Episodes

Dan Ferris: Hello, and welcome to the Stansberry Investor Hour. I'm your host, Dan Ferris. I'm also the editor of Extreme Value, published by Stansberry Research. Today we'll talk with my friend Chris Pavese of Broyhill Asset Management. We talked to Chris three years ago. The world has changed quite a bit since then. I'm very curious to see how he's been doing and what he's doing now. In the mailbag today, lots of questions about everything from rural real estate to the 1987 crash – most of them from one guy. Remember, you can call our listener feedback line at 800-381-2357. Tell us what's on your mind and give your voice on the show.

For my opening rant this week, the crypto crash. Let's talk about it. That and more, right now, on the Stansberry Investor Hour. Well, among other things this morning, among the S&P 500 officially going into a bear market at minus 20% from its high, we also see headlines about the crypto market crashing... specifically, the website Binance, the crypto broker really, and Celsius is another one. They've halted redemptions and withdrawals. This is a bad sign. This is a very bad sign.

Celsius lets their bitcoin holders, their customers, lend out their crypto. And it has blocked them from withdrawing their money due to what had caused extreme market conditions. Sure, if people are lending based on crypto values, they've lent – what they've lent is worth a lot less now, a lot less. So that can create a problem. If you've borrowed crypto and you're buying something else you might owe a lot more than you currently have. Anyway, we don't even need to know the specific problems.

All we need to know is that the crypto world is in such a crisis that you put your crypto into this account and you can't get it out now. This is like when a broker fails and they say, "Hold on. Hold on. We're hanging on to your money for a while," and then you go through this whole process and maybe you get it back and maybe you don't. Usually I think you do, but sometimes you don't. What we're finding out, if we just take a step back from this, here's what is happening. This is exactly like the dot-com crash because the technology was new.

Lots of people came out with all kinds of ideas about how to exploit it. I think I know at one point there were 16,000 cryptos in the world and that's a lot. There were thousands of dot-com businesses before the peak in 2000. Then in the bust, after the boom most of them disappeared. You had to wait till the bust to find out who was real and who wasn't. Some people said Amazon wasn't going to make it. Well, obviously that was wrong. All the companies that made it, some of them have done incredibly well. Some faltered. Obviously it's a mixed bag even after the bust, but you really find out what the great businesses are and the really robust ones are in the bust.

That's what's happening now and I think it's the early part of the crypto bust because I think it's the early part of the bear market after the mother of all bubbles in all recorded history. So as we speak bonds are falling, stocks are falling, crypto is falling. It's a classic bare market scramble for cash. People are scared and they want to go to cash. They don't trust crypto. They don't trust stocks or bonds or anything but cash. I've mentioned this. I've told people – I've continued to tell readers and you, our podcast listener, and others in the – who read the Stansberry Digest to hold cash even though we're seeing the latest inflation number, 8.6%.

So that means over the past year your dollar has lost at least 8.6% of its value. Some people will say more than that because that 8.6% is measured by the official CPI and people have a problem with that. And I don't know that they're not correct. They could be correct about that easily, I think. So your dollar has lost at least 8.6% of its value versus the goods and services that you buy. And yet, when the doo-doo hits the fan, people rush back into dollars. They just get really burned out watching the value in their account deteriorate and they say, "Oh, I got to sell it." And what do you get in this world 80% of the time all over the world? Eighty percent of global transactions are in U.S. dollars.

So that's what's happening. People are getting out. They're afraid. Crypto is crashing. Inflation is hitting 40-year highs, etc. There's the simple fact that valuations are still really high even as I'm speaking to you with the S&P 500 now officially in a bear market. It's still nowhere near cheap. We're just above or right around the peak valuation of the 1929 bubble. So that's one of the three biggest of all time, this one, the dot-com 2000 bubble, and the 1929 bubble. Three biggest, most overvalued, super expensive moments in all of stock market history and we're still up in bubble territory with stocks getting hit this hard.

I told people in my latest Stansberry Digest, Mark Hulbert is a guy who does a lot of good research of various kinds and he's got these eight indicators that tell him stocks aren't cheap eight different ways. They're still expensive eight different ways. I've talked about the economist and portfolio manager, John Hussman. Stocks are still extraordinarily expensive five different ways. So that's 13 different ways that stocks are really incredibly still expensive even though the S&P 500 is now down 20% and the Nasdaq must be maybe 30 by now. I didn't glance at that one this morning. But they're all getting absolutely murdered.

So people are rushing into cash and that's where we are. We're in a bear market, stuff is falling apart, crypto is falling apart. I think we'll find out in the end that bitcoin and maybe Ethereum and maybe a couple others were the real deal. They're really worth something. They really fulfill a genuine need in the world and they work and they're good to own. Now if you look add a chart of bitcoin, clearly if you take the chart back five years to 2017, of course there was the big run-up in the end of 2017 and then it crashed back to $3,000 or something over the next year or so, and that was the bottom.

Then we rushed up to, what was it, $69,000 I think at the peak. I look at the price of bitcoin on my little Coinbase app and the peak there was $69,000 and you have these two big runs. One was up to about $63,000 in April of '21 and then you crash back down around 30 and then back up to $69,000 in November of '21 last year when also the Nasdaq peaked in November too. That was a big moment for all the most speculative tech garbage that hadn't crashed already. There was a big peak in early '21 when the ARK fund, the ARK Innovation ETF, peaked and gosh, cannabis and clean energy and SPEC and all that garbage peaked then.

Then you got the Nasdaq peak in November and that's when bitcoin peaked as well. Now we're down just crashing straight down. It fell off the bottom because there was a bottom around 29 or so that was established in July of last year and we're through that and now we're around $23,000 as I'm speaking to you and I think the bottom is somewhere between $3,000 and $12,000. I don't think we're there yet. There's a little bit of – if you read charts maybe there's a little bit of support around the 20,000 area. There's a lot of noise between 12 and three, and I think it finds a bottom somewhere in there and I think it takes longer than this.

One of the things that we've gotten condition to over the last 12 years is buying dips and some people will say, the Fed having your back enabling you to buy the dip. So what happens in a big, nasty bear market is early on there's lots of shallow rallies. We just had one that was 7% or 8% or something. I covered this too in the past couple of weeks here and in the Digest. The early rallies are shallow because the market doesn't is have to work very hard to get you back in. You still want to buy the dips, but then you get killed over the course of six or 12 or 18 months and those last rallies have to be 15%, 20%, 25%, or maybe more to entice you back in and you still get killed.

Then there's a huge panic and a huge capitulation. The volumes go through the roof on a bunch of down days and then the market finds a bottom when nobody wants stock, nobody wants whatever it is that's in a bear market and many people will walk away and never return. A whole generation will walk away at that point and they won't be back in until there's another huge bubble in 10 years. That's just the way it works and I think that's the way this is going to work out.

There will be probably five or six rallies on the way down. The first ones here are shallow, 7% to 10%, and then we'll get the bigger ones after people really get crushed when the market is down 35%, 40%, 50%, something like that. If John Hussman is right, we've got another 40% or 50% from here. So hold on to your hats. If this is the real deal bear market, which I suspect that it is, and I said that before the S&P 500 went into what they call an official bear market minus 20% today, then there's more pain to come.

On that sunny note, let's move on and let's talk to my friend, Chris Pavese and we'll talk about what he's doing now and what he's been up to the last few years. Great guy, great investor, very thoughtful and measured and informed. Can't wait to talk with him right now. Let's do it right now.

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Chris serves as president and chief investment officer at Broyhill Asset Management. He leads the firm's research and investment process focused on idea generation, investment strategy, and portfolio construction. In addition to his role at BAM, Chris serves as vice president and chief investment officer of BMC Fund and the Broyhill Family Foundation. He's a CFA charterholder, past president of the board of the CFA Institute's North Carolina Society, and current member of the CFA North Carolina Society strategic advisory board. He's still considered an official "southerner in training"... understands the importance of sweet tea and the multiple meanings of "bless your heart." Well, bless your heart for being here, Chris. Nice to see you again.

Chris Pavese: Thanks, Dan. Good to see you also. Thanks for having me.

Dan Ferris: One of the reasons I wanted to have you, it's been a while since we had you on the show a while ago and the world has turned upside down and halfway right-side up again. I'm just curious. I've gotten a variety of stories about what people have done in the past couple years, what they're doing now with their money and clients' money. I was just curious to get your ideas as well. So first of all, what was the pandemic year like for you? You manage Broyhill money. So the money is not screaming out the door. You're not getting calls every day, I assume.

Chris Pavese: No. We're fortunate in that regard. The Broyhill family office has been around since 1980. So we're fortunate to have somewhat "permanent" capital base in that regard. We've been selected with regards to the external investors that we've worked with over the year. That's been by design. I think that's often one of the most underappreciated aspects of this business is the importance of having good clients. I can tell you in March '20, the only calls we got, – which I could count on one hand – were from our best investors asking when they should send us more money.

Dan Ferris: Wow.

Chris Pavese: So no calling, no panicking, and I could say the same thing for today. Although it certainly helps today that we're actually making money this year. That was not the case in March '20 when everything fell... correlations moved to one. But we've been doing the same thing all along and markets just seem to have gone our way, or at least as you said earlier, are on their way to making more sense again.

Dan Ferris: Right. So maybe let's orient the listener about your style. So if I met you in a bar – which we've been in a lot of bars together – if I just met you in a bar and I said, "What kind of investor are you?" what would be your answer?

Chris Pavese: So we are opportunistic, I would say, value-oriented investors. Value investing means a lot of different things to different people these days. To most of them, it's a bad word and few would even admit to being value investors anymore. That may be beginning to change. We hope it is. So what that means is we try to buy assets for less than what we think they're worth. Sometimes, that's a great business trading at a good price. Sometimes, it's a good business trading at a great price. Historically, the situations that we've gravitated to fall into one of three categories. So they're something we call value with a catalyst.

So it's a name that's cheap for reason and we see something on the horizon to unlock that value. So that could be a pending transaction. It could be involvement of an activist investor, shaking things up with the company. It could be new management, inflection point in the business itself. There could be any number of things. Second thing is what we call temporary dislocations. So sometimes these are one off. It's a good business that's a bump in the road. Most of us tend to extrapolate that bump forward. But more often than not, good businesses recover and those bumps are just temporary.

So if you could buy a good business – temporarily depressed earnings on a temporarily depressed multiple – and those earnings rebound and the multiple rewrites higher, you get a double bang for your buck on upside. COVID was one big temporary dislocation. So basically everything we bought in March of '20 Q1, Q2, Q3 of '20, it would fall into that category. Then the third is just really a catchall. Sometimes it's a thematic type of investment where we're seeing something top down. That's rare for us. Other times it's just a deep-value name that may lack an obvious catalyst, but it's a good business that we're comfortable owning for several years and we think it's too cheap for one reason or another.

Dan Ferris: Well, God bless you for maintaining the value focus. There are a precious few of us left in the world. You must have had a hell of a 2021 with the client base being what it was and their interest in investing in March and so forth and your focus being what it is. You must have had a hell of a good 2021, I'm guessing.

Chris Pavese: Yeah. Some of the numbers we saw in '20 and '21 were just spectacular. I can count just off the top of my head several managers that were up triple digits over that time period in either or both 2020 and 2021. That was not us. We don't typically run with that much volatility. Most of our clients have already made their money. So they're not looking for us to swing for the fences. They're looking for us to make sure they keep it. So they let us worry about it so they can sleep at night.

That said, we've been happy with the performance. Clients have been happy with the performance. I'd say it's been consistent over the last several years. Drawdown in Q1 of '20 was a fraction of what the market experienced and we rebounded fine through the rest of the year. Last year, we did have a good year. That's great to put numbers in absolute terms, but really we're most proud of what we've done in the last year, specifically. And markets have turned and the majority of investors are losing money.

I think when you look at managers, many investors make a mistake of chasing the most spectacular of returns. So they get quickly attracted to managers that put up great numbers in bull markets and ignore how they've performed over bear markets. Really today a lot of those investors haven't seen a bear market. The majority of investors today were not around for either the financial crisis, let alone the tech bubble, which I think is the best analogy to what we're seeing today. So having lived through that and managed money through that gives us a bit of gray hair – or in my case, the loss of all of it. We also get that experience to manage through those things. The most spectacular returns for the most part that we saw in 2021 are posting the most spectacular losses this year.

I'll give you an example of two securities. A couple years ago, I was at an investment conference speaking on a panel and the person alongside me was speaking very highly of Cathie Wood at ARK. And for a year or two, she was spectacularly right. Meanwhile, I was presenting a very unpopular idea and it was the anti-ESG trade and why we were so heavy in tobacco stocks. If you look at the performance of both of those businesses over the last two, three years, the turtle has outperformed the hare over the long run.

The hare was very fast out of the gate but has then given it all back and then some. And meanwhile, owning a business-like Philip Morris, or Altria, and you're clipping high single-digit or low double-digit, temporarily, dividend yields. If you're clipping an 8% to 10% dividend yield, you don't need much – if any – in terms of capital appreciation or price change to compound capital pretty nicely over time.

Dan Ferris: I was thinking as you were describing your style versus what screamed in 2021 and then collapsed. Since 2018, it had to of been difficult to be the guy looking for lower volatility and thinking about wealth preservation. That's been a tough road for the past four years, hasn't it?

Chris Pavese: It has, and I think it goes back to how people think about value and how people define value investors. I think that historically folks have thought about value investing as what we call statistical value, like buying low price-to-book or low price-to-earnings stocks. If you're just investing on that basis, you've gotten absolutely murdered over the last five years and maybe you're having a decent year these last six months, but you lost a lot of money and probably a lot of investors in the five years leading up to these last six months. Like I said earlier, we take a broader approach.

So we're not just looking at how something screens on the surface, what the P/E multiple is, what the price to book multiple is. We're trying to understand why something is undervalued and why that might change. We're trying to understand what the market's view is, what the consensus view is, how that compares to our own, and what may make the consensus come around to that view. We're looking for situations that in many cases have a discrete catalyst to realize that value. Most obvious example today... our largest position in the book is Activision.

Microsoft made a bid to acquire the company at $95 per share. Activision today is trading closer to $75. It's $77 and change. That's north of a 20% spread on a deal, so the market is telling us that deal has 50/50 odds of going through. We'd probably say the true odds are closer to 80/20. So we're willing to take that risk. For your original question on managing money and reducing volatility in the portfolio, situations like that are a great way to reduce volatility in the portfolio because regardless of what the market does, that stock is going to trade. It's pegged to that $95 offer and it's going to trade around that offer depending upon the new cycle and what the political climate looks like.

Dan Ferris: Right. And in the just past, I don't know, several years, decade, call it like "risk guard" sucked because the spreads were nonexistent. Now 20% – 50/50, I think that's generous. I think 20% says this ain't going to happen.

Chris Pavese: I think, Dan, you're spot on. I think that's also a reason why the spreads are so wide today. A lot of money has left that sector of the market because it hasn't been very profitable. So that's No. 1. No. 2, a lot of the traditional players that would be involved there typically don't like taking on political risk which is harder to handicap. If you look at this deal on just a rational, legal basis, there's no way it should be blocked. Historically, vertical integration has had no issues clearing antitrust. We saw that with the last time we were involved with a big deal of this nature which was Time Warner and AT&T and we had a very large position in Time Warner going into that deal.

Dan Ferris: So Chris, real quick –

Chris Pavese: The other similarity with that deal, by the way is –

Dan Ferris: Chris, real quick. Just for the listener's sake, let's just make it really plain, like "vertical integration," meaning Microsoft doesn't own 50% of the gaming market. So them buying Activision should not be a legal problem. I just wanted to make that clear to the listener, but I'm sorry. Continue.

Chris Pavese: Yeah. No. Thanks, Dan. That's a good example. So it's not two video game companies merging or if we go back to the Time Warner example, which is even cleaner, it's not Comcast and Charter merging or Netflix and who ever would be the next largest distributor. It was a merger between a content producer and a distributor. That's exactly what we see with Microsoft-Activision. You can think of Xbox platform as a distribution platform for the content, Activision providing the content.

Historically, those have had no issues with antitrust. That proved to be the case with Time Warner. But back to Activision, it's more of a political issue. Big Tech has been in the crosshairs of D.C. for several years now. And so people don't know how to handicap this one and don't want to be involved. The other factor pointing to larger-than-natural spreads today is just a lot of funds are struggling. You're seeing headlines week after week, if not daily this year, of funds down 30%, 40%, 50%, or greater. So they're reducing risk, reducing exposures, and the last thing they want to do is get involved in a situation with the risk of something else blowing up in their face.

So you don't have folks willing to step in here to close that gap, which is great for us. Again, the one thing that differentiates us from a traditional merger-arb investor – which we are not – is the fact that we're value investors. So we get involved and are comfortable taking a very large position in situations like this. When the deal closes, we make 20% in about a year ideally. It could take longer, but generally that's how we're thinking about the upside. The downside: the deal breaks and we will only be involved when we're comfortable owning the underlying on a deal break.

So if this doesn't go through, we think Activision is still worth a lot more a few years from now than it is today. So we're OK either way. We'd love to make a quick 20% and if the deal breaks, yeah, we'll see some short-term pain. Some of that will be offset, but a $3 billion breakup fee that Activision will take in, but there will still be some unwind in that position, but we're comfortable with that risk and we're comfortable owning the underlying.

Dan Ferris: I'm sold. I want to buy it right now. So Chris, are you comfortable talking about any other specific names? Like you mentioned these three areas, catalyst, temporary dislocation, and then your catchall. You got anything from any of those categories that you want to share?

Chris Pavese: Sure. I'd say –

Dan Ferris: Even just as an example. It doesn't have to be current.

Chris Pavese: Yeah. No. I'd say probably the best example of a temporary dislocation as a position, it's still one of our largest positions today. It's a position we bought in, I believe, in June of '20. It was obvious to us that the aerospace and travel and hospitality industry were going to be clobbered by COVID... which it was obvious to everyone. We spent a lot of time on aerospace and airlines. Actually started nibbling on a couple in February and quickly reversed course when we realized things were going to be a lot worse than they initially looked. So we minimized losses there.

But the work there led us into a different segment of the market and we wound up spending a couple months studying the airport sector. What's interesting about airports, first and foremost, is while airlines are notoriously awful businesses with notoriously awful balance sheets, the airport sector is a phenomenal business. You typically have large institutional money. Thinking about it as an infrastructure play, it's a great inflation hedge. You've got real assets. And the three airports we own had net cash on the balance sheet when we bought them. So there was negative net debt.

So, balance sheets were great. There was no issue regardless of how long travel shut down. They would burn capital a bit just keeping the airports up to date, but they did not have the debt that airlines needed to service. So when we looked at the sector, one thing that jumped out to us... if you plot all of the publicly traded global airlines on a chart and look at various metrics that you'd look at when analyzing a report – so, passenger traffic, EBITDA per passenger, sales per passenger – you can look at the regulatory environment across all of those companies, which differ from airport to airport and region to region.

Then you look at margins. You look at the mix of revenue between fee-based aeronautical revenue. So that would be airlines paying the airport a fee to use the service versus a more variable revenue source like charging rent to retailers inside the airport or parking or hotels on the premises. If you do all that and cover up the names and regions of the airports, you'll see a group that look fundamentally much stronger than most of the sector. Most of those businesses are in the East. So people are making a bet on growing traffic, growing GDP per capita in places like China, Yemen, Middle East, where that's been the biggest source of demand. They're also priced as such.

So the Sydney airport in Australia recently transacted. I think the bid was 25 times EBITDA. When we looked at the sector from going back to 9/11 through today, that's about what they go for. Multiples have creeped up over the last 10 to 20 years from the mid-teens to the mid-twenties of EBITDA. There were three airports that jumped off the map that, again, covering up the names and the locations, they were growing faster, higher returns on capital, higher margins, better profitability on almost every metric. And yet they traded at single-digit multiples of EBITDA and all three airports are located in Mexico. So we still own those today.

What's interesting, and the thesis at the time was we thought leisure traffic to Mexico was likely to pick up earlier than most. If you think about the world today, which is just a coincidence, it was not on our radar at the time. China is off the map. Europe is off the map due to Russia. So all of a sudden LATAM is the cleanest shirt in a dirty laundry basket. So LATAM has actually had one of its best quarters on record in Q1. Airport traffic in Mexico is already north of where it was pre-pandemic. Margins are already higher than where they were pre-pandemic.

So yet those things still trade at single-digit multiples of EBITDA. So I think we still own them. The earnings recovery has happened. I think there's still room for traffic to recover. So we'll still see cash flow continuing to drop to the bottom line, but I think they have not rerated yet and I don't see any reason why those businesses should trade at single-digit multiples or maybe at most, depending upon the numbers you use, you might see 10 to 12, but it's still less than half, the rest of where they should trade.

Dan Ferris: Yeah. When you said 25 times EBITDA I was like, "Well, damn, man. Airports are the SaaS of real estate or something. That blew me away.

Chris Pavese: Yeah. If you think about it, they make most of their money – so the fee base business is regulated. They sign an agreement – typically a five-year agreement with the Mexican government that basically sets the rate that they can charge the airport. But there's no regulation on what they can charge you and I or what they can charge a store front in the airport. If you think about that from the perspective of retail, everybody – brick and mortar has been collapsing for years. Ecommerce is taking share. Brick and mortar has been struggling for as long as we can remember, but airport brick and mortar is prime real estate. You've got an affluent client base and you've got a captive audience. That is just prime retail real estate and it shows through in the numbers and the rents that they can earn there.

Dan Ferris: Yeah. I'm thinking as you're talking, I've done a fair amount of my brick and mortar shopping in airports in the past couple years or whenever it's been and not hardly anywhere else. It strikes me, when I go to an airport – I've been thinking about just walking through an airport – all the employees that I see are retail and airline employees. Maybe the folks emptying the garbage or something. I rarely see an actual airport employee, which is interesting to me.

Chris Pavese: Yeah. Like the rest of hospitality, there's certainly been some cutbacks and most of the management teams will tell you a lot of those cost savings, they cut out cost permanently. We wouldn't be surprised to see much of those costs come back as traffic fully recovers, but there will be some savings.

Dan Ferris: Right. Hospitality is people serving people, but this is like they own the casino or something. It's a great idea. The casino is the airport. The airlines are the gamblers. It's cool.

Chris Pavese: Well, and the other beneficiary particularly in this environment is real assets are a phenomenal inflation hedge. So just watch ticket prices over the last couple – if anybody that's been on an airplane over the last year or two since COVID, take a look at what you're paying there relative to what you paid pre-COVID and typically real assets like airports, physical assets. It's your classic Warren Buffett toll-bridge business. They pass those prices along the customers.

Dan Ferris: And it makes me wonder is it as difficult in Mexico to build a new airport as it would be in the United States.

Chris Pavese: Yeah. That's a whole other story. You've seen a bunch of messy, political battles around airports being developed over the last few years, but yeah. That's the other nice thing about airports. It was similar to our prior investment in theme parks, which are not phenomenal businesses, but they're great investments at the right price. They're just – the assets there are very difficult to replace and to get zoning and put a new theme park in place, you're not going to have competition anytime soon, if at all. The airport market is very similar in that regard.

Dan Ferris: I'm glad you mentioned theme parks because I want our listeners to know, Chris is like a dedicated voracious reader, lifelong learner and you gave a presentation one year up there in the mountains where you were doing a postmortem. I was like, "Wow." I was impressed with that because nobody ever does that. Why do that?

Chris Pavese: I think, if I remember, Dan, that was maybe the presentation we gave – this was probably going back five years plus. We gave a presentation on creativity and idea generation. Is that the one you're referring to?

Dan Ferris: Probably is. I'm probably mixing some things up in my head, conversations plus presentation or something. I don't know. I just remember you talking very candidly about what went right, what went wrong, and how you're thinking about it and I was like it's impressive. People don't talk about it ever. So to mention it all speaks to you well.

Chris Pavese: Thank you. I think this industry sometimes doesn't suffer from a lack of humility. Maybe that will change right after this year. We haven't seen it yet, but yeah. We're the first to admit mistakes and that's the only way to learn from them. So we probably spend more time highlighting our mistakes internally as well as to our investors as highlighting what's working. We do that to make sure that we don't make the same mistake twice.

Dan Ferris: Right. I think a good topic now for a lot of people, it was probably a better topic six months ago or maybe even a year ago with a lot of this stuff is when to sell. I'm always curious to do that with value investors because traders have a whole different way of looking at the world. We know when they sell. They use stops and it's all very mechanical. When someone has done the deep work you're talking about, a couple months looking into airports and stuff, you get a higher sense of conviction. Some people take bigger positions and they don't give them up easily because they're sure that they know the industry, they know the business. How do you think about selling in particular and risk control in general?

Chris Pavese: Yeah. I would say that's probably one of the toughest things in this business. It's much easier to decide when to buy and even if you buy early, you've got an opportunity to buy more or you can like into a position over time. It seems easier to identify when something is oversold than when it may be overbought or overvalued. Like you said, it's very easy to fall in love with your positions. I can't tell you how many times over the last, let's say, five years I've wondered if – or kicked ourselves for selling a position too soon.

But we have not changed the way we thought about this because I've also constantly questioned whether or not that was really the right lesson to have learned over the last five, 10 years. There's a generation of investors in the market today that truly believe if you buy a good business, you never have to sell it and you should own it at any price. It's interesting. I remembered specifically and shared this with the team recently. I want to say this was back in 2020, 2021, Howard Marks published a memo where he shared an ongoing discussion he had with his son who was more in tune to the venture world than the value-investing world and it was a debate around this.

His son's argument is consistent with what we hear from most people in the market today is that you need to let your winners run and you never want to sell a good business. I feel like that may have been the wrong lesson to have learned here. I guess one of the things we've changed, we try to differentiate between before we go into a trade if this is a business that we would "own forever," if this is a great business we're comfortable owning. I think about it in terms of if this is a business I'd buy for my son. Can we put this away until he's in college?

That's different than buying a business – and we'll use the amusement parks as an example. I don't think those are great businesses. Like I said, sometimes they're great investments. So for those types of businesses going in, you need to be more disciplined as to where and when your exit price is because you don't want to hold on to those things forever, in our opinion. So I think differentiating up front between the two is important and you can give those great businesses more room to run. That's a mistake we've learned from.

So for example, it's hard to believe this, but it wasn't too long ago that you could buy Apple and/or Microsoft at single-digit multiples for earnings. Both are trading or were trading north of 30 times recently. I would argue the businesses aren't very different today than they were when they were trading at single-digit multiples for earnings. Some people would push back there. I would say they were not very different. Microsoft, in particular, people would point to Azure and Office 365 being more subscription base, but those were on our radar when we were buying Microsoft at $45 after Ballmer left. Those were on our radar. They just weren't appreciated.

Now they're very much appreciated. They're a bigger component of the business, but they're much more appreciated. So we bought Microsoft and Apple at single-digit multiples of earnings and we sold both within probably 12 to 24 months up 50% to 100% and gave up several hundred percent of upside. We want to avoid making those mistakes and I think the lesson learned there is not own great businesses at any price, but you could give them more room to run. So if we bought it at single-digit multiple of earnings and it rewrites from 10 to 15 times earnings, let it run to 20. You can make the argument that those businesses should trade at a premium, but there's a point where that premium gets extreme and in hindsight, we've reached that point.

Really what it comes down to, Dan, is for every position in the book, we've got a scenario analysis and when we position size, it's probability-weighted rates of return. So we've got a best case. We've got a best case and we've got a worse case. We think about what we think the business would be worth in each of those cases in three, five, 10 years down the road. Then we assign probabilities to each of those cases and none of those things are static. Each of those things, both the assumptions in terms of fair value as well as the probabilities of each of those cases, is changing with new information we're getting in.

So we've got the whole portfolio on a piece of software that ranks our positions on probability weighted expected return. So as something rises in price, if you're not updating your assumptions and your assumptions haven't changed, by definition your expected return on that position is coming down. So our system would be telling us to reduce the position. Conversely, if something is falling in price that you own and again, assuming that your assumptions has not changed, we're being told to increase that position. We don't do that dogmatically, but it's a factor in our decision making. It certainly helps. It helps institute a layer of discipline on when to sell.

I can tell you we've been trimming a position this year that's been very difficult to trim. It's been one of our best performers. We've owned it for five years. It's rerated from 7, 8 times earnings to more like 13, 14 today. It's traded in the past as high as 20 something times earnings. The business is fundamentally exceeding expectations and has been for the last few years, although the market is just starting to recognize that. It's been tough to sell, but we've been trimming because the alternative is keep going in there and nudging your assumptions higher to justify hold on to it. But you catch yourself doing that over and over again, then you need to pause and say, "OK. We probably need to be taking some off the table here." Having that framework in place to be glaring, flashing red on the screen forces you to think about it.

Dan Ferris: Being forced to think about it is a good thing because I'm glad you put it that way because we're all human. Everybody wants to keep the big winner they've got and it's just human nature. Actually, I think it's hard to sell in general because people get married to these positions and they get conviction on something that's down 50% and then they want – they get greedy and they want to hold something that's up 500%. I guess my point here is, Chris, I've talked to a lot of people from day traders, people that have just made a living trading stocks and commodities and everything, to long-term value-oriented investors.

And this idea of having some kind of mechanical threshold where you at least stop and say, "OK. Either this has gone unbelievably swimmingly well. We need to think about it," or "This is going against us. We must think about it at minus 20%," or whatever it is. It's just interesting to me that the judgment there is not – we'll know it when we see it. It's we won't know it when we see it, we need to force ourselves to do it. Maybe it's not that interesting, but I find it very interesting, simply put.

Chris Pavese: Yeah. It's a couple things there, Dan. One, you touched on this a second ago and why it's so hard to sell. There's that classic study where – that basically showed just that. We tend to value things more that we already own or hold on to. So there's a study that showed if you had a lottery ticket in your hand, what you'd be willing to sell it for. That number is much different than what you'd be willing to buy that same ticket for. It's just the fact that you already have it. It's more valuable to you. I think that absolutely comes in to play with securities you already own.

The other point you made in terms of – I'm drawing a blank here. Trying to – that's what it was. The other point you made was on mechanical rules and rule-based following and having those. There was a great book I read earlier this year when we were thinking about this stuff. There's a number of great books on market psychology. Most of them are focused on human psychology and what's known as behavioral finance and behavioral psychology industry. I did a lot of reading over the last couple of years on the trading psychology and how that impacts how we think about position sizing and when to buy and when to sell.

One study in particular grouped traders into three buckets. They were called rabbits. They were called assassins, and they were called hunters. Rabbits were classified as they didn't like being wrong. They were more interested in being right than making money. So they couldn't stand crystallizing losses. So when something dropped 20%, you just froze in your tracks. On the other side of that, you've got assassins who are quick to cut losses. It's your typical stop loss. Anything drops 20% to 30%, it's out of the portfolio. Then you've got the hunters who will often – they don't go all in on day one. This is most like us. They don't go all in on day one and they allow themselves, if prices fall – assuming nothing has else changed – to continue to build up the position and often concentrate in their best ideas.

The big takeaway for me was not that one works better than the other. There's lots of different ways to make money in a market and I think a lot of investing is finding what works for you, personally and matching your investment style with your personal style. But what stood out to me was the folks that did the worst were those that did nothing. So, oftentimes if something drops – let's use an extreme example. If something gets cut in half, it's probably safe to assume either A, you were wrong, and if that's the case you should sell the position and move on. Or if you've got conviction and you believe you're right, if it's been cut in half you should be buying more.

So I don't know if the lesson to be learned there and the results tell us that mechanically one is better than the other. It may just tell us that if you didn't do anything, maybe you didn't have the conviction to be in the position in the first place rather than you need to do A or B. But a lightbulb went off when reading that study. So we try to force ourselves to act in one way or another when we see big moves in the portfolio.

Dan Ferris: Interesting. Wow. Thank you for that. I will be mulling that over. Do you know the title of that book off the top of your head with the rabbits and the assassins or was it a study you said?

Chris Pavese: It was a book and I'll forward you. I've got detailed notes on this one, which I'll occasionally do when something resonates with me. I'll put together a write-up and share with the team. I'll send that to you, Dan, but the name of the book is The Art of Execution.

Dan Ferris: Oh, OK. Art of Execution. All right. I knew I'd get a title out of you. Chris is always good for a book, always good for a book recommendation. So thanks for being here. I do have one final question though. It's the same final question for every guest, no matter – even if sometimes we have a noninvestment guest. You can answer the question from any perspective. It doesn't have to be from an investment perspective. The question is simply if you could leave our listener with a single thought today what would it be?

Chris Pavese: That's a tricky one. I wish I had – I should have thought of this in advance, Dan. We'll keep it to investing because I think it's important right now. I would just say be careful out there. I think things have changed in the markets and I think we're going to be – we're entering an environment where folks that learn the wrong lessons over the last 10 years may have several painful years ahead of them. So it's time to rethink those assumptions. I think I had this debate with a friend this morning over coffee about whether or not markets really have changed.

Are cycles really that much faster today? You can think about – well, COVID is an extreme example, which may not be representative, but that recession lasted all of a few weeks and the recovery was just as fast. News cycles tend to occur much faster. Product cycles tend to occur much faster. Even what's popular on Spotify is different from one day to the next. So there's an argument made that things just happen much faster in the market. So we've been trained to buy the dip over the last 10 years because every sell-off is followed by a rebound just as quick. I don't think that's the case here.

I think something has changed and I think it's going to take time to flush out the excesses that we've built up over the last 10 years. Again, you go back to '99, 2000 analogy, which we've been using for a few years now. You can divide up that bear market, which lasted a good two, three years into three phases. The first of which you saw the junk sell-off. So it was the dot-com, IPOs that just busted that were up triple digits on day one and continue to rise triple digits almost daily or monthly until they all went to zero. You had some survivors there, but the crap tends to fall first and we've seen that with a lot of names in the market today down 80%, 90% plus.

The next phase of the bear market is you see the leaders follow. I don't think – I think we're just starting to see that crack. So you can think of the first phase as you see the correction in multiples, which you could argue we've seen. You've seen especially in SaaS. You had businesses trading at literally north of 30 times sales. People would argue they're cheap today at 10 times. I don't know that's the case. There's that famous McNealy quote from '99, 2000 at companies trading at 10 times sales. Today, we still think 10 times sales is for some reason cheap. But the first stage is the error comes out of the valuations.

I think we've gotten there. We're largely a way through that. The second stage is you start seeing the rest of the market follow suit from most of the junk in the market and that comes when we start to see earning provisions. I think you're just now – we're on the front end of that. So the multiples fall. The "P" in the P/E falls. Then the "E" in the P/E falls, and then you get the last stage where it's just capitulation and everything falls together. That's going to take time to play out. So if you use that as the analogy, which I think is still a very good one, we're about a third of the way through this mess. Be careful out there.

Dan Ferris: Well said, and I couldn't agree more. So hey, great to talk with you and thanks for being here. I always enjoy hearing from you whether it's e-mail or presentations or here on the show.

Chris Pavese: Thanks, Dan. Appreciate it. Thanks for having us.

Dan Ferris: You bet. We'll definitely do it again. Maybe I won't wait a few years or whatever it was. Maybe we'll get you back in six or 12 months and see what's happening.

Chris Pavese: In the meantime, we'll see you in a few weeks.

Dan Ferris: Yeah. See you in the few weeks.

Chris Pavese: All right. Thank you.

Dan Ferris: All right. Thanks. Bye-bye. One of the reasons I enjoy talking with my friend, Chris, is that he is very – well, you heard it. You heard the way he speaks, measured, disciplined, thoughtful, thorough. He strikes me as a man who he knows who he is, he knows what his style is, and he does that every day. I really enjoyed his presentations at the conference we go to every year and I've enjoyed his book recommendations. He's a voracious reader. If you go to Broyhill Asset Management website, you'll find their book club and there's a whole list of books there that they've read and that he's read and he's discussed them with his team at Broyhill.

Great guy, as you heard. Great guy. Really good idea on the airports. I thought that was a wonderful idea. I've heard it from others too. I know Chris Mayer has bought at least one of the Mexican airport stocks. So it didn't surprise me at all when he started talking about it. Great talk. Pretty darn good answer you have to say to the final question as well. Right on the same page as I am here at the podcast. Great conversation. Hope you enjoyed it as much as I did.

Let's take a look at the mailbag. Let's do it right now. Look, I think you know by now I'm always trying to tell you the really hard truths even when – especially when what I have to say is unpopular. Today, the hard truth is that your wealth is in danger. Everything you may have made in the bull market of the last decade could disappear very quickly. Some of it is probably gone already. This process has already started and even the financial market somehow avoided devastating crash from here, inflation is still eating 8% of your money every year.

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This plan does not involve options, shorting, crypto, or anything complicated and it doesn't require perfect timing. The perfect time to act is right now and you could see triple-digit upside in the coming years. To watch my full interview with the brilliant financial journalist and hard asset expert, Daniela Cambone, simply go to CrashProtection2022.com. Again, that's CrashProtection2022.com to watch our full interview for free.

In the mailbag each week you and I have an honest conversation about investing or whatever is on your mind. Send questions, comments, and politely worded criticisms to [email protected]. I read as many e-mails as time allows and respond to as many as possible. You can also call our listener feedback line, 800-381-2357. Tell us what's on your mind and hear your voice on the show. First up this week I have a bunch of questions from our faithful listener and longtime correspondent, Lodewijk H. I want to go through those.

Lodewijk does a great job because this is not a long e-mail and he packed a bunch of questions... so many that I couldn't take them all. So I'll take as many as I can here. The first one is, "Should you have a 401(k)? I believe this is a tax-deferred investment strategy, yes, but why pay tax? Go offshore and consider a nomad lifestyle or a digital nomad style." Yes, Lodewijk. Those are two different things I think. I talk to a lot of people who live in various places around the world and they have different reasons for wanting to be there and other folks who are of a mind to want to minimize taxes and so forth,\ but still live in places like California or even Oregon or some U.S. state or another. They say, "Well, my whole family is here and my business is here and my life is here." That's just the way it goes.

So there are two different things, that nomad lifestyle versus having a 401(k) to minimize your tax burden. I think if you're going to hang around, you should have a 401(k). Your next question is, "Is the real winner of the lockdown not rural real estate away from the city, no more expensive apartments, etc.?" Yeah. I think in two ways because the value of it goes up and the benefit of it, as you said elsewhere in your e-mail, is that you're away from the big city.

My wife and I made very much that move. We made it so we could be closer to our grandchildren. We went from zero to five grandchildren in world-record time. All three kids had children within a year and a half or something. But we also – we lived near a big city that was where they were rioting every night for months and months and months. We were very happy to get away from that. My wife was not happy there at all. I wasn't thrilled with it, but I could have stayed. But she was unhappy. I didn't like keeping her in that place and she didn't like being there. So yeah. I'm with you. Rural real estate.

Your next question here, and I'll take two more. You have several, but I'll take two more. "More money in one year than in 19 years?" And folks, what Lodewijk H. is referring to there is I've said it a few times on the podcast and elsewhere that it was reported, I think it was a Bloomberg article last November, that people put more money in the stock market in 2021 than in the previous 19 years combined. Did I say 19 when I read your question? Yeah. More money in one year than in 19 years, you said. You said, "Well, that is my signal to walk away. Sorry. I'll take that back. You run away." And then you said, "Oh, wait. I'm out of the market."

So good for you. You were out of the market before all this crashing started happening and yes, that was the moment because it was reported in November when the Nasdaq peaked and that was when the top really started coming in in the broader indexes. So yeah. That was the point of reporting that statistic. Walk away from all your speculative garbage and everything but the highest-quality stocks. I'll take one more question, Lodewijk. Actually, two more. Sorry. I did have another one after this one. You said, "What caused the '87 crash?" And you said you were one year old. So any insights and experiences more than welcome.

Nobody really knows. People say it was program trading and other people say other reasons, but nobody really can tell you about the 87 crash. It didn't start here. It started in ex-Japan, Asia and went, moved West and then wrapped back around to Japan. It wasn't program trading because there were all kinds of markets that were crashing like crazy. Anyway, one more. You said, "Hi, Dan. Yes, I understand free cash flow. Just a question. Why put money back to the shareholder in a crisis by competitors who add something of value? Lodewijk H." Thanks for all your questions.

That last one, yes. If a business can take the free cash flow they're making in a bear market or a recession or a crisis and buy a competitor, that's great. In fact, really great businesses do that. They get stronger during the bear, during the recession. Their competitors weaken and go away or they acquire them and they come out of the recession much, much stronger. So you're absolutely right. We recommended several businesses in the past year or two in Extreme Value for that exact purpose of holding them for the long term and watching them exploit the crisis by acquiring competitors or simply growing market share when competitors disappear.

Next and last this week is Zach R. Zach R. says, "Hi, Dan. I'm a big fan of the show. I wanted to hear your thoughts on the recent all-time low in the University of Michigan Consumer Sentiment Index. It goes all the way back to 1952. So it seems surprising to me that it wasn't lower in the 1970s or even 2008. Does this surprise you? Historically have lows in consumer sentiment been a good signal for being at or near the bottom of market sell-offs? I look forward to hearing your thoughts. Zach R."

I'm not a big watcher of sentiment, Zach. I used to think it was really worth watching, but I'm not a big watcher of sentiment. So I can't answer your second question. I don't know. Probably yes, but sentiment – the problem with it for me is it's too volatile and spiky. It goes way down and way up and way down and way up even when you're in a bull market. It just seems to be all over the map to me. In this particular case, you're asking about why wasn't it lower in the '70s or 2008, and I thought about it. I don't know the answer, but I have a guess that I think is worth making.

In the last 50 years since the '70s, or even the last 13 years or so, 14 years since 2008, what has happened? Well, I think people have lost faith in big institutions, like for example, oh, I don't know, government and even corporations and things. I think that's a big difference between now and then. So today, not only is there sentiment low, but their belief in anybody who could bail them out or help them is low. So I'm guessing. I don't know the real answer or even if there is one. If I'm honest, this could be a random anomaly in the data and nobody knows why, but I'm going to guess that if there is a reason that's it.

Certainly, I don't know. Is it controversial even to say that people have lost some of the confidence they had in those institutions, institutions like government and even religious institutions with all these scandals with priests and so forth? I don't know if it is really – I think people have lost some of their confidence and some people have lost all of their confidence in these institutions. So that's my guess. It's a good question, Zach. I don't know the answer. I'm glad you highlighted how low the sentiment is.

When I look around... for example, like take bitcoin, since I was talking about that earlier. It fell off the bottom. A trader will look at the chart and say, "Oh, it fell off the bottom," because there was a little bit of noise or support or whatever around $31,000, $30,000-ish and we were going sideways, $29,000, $30,000-ish and then, wham, all of a sudden we're at $23,000 as I speak to you. Who knows where the bottom is. I think it's between three and 12 and it doesn't surprise me at all that it's crashing. I recommended people sell it. I told you on the podcast I recommended it in Extreme Value. We bought it. It was up. We sold it. Wish we had sold a lot sooner. We'd had a much bigger gain, but we did what we did because we thought we were going to be holding longer.

I just expected this thing to behave a lot different. I expected bitcoin to live up to its promise as either some kind of alternative currency or some kind of a store of value... an inflation hedge maybe. None of the above. Absolutely none of the above in any meaningful way yet. People who say, "Well, since it started in whatever it was, January 2009, I think, it's up extraordinarily, tens of thousands of present or whatever." Well yeah, but let's face it, most people – you can just take a look at the chart and go, "Oh, OK. Everybody bought at the top and now they've all gotten murdered." That's just the way it goes.

So, lifetime track records in an asset or a fund or anything, you got to temper it with reality. You could say the same thing about ARK Innovation ETF. It's probably up still 150% or 200% since its inception, but as we covered here on the podcast and I covered in Stansberry Digest, all the money came at the top and most of the people in that fund have been underwater for months and month, maybe a year already. So there's that. Anyway, Zach, you obviously got me thinking about a lot of stuff with your question. So that makes it an even better question than I already thought it was.

And that's another mailbag and that's another episode of the Stansberry Investor Hour. Hope you enjoyed it as much as I did. We provide a transcript for every episode. Just go to InvestorHour.com, click on the episode you want, scroll all the way down, click on the word "transcript," and enjoy. If you like this episode and know anybody else who might like it, tell them to check it out on their podcast app or at InvestorHour.com.

Do me a favor, subscribe to the show on iTunes, Google Play, or wherever you listen to podcasts. While you're there help us grow with a rate and a review. Follow us on Facebook and Instagram, our handle is @InvestorHour. On Twitter, our handle is @Investor_Hour. Have a guest you want me to interview? Drop me a note at [email protected] or call the listener feedback line at 800-381-2357. Tell us what's on your mind and hear your voice on the show. Until next week, I'm Dan Ferris. Thanks for listening.

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