On this week’s episode of the Stansberry Investor Hour, we’re inviting a different type of guest onto the show.
He’s a man with tons of experience as an investor…
After all, he worked as a portfolio manager for Harding Loevner for many years…
But what really sets him apart, is that he is the owner of a professional soccer team in England…
This week, Dan invites owner of the Plymouth Argyle, Simon Hallett, onto the show…
Simon’s not your typical guest, so Dan takes this opportunity to ask Simon all the questions from a successful businessman and sports owner.
The two have a lighthearted conversation about what it’s like watching your favorite sports team as a child, then growing up to become the owner…
Then they pivot to some of the best investing lessons Simon has learned over his many years as a portfolio manager…
And Dan picks up on a ton of good advice from Simon that applies to every investor.
It’s a conversation full of great business and investing insights… from a man with decades of experience to show for it.
You can listen to Dan’s full conversation with Simon and much more on this week’s episode.
1:23 – Dan’s on a new diet and it’s doing wonders for his health… “I’ve been on a news diet for a week, no news, no Twitter…”
3:30 – “Just not doing that for a whole week has been amazing. You’re more likely to sit down and read a book. Or if you want to find out about a particular stock, you don’t go to the news, you go to the SEC website and read the 10K… It actually prompts me to read more of those long form original sources rather than the shorter form news stories, and I think it just gets you a better quality of information…”
5:40 – Dan shares a quote from Rishi Gosalia on twitter… “Hold a high bar and wait patiently…”
8:11 – Dan shares another quote, this one from Jerry Seinfeld about stand-up comedy, that we can apply to investing as well… “Survival is the new success…”
14:06 – This week, Dan invites Simon Hallett onto the show. Simon joined Harding Loevner in 1991, where he worked as a portfolio manager, focused on high quality growth stocks. Today, he’s an owner of a British soccer team, the Plymouth Argyle.
18:56 – Why did Simon decide to own a soccer team? “It’s an investment only in the very loose sense, in that I paid money to buy shares. It’s not an investment upon which I expect much of a return. It’s partly a boyhood dream and it’s partly payback to the people of Plymouth…”
25:00 – Dan and Simon talk about the now famous Moneyball strategy… “We all know about these behavioral biases that we have. We all know about how to use data to identify underpriced baseball players, but very few people did it. So it’s not what you know that gives you a competitive edge. It’s being able to take what you know, which is often what everybody else knows, and being able to apply it…”
30:35 – Dan shares a revelation he had recently… “It suddenly dawned on me, that all this data I’m looking at… if it’s a fact, it’s in the past. And if it’s not in the past, it’s a guess…”
38:55 – Simon talks about what he looked for in stocks when he was a portfolio manager at Harding Loevner…
43:04 – “What we’ve been doing in our portfolios over the past 4-5 years really has been dialing down a little bit on the quality, dialing down a little bit on the growth, but dialing up on the value…”
44:42 – Simon shares what he calls his biggest investing mistake… “I started thinking, well this is a great way over the long term to save money and invest, but stocks are too expensive now…”
48:57 – Simon explains why he never tries to time the market… “If you start holding cash, you have to get two decisions right. And the combined probability of being right twice is very low…”
55:32 – Simon leaves the listeners with a final thought before the interview closes, “I’m going to quote Annie Duke, who I very much admire… She says her biggest piece of advice is to ‘be humble’ and I’ve been thinking about it ever since…”
1:02:23 – This week we’ve got a ton of great questions on the mailbag. One listener asks Dan if the government could ‘inflate away’ our debt… Another asks Dan if he thinks big banks and governments could try to stop decentralized finance… And another listener writes in with his viewpoints on El Salvador’s adoption of Bitcoin… Listen to Dan’s response to this and more on this week’s episode.
Announcer: Broadcasting from the Investor Hour Studios and all around the world, you’re listening to the Stansberry Investor Hour. Tune in each Thursday on iTunes, Google Play, and everywhere you find podcasts for the latest episodes of the Stansberry Investor Hour. Sign up for the free show archive at investorhour.com. Here’s your host, Dan Ferris.
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 Simon Hallett, a former portfolio manager with Harding Loevner. In the mailbag today, a big, big question about inflation and some questions about crypto and El Salvador. And remember. The mailbag is a conversation, so talk to me on our listener feedback line – 800-381-2357 – and hear your voice on the show. In my opening rant this week, I’ll talk about, well, not looking at the news for a week and counting, and then I’ll tell you a little bit about this year’s VALUEx Vail Conference. That and more right now on the Stansberry Investor Hour.
So two things really quick before we talk to Simon Hallett, who sounds [laughs] like a really interesting guy, I have to say. Can’t wait to do this. But first of all, I’ve been on a news diet for a week... no news, no Twitter. And I also did not allow myself to shop for the things that I sort of obsessively shop for, like guns, ammo, gun parts, new gun – you always want to upgrade your gun. And for some reason, guitars, of course, because I play the guitar. And for some reason, cars. I’ve been driving the same car for almost 20 years, but anyway. Maybe that’s why I’m shopping obsessively for them.
So none of that. I’ve done none of that right up until the time you’re hearing my voice. And I’m going to try to keep it up for as long as I can. And I got this idea from a fellow named Rolf Dobelli – Swiss fellow – who himself has not looked the news since 2010. Now, it doesn’t mean he doesn’t know what’s going on in the world. He goes to original sources. He goes to original sources when he hears that there’s a pandemic or some other big development in the world. So instead of watching the news, he’ll go right to the CDC website or something like that. That’s what it really means.
So I’ve been, you know, not looking at any of my news sources. I subscribe to all kinds of news sources, and I didn’t look at any of them... haven’t looked at any of them right up until this moment. And I have to say it puts me in a different frame of mind and it really – immediately within 24 to 48 hours, I thought, “Boy. I’ve been wasting so much time looking at news.” The thing about looking at news – especially online where you’re bombarded with all kinds of stuff. It’s different from looking at a printed page. To me, anyway. You instantly are aware of how often your attention – or in my case, I’ll just blame myself. I won’t blame all [laughs] humanity... how often my attention is pulled away like every several seconds or a minute or so.
And just not doing that for, you know, a whole week – or a little more at this point – has been amazing. You know? You’re more likely to sit down and just read a book. Or, you know, if you want to find out about some particular stock, you don’t go to the news. You go to the SEC website and just read the 10-K. Or if you want to find out about an industry, you go to maybe the industry group website or something like that. And it actually prompts me to read more of those long-form, original sources rather than the shorter form news stories. And I think it just gets you a better quality of information. I think most news is pretty poor-quality information.
Rolf Dobelli, who started [laughs] all this stuff, the guy who created this news diet idea as far as I know – he says it right. He says, “News is the absolute worst-quality information. You’re more likely to be radically misinformed than informed.” So I think that’s all I’ll say about that. I highly recommend that you do this. Learn to ignore the news and go to original sources for things you want to learn about. And also, avoiding Twitter has been very good. That’s the one that’s just insidious for me. Because one thing leads to another and another and another, and pretty soon an hour has gone by.
The next thing I want to talk about is VALUEx Vail. This is an annual invitation-only investment conference mostly attended by fund managers, but there’s also people who are not fund managers – a few of them. One guy was a Google executive who runs his own portfolio. And I’m a newsletter writer, mostly. I don’t manage other people’s money at all, certainly. So I can’t tell you the stock picks... although, somebody recommended Qualcomm. I can tell you that one. But the others, they don’t want the research getting out there for some reason. And I just respect that. But there are a couple of things. Like this one fellow – you can follow him on Twitter.
His name is Rishi Gosalia. And Rishi Gosalia actually came up with what I’m going to throw my quote of the week in here with this. And the quote of the week is, “Hold a high bar and wait patiently.” And I think he’ll even credit somebody else. I think a friend of his said that to him. But I’ll credit you, Rishi, if you’re out there [laughs]. And I thought that was really great because it addresses two really important aspects of investing, which are hold a high bar – which is really just knowing what you’re doing. Hold a high bar meaning have a system... have a viewpoint. You know, if you’re looking for high-quality growth companies or something, then stick to that.
You know, don’t get your attention pulled away by somebody at a cocktail party and then run off and buy something without any research or information or without it being a part of your investment strategy that you have decided is right for you. So hold a high bar. Know what you’re looking for. And wait patiently. Wait patiently in both aspects. Wait for your setups, for your trade setups for the right kind of companies at the right price... whatever it is you’re looking for. And then once you get it, wait patiently for the idea to go up or down or whatever it’s going to do, right?
But with equities, the more patient you are – if it’s a really good, high-quality business that’s compounding at high rates and re-investing capital at very high rates – patience is going to make you rich. Bottom line. So that was one of the big things that came out of the event that – you know, Rishi is the one who said that and spelled it out in his presentation. But so many other people in the event say things like that. Like, everybody is long-term-oriented there. Nobody’s like an options – there are no options traders there. You know, these are long-term equity investors who think of the stocks they buy as a piece of a real company, so they have ownership in a real business and they want to know about it as if they own the whole thing.
And another thing I wanted to point out was a quote by a guy – the quote is actually by Jerry Seinfeld, but it was put up in his presentation by a guy named Matt Griffith. Really great guy who has attended the event I think as long as I have. So, Matt, before he got on to his stock pick he talked about Jerry Seinfeld who said, “Survival is the new success.” Survival is the new success. And Seinfeld was talking about the stand-up comedy profession. And Seinfeld says basically, “Look. If you’ve been around the business for, you know, decades” – basically – “and you’re still getting paid and still getting gigs, you’ve survived and you win. That’s success.”
Because apparently, it is just the most insanely competitive thing in the world. You know, audiences are ruthless. They laugh at what they laugh at and they don’t laugh at what they don’t laugh at. And, you know, you generally play to small venues. The audience is right there, people are heckling you. It’s tough. And it’s tough to stick around even if you have a good year or two. And Seinfeld talked about that, and Matt talked about it too. And the parallels with investing are interesting because, for example, at one point Matt was saying that, you know – somebody asked Seinfeld about getting feedback from your peers.
And Seinfeld is like, “Who needs feedback from your peers? You step off the stage, you just got all the feedback you need.” And it’s the exact same way with investing. You don’t need feedback from your peers. You try your ideas in the market and you’ll find out pretty quick or, you know, within a reasonable amount of time, right? You got to be patient. But you’ll find out. The market will tell you. You won’t need feedback from your peers. And your feedback from your peers doesn’t really matter. What happens int eh market after you put your ideas to work with real money – that’s what matters, right?
So you either – as a stand-up comic, you either get laughs or you don’t. And as an investor, you either make money or you don’t. And I found that interesting because a lot of people approach investing like they think this is going to be easy. But I doubt if very many of those people would say, “Yeah. I can be a stand-up comic.” Because that’s brutal. Just getting in front of an audience scares the daylights out of many people. And getting in front of the audience and having to tell your own original comedy material which is either going to – probably going to bomb, as a lot of it does for those comedians we never hear from again – that would be a different story.
And we talk about – you’ve heard people say things like, “You know, you wouldn’t do your own brain surgery. Why do you think you can manage your own money as well as Warren Buffett,” or something like that. And I don’t think that’s really right. I think people can manage their own money. However, I recognize that it is a highly competitive playing field and you do need an edge. And the lowest-hanging fruit – I’ve said this many, many, many times. The easiest edge to get is simply to be patient and have a long-term horizon because almost nobody does. The market just trades millions and millions of shares a day, turns over and people just get nervous, you know?
They’re down a few percent and they sell out. And then, you know, they don’t get the benefit of the long-term compounding. And overall, I have to say going to VALUEx Vail, I’ve been there a bunch of times and I’ve presented three times. And contributing is wonderful, and just being around a group of kind of more or less likeminded people and interchanging ideas is good. So if you can do that in your business and in your life, I highly recommend that you do so. It’s tough in the age of COVID but do your best. All right. That’s all for that right now. And remember. My quote of the week was from Rishi Gosalia. You can follow him on Twitter. His name is R-I-S-H-I Gosalia – G-O-S-A-L-I-A. You can find him on Twitter. I bet he’s a really good follow.
I just started following because I just met him this past week. Hold a high bar and wait patiently. Great advice for investors. Especially for equity investors. All right. Let’s do it. Let’s talk with Simon Hallett. Let’s do it right now. [Music plays and stops] So I need to talk to everyone here seriously for just a minute. Because right now, we’re in this weird, emotional market with a lot of fear and greed controlling what the average investor is doing with their money. That’s why we’re seeing a lot of money pouring into crazy investments like NFTs and meme stocks and penny cryptos.
People see the market still near record highs and they’re scared of getting left behind. They want to be part of all the hot money-making stories we’re hearing right now. But really, for most people unfortunately it’s a bunch of crap. You’re probably going to lose everything chasing speculative gains like that. Just ask someone who bought AMC stock or a bunch of Dogecoin a few months ago. It’s the exact opposite of how I approach investing. That’s why I’d like for you to check out a new video I just posted online at extremevaluestock.com.
In the video, I’m sharing details of a fantastic, risk-averse value stock opportunity that my research is showing could return about 200% over the next 24 months. I’d love for you to check it all out by heading over to extremevaluestock.com. But please hurry because the stock I’ll be telling you about is getting close to exceeding my buy-up-to price recommendation. And once it does, I’ll probably have to take the video offline.
So one more time. To learn the details, head over to extremevaluestock.com today. That’s extremevaluestock.com. [Music plays and stops] All right. Time for our interview once again. Todays’ guest is Simon Hallett, a former portfolio manager with Harding Loevner and owner of a British soccer team, which is really cool. And we’re going to talk about that. Welcome to the program. It’s great of you to be here.
Simon Hallett: Thanks very much, Dan. It’s an honor to be invited.
Dan Ferris: So naturally, the topic at Stansberry Investor Hour is investing. So the first thing we need to talk about is soccer. [laughs] We need to talk about the Plymouth Argyle, which you own substantially all of that. Do you not?
Simon Hallett: I do. Yeah. I became a shareholder in Plymouth Argyle about five years ago. And then, about three years ago I became the majority owner and chairman. So I’ve gradually become more involved here.
Dan Ferris: Yeah. And for our listeners’ sakes, since they’re mostly in the United States, Plymouth Argyle is a British football club known as a British soccer team. And how are they doing?
Simon Hallett: We’re currently lying eighth, after six games of this season in the third tier of the English football, which perhaps surprisingly is known as League One.
Dan Ferris: League 1. All right.
Simon Hallett: There are four divisions of entirely professional football in the U.K. The first of which will be familiar to people, is the English Premier League. The second is called the Championship, the third is League One and the fourth is League Two. And that’s the apex of the pyramid of soccer that extends down to, you know, your local bar team.
Dan Ferris: Right. So I was looking through – there was a Q&A that I was reading about this where you would answer some questions coming in as a majority owner and so forth. The thing that really intrigued me was the limit on player salaries which look like 55% of revenues at the time of the question?
Simon Hallett: At the time of the question, it was 55%. In the current division we’re in, it’s 60% of revenues. Yeah.
Dan Ferris: Right. But the first thing on my mind was, “Does everybody have the same-sized budget?
Simon Hallett: No. No. No. There is several problems with this form of salary cap. One is that revenue is defined in a way that would appall an investor-related podcast such as this one. In the revenue includes equity injections. So if I decide to [laughs] –
Dan Ferris: That’s weird.
Simon Hallett: It’s very, very weird. It’s very controversial. But at root, it’s actually quite a good system because it means that the bigger clubs can spend a higher dollar amount but the same fixed proportion of their overall revenues. And that’s pretty good. That would actually, properly applied and without the counting of equity injections as revenue, be pretty good for the Plymouth Argyle.
Dan Ferris: All right, Simon. You’ve come to the right man. I’m going to put your team at the top of the leader board in one fell swoop. You need to meet Jeff Bezos. You need to be good friends with him and get an equity injection and crank the revenue up. He could triple your revenues.
Simon Hallett: He could indeed. Actually, he could more than triple our revenues.
Dan Ferris: Of course.
Simon Hallett: I think one of the things that confuses people quite often, coming from the investment world or the company research world in particular, about football is that football – or soccer, sorry – is very salient. It gets a lot of publicity. It looms large in people’s minds. And yet, it’s actually a fairly small business. If the biggest clubs in the world were listed on one of the world’s leading stock markets, they would make it only to the small-cap index. So the football industry is actually fairly small, but it has astonishingly large reach with billions of people.
Dan Ferris: Like the biggest premier league teams, you mean? If they were listed?
Simon Hallett: If they were listed, they’d be in the small-cap index. The market capitalization of Manchester United, which is owned by the Glazers who are Tampa Bay Bucs... not just United lists – I think it’s still listed. It doesn’t actually trade much. But its market capitalization I’m going to guess is somewhere between $3 and $4 billion in the small caps. It’s an industry that looms large in the imagination of the public but actually is not as economically influential as people think.
Dan Ferris: So what’s the last one? There’s got to be a lesson. Warren Buffett tells us being a good businessman makes me a better investor. Being a better investor makes me a better businessman. What’s the intersection here for you between investing and football club ownership?
Simon Hallett: First of all, I’m from the town of Plymouth. And I was a fan. I was a fan, a schoolboy standing on the terraces at Argyle watching them going back to 1966. So this is very much – it’s an investment only in the very loose sense... in the, “I paid money to buy shares.” [laughs] It’s not an investment which I expect much of a return. It’s partly kind of boyhood dream and it’s something of a payback to the people of Plymouth who –
Dan Ferris: The old softies.
Simon Hallett: I am a bit of a softy. Payback – normally, one of my favorite rants is, “I hate it when people say, ‘Oh, Bill Gates is giving back.” You know, it’s like, “Well, what did he ever take from us that he has to give it back? You know, what he does was changed the world for $100. And modern capitalism I think differs from wealth creation in the old days. In the olden days, if you wanted to get rich you had to knock somebody on the head and steal their stuff. Today if you want to get rich, you have to provide goods and services at prices that people want to pay. And I don’t normally like the concept of giving back. But in this case, the people or the ratepayers of Plymouth paid for my education from the age of 10 through 21. It was a very good education. And I feel that I do owe something back as I’ve been able to generate rents on that education throughout my career. So it’s a bit of payback and a bit of fun, frankly.
Dan Ferris: I share the pet peeve, by the way, about that phrase. It annoys me.
Simon Hallett: Yeah. Look. I think it’s wonderful – let’s just be clear. I think it’s wonderful the people who acquire wealth are philanthropic. I like to think I am myself. But the idea that they’re returning something that they stole or temporarily borrowed is outrageous in my opinion.
Dan Ferris: They’re net creators. I mean, it’s silly.
Simon Hallett: By definition. By definition. You can buy Windows for $100.
Dan Ferris: I know.
Simon Hallett: I mean, there are huge surfaces. And I suspect that we actually owe some of them to him. But the intersection – I’ve been absolutely fascinated by this intersection of investing and managing a football team. But it’s not about ownership of the club. It’s really about decision making. So what’s common to investing and to soccer is that short-term outcomes are the result of both luck and skill. And yet, people attribute successful outcomes always to skill and unsuccessful outcomes to bad luck. It’s an absolute constant.
So all the behavioral biases that we see in investing can damage your portfolio returns. We see very, very, large in the world of soccer. And I was just going to say something earlier that we had a very good win on the weekend against a much wealthier team than us. And the narrative is all about... but the narrative about the match is driven by the outcome. It’s not driven by what actually happened on the pitch. And you see that time and time again.
And they can lead to very, very bad decision-making in the same way that if you buy a stock because you think it’s deeply undervalued, you have expected returns of 8% or 9% versus expected returns from the market of 6%, and you’ve spent those kinds of returns to compound as price and value converge, and it’s a classic... price is what you pay and value is what you get. Generate some investment returns but then to stop completely out of the blue gets taken over, you think, “But I was very clever buying it.” But of course, you got lucky. So it’s very, very important to distinguish when you’ve been lucky and when you’ve been skills. So those biases – it’s not easy at all. And the other thing that is so common in both is that we revere those who are successful, even if it’s only over short periods of time. And, you know, we never think that they’ve been merely lucky.
And in football, it’s actually that there’s a lot of evidence that the market for football is fairly efficient. So, you know, if we think that market efficiency is, you know, you’re essentially going to get a market return adjusted for risk from a diversified basket of stocks, it’s pretty much the same in football. If you pay the market price for your team, you will get market – you will get what you paid for essentially. So fairly efficient market. So the job when you’re assembling a portfolio of stocks is to buy the portfolio of assets that will make for a diversified portfolio.
But where you think there is a disconnect between the price you’re paying and the value that you’re receiving. And it’s hard. It’s hard to identify those stocks. Similarly in football, it’s hard to identify those players. There’s a converging industry of data analytics that enables us as football club executives to think about the portfolio assets. But commonly, data analysis is ignored and people prefer to go with their gut... just as they did in investing when I started, you know, 40, 45 years ago.
Dan Ferris: And as they did in American baseball before what I might call the Moneyball year... you know, the Bill James year.
Simon Hallett: Yeah, before – absolutely, before the Bill James, Billy Beane era. And again. So this is yet another interesting intersection of football and investing. Soccer and investing. It’s that we all know about these behavioral biases that we have, we all know about how to use data to identify underpriced baseball players, but very few people did it. So it’s not what you know that gives you the competitive edge. It’s being able to take what you know – which is often what everybody else knows – and being able to apply it in your organization. And I think that was the great key to the success of the Oakland Athletics and Billy Beane in the early days. Everybody knew what Bill James was saying. But Billy had Art Howe, the coach, report to him. And if Art Howe said he wanted to steal bases or bunt, Billy Beane would say, “No, you’re not going to.”
And Howe had two choices. He could either not steal, not bunt or he would walk himself. So a confusion in baseball terms. But essentially, Hal had to do essentially what he was told or he would have to leave. And it’s very similar in football. The term – you know, the football people prefer to go with their gut, with their eyes. And they – at my club, they’re learning now the language, data analysis, and good decision making. We had an interesting time getting them to the doctor. But it’s the same in investing. You know, people prefer to go with their gut. People think that they’re geniuses. The industry tends to revere geniuses. They put their brands all over, you know, distribution vehicles and sell billions of dollars of them until it all goes wrong.
Dan Ferris: Right. They manufacture geniuses [laughs].
Simon Hallett: They manufacture – but, well, usually it’s just lucky. There's so much luck. But you can turn a good luck into a good business in a very short period of time.
Dan Ferris: Yeah. What I was really thinking, what I should’ve said, was that they manufacture stories about alleged geniuses.
Simon Hallett: Absolutely. Well, the problem with stories – again. Football, what’s true about football is true of many sports. Football is a low-scoring game. So the outcome of any particular match is very much a function of luck. Imagine that you have a slightly weighted coin... slightly weighted in favor of heads, but you only get to toss it three times. The probability of getting a majority of heads is, you know – whatever it is, 50-50. But if you tossed it 100 times and it was slightly weighted in favor of heads, then it’s almost certain that you’d get a majority of heads. But football on average has three schools again. The average score in football is two to one.
So the difference between a win and a loss is very, very much down to luck. But that’s part of the challenge. So a lot of the challenge of football is that you then get all this narrative around the drama. And I often get Americans who say, “I don’t like football. I don’t like soccer because there’s not enough scoring.” But that’s the point. So football is ripe for, you know, the narrative fallacy. It’s right for taking outcomes that were really about luck, turning them into drama and turning them into stories. And that’s really part of the charm.
You know, whereas in baseball it’s much more about playing the odds, but the outcome of an individual game – it’s very interesting in baseball. If you go and watch your favorite baseball team and they lose, there’s not much emotion attached with that. Even if you’re the best team in baseball, you’re probably going to lose 60 games that season. But in football, the drama, the passion, is much, much intensified by the fact that there’s so much luck involved... even if people don’t recognize that.
Simon Hallett: As you describe this, I realize I don’t watch a lot of soccer. And is the screen as – the TV screen as filled with numbers in a soccer match as it is in, say, an American baseball game or American football game? Because it’s numbers, numbers, numbers everywhere all over the screen constantly.
Dan Ferris: Yeah. No, it’s not. The basic statistics of football are just starting to catch on. So, you know, a number of chances created, number of shots on goal, number of passes completed versus made. The whole use of data analytics has been heavily resisted in soccer. And it’s really only just catching on now. But I have to say there are a lot of teams, you know, they hire the data analysts that get ignored. You know, I’ve heard several stories from data analysts who say, “You know, we have this process for identifying underprized players, but what happens is that a scout or an agent will call up the manager, he’ll look at a video for 20 minutes, make his mind up and offer him the contract.” So there’s a lot of lip service being paid for the good process. Again, this is – I think it’s the same in many investment firms. There’s lip service paid to the process structure. But in practice, people make their minds up to exercise judgment on whatever they want. It really is – they really are activities with a lot of paradox.
Dan Ferris: I think that’s true. You know, they describe a process that is... data-driven is a big word, right? You know? “Oh, data-driven process.” You know, “OK. Fine.” And it’s good as far as it goes. Certainly, Renaissance Technologies has taken it quite far.
Simon Hallett: It certainly worked for them.
Dan Ferris: Yeah. No one would believe, right? But there’s also this other thing, Simon, that I’ve experienced as I approach my 60th birthday in a couple months here. And that is, at one point in the past probably decade or so it suddenly dawned on me that all this data that I’m looking at – if it’s a fact, it’s in the past. And if it’s not in the past, it’s a guess. Now, you can arrive at that guess at any manner of process you wish to describe. But if this is about the future, it reduces to a guess in my opinion.
Simon Hallett: A forecast.
Dan Ferris: A forecast. Yeah [laughs]
Simon Hallett: Let’s be kind.
Dan Ferris: Yeah. That is very kind, you know. And around here, forecasting is getting to be like a four-letter word almost. But OK. But I sort of wonder. They got somewhere in baseball with the analytics. But even those effects, it’s become much more difficult because there’s initial effects. It was so novel. They really made a big difference, and now everybody does it to death. So it’s very efficient. But the game hasn’t changed too much. And I’m wondering, “You know, is there a sense of like, “Gosh. Don’t ruin soccer with all these numbers”? You know?
Dan Ferris: Very much so. It’s not quite – let me just back up a bit to what you said. I mean, I have heard from some sources that a lot of baseball fans are now starting to resist it. You know, it’s changed the game. This use of data has changed the game and it’s become too efficient. You know, people don’t like the shift. They don’t like the fact that, you know – what is it – Vertical Lift is now studied, the rotation on the ball is now studied. Currently the romance of baseball, as in the romance of football, is that you want some judgment to remain. You don’t want it all being driven by algorithms because, after all, it’s a sport and it’s supposed to be entertaining, not just effective... not just efficient.
And there is a sense in some quarters that that is beginning to – that that will be the end result of all this data analytics used in football. But we are so far away from it, and it will never be – never be – as effective in baseball. So baseball is a series of, you know, one-off matches. It’s a pitcher, it’s a batter. Then it’s another pitcher and a batter and sometimes a fielder or a catcher is involved. But that’s basically it. And so, a series of one-to-ones. It’s a batter to – it’s a pitcher to a batter, it’s a batter to a fielder and so on. There’s very little complexity in it. Whereas, once you start getting five people on court as in basketball or 11 people on the pitch as in NFL or soccer, that complexity makes it much more difficult to analyze and get algorithmic in your decision making.
But you can improve your decision making. And I think that that’s the key thing. You know, the market isn’t inefficient, but you can improve it. So, you know, it depends what you want. Do you want a computer making decisions all the time or do you want to win more games? to win more games? You know, what are your priorities? In my case, my priority is to win more games. And with limited resources. That’s the key thing. That’s, again – it’s kind of something I mentioned earlier. It’s why it’s like, “Portfolio construction” – when you’re constructing a portfolio... you could.
But you rarely kind of rank order the companies in your universe by the price-to-value relationship and take the 40 or 50 keepers because you’d be missing out on the opportunity for diversification. And it’s the same in soccer. If you ranked all the available players by price to what you thought they would be worth, you’d end up with actually a team of nothing but goalkeepers. Goalkeepers tend to be cheaper than outfielders. And of course, that would not be – that wouldn’t be very effective in terms of producing results. So, you know – sorry. I’m drifting away from the original question. But you could definitely have too much data, but we’re a long way from that in soccer. But we do seem to be well on the way toward spectator resistance in the amount of decision making that’s data-driven in baseball.
Simon Hallett: And apropos if nothing here, just off the top of my head. To me, baseball and soccer are in a similar category just kind of in a poetic way. To me, they’re like these more pastoral kind of experiences. And they’re less – actually, I know soccer can get a little rough, but they’re less violent than football, which to me is a highly technological warlike undertaking. It’s just battle, and they look like – they look like soldiers on the field. And, you know, the injuries to the brain and all this stuff, it’s just gotten crazy. Like I said, apropos if nothing.
Simon Hallett: Yeah. I think you’re right. I think you haven’t seen enough soccer.
Dan Ferris: OK [laughs]. That sounds like it. There we go. OK.
Simon Hallett: Something that – soccer is a game – it’s pastoral that’s played on grass. So it’s played on a field, but that’s about it. You know, even in League One we have 13,000 fans yelling their heads off for 90 minutes on Saturday, 2,000 of which were yelling their heads off for the opposition. So, you know, if you take that to the Premier League or to the Italians, Spanish First Divisions, these stadia are cauldrons of passion. And soccer’s a much more physical game than people normally think. But the kind of lyricism that is associated with baseball has actually started to appear in soccer. So soccer traditionally is very much a blue-collar, working-class game. And the kind of lyric writers about sports tended to be writing about cricket, actually.
So cricket is much more of a kind of pastoral, bucolic baseball-like game. You know, nobody outside your own country or a few people outside your own country – in Britain’s case, her former empire – really understand. But they kind of know that it evokes the past. There’s a lot of nostalgia associated with it. But what’s happened is, soccer in Europe in particular has moved beyond the kind of blue-collar strata. It’s attracted a lot of great writers. So there’s now absolutely first-class writing about football. And of course, great writers who like to write about the lyricism of baseball, with nostalgia a little. And we see the same in football. But football, they’re not pastoral. It does attract very good writing in the same way that baseball historically has attracted the best writers in the United States.
Dan Ferris: All right. Well, the topic of football, I mean, when do we ever have a guy like you on the program? So I couldn’t resist it. But we should turn in a more focused way to the topic of investing. And maybe you could just tell us about the firm a little bit, about Harding Loevner.
Simon Hallett: Sure. Well, we’re based in central New Jersey. We were founded in 1989 by Dan Harding who left about 20 years ago and David Loevner – who’s still our chief executive... We are a rather old-fashioned stock-picking company, research-driven., long-only global equity investor. So we have, you know, a limited number of different strategies that are available through different distribution channels. But they share a common philosophy that we invest in high-quality, long-duration growth companies. We like to say that we have three pillars to our investment philosophy... which is growth, quality, and price or value, as Stansberry would like to say.
So if we want to put it in the jargon of the industry, we’re probably – actually, these days we are not as high-quality growth companies. However, over our 32-year life, we’ve been known as value, growth, GAAP. And now today, we’re quality growth. And what’s been interesting is the fashions in naming styles have changed. What we’ve done has been very constant over that 32 years. So we do company research. We do it on a global basis, and we pick stocks, and we are long-term investors. So our average portfolio turnover tends to be, you know, somewhere between 15% and 25% a year. You know, we’ve still got some stocks that we’ve earned. Yeah. We still got some stocks that we’ve earned for 20, 30 years.
Dan Ferris: What I was thinking the entire time you were describing – even the developments in the naming of this style that has remained essentially the same as you describe it, even as the names have changed – is that everybody today seems to want to own this. Everybody seems to want to own quality growth. And it’s interesting to me that you had that third value component in there. So what does that look like here in – well, we’re in the latter half certainly of 2021. How does that component look?
Simon Hallett: It’s dangerous. Well, the background here is that when we started we didn’t know there was a quality factor that generated a return premium. So talk about getting lucky. As we were referring to the combination of luck and skill, one of the things that got us very – that made us very lucky was our personalities. Said, “Look. We just want to invest in high-quality companies. We don’t want to trade much. We believe quite strongly that trading has cost and no benefits – certain costs, unknown benefits.” Many of our original clients – actually, we started off with nothing so I can’t say original clients. But many of our first clients were taxable, and we strongly believe that, you know, even a minimal level of turnover in a portfolio was tax inefficient.
But really, it was about our personalities. We didn’t want to be frantically trading. We wanted to be studying companies and we wanted to be long-term investors. And we didn’t want to have to worry about the companies in which we were investing. So for us, in those days that was how we defined quality. Today, we’re much more objective. You know, we talk about volatility of ROE, we talk about margins, we talk about volatilities of margins and so on and so on and so on. But in those days, again, it’s a kind of function of how we evolved and how the industry has evolved. We used our judgment. We knew a high-quality company when we saw one. Today, we can define it with data and much more objective numbers. But there’s still a judgment call at the end of it.
But we stumbled across this return premium, which has been pretty steady over the last 30 years. And we’ve been worrying – I think for four or five years – that quality was discounted. Everybody wanted quality, just as – if you remember back about 10 or 12 years ago – mean variance optimization and low-volatile portfolios were all the rage. I think they got priced out of any potential return premium. And I think there’s a danger with quality there. I have to say that the kind of growth that we talk about – you know, and we’ve earned some of the fangs over the years. But the kind of growth that we talk about tends to be much more modest.
We’re not looking for the kind of moonshots. We’re much more looking for the very long-term compounders where the overpricing is much less evident. Though it’s still there. So what we’ve been doing in our portfolios over the last four or five years really has been dialing down a little bit on the quality, dialing down a little bit on the growth but dialing up on the value... just at the margin. But there was some years – I think this is one year where our global asset portfolios is outperforming but not by as much as we’ve done historically. So yeah. We’re nervous.
Dan Ferris: You’re nervous. OK. Do you do anything about that, or you’re just long only? And for example. In a long-only classic move would be simply to build a cash balance, if only as a residual from sales. But you don’t.
Simon Hallett: No, we don’t. We’re run, you know – my people often ask me about my biggest mistake in investing. And I have always thought the – you know, I started in this industry in the late ‘70s, whenever that was. You know, after I graduated I went to work for a bank, and then after about 18 months, went to work for an investment management company. And it was actually before Margaret Thatcher was elected. That long ago. And after I kind of learned just the basics of equity investing – the people forget that 45 years ago, outside the United States we weren’t really equity investors. There’s no culture of long-term investment in equities outside the United States when I began.
So, you know, although I was reasonably well smart and certainly – reasonably well smart and certainly very well-educated, I didn’t really know what a stock or a bond was. So I found out pretty early on. I kind of started thinking, “Well, these things are a great way as a long term to save money and to invest.” But stocks are too expensive now. And it’s like agricultural land. One of my friends was telling me the other day that agricultural land is always too expensive. But it’s always too expensive. And that’s kind of been my experience. You know, again. It comes back to what I know about decision making and the biases we have. We tend to have different discount rates for things now and things in the future, and we’re much more risk tolerant in the future.
Or as probably professors of behavioral finance once said, “We all want fruits and vegetables next week, but we want fats and sugars tonight.” And I’ve always been the same with equity investing. You know, I really like stocks for the long term but a bit too rich for me at the moment. So we very much adopted a policy that if we get a new client, we put their money in, we execute ruthlessly and quickly if – and funnily enough, I’ve done this in my personal life about three or four years ago. I decided that I was so bad at managing my own money that I was going to hand it to somebody else because otherwise, I was never going to get invested [laughs] after 40 years of a bull market. So you have to take measures to control what would otherwise be very bad investing behavior.
Simon Hallett: Right. So, Simon, when we say – and I say the same thing right now. When we say we’re nervous or, “It’s dangerous,” we don’t really – that’s a form of market timing. Isn’t it? We think we know something about that –
Simon Hallett: But we know nothing. We know nothing.
Dan Ferris: Right. Right.
Simon Hallett: I think one of our great successes has been, A, that we’ve been lucky – we stumbled across a return premium that was clearly there 30 years ago but we didn’t... we nor anybody talked about the quality of premiums 30 years ago.
Dan Ferris: People didn’t talk about factors.
Simon Hallett: They didn’t talk about factors. It was just you bought a bunch of stocks, you know? Or you bought stocks in a bunch of companies, I think most accurate from our point-of-view. And I think so much of investing – coming back to soccer, so much of the investing when people are getting their views, they’re describing their psychological state. And your psychological state has nothing to do with what the market’s going to do. I mean, I hate it when people say, “You know, do you have conviction in this stock,” or one of our analysts says, “I have high conviction in this stock.”
Dan Ferris: So what?
Simon Hallett: Psychological state.
Dan Ferris: Yeah.
Simon Hallett: Psychological state. You know, whether you have high conviction or low conviction, the return’s going to be the same. And, you know, you tend to make your best investment decisions when you had the least conviction... the most dangerous, at the most dangerous time. You know, are you comfortable with your portfolio? Well, you know, I hope not. You shouldn’t be comfortable. You should be lying awake at night worrying about it. But you have to train yourself not to let those emotions influence your decision making.
Dan Ferris: Right. So there’s another side to this. On the one hand, it is absolutely true when we say, “We’re nervous, and it’s expensive and dangerous.” We really don’t kind of know what we’re talking about. At least in terms of timing, right? But the flip side of that, Simon, is that undeniably – undeniably – cycles happen. Things are cheaper at the bottom of the cycle and they’re expensive at the top. You know, even just relatively. It doesn’t even have to be absolutely... just relatively. It sounds like we’re almost headed in a direction where you’re about to tell me, “So what? You can’t do anything about it.” No?
Simon Hallett: That’s correct. That’s correct. You can do something about it. But if you do, it’s likely to be very, very expensive. That certainly would’ve been – it would’ve been very expensive if you’d done anything about it unless you got lucky. Over the length of my career, if you decided to take – as soon as you started getting nervous, you took 30% of the portfolio out, and even if you timed it at the bottom correctly – another thing – if you start holding cash you have to get two decisions right. And the combined probability of being right price is very low. People underestimate, you know, how combined probability works.
You know, if you say to somebody that you’ve got a 50% chance of this and a percent chance of this and a 50% chance of that,” they’ll kind of estimate that they’ve got a 35% to 40% probability of getting them both. And of course, they don’t. So if you’ve got to get two things right, the chances that you’re going to get them both right are very, very low. So we’ve always taken the policy that, you know, we’ll just stick in cash. And it’s worked for the last 30 years for us. But who knows if it will in the future?
I mean, as you say it’s very, very, very hard to forecast the future. I mean, all I think we can do – as I think you’re suggesting – is you can set your own expectations. In our case, we can work with our clients on their expectations. And we can tweak at the edges. But, you know, we really can’t go out there. And I think it would be irresponsible if we went out and started making major changes to the portfolio because we were nervous.
Dan Ferris: And all this makes sense, right? Equity is this long-term, more or less permanent type of capital. And, you know, if you are buying quality you’re getting substantial – nice, high, rich, double-digit ROE’s and you’re getting these excellent returns compounding for all the cash that’s put back in the business. It’s a great long-term thing. And yet, I promise you, like, 90% or some huge percent – I don’t know what it is – of the people within the sound of our voice, they are trading in and out all of the time. Even though the nature of this investment is crystal clear – it is long-term, ideally permanent capital, right?
Simon Hallett: Yeah.
Dan Ferris: I guess I’m just headed for another comment about human nature, aren’t I? Like, how do we get past this? How do we teach – do we ever do this? Do we ever teach great swathes of humanity that trading is going to ruin you? It’s going to be high-cost and it could possibly ruin you”?
Simon Hallett: Well, I commend you for even raising the issue. It’s very unusual. I mean, when I look back over my career and the industry that I’ve been very lucky to have stumbled into, I think we’ve done our clients a disservice. By we, I mean financial services industry and associated with what I loosely call media. But, you know, that includes podcasts. It includes, you know, CNBC, it includes the newspapers. We’ve done a disservice to our clients in failing to educate them about how to control their behavior... their self-damaging behavior. To the contrary, large parts of the industry have encouraged people to transact.
And one of the troubles with the industry I think has been that so much of the revenues that have created financial services are transaction-based. And people respond to incentives. So I will encourage you all day long to transact if my incentives are to transact. You know, people often criticize the investment management business – and I can see why – for charging based on assets. But we have no incentive to transact. So, you know, I think that puts the investment management industry in a pretty good place. But I don’t think we’ve educated our clients to do the same thing. And I should say that Harding Loevnes client base is both global – you know, we manage money for institutions throughout the world – and it’s a mixture of institutional, high-net-worth individuals where we manage about $90 billion... which is distributed through all kinds of channels.
So, you know, we’re not a giant but we’re a reasonable size, and we are an org channel. So this transaction-based activity applies in all channels. This isn’t a retail versus institutional thing as it’s often characterized. You know, I often – we often observe our – although we’ve got a very good brand, we’ve got very good long-term track record, we have very good communications with our clients, people know and understand what it is that we’re doing, they understand that there’ll be periods in which we’ll underperform... and even the most sophisticated clients who are sophisticated enough to know they should never fire us because of short-term performance, we often get fired for completely – apparently completely different reasons after periods of short-term underperformance.
So, you know, even a firm like us loses clients when short-term results are poor. So it makes it very, very difficult. But I think it’s all about responsibility to keep hammering home the importance of inactivity, the importance of a long-term commitment. The policy document for individuals. Anything you can do to tie your hands, we are – one of our previous managers of the research department was first appointed, the first thing he did was to tie a print of an old oil painting of Odysseus tying himself to the mast. And I think that this is very much what we need to learn as investors... that we need to put in place structures and processes that tie us to the mast so when we get the siren calls of, “Trade, trade, trade,” or, “Here’s a hot stock,” or, “You’re missing out on X,” or, “Your friend over the road is benefiting from Y,” we need to be heavily tied to the mast to stop us damaging our own investment returns.
Dan Ferris: So just for our listener’s sake, we’re not going to talk about individual names. We usually do that on the podcast. But not always. To be fair, not always. And I really wanted to talk [laughs] with Simon about football investing and a lot of other things. But, Simon, we have been talking for a while. It is time for the final question. And I ask every guest – even sometimes when we go completely off topic and talk about things like health and fitness just once in a blue moon, the final question is the identical one for every guess. And it is simply, if you could leave our listener with a single thought today in mind – you may have already touched on it – what would it be?
Simon Hallett: I’m going to quote Annie Duke, who I much admire.
Dan Ferris: A previous guest.
Simon Hallett: Oh, yes. Yes. So I heard Annie talk about this the other day. And she says her biggest piece of advice is to be humble. Well, I’ve been thinking about it ever since. And we’ve always said that you need a dose of humility. But being humble really gets you all the way to thinking about forecasting, about the limits to successful forecasting. It gets you to thinking about possible events in terms of probabilities. And I’ve always said that I think we’re very, very bad at thinking in probabilistic terms. You know, we tend to think in terms of binary outcomes. “Either X is going to happen or Y is going to happen. And I don’t believe Y is going to happen, therefore it’s going to be X.”
Whereas, in real life it’s probably 65% likely that one’s going to happen and 35% the other. So I think being humble about our ability to forecast is absolutely critical. And it implies that we need to go out and think about probability, we need to go out and think about our own behavior, and we need to think about how we can control that behavior in order to control our – or, to enhance our investment returns. So associated with that is what I think is probably the lowest-hanging fruit in the investment world... isn’t a particular asset class or a particular security or something that’s trading at great value or a short opportunity in some overpriced tech stock. It’s controlling your own behavior.
You know, you need to be humble about your ability to trade, and you need to be more optimistic about the ability of the companies in which you invest to generate long-term returns. It’s very, very clear in the mutual fund world in particular that the difference between time-weighted returns – which practitioners generate – and the dollar-weighted returns – which our clients generate out of those time-weighted returns – is different. And it’s a gap. It’s a negative gap that the dollar-weighted returns are less than the time-weighted returns. And that means that people are buying high and selling low. And the behavior control is probably the best way to improve your investment returns rather than, you know, overconfidently chasing the latest bauble to flash across the TV screen.
Dan Ferris: Humility. Excellent. Excellent final thought. Thank you for that. You know, we could probably do that one every week. All right, Simon. It’s been a real pleasure, I have to say.
Simon Hallett: It’s a pleasure. If ever you want to talk about football or soccer or the intersection, I’m very happy to do so. You know, just for fun. Doesn’t have to be on a podcast.
Dan Ferris: You bet, Simon. Have a good day.
Simon Hallett: Yeah. See you again, Dan. Bye. [Music plays and stops]
Dan Ferris: Well, that was really, really fun for me. I hope you enjoyed it as well. I just – as you heard, I really wanted to take the opportunity to talk to somebody who has lots of experience as an investor and then he’s got this other sort of interesting business – the business of owning a soccer team in England – and find out where the intersection was and what he had to say as an investor about both of those things. You know, it’s a strange thing owning a football team apparently. You know, as a business he obviously didn’t quite approach it the way we would approach something where we definitely want a great return. OK?
But I thought he had some interesting comments, and I thought it was just absolutely delightful to hear him talk about the long-term nature and the humility necessary for a long-term investment success. Most people are never, ever going to make it as traders. They’re just not. We have all kinds of tools at Stansberry if you want to be a trader. And, you know, frankly if I can brag on us a little bit, we have people like Doc Eifrig. His track record as an options trader is just – it’s endless. It’s just endless success off into the distance. It’s amazing. So, it can be done. And if you have the right strategy and the right person behind you, you can do it too.
But without that, you just wind up being overwhelmed by the market. You really do. Great talk, great thoughts. Profound, philosophical stuff for investors to consider. Wow. Simon Hallett. That was really great. OK. That’s that. Let’s take a look at the mailbag. Let’s do it right now. [laughs] I want to share a quick story about a man named Ken Langone, the son of Italian immigrants, Langone describes himself as a dumb kid from Long Island that barely got out of high school and almost flunked out of college. Langone’s dad was a plumber. His mom worked in a school cafeteria.
But Langone lived the American Dream. Hue went from $82 a week to one of the richest people in the world. Langone’s most famous move was an early investment in Home Depot, which enabled him to become a co-founder of what is now the biggest business of its kind in the world with 2,000-plus stores and 400,000 employees in North America. Because of Langone’s Home Depot connection, he has unique insights into the current status of the U.S. economy. The labor shortages, supply chain issues, soaring prices, and increasing inflation.
And that’s why it was telling to see Ken Langone go public on CNBC recently with an alarming prediction. He also says the government is already creating major distortions and that the people they are trying to help are the ones who are going to get hurt the most. And my colleague, a former Goldman Sachs banker, Dr. David Eifrig, agrees. He says, “Most Americans are completely unprepared for what’s about the take place in our country.” What exactly is going on and what has these successful and wealthy Americans so concerned? Go online to get the facts about this urgent warning by visiting www.loomingeconomywarning.com. That website, again, is www.loomingeconomywarning.com. [Music plays and stops]
In the mailbag each week, you and I have an honest conversation about investing or whatever is on your mind. Just send your questions, comments, and politely worded criticisms to [email protected] I read as many e-mails as time allows and I respond to as many as possible. You can also call us on the listener feedback line, 800-381-2357. Tell us what’s on your mind and hear your voice on the show. Nobody called in on the feedback line this week, but we’ve got plenty of e-mails. First one is from Ben S.
And Ben S. says simply, “Dan, can you explain how our government could inflate away their debt? It seems like this would not be possible because the only way new currency is issued is by selling bonds or debt. Would all the debt just end up on the Federal Reserve balance sheet or is there some other mechanism for clearing it? Thank you for the great shows. Ben S.” Well, yes. Most of our money is brought into existence by being lent into existence. It’s debt. But it’s not government debt. Most of the stuff that’s lent into existence in our money supply is like, you know, lent from one bank account to another to another.
It’s that multiplier effect that you get in a fiat currency fractional reserve banking system. But how the government could potentially inflate away debt is simply by monetizing it, by printing money, and buying debt issued by the government for that purpose, right? What happens right now is that the Federal Reserve – sure, they go to the computer as Ben Bernanke once told 60 Minutes, and they mark up the account, meaning they just kind of press a button and electronically create money. But that money really doesn’t go anywhere. They’re buying bonds from the, you know, people who like have accounts with the Fed. The Fed member banks.
And so, they’re just – it’s just a swap. They’re swapping, you know, a bond for $1... for an asset that just doesn’t yield anything and just sits there like a dollar would. But it’s not a dollar, really, because it doesn’t go to – nobody’s going to take it in the grocery store and spend it. In fact, it never really leaves the Federal Reserve. It just stays in that account. So, you know, people who say QE makes the stock market go up have a lot of explaining to do in the end, because that’s how that works. It’s just like – it’s almost like this, you know, quirky, behind-the-scenes thing that nobody ought to care about.
The reason you ought to care about it, though, that we wind up kind of caring is that there’s a lot of it going on... like trillions and trillions and trillions of this stuff on the Fed balance sheet, and we just kind of wonder if they won’t go the way of, say, Bank of Japan and actually go into the market and buy equities. They have gone into the market and bought other types of debt. But again. They were buying it from people who have accounts at the Fed. So it just – so far, you know, that’s not going to create runaway inflation. But they could create lots of inflation, couldn’t they? If they started monetizing the debt?
In other words, the government says, “You know, we’re going to spend $6 billion this year, but we only bring in” – whatever it is – “$2 billion or so in taxes. So we’re going to issue $4 billion in securities and the Fed is going to buy them outright.” That is monetizing the debt, and it would be a problem. That would be just like, you know – that could really set inflation going. So yeah. They can do it. I mean, the ability to bring money into existence at the drop of a hat is there. It is a fiat currency. But the specific mechanism by which it’s brought into existence and how it’s moved around, that’s what will or will not get inflation going. I’ll just leave it right there because that really – what I just said, it’s vague but it’s kind of accurate, I think.
Next is Terry I. Terry I. writes in and says, “Dear Dan. Just listened to your last guest.” He’s talking about Cam Harvey. “Just listened to your last guest and is truly one of your best, although there has been many. I’m very interested in this new financial revolution as I believe it will be. But my question or questions are, will the big banks and governments let this occur?” And he’s talking about decentralized finance and also, you know, just currency – you know, the idea of using bitcoin as a currency, let’s just say. crypto in general.
Terry I. continues. “I can’t believe that they will sit aside and let this happen. Gary Gensler of the SEC has already said he will crack down on exchanges, and they also have a current lawsuit against Ripple Labs, the XRP token, and have supposedly sent a will notice or threatened to bring a lawsuit” – oh, yeah. “They’ve threatened to bring a lawsuit against the Coinbase Exchange, which is only a centralized exchange and not even a decentralized exchange. I truly believe that this will set the U.S. behind in this new financial freedom and asset depending on these outcomes. What are your thoughts? And like you, I have more questions than answers. Ha-ha. Thanks, Terry I.”
Yeah. I still have more questions than answers. But, you know, you reminded me of a scene in a book called The Fountainhead by Ayn Rand. And the hero is this renegade architect, and he’s leaving school. And the dean of the school, you know – he’s a renegade architect and he does all these drawings in a very modern style in the book, right? You get the impression that Ayn Rand has channeled Frank Lloyd Wright through this guy’s style. Anyway. So the dean of the school where this guy is leaving, he says, “You know, do you really think you’re going to be able to build this way in your career?”
And he says, “Of course.” And the dean says, “But who’s going to let you?” And then, he says, “Who’s going to stop me,” basically. That’s not a verbatim quote, but that’s really it. The dean asks him, “Who’s going to let you build this way?” And he says, “Who’s going to stop me?” The real question is, “Who’s going to stop me?” And I feel like there’s a lot of that dynamic in crypto and decentralized finance. Governments can try to regulate all they want – they can regulate it all they want, but they’re not going to stop it any more than they’ve stopped the crappy going-ons of Wall Street by regulating it.
And in many ways, they’ve probably made it worse, right? Wall Street’s incentives are terrible. They’ve been raping investors forever, right? Selling them toxic waste and all kinds of things. They’re just, you know – regulation hasn’t helped. There’s still lots of crooks. And it’s not even just crooks. It’s business models that are just awful, right? The regulations do not serve investors. They serve the large incumbents and keep them in business. So, you know, I have no reason to suspect that dynamic won’t infect the decentralized finance world, that it will mostly act to keep the biggest incumbent technologies or firms – however this works, however it plays out, it’s very early days. As our guest Cam Harvey said last week, “We’re 1% into this.”
But I suspect that there will be an advantage for incumbents created by the regulation. And frankly, regulators, they aren’t trying to shut things down. They’re trying to get control of them. And I believe a lot of it – I believe. I can’t say I know for absolute certain, but I think a lot of it is motivated by the fact that, you know, most politicians are just human beings and they go to Washington, D.C. because they know that coming out of Washington, D.C. they’re probably going to be able to make a lot of money from all the connections that they made. So their motivations in regulating things are colored by that.
And that’s not – I’m not even talking about regulatory capture. I’m just talking about the whole idea of having a centralized government where everybody can target them for influence, and the people being targeted love it because it puts money in their pockets. So that’ll remain the dynamic. And the regulation will not stop any of this. It may slow it down. It may put the U.S. behind, as you suggest, but it will not stop any of it. I don’t believe markets are things that humans create the way they build an automobile or not, you know, the way you build a house or not or a machine. A market is just more like an organism. It’s a thing with a life of its own. And you can’t stop it. You can’t, you know? U.S. drug laws have not stopped anything. They’ve just created a whole underground economy.
And if they try to stop crypto or stop decentralized finance, they’ll do the same thing. They’ll just shove it underground. But it won’t stop it. You can’t stop markets. I mean, we can’t stop markets in human trafficking, for God’s sake, with all the laws against kidnapping and rape and murder and all the rest of it. And, you know, pedophilia and everything else... all of the laws we’ve brought to bear have not stopped it. It’s a thriving industry. So we’re going to stop this thing, which is benign and quite beneficial to humanity in my opinion. Yeah. Anyway. You see where I’m headed, Terry. I don’t think you need to worry about the government so much. But as an interested party, you do keep an eye on it, right? You never know.
Next comes some comments from Matt O. Good to hear from Matt O. I’m pretty sure I recognize your name, Matt, and I’m pretty sure you’ve written in before. Wow. So many people have written in that I can’t remember if I’ve seen Matt O.’s name before. [laughs] Sorry, Matt. It might not be great for you. But Matt has a lot on his mind. He says, “I have two comments regarding your opening remarks on El Salvador’s adoption of bitcoin.”
And then, he says that El Salvador did not make bitcoin its sole form of legal tender. I thought I made it clear that I understood that, right? My complaint is that bitcoin is not the legal tender. Legal tender is the U.S. dollar twice removed, because it’s the U.S. dollar through the El Salvadorian dollar, whatever – peso, whatever it’s called. I don’t even know or care. And then, to bitcoin. And I said, “Bitcoin’s more like a payment system for them.”
And then, he says, “In my opinion, facilitating open competition on equal footing between crypto and fiat is the best approach governments can take to crypto adoption. Remove the tax impediment associated with treating cryptos as security, grant both forms of currency legal tender status, and let the people choose whichever currency they prefer. It will be interesting to watch El Salvador’s experiment play out.” I totally agree with everything you just said there. “No. 2,” he says, “I would submit that there is, in fact, a transaction fee built into much of our everyday commerce conducted in U.S. dollars because debit and credit cards are the most common forms of payment in the United States... 60% to 80% of transactions based on some research,” he says.
But yeah. We know it’s a lot. We know that’s what people are mostly using, right? “Retailers likely factor the costs associated with these payment networks into their product prices.” Of course. I didn’t mean to suggest otherwise. I just meant that there’s another layer on top of that when you use bitcoin, right? “So far, using bitcoin is just kind of almost like using a credit card. You’re ultimately priced in dollars, because you’re just translating from whatever the dollar price is at that moment, through the transaction into the other side and you’re – what the dollar price is, that’s what the holder of bitcoin will have, is the dollar price when the transaction’s done.
You know, even though the thing will be priced in .00213 bitcoin or whatever the number, it’s still going to be whatever the dollar price of bitcoin is. You see? What’s why I’m talking about fees in bitcoin versus fees by just pulling paper dollars out of your pocket, let’s say, not using a card and doing it that way. But I hear you, Matt. Good stuff, Matt. Thanks for writing in. Next comes Mike W. He said, “Hi, Dan. Looks like you picked an interesting week to take a break from the news. Were you able to do it?” Yes, Mike. As I said in the opening, I’m still doing it. “Regardless, thank you for consistently great shows and keep up the good work. Best, Mike W.”
I’m proud to say, Mike, that I don’t know what you’re talking about. Why was it an interesting week? I stayed away from the news and just looked at, you know, reports from various investment firms and other things. And, you know, thanks for the kudos saying that we produce consistently great shows. We sure try to do that. Lastly this week, once again we hear from Ludvik H. Always very happy to hear from him. I think he wrote in three times this week. He usually writes in, you know, at least twice a week. And Ludvik says, “I have a question for you. There seems to be a big move toward Puerto Rico. It is not part of the United States, so no federal tax.
But why? There’s the ongoing push to bring it into the USA? Sooner or later, people will vote destructive and toward poverty.” I think he means they’ll vote in a destructive manner and that’ll create poverty. “Why not select Vanuatu? From a tourism perspective, because it’s a beautiful place, and from an investment perspective.” And then, he includes these links that will tell you about getting a second passport in Vanuatu. Ludvik. You know, man, the choice between Puerto Rico and Vanuatu is just not on my radar screen.
But, I mean, Puerto Rico scares the crap out of me. I think there’s still a pretty good crime problem down there, and I just hear about people I know who have gone there and visited and stuff and say, “Wow. You know, if you’re inside a gated community, you’re OK. But it’s scrappy doings elsewhere.” Maybe they’re exaggerating. But I don’t know anything about Puerto Rico. I just wanted to read your e-mail because I think your point that, “If you think you’re moving to Puerto Rico because they’re going to bring it into the United States” – I think that is a very optimistic view of the situation.
And you know something? Ludvik, I have to say that’s probably still true. If you’re living in Puerto Rico now and all-of-a-sudden it becomes a U.S. state, it wouldn’t surprise me one bit if it suddenly became a much safer place to live just because, you know, if it’s part of the United States it’s easy for everybody in the United States to go there all of a sudden. It’s like instead of like going from the United States to a foreign country, it’s like going from the United States to... so I have to say – and I hate to say it. You really put a bug in my head about this. That’s why I included your question. I know your questions are kind of different. You know, you’re suggesting Vanuatu and all this stuff.
But the issue that you put into my head that I can’t get out of it is, I’m critical of the United States government, but if suddenly Puerto Rico were the 51st state of the United States I think within a fairly short time... I don’t know if that’s months or years. It’s probably some number of years – it would be a nicer place. It would. The roads would probably be better and, you know, everybody there could get all the things that you could get in any U.S. state just by being a U.S. citizen. So look. I claim that I’m a Libertarian but I can’t prove it because I didn’t spend half my life in jail. But if put to it and forced to judge one way or the other, I have to say what I just said about Puerto Rico and about being a United States state.
Thank you for making me think about that, Ludvik. Great question. Well, that’s another mailbag and that’s another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as I 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, and click on the word "transcript" and enjoy. If you liked this episode, send somebody a link to the podcast and help us continue to grow. Anybody you know who might also enjoy the show, just 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. And while you’re there, help us grow with a rate and a review. Follow us on Facebook and Instagram – our handle is @Investor_Hour. On Twitter, our handle is @Investor_Hour. If you have a guest you want me to interview, drop me a note, [email protected], or call the listener feedback line, 800-381-2357. Tell me what’s on your mind and hear your voice on the show. Till next week. I’m Dan Ferris. Thank you for listening.
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