be following some rules because we just can’t keep up with everything. I don’t know if that’s something you’d find interesting as a strategy, but that’s something that I’ve personally arrived at myself.

Dan Ferris: There are two positions in Extreme Value that we are never going to use trailing stops on.

Richard Smith: There you go.

Dan Ferris: And readers probably know what they are, and I will never use trailing stops on them. I know the management. I’ve known them 20 years. I know the balance sheet and the business and a lot of stuff about it, and I’m just not going to do it. But like you say, 80% of the time, gotta do it.

Richard Smith: There’s so many things that can go wrong. That’s great. Glad you’re validating that for me. It was really great spending time with you last night and with the panel. It was really an honor.

Dan Ferris: Yeah, let’s talk a little bit about that. Who did we have on the panel? We had, well, me obviously, you obviously, and we had Steve Sjuggerud from Stansberry. We had Alex Green from The Oxford Club, and two awesome guys who I’m so glad have kind of stepped into the Stansberry orbit, Whitney Tilson and Glen Tung, two former hedge-fund managers from New York. What a time. What a great time we had.

Richard Smith: And what a great amount of information that we shared with the investing public in a framework that I think they never really got to experience that before.

Dan Ferris: I know. It was like six guys coming off the top of their head with 20, 30 years’ worth of stuff.

Richard Smith: Each.

Dan Ferris: It was pretty good.

Richard Smith: And giving both sides of the argument. I find so many times people are trying to just give one side of the argument, but I think we really presented compelling arguments about why 2019 could be a big bull year and why 2019 could be a big problem.

Dan Ferris: Yeah. Look, I’m sympathetic with the bulls. Steve Sjuggerud was a bull, Whitney Tilson was a bull, and Alex Green. They were the bulls and Glen Tong and I were the bears. I said right out loud last night on the panel, I don’t disagree with half or more of what they’re saying. I just have a different viewpoint of the other half and the ultimate outcome.

Richard Smith: Look, early on in my career, people would say I take the emotion out of investing, and I’ve kind of developed a little refinement of that. Yes, I take some emotion out of investing, but I help take the wrong emotion out of investing. In the end I really believe that people should take a stand as a bull or a bear. We’re human. We have emotions. They’re always going to be present in our investing decisions. It’s not like we can cut them out of ourselves and be investing Spocks.

So, being able to really see where you fall. If you really sympathize with the bulls, you really sympathize with the bears, and take a stand, but make sure you have a plan B that if you’re not right, because we can’t always be right in the markets, that you’re still going to make money. How do you manage your risk no matter what happens, whether you have a bull bias or a bear bias? I think we did a great job of sharing that with the investing public last night.

Dan Ferris: Yeah, we did a real good job. What made you want to put this thing together? When people told me about it, I was like, sure, I’ll do it. Sounds like a great idea. Why didn’t we do this sooner? How did this idea come to you in the first place?

Richard Smith: Well, I feel the anxiety that everybody else feels in the markets right now, and I wanted to hear from you guys about what you saw in the markets, and I wanted to be able to share what I’ve learned over the past 15 years from helping 50,000 different retail investors of how to manage risk in an intelligent way.

So, it was just an incredible opportunity to hear from you and the other panelists and really get a firm sense of what the core issues are in the market for 2019. And then to be able to share my work and have you all support that was really the highlight of my career, Dan. Last night was just incredible. I’m so proud to have been able to bring that group together and help bring that information to thousands and thousands of people. It was a real honor.

Dan Ferris: I see. So, you do what I try to do and what we try to do at Stansberry. You saw a moment and you recognized a substantial amount of anxiety in this moment for investors given what happened from September, October, through really December 24, that big bottom, down 19% on the S&P 500 and you decided to step in and offer some wisdom, which I think is a great idea.

Richard Smith: Yeah, and you know, I think it’s very important that people be on the playing field as investors, and I’m afraid that many people are on the sidelines because of the fear, because of the uncertainty, because of the increased volatility that we’re seeing right now. And so, to give people a balanced perspective that says, hey, here’s what could happen, here’s some bad things that could happen, here’s some different scenarios, and here’s some ways to still be involved and engaged in the arena but controlling your risk.

I think that’s what people are looking for in the end. Everybody wants to be an investor, but they just want to make sure that they’re not going to really get blindsided. So, giving people a way to kind of have that assurance and hear from very experienced investors, it was great to be able to bring that information to the public.

Dan Ferris: Right. You said something important, people don’t want to be blindsided. They don’t want to and they should not want to incur that catastrophic loss that can destroy years of savings and compounding, and that for me, Richard, I have to tell you, what you do with TradeStops and just the whole idea of trailing stops, that’s the great value of it to me because we know darn well what happens.

People think they’re going to hold on. They say, “Oh, I don’t care about a bear market” with the market down 50 percent. “I’m going to hold on.” Then what happens? Then they’re down 50 or 60 or 70 or 80 or 90% on individual positions and they can’t take it anymore and they sell out at the bottom, and trailing stops help. They just disintermediate that whole mistake and that really, I have to tell you, Richard, I got really excited participating in this thing and leading up to it and writing the current issue of Extreme Value and it’s been a major kind of sea change in the way I present my research to my readers especially.

Richard Smith: That’s great to hear. Warren Buffett was down 75-80% in the 2008 financial crisis. You and I both know Chris Mayer, one of the great newsletter writers and value investors of all time, his portfolio was down 80% at the bottom of the market in 2008. Both Buffett and Mayer held through those drawdowns and they ultimately ended up beating even a trailing stop strategy, but I just don’t think like you said that most people are prepared to hold through those kinds of downturns and see their portfolios go down 80% when the market is throwing the baby out with the bathwater.

I’ve been trying to basically provide a middle road for investors who wanna be in the markets, want to have a safe way of being engaged but just aren’t prepared to see their portfolios fall 50, 60, 70, 80%. That’s what even great value investors have had to endure during some of these market bottoms. Wouldn’t you agree?

Dan Ferris: Absolutely. We had two really good value investors on the Bull Bear panel with us, and they both, I mean Whitney just came right out and said, “If I had done something like your TradeStops or just using trailing stops, I would have done a lot better.” He said, “My hedge-fund business probably would’ve turned out a lot different.”

Richard Smith: I loved his example of Netflix, buying into Netflix and getting out with a 200% gain only to see Netflix end up going up 50,000%. That’s what I call catastrophic profits, right? How do we get some catastrophic profits in our portfolio instead of catastrophic losses?

Dan Ferris: I know.

Richard Smith: And my system would’ve basically made more money on Netflix than just a buy-and-hold strategy on Netflix from 2009 to 2018. It was pretty incredible.

Dan Ferris: It is, and the really volatile names, when you get a huge run like that and then the thing gets hacked in half or whatever, that is when trade stops and trailing stops really shine. That’s the moment when people just, they hold on until they’re down 50, 60, 70, 80%and they get murdered and the TradeStops system using a trailing-stop discipline will easily prevent that.

Richard Smith: And don’t forget, keeping you in your winners, being able to have a 50,000% gain in Netflix, or Domino's Pizza was another example that I talked about last night. That stock was up 1,800% after turning green in my system in 2011 or so at $10 a share, and going up 1,800%. So, who knew that was going to happen? Nobody. But that’s part of the beauty of a trailing-stop strategy is it can keep you in your winners for profits that you never thought possible, and I think that’s harder for people to do than they realize.

Dan Ferris: OK, Richard, we’ve got about five or 10 minutes or so left. We have a deal here for Stansberry Investor Hour listeners on all the same stuff that was available for people who were watching the Bull/Bear debate. I have a list of that. I don’t know if you have it listed in front of you. I can read it if you don’t.

Richard Smith: That would be great if you’d read it, Dan. I don’t have it in front of me.

Dan Ferris: Yeah. So, here’s what you get when you sign up today with this offer that we’re making. You get a lifetime subscription to TradeStops Pro. This is like the best version of Richard’s tool that you can get. One free year of TradeSmith, I’ll have Richard talk about that in a moment. One free year of True Wealth, that’s Steve Sjuggerud’s newsletter, great track record. He’s the man who really introduced the trailing-stop discipline that is kind of the foundation of Stansberry for sell discipline.

You get one free year of the Oxford Communique written by Alex Green, also a pioneer in the use of trailing stops. One free year of Extreme Value, my newsletter, which normally goes for like $1,000 or $1,500 or something. You get a free copy of “Three stocks from the bulls and bears poised for growth in 2019.” You get a free copy of a report called “The official 2019 Bull vs. Bear Summit recap,” and you get Richard’s 30-day full moneyback guarantee, all of this for $2,999. I think it would normally cost you just more than double that. So, Richard, tell me about TradeSmith.

Richard Smith: Well, let me just take a step back first and just tell you that I’m so excited to be able to have put this package together because I really think it represents a very complete suite of investment ideas and investment tools that anybody can profit from. The newsletters that we were able to bundle with Steve and Alex and yourself – I started out as a newsletter reader myself, and basically, I’ve been developing strategies to amplify results of great newsletters.

So, those are three of the best newsletters in the business. You can access them right inside of TradeStops and you can see my algorithms and indicators on the recommendations of those newsletters. So, to be able to bundle my tools and algorithms with great newsletters, this is a first. We’ve never done this before. So, that was very exciting to me to be able to really put together this complete package and offer my lifetime level of service along with this, so that was incredible.

Now TradeSmith, it’s actually called Ideas by TradeSmith. This is a new product that I introduced last year that uses my algorithms to help investors find new investment ideas and also to get a sense of what’s going on in the broad market overall. So, TradeStops is mostly focused on individual equities, managing your existing portfolio. You can synchronize your account with over two dozen online brokers to read your data into TradeStops and track it very easily.

Now, we don’t handle anybody’s money. We don’t execute any trades. It’s an information service. We send you alerts or you can log on to the website to see what’s going on. But this Ideas by TradeSmith product really was created last year from the demand of my customers. I write about research every week. We are doing new research constantly.

And they said, “Hey, we really want to see your indicators on different sectors of the stock market, on different countries, commodities, and then be able to drill down and find what areas of the market are really performing well, and then use some of your algorithms to zero in on specific investment ideas that they could add to their portfolios that they were tracking in TradeStops."

So, that’s what Ideas by TradeSmith is. It’s been incredibly well-received, incredible product launch last year, incredibly low refund rates, so people have just been thrilled with it and we’re able to bundle that along with a lifetime of TradeStops. You get a free year of this product Ideas by TradeSmith which normally retails for $1,000 just by itself.

Dan Ferris: Wow, that’s a lot of stuff.

Richard Smith: It is a lot of stuff.

Dan Ferris: Just in those two, TradeStops Pro Lifetime and TradeSmith. And to get all this -

Richard Smith: We just barely scratched the surface last night of what’s in TradeStops Pro. There was no way we could cover the bull case, the bear case, and all the details of all the algorithms that I’ve built, but I’ve just built some incredible stuff in there.

Really, you can build a portfolio in seconds, taking your favorite sources of investment ideas, whether it be your favorite newsletters or your favorite billionaires, run them through what I call my pure quant algorithm to find the ones that have the best momentum based on your favorite analysts, and put together a portfolio with position sizes. I think people will just be blown away by this tool if they haven’t had a chance to see it before, and it all comes with a 30-day moneyback guarantee, full moneyback guarantee.

If people don’t find the value in this after 30 days, which I’d be shocked if I don’t, but that’s why I’m able to make this guarantee because I’m so confident in what we’ve built and its value to investors and aspiring investors, that you can get all your money back after 30 days, find out all the recommendations in those three incredible newsletters, and see all my indicators on your portfolios and how to decide how much to invest, whether they’re red or green in my system. It’s an incredible value and with a 30-day moneyback guarantee it’s just a no-brainer.

Dan Ferris: Yeah, and to take advantage of this, folks, you go to www.investorhourbvb.com.

Richard Smith: Well, it’s bull versus bear.

Dan Ferris: Yeah. So, investorhourbvb.com is where you get this Stansberry Investor Hour listener price of $2,999 for all of this stuff.

Richard Smith: Yeah. I can’t encourage people enough to check it out. I think it’s the best value ever offered to investors if I may say so myself, in all humility that I can muster right now.

Dan Ferris: I know, it is really certainly one of the very best deals that since I’ve been at Stansberry 21 years that we’ve ever offered, so one more time. Lifetime TradeStops Pro, one free year of TradeSmith, one free year of True Wealth, one free year of the Oxford Communique, one free year of Extreme Value, free copy of a report called “Three stocks from the bulls and bears poised for growth in 2019.”

Richard Smith: Yep.

Dan Ferris: Free copy of the official 2019 Bull vs. Bear Summit recap, and Richard’s 30-day full moneyback guarantee. Wow, that’s a lot of stuff.

Richard Smith: That’s a lot of stuff, and I think people will be blown away by the quality of all of those resources, and I’m really honored to have been able to work with you and work with the other people on the panel to put together such a comprehensive package that I think any investor or aspiring investor will really be able to use to make money with in 2019 no matter what the market does.

Dan Ferris: Yeah. I mean, Richard, you and I have only begun to work together on this. When I get behind something, I get behind it, and I think this can really help people keep from making huge mistakes and help them make a lot more money. But I think that’s all we can do today and just thanks a lot, Richard. Thanks for all you do and thanks for coming by today.

Richard Smith: Thank you, Dan, and thank you to your audience.

Dan Ferris: All right, folks. That’s Richard Smith. Listen to what he says. Take heed. Go to investorhourbvb.com. I’m not kidding. Everybody says Dan hates selling things, and I kind of do, but I actually believe that this is going to help you, so just go check it out, investorhourbvb.com.

Dan Ferris: It’s time for the mailbag, and remember, your feedback is very important to us. It’s important to the success of this show in fact, and you can e-mail us with any questions or comments at [email protected]. We read them all. I’ve been reading all of them lately and I’ve even responded to some, and I’m going to read some on the air for you today. I’ve got a bunch of them actually, more than usual.

So, the first one is real simple. This is by Dale C. and he says, “I’d like to get a transcript of Investor Hour Episode 87. Can you tell me how?” Yeah, it’s real easy. Just go to investorhour.com, click on Episode 87, and scroll all the way down. That’s where the transcript is. Now we don’t have Episode 88 up just yet, but we’re getting there. We got a little feedback that said, “You need to put the transcript up when you put the episode up.” Look, we get it out as quick as we can, OK?

That’s the first mailbag. Mailbag number two, this is by a guy named Dan F., same initials as me, same name. Dan F. says, “Just wanna let you all know how enjoyable it’s been to listen to Dan on the Investor Hour. I, too, was initially disappointed when Porter wasn’t on, but I enjoy listening to Dan so much, I now look forward to the show as much as before. What I like most is Dan’s wry, slightly sardonic way of examining issues. Someone wrote that they initially thought he was just a negative person. I’ve never felt that way because I understand the concept of positive cynicism where one looks at the ridiculousness of things people say and do and finds it truly funny, albeit in a dark sort of way. I also love real people who don’t try to figure out their audience and change their delivery and content to avoid offending them, which is also why I like Porter so much. So, thanks again, and here’s to staying true to yourself, Dan F.”

Thank you, Dan F., and I want to say, look, we got a lot of positive feedback lately. I was kind of discouraged because I went to YouTube and found all this negative feedback that literally said, “Dan sucks. He’s so boring. Dan sucks.” But we’ve gotten just really an avalanche, I’m not kidding, of positive feedback, and I thank you for it. Keep it coming and keep all the feedback coming.

Okay, the next one, I’m just going to read a portion of it. It was a longer note by Steven S., and Steven writes in and says, “I work for Caterpillar and disagreed/agreed with you. Yes, the company is cyclical and we must frequently adjust to demand. Although China is an important region, we get significant revenue from other regions and markets, we take pride in the machines we build, big or small, we introduce technologies, solutions, and services to improve our customers’ productivity especially when commodity prices are not so hot. We don’t compete with ourselves” – that’s what I said, by the way – he says, “We don’t compete with ourselves. When times are tough, customers reduce capex and focus on keeping existing machines running, which helps with our aftermarket sales, i.e. parts. When times are good, customers replace aging equipment. It is a challenging business recap, but we’ve been profitable and we return to shareholders. Thanks, Steven S.”

OK, I still believe that they’re basically competing with themselves because when the spending comes down and people are keeping existing machines running they’re not buying new ones, and the existing machines last a long time. However, your point is very well taken and I strongly encourage anybody who works for any company we mentioned to write in. Tell me if I’m wrong. I wanna know about it if I’m wrong.

It’s one of the things I hope we do that’s different from the normal financial media. They never talk about when they’re wrong. They talk every day as if yesterday just didn’t exist. Okay, the next mailbag is from Dave D. His message is 1,300 words long. I’m not going to read it. It’s way too long.

I’m going to read the very last couple of sentences. Dave D. says, “I just think if we’re going to talk price to sales we need to adjust the numbers from the Internet bubble and the tax rates then to the numbers today with the tax rate today, otherwise you’re not being consistent, and what do we call that? A fraud. Don’t be a fraud, Dan. You’re a smart man with good, wise wisdom. I believe that much about you. Best wishes, Dave D.”

OK, I don’t know why you think it’s okay to use the word “fraud,” and you’ve made a couple huge mistakes here. I did talk about the price-to-sales ratio as an excellent way to track the relative valuation of the overall stock market, of the S&P 500, and what I said was price to sales is one of five metrics that I really track. Actually, John Hussmann at Hussmanfunds.com tracks them and I read his work from time to time, and I think it’s the best way I’ve ever found to track the value of the overall stock market using actual earnings and price data from the actual stocks.

There are five metrics, not one. I said five. And in your message when you were rambling through here you acted like I only use this one metric, and you also conflated the task of valuing an individual business with valuing the overall market, which are nothing alike. And this idea of adjusting numbers for tax rates to make the price to sales ratio different is false. It’s crazy. Sales is the top line of the income statement. Taxes don’t come down until way farther down.

Tax rates and price to sales have nothing to do with one another. You’re completely wrong. Sorry, but you got me excited because you sent me a 1,300-word e-mail and called me a fraud, so you’re wrong, and I was right. Next.

Next is a couple of e-mails from Peter G. Peter G. is a model listener correspondent. He’s obviously a very smart fellow, probably a very experienced investor, maybe even a professional investor, but he wrote me a couple of e-mails here. He said, “Dan, have you really looked into this gold blockchain business? They charge 3 percent if you use your credit card, which is really just a spread disguised, and the storage in this case is not proven. It’s really just someone giving you their word. Also, what about gold compliance laws? I think before recommending things like this, you might want to let listeners know about these aspects of it or it might come back to haunt you later.”

And another e-mail he says, “Not to mention, Dan, since I opened an account which I think might be a One Gold account, I haven’t bought anything yet. I’m getting calls from other dealers. I suspect they sell their list. These are things I recommend you look at before podcasting a recommendation.”

And I asked him about this idea that the storage of the Old Gold and VaultChain accounts that we discussed when we interviewed Fraser Buchan a couple episodes ago, he says, “The storage in this case is not proven, it’s just someone give you their word.” The storage is the Royal Canadian Mint. I mean, I happen to know a fellow who, his company has $2 billion in gold there, and he did go and he said, “You know what? It’s there.”

And we made a point of saying that you can actually show up at the mint with your VaultChain info and get physical metal. I don’t know what else I can do. Should I have gone to the Royal Canadian Mint before I interviewed Fraser Buchan? I don’t know, maybe.

And I asked him about that, I said, “What do you mean?” He says, “By unproven, I mean the storage issue. By unproven storage I mean that’s what total strangers are saying they’re doing with their metals, but believing them on their word is like believing Elon Musk when he said he had a buyer at $420 per share. What’s the difference? Do you know for a fact that this storage in the Royal Canadian Mint is true or do you just believe the guy who told you? I’m not busting your balls, Dan, I really would like to know.”

Well no, I haven’t been to the Royal Canadian Mint and I don’t think I need to go. I think you might be a little bit too paranoid here, although when we’re talking about storing physical gold you do wanna know where it is. I’m going to make you a bet. If you go to the Royal Canadian Mint, I bet it’s there. That’s all I’m going to say. But folks, Peter G. is a great correspondent and I encourage you to have a lively conversation with us.

I got one more. It says, “Dan, what do you think about emerging markets these days? Many of them seem to be broadly trading at cheaper levels than U.S. equities based on simple metrics like PE ratio. Do you think they’re potential treasure houses for value investors today? If a recession in the U.S. is likely coming in a few years, do you think emerging markets have a better chance of offering better return? You are a great podcast host. Keep up the good work, S.Q.”

All right, S.Q. Thank you for the compliment. Overall, I agree with you. If you look at the emerging markets ETF, it had a great run up to 2007. It’s kind of gone sideways since then. That makes it a good place to look I think just in general, but overall, I’m never going to say “buy emerging markets” or anything like this, but I think your thinking is sound.

If the cycle in the U.S. has just been up, up, up, and emerging markets have been sideways and some of them have been down or something and they’re cheap now, I think you’re right. That’s where a value investor ought to go looking for ideas. So, I agree with your thinking and good luck to you. If you find anything really good, let us know about it.

So, that’s a lot of feedback. I normally won’t do that, folks, but there was just so much stuff that I wanted to get to. That’s really it for this episode of the podcast. I love doing this. Thank you so much for all the complimentary feedback, and even people like Peter G., thank you for the criticism. I appreciate it.

That’s another episode of Stansberry Investor Hour, folks. Be sure to check out our recently revamped website where you can listen to all of our episodes, see show transcripts, and where you can enter your e-mail to make sure you get all the latest updates. Just go to that same address, www.investorhour.com. That’s it for now. I’ll talk to you next week.

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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