Episodes

 Dan Ferris:                 Hello, and welcome to the Stansberry Investor Hour. I'm Dan Ferris. I'm editor of Extreme Value and The Ferris Report, both published by Stansberry Research.

Corey McLaughlin:    And I'm Corey McLaughlin, editor of the Stansberry Daily Digest. Today, we talk with Stansberry's Investment Advisory lead editor, Whitney Tilson.

Dan Ferris:                 Whitney has been a friend of ours and a colleague for many years now. I attended many of his value investing conferences. It was one of the best conferences I ever attended. Lots of great ideas. Lots of great presentations, many of them Whitney's own. He's had a lot of great ideas over the years. He's been around, he's managed money, he travels the world, he's an adventurer. There's a lot to talk about when we get Whitney in the house, isn't there?

Corey McLaughlin:    Indeed, yeah. We caught up with him in Italy and this conversation I'm really looking forward to sharing with everyone. He talks a lot about lessons he's learned over his career, running money, a hedge fund and letting winners run and figuring out what the difference is between an actual value trap, as you asked him, and how to determine that and a lot more. So, it was a really good conversation.

Dan Ferris:                 Absolutely. Let's get to it, man. Let's talk with the one and only Whitney Tilson, our friend and colleague. Let's do it right now. Whitney, it's great to see you again. Welcome back to the show.

Whitney Tilson:           Thank you so much for having me.

Dan Ferris:                 Speaking of seeing you, where are we seeing you from? I understand you're on the road somewhere.

Whitney Tilson:           Yeah, I'm actually in the town of Trani in southern Italy, and it is the 20th consecutive year that I have co-hosted an investing conference here that came about sort of by happenstance when a young man, then young, 20 years older now was reading my writings, way back when and invited me to come over here and teach a little investing seminar. And we turned it into a conference, and we've been doing it every summer. And so, this year I've got my family here with me. We're making a little holiday out of it. And it’s always a nice gathering of people from all over the world who just come and pitch stock ideas. That’s what, of course I do for a living is try and gain investment insights that I can share with my subscribers and where better to do it than surrounded by a lot of smart people with everybody sharing their best ideas?

Dan Ferris:                 In Italy, where better?

Whitney Tilson:           Yes. I go to at least a half dozen, probably closer to a dozen conferences of various sorts. If you could include, for example, the Consumer Electronics Show in Las Vegas, which isn't technically an investing conference, but I'm out there in the first week of January, usually every year in Las Vegas checking out what the latest technologies are and many, many, obviously many public companies are there. It's all what I do all day every day, which is read, talk to people, try and gather information. And then, every once in a while, maybe once a month, sometimes once a year, come up with some big idea that can either, most importantly, make my subscribers a lot of money, or at least, sometimes the big idea is to avoid something, to avoid losing a lot of money, which is, of course, an equally important part of investing, I'm sure you'll agree.

Dan Ferris:                 Yeah, absolutely. I believe deeply in what I would call negative thinking, like what Nassim Taleb calls via negativa.

Whitney Tilson:           Or what Charlie Munger said, if you want to figure something out, he always said invert, always invert. If you want to figure out how to be successful, for example either as an investor or in life, think of the things that will cause you to be very unsuccessful and avoid those.

Dan Ferris:                 Or actually more in line with negative thinking, Munger said that thing which always made me chuckle like all 20 times he said it, he says he was like the rustic who said, I just want to know where I'll die so I can never go there.

Whitney Tilson:           Yeah, I remember the first time actually, it was one of those handful of formative moments at the Berkshire and then Charlie Munger used to do the WESCO annual meeting right afterward, and I remember sitting there hearing him say that in a room of about 1,000 people at the WESCO meeting, must have been at least 20 years ago, and everybody chuckled, and he said, “No, I'm serious. What I mean there is you should be thinking hard.” He said, he elaborated, he said, “Once you reach a certain position in life where you've sort of met your basic needs and you're doing well, you should stop thinking about playing offense and you should start thinking about playing defense and avoiding the calamities that can” – he always said that can send you back to go, using the Monopoly analogy there.

Dan Ferris:                 Yeah. All right.

Corey McLaughlin:    Yeah, I found myself trying that quote, invert, always invert. I just, it pops up in my head every so often when I'm trying to think of some sort of solution to a problem. And it's, I don't know if it's more so since he passed, but you remember these things I think more now. I don't know. The things that Munger say and Buffett, yeah.

Whitney Tilson:           I in fact wrote a book called, my latest book, I've written four investing books, but then my latest book from three years ago, I guess now called The Art of Playing Defense is a book I wrote to my daughters on life lessons, how to be successful in life. And I was writing it a couple of years beforehand, and I really ran out of steam. It was just so boring to write the same things everybody else had already written, work hard, be nice to people, have high integrity, etc.

                                    And then I realized no, I need to invert. And I inverted the entire book into the title. The Art of Playing Defense is the five major chapters are the five calamities that I identified, some with the help of Charlie, of course that can destroy your life. And so, I wrote a book on how to be successful in life that's a downer of a book talking about all the terrible things that can derail your life, and these are the things you should avoid.

Dan Ferris:                 Yeah, I thought it was good. It’s behind me on the shelf somewhere or actually might be in the next room. And I remember I believe we talked about it in the show at one point if my memory is not failing me.

Whitney Tilson:           Yes, you’re right, a while back. I'm a one trick pony.

Dan Ferris:                 I was thinking about you today and we're doing a couple of short ideas in the newsletter I write with Mike Barrett called Extreme Value, and we haven't done that in a while. I've got my trepidations about it ‘cause it's hard. And I thought of you because I never really even, you and seeing David Einhorn's presentation on Lehman Brothers, which among other places he did it, Grant's actually, he talked about it at Grant's, which is where I saw it.

Whitney Tilson:           Yep. He did it on stage at my conference six months before that, but nobody remembers it.

Dan Ferris:                 No, I remember that. Yeah. And so, that was really those presentations and your ideas too, they just emboldened me a little bit more to look on the short side and start thinking about it. We're getting back on the short side of my newsletter, so I feel like you're one of the guys I want to check in with to see if you are doing anything on the short side these days as well, speaking of avoiding calamities.

Whitney Tilson:           Yeah. Boy, we could talk about this for an hour if you want, because – so, let me start with, for 15 years, I ran a hedge fund for almost 18 years ending in 2017. And so, for about 15 of those years, I did some activity on the short side and actually became known as one of the best known activist short sellers. For example, going into the housing crisis, I was very loud and active about banks, financial and real estate and housing stocks that I was short.

                                    And then again, probably most famously, lumber liquidators, exposing that with Anderson Cooper on 60 Minutes back in 2015. But I will tell you that while I was known for it and had some great big calls, net-net I lost a lot of money doing it, and it was one of the contributors to why my fund underperformed for many years after the global financial crisis. And it was so frustrating, given that I had been beating the market every year for 10-plus years. It was one of the reasons I closed my fund. But the first thing I will say, for 99% of people is you should not actually go out there and be shorting stocks making bearish bets.

                                    People can say, oh you can just do it via puts, but then you've not only got to be right on the stock. You also have to be right on the timing. So, that makes it twice as hard. And so, I don't recommend that either. But that said, I think having a short sellers mentality and being skeptical and all because the most important thing you can do is just invest on the long side, own great companies, but look out for bombs out there. And you just need to know what stocks to avoid. Don't get sucked into value traps and things like that.

                                    So, to summarize for 99% of people, I would suggest not actually short selling or buying puts or anything like that, but definitely develop the skepticism and the tools that short sellers have to identify value traps or worse, frauds and so forth, because of course the key to successful long-term investing is not only making successful investments, but also avoiding bad investments that can really sink you.

Dan Ferris:                 I'm glad that you, by the way, thank you for that. That's an excellent idea by the way, the short sellers mentality without taking the risk of short selling is very helpful. I'm glad you brought up the topic of value traps you mentioned there because I just got back, I was at the Value X Vale a week or so ago with Vitalik Katzenelson and the whole crew that goes there. And the topic came up a couple of times, and I realized, I was thinking, the more I thought about it, the more I thought, you know, I don't think I know the difference really between a value trap and a mistake made by someone buying a cheap stock.

                                    It seems like, in other words, there was not a special benefit to identifying value traps that I could see. You’re just making a mistake. The cheap stock was not as cheap as you thought, not cheap at all maybe. And it was deteriorating, and you were wrong. So, maybe you can help me because I remember, correct me if I'm wrong, Whitney, but I went to a lot of Value conferences. When Vitalik Katzenelson introduces me at Vale, he said, “Dan's been to more Value congresses than Whitney Tilson.” He used to say that as a joke.

                                    Of course, obviously not true, just a joke. But I thought I remember you putting up a list of value traps at one point. And if not, I know there's a topic you've discussed in presentations, and I wonder if you could actually, it's a personal thing, not just for the listener, but for me, help me out here understand what you mean by value trap.

Whitney Tilson:           Sure. The word “value trap” can mean a lot of different things. I suppose the best kind of value trap, well, big picture is value trap means is you invest in something that looks like a value stock. It's trading in a low multiple of earnings or revenue or book value or something like that. And then, but it turns out you're wrong. You don't make any money, right? So, the best kind of value trap is a stock that just sits there, and it's tied up your money and you could have done better investing it elsewhere, but you don't really lose a lot of money, maybe because you just bought it particularly cheap.

                                    And so, even if the company doesn't do as well as you expect you bought it cheap enough you're probably not going to lose much money. Maybe it just sits there. But value traps can take you down and can put you out of business because some value traps turn out to be frauds. That's why they're so cheap and you didn't pick up on the fraud and it goes to zero, or if they've got a lot of debt and the business doesn't perform up to par and the equity, the shares that you own get wiped out, even if there's some value in the business left because it's all owned by the debt holders.

                                    And value traps can be seductive because let's say you buy a stock at 10, you think it's worth 20, and then the stock drops to 5. And you think well, OK, the company's not performing, but I still think it's worth 10. But now so I'll buy more, and you double down. And then it goes down some more and you double down again. So, in other words, if you keep putting money into it, your losses can be infinite. And that's what can take people out. And it can also, it can lead to all sorts of things like commitment bias and so forth, where people oversize positions.

                                    So, it's one thing if you know you're investing in a low quality company, like over the years I've invested in airlines, for example. And one airline CEO long ago once told me you can't own airline stocks. You can only rent them. And by that he meant, look, it's just a terrible business. We all know it. It's, every time there's a terrorist attack or an oil price shock or something, these stocks are going to get clobbered. But if you're clever and lucky and you get in something that's cheap, there's some short-term catalysts. I own JetBlue. I'm trying to think back probably in 2015, a new CEO came in.

                                    They started to charge for bags, and there were some very immediate things that the new CEO was doing that made it very clear to me that earnings were going to go up a lot over the next 12 months. And sure enough, I was in there. The stock went from 7 to 21. Earnings tripled. The stock tripled. I was in and out in a year. And thank goodness because JetBlue today is just a few, $4 a share or something, right? Many, many years later. So, the stock ended up being a terrible value trap, but I made money because I knew it was a short-term trade and it's not something I could hold long term.

                                    I wish I could give you the top three things you could do to avoid value traps, right? But because they come in so many different flavors and there's so many different ways that stocks or companies can underperform. But if I were to summarize a value trap is generally, it's a low quality business that you get sucked into it just because the stock looks cheap. And that's the biggest mistake, big picture that I made in my entire investing career. Nearly all the money I made and nearly all the money anybody has ever made in the stock market over any period of time, any style of investing you want.

                                    At the end of the day, almost all of the money made in the stock market, and by the way, there's studies showing that basically 100% of the gains in the stock market over the last 50 or 70 years come from 2% of the stocks. I can assure you, those 2% of the stocks are not crappy cyclical businesses where you caught a cycle. They're high quality businesses. They're long-term compounders. And that's, over the years I owned Apple, Amazon, Netflix, Home Depot, McDonald's, the litany of stocks. That's where I made all my money.

                                    And everything else was sort of a distraction and a waste of time and shame on me. I should have just owned those stocks. The mistake I made in every single one of them is I sold them too early. By the way, I forgot to mention Berkshire Hathaway would be at the top of the list of one of the great all time compounders.

Dan Ferris:                 Yeah, you've been very straightforward about your successes and failures and things you should have held on to and things you should have sold or bought or whatever over the years. And I know it's like one of your greatest hits. You probably talked about it 20 times, but for me, one of the kind of smartest and most impressive ones was Netflix. Because I was short at the same time in my newsletter anyway, and I saw you turn on a dime, and I didn't turn as fast, and the turn was the thing to do. Staying short was not the thing to do. That evolved out of a discussion you had with the CEO, did it not?

Whitney Tilson:           Yes. And by the way, turn on a dime, if you call turn on a dime waiting a year.

Dan Ferris:                 There you go.

Whitney Tilson:           What happened was, is Netflix was getting into the streaming business. They weren't charging for it. They call this 2008, 2009, 2010. I shorted the stock ‘cause the stock was really ramping. I don't know. It'd gone up 3, 4, 5X in the previous year or two, and it was trading at something like 80 times earnings, and I just saw a commodity business with lots of deep pocketed competitors where they had to pay for the content. Unlike when they were sending DVDs, their core old DVD by mail business was one where once you buy the DVD you could mail it out as many times, you could rent it out over and over again, and you never have to pay whoever, the content provider whoever made the movie, The Godfather.

                                    They could just buy the DVD and rent it out over and over again and not pay the studios for it. Whereas streaming, they have to pay for all the content or develop it themselves, right? So, I that was sort of, I was, and they didn't have very good content on their streaming service. They didn't have the top movies, for example. And so, that was my thesis, and the stock doubled against me. It continued to go up, and I was so frustrated that by December 2010, I said, you know what? I think I have blinders on. I have commitment bias here. I must be missing something.

                                    The market is telling me I'm missing something. And so, rather than digging in my heels, I wrote an 18-page report entitled, Why We're Short Netflix. And I put it out there to test it. What am I missing? And I figured I had a pretty wide audience, and I posted it publicly on Seeking Alpha. I sent it to my very large email list. And I started to get a lot of feedback from people, but most importantly, the CEO of Netflix, Reed Hastings, who I had met. We were both on the board of a charity called KIPP Charter Schools. He was on the national board, I was on the New York board, still am to this day.

                                    And so, we had met at a conference once, so he knew that I wasn't some nefarious market manipulating short seller, that I was a good guy. And so, a few days later, much to my surprise, he published an article on Seeking Alpha entitled Whitney Tilson Cover Your Netflix Short Now. And the opening paragraph was, Whitney Tilson, and I'm forgetting the exact words, but it was something along the lines of, “Whitney Tilson, a fine human being and a great humanitarian recently published, the bear case on Netflix. And I know how philanthropic Whitney is, and I want him to have as much money as possible to give away to the charities we both care about.

                                    So, I don't want to see him lose a lot of money short of Netflix. So, I'm going to tell him, I'm going to write out here, this is an open letter to Whitney in a very friendly way, addressing your bear case.” And he laid it out. And he said, “Maybe we can talk about this more. Let's get together.” And I had never in my life as a short seller then or up to this date of hundreds and hundreds of short campaigns I witnessed, I had never seen a CEO respond that way. So, that was a warning flag right there that I might be wrong.

Dan Ferris:                 Right. They’re usually so defensive, which is a further red flag.

Whitney Tilson:           And I met with him, by the way, I still hadn't covered my short. And after I met with him for a couple hours, I remember thinking to myself, I don't care what the valuation is. I do not want to be short anything this guy is running because he was that impressive, and he laid out the vision for streaming and why it was a better business than I thought. And I immediately covered the stock, but I wasn't smart enough to immediately go long in.

                                    Now interestingly though, that turned out to be better lucky than good because the stock ran up another 50% over the next 6, 8, 9 months. And then they announced this quick stir idea. They were going to separate their streaming business from their old DVD by mail business, start charging people twice and customers revolted. For the first time in years, they had a decline in customers and the stock collapsed by 75%. And that's when I got the opportunity to get in because I'd been waiting and hoping it would get cheap enough, because I was still a stupid value guy who wasn't willing to pay up for a good company, but I got lucky.

                                    The company shot itself in the foot, investors panicked, and I got a chance to get in. And I went super public with it right at the bottom. You were probably there, Dan, at the Value Investing Congress on October 1st, 2012. The stock hit a multiyear low, down 75%. And I pitched it at the Value Investing Conference. And then as I walked off stage, I went to the CNBC remote studio they had at the conference and I went on national television and I said, this stock is a screaming buy.

                                    I compared it to Amazon over the previous 10 years. And I said, Netflix today reminds me of Amazon 10 years ago. And by the way, Amazon over the previous 10 years had been a 20-bagger. So, I said, I think this next decade for Netflix is going to look like last decade for Amazon, and it turns out I was completely wrong. It wasn't a 20-bagger. Netflix over the next eight and a half years was a 90-bagger. It went from $7.78 a share to $701 a share.

Dan Ferris:                 Wow. How long were you on board?

Whitney Tilson:           So, I went up 7X, I sold all the way up 7X thinking I was a genius. It was my most successful investment ever, and I left a 10-bagger on the table. Kill me now.

Corey McLaughlin:    I wish I knew you and was listening to you back then.

Whitney Tilson:           Some people were, and they thank me to this day because they just hung on there. They recognized, and this is the most important lesson I can give to anybody, which is you've got to let your winners run. In any portfolio you're going to get lucky on, if you have a 10-stock portfolio, you might get one or two, a 20-stock portfolio you might get two to four stocks that just do much better than you expect, assuming you're smart in picking high quality businesses that you think can be long-term compounders. You'll be wrong on a few. Some will just go along with the market. But I'll give you an example.

                                    When I went through a tough period in 2011-2012 I went to cash, and I rebuilt my portfolio, and I basically had a 10-stock portfolio on January 1st, 2013. And this was by the way, just a few months after I had pitched Netflix. So, sure enough, I had about a 5% position in Netflix. I owned a little bit of Apple and then I owned Berkshire Hathaway, Goldman Sachs, Citigroup, Canadian Pacific, a couple of smaller companies, Iridium, whatever. I just did this analysis in one of my Investing Dailies last week. What's interesting is, there are a number of interesting things that emerged.

                                    If I had just gone on vacation for the last 11 plus years, I would have obliterated the market, crushed the market. I'd be flying private jets right now. Why? Because Netflix went up 50 times from then to now. Apple went up 10 times and three or four other stocks basically went up in line with the market, which is about 250%. So, the S&P 500 has done well. And one company went to zero, a little mall-based retailer called Delia's was a zero, and a couple of companies underperformed. But the point is nothing else mattered except Netflix going up 50 times, Apple going up 10 times. Nothing else mattered.

                                    And the problem is after a year or two, the stocks went up a bunch and I figured, oh, I don't want to be greedy, and I sold them. But the point is those are the dumbest. Anyone who tells you don't be greedy, pigs get fed, hogs get slaughtered. Don't listen to them, OK? You must be greedy.

                                    If you stumble into a Netflix and an Apple you must let your winners run as long as the story stays intact, as long as they're still crushing it and whatever. Don't get hung up on short-term valuation or the fact the stock's gone up a lot. You must be super greedy because just a few winners like that, literally in a lifetime, is all you need to be super successful and build generational wealth.

Dan Ferris:                 This is very interesting to me.

Corey McLaughlin:    Yeah, me too.

Dan Ferris:                 Because I know people who are involved in managing portfolios of far more speculative fare, who report something very, very similar with a lot more names than what you're talking about. You're talking about 10 names. But a typical thing that I've been told by someone managing a portfolio of really highly speculative stuff is I had 105 positions, and I made all my money on six or seven of them and a whole bunch went to zero and it's a similar dynamic, which somehow I'm not sure where I'm going with this thought, but I find it very interesting. I find it very interesting that large caps, small caps, speculative, great compounders holding over a long period of time and just letting those few Lollapalooza, as Munger would say, winners do their work. It seems like we're talking about a sort of an untapped secret of investing here.

Whitney Tilson:           It's interesting. It is both the most obvious non-secret.

Dan Ferris:                 Yeah, exactly. Secret in plain sight.

Whitney Tilson:           Preaching it for decades. But when you say untapped, I think there's a lot of truth to this sense that almost no human being has the ability to do this. And if you want to know the main reason index funds outperform almost all active managers over a long period of time, it's because they never sell their winners. They let their winners run. Just look at the S&P 500 index.

                                    The S&P 500 index has never sold a share of Apple, Nvidia, Microsoft, Berkshire Hathaway, Visa, Mastercard, Lilly. I've just named almost all the top 10 stocks in the S&P that drive its entire return. They've never sold a share. They let their index funds, let their winners run.

Dan Ferris:                 And they cut their losers too, index funds. They get rid of them.

Whitney Tilson:           Someone gets an acquired, but if a company gets really small or it goes bankrupt or something like that. So, they're constantly replacing inferior companies, but that's sort of at the margin. That's a minor thing. Ten times bigger impact if not 100 times bigger impact is they let their big winners run and run and run and run. By the way, I recently wrote a series of dailies recently saying, if I were to get back in the money management business today, I would do what's called 10 for 10. I would simply find the 10 highest quality, best businesses I could, that I could acquire at a reasonable cost.

                                    So, I'm not going to go out there and buy Nvidia at 50 times revenue today or something. I'm not going to chase the best companies like Nvidia is an insanely great company. But the valuation, I'm not going to get there, but over time, slowly over time, I could probably only come up with a few names right now, but I would get put 10 companies in there and I wouldn't hold for a lifetime because things change. Once great companies fall by the wayside. I make mistakes. So, I would build 10 companies, and I would plan to hold each an average of 10 years. In other words, only once a year when I swap out a stock.

                                    But keep in mind, my extreme bias would be not to sell a winner and replace it. It would be each year I would be doing what the index funds do, which is a company where, not necessarily driven by stock performance, sometimes stocks are flat for a number of years before they take off, right? But my general bias would be to pick my weeds and leave my flowers alone to bloom. And that is the exact opposite of what most human beings do, which is they pull their flowers and water their weeds. That's insane.

Dan Ferris:                 It is. One of the reasons why they do that is they have this idea about rebalancing. You get that Lollapalooza, and you've got a huge chunk of your money in it. Where do you come down on that?

Whitney Tilson:           Yeah. Look, I'm not saying never sell a winner or something like that. Like I had a 5% position in Netflix, and I don't beat myself up for never selling a share as it went up 90X. It would have become 90% of my fund and I'm managing other people's money. And by the way, after the stock went from seven and change to $701 a share, it then declined by 75% again, just like it did earlier. Now, today it's almost back to $700, almost back to its former peak that it reached three years ago, right?

                                    So, don't beat myself up for trimming it a little long along the way because you have to manage position size in a way such that you can sleep at night and such that, if you're wrong, that you don't go out of business or lose your fortune. What I beat myself up for was is I should have, as the story was playing out they were able, their international expansion went much better than I hoped for, developing their own content went much better than I hoped for, and they were able to raise prices regularly and the number of subscribers just kept growing and growing.

                                    All of those things were much, much better than I ever could have hoped for. That's why the stock turned into a 90 bagger, right? But as that story was playing out, and by the way, when I bought the stock, I had done a calculation that I presented on a per subscriber basis, when I bought it, Netflix was trading at a, roughly speaking $3 billion market cap, $2.8 billion market cap and had 28 million paying subscribers. So, it was being valued by the market at $100 per subscriber, which as you know is a perfectly reasonable way to value subscription-based businesses, right? Because the company wasn't generating cashflow at the time, right?

                                    At the same time that I was recommending it, Hulu, a massively inferior business then and now, had 2 million subscribers and had just been valued in a cash transaction in the private markets at $2 billion. $2 billion value divided by 2 million subs is $1,000 a sub. So, that means Netflix, a massively better business, was trading at a 90% discount to Hulu's valuation. So, one, let me tell you and everyone listening, if you come across a great business with an incredible management team, and you buy the stock at a 90% discount to what you think it's worth and what the market says it's worth, it’s a 10-cent dollar.

                                    And if that stock doubles, don't sell. It's now a 20-cent dollar. So, I beat myself up for not letting that position grow larger because it was so cheap and because the business was performing so well. But let's just say I'm thinking 10% position. I probably wouldn't have been comfortable. So, all I should have done is just trimmed it and kept it at about a 10% position as it went up and doubled and doubled and doubled. OK? And I just should have held it all the way to this day. I should still own a 10% position today in my “retirement” now that I'm not managing money professionally, right?

                                    And so, I wouldn't have made 90 times my money. Let's just say I had a $100 million fund. It was a 5% position. So ,if I had never sold a share, those, that $5 million position today would be worth $450 million. I am not beating myself up for not having a $450 million position in Netflix. I would have been selling it all the way up and that's OK.

                                    But what the real fatal mistake I made was I was selling way too much of it and much too soon, and worst of all I sold out completely. At the very least, I should have run it with a trailing stop, a 10% position with a trailing stop of some sort to protect my gains. And in that case, I would have made tens of millions of dollars more than I did.

Dan Ferris:                 Wow. Huge lesson there.

Corey McLaughlin:    I'm taking notes here.

Whitney Tilson:           All sorts of lessons there. But the starting point is focus on high quality businesses. Don't run out and just chase the hottest ones or whatever. Be smart and selective. There are opportunities to get into these high quality businesses. It's funny. I was doing a podcast with Porter Stansberry last week that hasn't aired yet, but a new podcast and we were citing some of these and it's remarkable how many of them, how many of the world's greatest businesses and the world's best stocks at one point have declined by 75%. McDonald's from 1999 to 2002, when I loaded up, went down by 75%.

                                    Netflix, I told you, went down 75% from 2000, middle of 2012 to late 2012 in a short period of time. But then again, just in the last few years, it went from 700 down to about 175. And now it's back to 700. Let me think of some other, there were a number – oh, Meta, Facebook.

                                    Remember how that peaked and then it got hammered along with all the other big cap tech stocks during the bloodbath in 2022? And when Mark Zuckerberg renamed the company Meta and was pouring billions of dollars into the metaverse that investors correctly saw it was just money flushed down the toilet, the rise of TikTok, everything was going wrong at the company and the stock went down by exactly 75% peak to trough. And at the very bottom, first week in November 2022 -

Dan Ferris:                 I remember.

Whitney Tilson:           I was pounding the table saying, get in, get in to this stock. This is still one of the world's greatest businesses. Almost all of the problems are self-inflicted and fixable, and to the extent there are external forces on this company, all of them are one time effects, most notably the rise of TikTok and Apple introducing privacy metrics that made it more difficult for Facebook to track its users. Both of those had a meaningful impact on Meta's business, but they were one time shocks that the market was pricing in as if they were permanent headwinds. So, I laid out the analysis in great detail.

                                    I'm not telling you, hey, just wait until Nvidia goes down by 75% and buy it. It may not. Most high quality businesses like Berkshire Hathaway, for example, has declined by 50% multiple times in the last 25 years. Never gone down by 75%, right? You can't be too greedy. And sometimes, I was buying Netflix when it was down 50% a couple of years ago and lo and behold, there was another leg down.

                                    And stock went from 700 to I don't remember the exact numbers, but call it 300, 350, and I was recommending it as a buyback and lo and behold, it went down to 175, but you know what? Had you bought a 350 and held on, today it's almost a 700, right? So, with high quality businesses, if you're fundamentally right about the business, you don't have to be perfect at nailing the bottom.

Corey McLaughlin:    Yeah. And then Nvidia went down not insignificantly in 2022 to fairly recently.

Whitney Tilson:           Yeah, you're exactly right. Nvidia has had some big ups and downs. And so, I would be very surprised if at any time in the next, I don't know, 10 or 20 years, if we saw Apple or Microsoft fall by 75%. They may not be great investments today, but they're just not the kind of volatile businesses and super richly valued stocks. It wouldn't surprise me at all to see a 50% decline in those stocks, but 75 unlikely. But when you get into businesses like Nvidia and Netflix that are much more richly valued, where the businesses are less stable, you could easily see that 75% decline in those stocks. That would not surprise me.

Corey McLaughlin:    And I just want to go back to something you said earlier on just to make sure I have this right, and for the listeners too, you said 2% of stocks drive what percentage of gains in the market and like over what time?

Whitney Tilson:           I think he said Arizona state. And if you just Googled Arizona state professor, what percentage of stocks account for all of the stock market gains, I'll bet if you type that in, it would pop it right up, but he's done research over time and over different time periods, but it all shows the same thing, a very small low single-digit percentage of stocks accounts for virtually all of the stock market's total gains. And by the way, that's happening this year. This should not come as a surprise to anybody just right because -

Dan Ferris:                 Right, but that’s what you hear now.

Whitney Tilson:           The media by itself is a third of the S&P 500’s roughly 15% gain this year, and then you throw in a handful of other big cap tech stocks And for example, the Russell 2000, which is the next after the biggest 1,000 stocks, the Russell 2000 is the next smallest stocks from 1000 to 3000. The Russell 2000 this year in a market where the S&P's had the second best start to the year in the last 20 years. So, the S&P is rocking, but if you own just a collection of smaller stocks, you're flat this year.

Dan Ferris:                 Yeah, a lot more lower quality businesses in the Russell 2000. A lot of them. A lot of them aren't profitable. Jeremy Grantham says he likes to short the Russell 2000 because he says sometimes the entire index is net negative earnings. So, you know, it's just -

Whitney Tilson:           Right. By the way, I will tell you there's some interesting data that I may throw in my Daily Today. I've been using bits and pieces of it that show that value stocks relative to growth stocks, small cap stocks relative to large cap stocks, and international stocks relative to U.S. stocks. All of those are at roughly 24-year lows or wide valuation, relative valuation discrepancies. Going back to when I first started investing at the peak of the Internet, Nifty Fifty, growth stock, tech stock, large-cap bubble back in 1989 and early 2000, and the reason I would never short the Russell 2000, especially here, is because yeah, there are a lot of unprofitable businesses in there, but they're just a lot of small cap value stocks in there.

                                    And if you actually look at how the Russell 2000 performed relative to the S&P 500 from 2000 to 2007, a seven-year period, the S&P 500 was flat, even down a little bit, and the Russell 2000 was like up 80%. So, there are powerful reversion to the mean trends here, and we're at pretty extreme underperformance in the out-of-favor categories now. That sort of make me think, look, I'm hanging on to my Berkshire Hathaway, and I still think Meta and Amazon are buys. Those are sort of my favorite big cap stocks along with Alphabet. So, my sort of four core big cap stocks that I've been recommending now for six years to repeat, Berkshire, Alphabet, Meta, and Amazon.

                                    Those are still holds for me, but I'm certainly not putting new capital to work in them. And in the newsletters we're publishing, we're sort of looking off the beaten path a little bit in the less favored categories. For example, we recommended the Brazilian stock exchange the Bolsa there, which is a publicly traded company. Stock exchanges have been incredibly great businesses in every country all over the world over long periods of time. But the U.S. exchanges, which we like, CBOE, for example are very richly valued, whereas the Brazilian ones, pretty cheap. That's one example of one of the stocks we've recommended in the past few months.

Dan Ferris:                 Yeah. I love exchanges. Exchanges are one of the things that come up frequently at some of the conferences, the sort of value-oriented conferences along with, I feel like exchanges for some reason, don't ask me why, they're in the same category as like the Mexican airports. They keep coming back over and over again as these businesses that just can't be wrecked, basically. So, they keep popping up on value guys screens and their analysis seems to be consistent.

Whitney Tilson:           How has that Mexican airport stock performed? Because I remember, like you, I've seen it pitched on Value Investors Club and all of that.

Dan Ferris:                 Yeah. I'm unaware of them doing especially great. But I think the financial businesses are better, the exchanges. They're obviously, they've done really well in the U.S. And as soon as you said that, I thought this seems like a good place to ask, the exchanges that trade in the U.S, they're obviously richly valued. They've done really well. The ones in Brazil are cheaper. How do we know we're not in a value trap? Is it simply because exchanges are good businesses and not cyclical nightmares?

Whitney Tilson:           Yeah. The business has not done especially well. The stock has not done especially well. The business has actually done OK, but you've sort of got Brazil risk and that's turned out to be the headwind. So, this is one I would not size particularly big, and there's a wide range of potential outcome at any time you're investing in sort of a more developing market stock.

                                    But it also has incredible upside in that it is the fundamental characteristics of a monopolistic exchange like this are extremely attractive. And if Brazil ever catches a wind and sort of comes back into favor, you could get a double benefit there. So, it's one where there's certainly more downside, but it has multibagger upside potential. And so, you just have to understand that and size it appropriately.

Dan Ferris:                 It sounds like our friend Manish Pabrai, right? Heads I win, tails I don't lose too much.

Whitney Tilson:           Yes. Unfortunately, I will say that rationale is often used to justify the purchase of really crappy companies because you think the stock is so cheap. So, I would just add that caveat. Stick to trying to find long-term compounders, high quality businesses. And then once you're looking in that universe, look for a diversity of industries and small cap and large cap, and if you're comfortable with it, throw in international stock here and there, though you can lead a long and happy life just focusing on the U.S. market, which is largely what I've done over the years.

Dan Ferris:                 So, small cap, large cap, international, domestic, the lens is high quality.

Whitney Tilson:           Yes.

Dan Ferris:                 What are the bullet points on high quality?

Whitney Tilson:           I'm not sure. I'm not going to, I don't want to sound trite, but it's very easy to identify high quality businesses are ones that earn attractive returns on capital, generally have high margins, though some of the very best businesses in Amazon or Costco, for example, are low margin, but high turnover businesses. They generate good returns on capital that way. But the most important thing is they have a moat around the business that protects them from competition because we live in a ferocious capitalistic world. That's great. But it's not good for dominant incumbent businesses, of course.

                                    So, you want to find those rare businesses that can maintain their moat, their competitive advantages over time. And that's the hardest thing, ‘cause now you're trying to, the key to successful investing is not finding out what businesses are good today. The key to successful investing is finding out what businesses are going to be good 5, 10, 20 years from now, and that's much harder. So, I remember back when I was loading up on McDonald's as it was declining by 75% back ending it bottomed in March of ‘03.

                                    I remember the thesis back then was that a once great business was now permanently, secularly challenged, not cyclically, and so, the key pillars of that thesis were there was no more room to grow. All they were doing is opening up new units that were cannibalizing existing units, but not making the pie bigger, just hurting their franchisees. And you may laugh at this, given the obesity epidemic, but the actual thesis back then, 21 years ago, was that Americans were going to start eating healthier. It's easy to laugh about it then, but people really believed it then.

                                    What was really going on was they had bad management that was trying to manage the business for short-term earnings and had engaged in a price war with Burger King to try and grab short-term market share to meet short term-goals. And I correctly saw that this was still an insanely great business, that their real estate alone was worth the market cap of the company, and that a new, critically, a new CEO had already come in, Jim Cantalupo, and he had already stopped the price war, and he had already launched some new products. He was already amending fences with the franchisees.

                                    And I didn't have to speculate that, well, yeah, the people running it today are bums but someday there might be someone else who come in and do something smart. I waited and waited until a new guy came in and actually was doing the smart things that I could clearly see were going to fix the business. And it's the exact same thing, by the way, that I did with Meta, Facebook back at the end of ‘02, which is no, Mark Zuckerberg hadn't been replaced, but he had clearly indicated that he was scaling back investments, the amount of money he was squandering on the metaverse.

                                    They had over-hired during COVID, so they were laying off people, which I could see wasn't going to affect their revenues. And so, the savings would drop straight to the bottom line. And I could see that TikTok's growth after a parabolic growth was slowing. I could see that Apple was not going to introduce any new privacy things that would hurt the business anymore, so that was going to soon be in the taillights. That's what you want to look for is be a little patient and look for once great businesses that are facing some short-term headwinds and all. And the key is you got to be smart and figure out are these short-term headwinds or is this business permanently impaired?

                                    And the once mouthwatering economic characteristics are now permanently either in decline or this is no longer a great business, and that's the time where you want to avoid the stock probably and likely, and that's the time if you've owned it, you've had a good run, but the world has changed. So, let me give you an example of that. Valiant the pharmaceutical company went up, the stock went up something like 20 times in five to seven years under the CEO, Mike Pearson, and his game plan was simple. Go out and acquire smaller drug companies, and the moment you acquire it slash all R&D spending and increase the price of the drugs exponentially.

                                    So, he basically, he was gaming the U.S. health care system that allows companies pharma and other medical device companies, etc., to charge basically whatever they want, and the payers will just pay it. And the game worked. It worked for many years and the stock went up and up and up. But then a couple things happened. They kept taking on a lot of debt to do this. So, the game, it was hard to do more acquisitions because they already had a lot of debt. But also, they got to be so big, the stock went up a lot and they acquired so many companies that there was nothing else they could buy that would move the needle.

                                    They famously tried to acquire Allergan and Allergan told them to go jump in a lake. So, that was the end of the acquisition game. And then also, this was right around the time of the 2016 presidential election, and both Trump and Hillary Clinton were out there bashing the drug companies for their exorbitant prices and Valiant was Bbd company exhibit A there. So, the price gouging was also over. So, you had to see that a business model and growth that was driven by a couple key pillars, that those pillars had just been blown out, and what you are now left with is, Wile E. Coyote had gone off the cliff and the legs were spinning wildly and was about to plunge and worse yet, there was a lot of debt. And so, the stock went down by 97%, peak to trough.

                                    So, the question there is you have to, as an investor, you need to have the judgment to be able to look at Valiant down 75% and Facebook/Meta down 75% and be able to figure out one of those is an insanely great company that short-term things, they're fixing them, etc., and it's going to recover because it's still an insanely great company and the market's just panicking on short-term factors. Versus Valiant, which after it went down by 75%, went down by another 85%. Now that's a value trap and you've got to be able to distinguish between those two. Otherwise, you shouldn't be an investor if you can't make those judgments, and you should instead just buy index funds and there's no shame in doing that.

Dan Ferris:                 Right. That is such a pristine example. I'm going to end us there and go to my final question because I want that to be the last thing that people hear before we get to the final question. You've answered the final question before. I hope you don't remember it. It works better that way. We asked the identical question to every guest and no matter what the topic, even if it's a nonfinancial topic, it's the same identical question.

                                    If you've said the answer already, please feel free to repeat it. Expound a little. That's fine. And the question is very simply, Whitney, if you could leave our listener with one thought today, what would you like it to be?

Whitney Tilson:           You know what? I haven't answered this before, but because politics is just front and center right now with the debate last week and is Biden going to step aside, etc., people are so emotional about this and it seems like everybody's in one guy's camp or the other, right?

Dan Ferris:                 Yep.

Whitney Tilson:           So, I’m very careful to stay away from politics. I have no desire to alienate half my viewers and subscribers at all, but here's the key message, which is the mistake I see people make is, and this is backed up by lots of surveys and so forth, which is like when Trump was president, Democrats, when you surveyed Democrats and Republicans, Democrats thought the economy was doing a lot worse than it really was. And then when Biden got elected, Republicans have thought the economy is doing a lot worse than it really is because they're all listening to their, they're all in their own information bubbles and they are literally being fed different facts.

                                    You'd think, back in the day when we grew up, Dan, you and I, everybody read the same newspapers and we all sort of have the same facts and then we would come to different opinions on it, right? It's very important to recognize that we live in a world now in which nobody even agrees on the facts. And the investing lesson here is if you actually go back 75 years, and let's just say you sold your stocks. Let's take a typical Democrat and a typical Republican.

                                    And so, let's say you own the S&P 500, but if you're a Democrat and a Republican got elected president, you sold and went to cash during that president's term, and then you only bought back into the market when your guy got elected because you're feeling optimistic, right? And you run the math and basically you've just absolutely destroyed your returns. By far the best strategy is to have simply owned blue chip American stocks, the S&P 500 or something like that over the entire period. So, I see that happening again today.

                                    And so, I'll leave your readers with this thought, which is I actually think this presidential election is going to matter a lot in almost every way you can think about because the two candidates or the two parties, even if it's not Biden on the Democratic side, have such different views on so many different issues. So, depending on your viewpoint, this election is really going to matter, no question about it, except in one area. I don't think it's going to matter for the stock market. I'm actually pretty constructive on stocks. And I know you're sort of more of a permanent bear than I am, and maybe I'll come back, and we can have that discussion.

                                    But for the average investor out there if I look back under how stocks did under Trump, they did great until the pandemic hit, and that was sort of a black swan event that I'm not expecting to happen again, or something like it to happen again. And by the way, I can simply point to the fact that stocks have done great under Biden as well. So, regardless of who wins the next election, I think the U.S. economy is super strong right now. Unemployment is near a 50-year low. I think inflation is back down to pretty close to the Fed target. I don't think that's going to be a big issue going forward, etc.

                                    On the big macro stuff, and look, the market is richly valued, but I think justifiably so given it's a pretty favorable environment out there, right? So, I would just say, the most important to summarize what I've just said here is don't let your politics affect your investment decision making. Invest for the long-term and just stay the course. Whatever investing style you have, if you own good stocks, if you own an index fund today, there may be reasons you want to sell, if you're in retirement and need to pay some bills or if you want to buy a house or something like that, but don't let the media hysteria on one side or the other about the upcoming election cause you to think short-term and do something stupid and snatch defeat from the jaws of victory, meaning, letting long-term compounding work its magic.

Dan Ferris:                 Excellent. Yes. I'm glad you said that. This is the perfect timing for that message, I think. And just Whitney, thanks for being here. It's always a pleasure to talk with you. You always have a lot of great value to give our listeners, and we appreciate it. Thanks.

Whitney Tilson:           My pleasure. I hope to do it again.

Dan Ferris:                 Oh, don't worry. You'll be getting another call. That was a great deal of fun. In some ways, Whitney's like a walking encyclopedia of the last 20 years of investing, isn't he? There's always lots of examples online and lots of details. It's great.

Corey McLaughlin:    Yeah, remarkable just listening to him go through all those different examples of successes and regrets and not regrets or how he would handle different things differently. I was listening closely. I'm thinking in my head right now, let your winners run and sell a Wile E. Coyote is what I'm taking away.

Dan Ferris:                 That's right. Sell Wile E. Coyote. That's a good way to put it. That's something I can remember. And the example, that juxtaposition at the end was perfect. Valiant Pharmaceutical down 50 or 75% versus Netflix down 75%. Look at the differences. One is a sell, one is a buy. Learn how to identify it and you will not lose tons of money on Valiant, and you will make tons of money on Netflix.

                                    I thought that was so absolutely pristine, I just, I had to stop right there. It's exactly the kind of thing that we count on him for and that we get from him because of all the experiences and the encyclopedic nature and just the way he analyzes things. He's always done these presentations, he's not like Bill Ackman with 300 slides, but he's pretty detailed. I've seen him get into several dozen slides in a single company, and you can trust him to be thorough at the very least, if not really insightful about what's a great business and what isn't. Really good.

                                    All right, that is another really fun interview and another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as we really, truly did. We do provide a transcript for every episode. Just go to www.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 please. And also, do me a favor, subscribe to the show on iTunes, Google Play, or wherever you listen to podcasts. And while you're there, help us grow with a rate and a review.

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