In This Episode

There’s nothing like a global contagion to take the market down a bit. In this week’s episode, Dan discusses the spread of the Coronavirus which is clearly a bigger threat than the markets were originally anticipating. What are the short-term and long-term implications of the virus on the global equities markets? How much worse will things get?

Then Dan introduces today’s guest, Dan Schum, who writes a blog nonamestocks.com. He shares stories of the best microcap and nanocap stocks he’s found. Schum talks about the mental fortitude needed to watch a stock go down 90%, and the joys of watching others soar 8,000%. If you’ve ever been interested in trading some penny stocks with a small part of your portfolio, you’ll love this week’s episode.


Featured Guests

Dan Schum
Dan Schum
Dan Schum is 39 year old engineer living California with his wife and 3 kids. Schum started investing in 2013 with a lot of book reading. He focus's on tiny companies with most having a market cap less than $5M. He has invested his entire retirement plus some after tax savings in these stocks. Schum started a blog nonamestocks.com in 2015 where he writes about stocks he owns. Some of the stocks Schum owns are dark so he has also written posts about dark stock related issues like SEC rules, otcmarkets categories, and brokerages that will allow this type of trading.
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Episode Extras

NOTES & LINKS   

  • To follow Dan’s most recent work at Extreme Value, click here.
  • To check out Dan Schum’s research and insights, click here.

SHOW HIGHLIGHTS

1:21 – “There’s nothing like a global contagion to take the market down.” Dan discusses the short term and long-term impacts of the Coronavirus, which is much more serious than originally thought.

2:10 – “I think if you want to do anything differently, you should probably do the trade our guest Raoul Paul said a few episodes ago suggested…”

11:07 – Dan explains why the situation is likely to get worse… “I heard a story of a South Korean airline flight attendant who tested positive… I mean how many people did she serve things to?” Dan reveals the only thing about the situation that we can say for sure.

12:20 – Dan speaks with this week’s guest, Dan Schum who created his own blog nonamestocks.com, where he focuses on microcap and nanocap stocks. He tells a deeply personal story of how losing his job while being the sole breadwinner for his wife and three kids ignited his interest in investing.

17:55 – Schum shares his favorite investing book and why it gave him a “light bulb moment” in his investing career

22:04 – “Many of the stocks I buy have been left for dead and the market prices them down to absolutely nothing… all they have to do to be a winner from that point, is not die.”

24:00 – Schum discusses some of his biggest losers and winners while investing in the nanocap space. “I have a number of stocks that have gone up 5X… 10x… my biggest winner is up some 8,000%.”

31:36 – Dan asks Dan S. which micro and nanocap stocks he’s particularly excited about at the moment. “Sure, I can tell a story… This is a $10 or $15 stock trading at $0.60 because no one knows it exists…”

36:40 – “There’s another one… I bought as low as $0.25 that recently got bought out for $25.”

46:40 – Dan asks our guest, “If you were forced to leave our listeners with one single idea, what would that idea be?” It’s the key to how he’s managed to gain over 50% annually over the last few years.

48:35 – Dan answers questions from listeners in the mailbag. Do ETFs “bleed value over time?” Dan’s answer may surprise you. And another listener respectfully disagrees with Dan on climate change.


Transcript

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

 

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. Let's see, today's guest will be Dan Schum. Can't wait to talk with him, and I promise you, this guy is going to name a whole bunch of stocks that you have absolutely never, ever heard of before. Very interesting guy – not even a finance professional – just a real smart guy who is way, way into picking these teeny, tiny little stocks and doing his own research, and we'll talk about his website and everything else. It'll be cool.

But first, I have a few thoughts to share. Now, as I speak to you, this week has already been crazy. At one point the S&P 500 was trading like 7.5% off of all-time highs that it made last week. You know, like, wow, that was quick. There's nothing like a global contagion to take the market down 7.5%. By the time you hear this, maybe it'll be more. I don't know. And there's more than 81,000 cases of corona, more than 2,700 deaths. It's spread all over the world. There's new cases. There's almost 1,300 cases in South Korea. Bunch of cases, almost 400 cases in Italy. It's bigger. It's bigger than the last time we talked, and it's having an impact on the market.

And I don't know if you should go into your 401(k) and raid it and start selling everything. Sure, if you overpay, even for wonderful businesses, you won't get a great return anyway. But, selling because of the virus over the long-term, you know, if you've got a 401(k) you're not going to touch for five, 10 years, I'm not sure that's really the best thing to do. I think if you want to do anything differently, you should probably do the trade that our guest, Raoul Pal, from a few episodes ago, suggest, you know, he suggested buying the TLT, and we talked about also short-term Treasury funds that – TLT is a long-term Treasury fund.

And I've written about SHY, ticker symbol SHY, in Extreme Value, and there's another one, ticker symbol VGSH. So those are different ways to buy treasuries, and if Raoul's right we're going to see some interest rate cuts here from the Federal Reserve, and we've already seen stimulus and interest rate cuts from the PBOC, the People's Bank of China. And Hong Kong announced a massive stimulus this week. Part of it is to give 10,000 Hong Kong dollars, which is just shy of about $1,300 U.S. to everyone – I think every resident of Hong Kong who's 18 and over. It's about 17 million people. They're just going to give them – I think it's about $1,281 U.S..

And it's funny because the comments that I read that were in the article that said that, like, people don't think it's bad to be giving money away like that. But, the question they have is that they're skeptical of when they're going to get it. Which tells you about something about their frame of mind. Like, they've been through all these anti-government protests and now they've got coronavirus bearing down on them. They've got 80 or 90 cases in Hong Kong, and they're right next to China. They're effectively in China. So the main thing they're worried about is just getting paid. It's not whether or not it's a bad idea to have government stimulus.

The other thing I wanted to say about this is that – how to put this. Look, I think a lot of people are rushing into the market. Jason Goepfert, who we had on the program several episodes ago from SentimentTrader, there was a quote from him on Twitter somewhere recently where he was saying the retail investor right now is trading in a frenzy. Zero commissions on stocks. I noticed the commissions on options have gotten much lower. The wheels are greased.

It reminds me of the way people were in 1929, not that I was alive to remember it, but I've read about it. And those people were induced to trade on margin, and they found that, "Oh, I can buy $10,000 worth of stock with –," I think it was like $1,000. "Oh, OK. I can afford that. I can do that. That's easy." And now they're like, "Oh, I can just go online." It's easy to go online and open an account. That's part of what fueled the dot com boom. Now, it's easy to go online, open an account with a few hundred bucks sometimes, not even that much, not even a couple thousand, and buy with no frictional cost effectively, no commission.

There's a little bit of friction in the bid/ask, but otherwise no commission, and that induces people. It's just an analog of that 1929 thing where people were induced to trade because it seemed easy and cheap. And the same thing is happening now. And I think these are – it's a very – it's a typical thing at the end of cycle for things to be really frenzied for markets to be really volatile and for everybody to want to be in, and it's perverse. People are attracted to get involved in precisely the thing that they should be avoiding.

I was looking online and one of the people I think is pretty smart, a guy I mentioned before, his name's Mike Harris. He said, "This is the time when I pull back, and I try to get some writing done and do things around the house or whatever." He said, "Maybe buy a few calls at some point," when the market was way down recently, "but other than that, I don't know. I don't even know if I'm going to do that."

Here's the pro pulling back when the amateurs are, according to Jason Goepfert, frenzied to get in. And personally, I totally agree with him. Because personally, I was long gold in the futures market going into Monday. I held the position through the weekend, because I thought all hell was going to break loose, and I didn't think it was going to break loose that quick, but it did. And gold shot up, and it peaked at $9 shy of $1,700, $1,691 and change. Then it just fell apart, and it's been all over the place.

I got out at some point. I got out with a decent profit, but I was looking at the market after that in the next 24 hours I was thinking, "Yeah. Okay. I'm going to find a place to get back in." But the action is so unbelievably hectic, I'm just like, "No way. Can't touch this." It's a hot potato, don't touch it. And there's no discernible pattern. There's no rhyme or reason to it. It's down. It's way the heck down, up, and you can see the market pulling people in and ratcheting them out. It pulls them in, it goes up a little bit and then pulls them out.

And frankly, gold is a little mystifying here, it's it? It showed up for work on Monday, and nobody was there, and it said, "Screw this, man. I'm out of here." And after hitting $1,691, it was down as low as $1,627 last time I looked, but frankly, I'm not looking anymore because it's just so crazy. And that doesn't sound like a lot, but in a 100-ounce gold contract, futures contract, it's $100 every $1 moved in gold. So I think from the top to the bottom in the last few days it's been $6,400, which is a hell of a lot but move in one contract in, I think, it was about a 24- or 30-hour period or something like that, just insane.

So, the thing is, people look at this, and they're like, "Oh, I'm going to make a killing. I'm going to jump in now. This is the time. What do I do? There's got to be something to do. It's exciting. There's lots of news." Man, it's the exact opposite, so be careful. I think this bond thing, that's why I like that bond idea that Raoul Pal had. Because how bad can it get with bonds? I mean, Treasury bonds. And the neat thing is, you'd never figure Treasury bonds for having – you'd figure them for having limited downside for sure, but you'd never figure they might have some kind of explosive upside that might come along if and when the Fed cuts rates as we expect.

And the Fed fund futures are discounting at this point at least 125 bases point cut by April if you look at the April futures contract. Those things are priced the same as Euro dollars, so when the Fed fund futures is at 98.5 where it is right now just about, it's been like 98.48, 98.5... something, right around there. You go 100 minus the expected interest rate. So that's 1.5%, 100 minus 98.5. That's what the market is expecting.

Right now, the Fed funds rate is 1.75, ergo, the market is expecting a 25-basis-point cut, which is reasonable. And I think if this thing continues – and it will continue – the director of the CDC's Immunization and Respiratory Diseases came out and said in public, serious as a heart attack, "It is not a question of if the virus will spread more in the U.S., it is only a question of when and of course how much and where?"

And so, there's still a lot of uncertainty. I don't feel like – I've seen some folks online being rather smug and saying, "You're stupid to get worried, and you're stupid to sell, and you're stupid to do this, and you're stupid to do that." But, I can't be smug about any of this, and I can't pretend that I know how it's going to turn out. But, when people who know are saying it will definitely get worse within the confines of the U.S., and we have no idea of it's a little bit or a lot. You want to take them seriously.

I mean, I'm supposed to travel to a meeting this Sunday, and I don't know. I guess I'm going. There's 50 or 60 cases at this point, round numbers, in the U.S.. So hundreds of millions of people, 50 cases –  OK, not a big deal. But the problem is nobody knows who actually has this thing. Nobody knows who has it because it takes two weeks for the symptoms to appear. I heard a story of South Korean airline flight attendant who tested positive. I mean, how many people did she serve things to and touch and help out and talk with right in their face before they found out that she had it?

So, there is – the only thing you can say for sure is that there is a great deal of uncertainty here. Is there not? That's fair to say, right? There's a great deal of uncertainty, and we know that markets – stock market, especially – hates uncertainty. And I think that's probably a pretty decent place to leave you. We gave you the bond-trading idea, and I'm trying to sort of keep things as updated as necessary, and that comment from the CDC about not if but when I think really says it all. And I'm sure we will be talking more about this next week. So that's it for now, and let's talk with Dan Schum. Let's do it.

 

Dan Ferris:                          All right, folks. It's time for our interview. This one is going to be really cool. Today's guest is a guy named Dan Schum, and Dan is an engineer living in California with his family... and he started investing in 2013 and reading a lot of books in his spare time about investing. He focused on tiny companies with most of them having a market cap less than $5 million. And he's invested his entire retirement plus the after-tax savings on the stocks, and he started a blog called NoNameStocks in 2015 where he just writes about the stocks that he owns. He's got skin in the game. He's just writing about what he's doing.

And some of the stocks he owns are dark, and we'll talk about what that means, and he's written posts about dark-related issues like SEC rules and OTC market categories and brokerages that will allow that type of trading et cetera. And all of his stock and blog work is done in his spare time as a hobby. Please welcome to the program Mr. Dan Schum. Dan, welcome.

 

Dan Schum:                Thank you. It's great to be here.

 

Dan Ferris:                 So, of course, my first question is, since this is not your career, most people they have a story where they majored in finance, and they went to work for a hedge fund and something like that. You're an engineer, so when did you get started as an investor? How did you get started in all of this?

 

Dan Schum:                I am 39 now. I have a wife and three kids. And I got started with stocks and the financial world in 2013 mostly because I was working at a startup at the time, and my wife had not been working. So at the time I was 32. We had two kids, and my wife had stopped getting paid for work when the second kid came. And so, we were entirely dependent on my salary, and I was working for a startup company in Los Angeles, and that company went bankrupt.

And so, right away, we had to scramble and move, and luckily I was only out of work for a couple weeks. I got something lined up. We moved down to San Diego, but it just really pounded home how dependent we are on my salary specifically. So I wanted to find some way to diversify our family away from my salary only. Because at the startup, I had done good. They liked me, but it was the company itself stopped raising funds or whatever happened. So I started just reading books. And my wife had got me – this was right around Christmas. My wife had got me an audiobook subscription, and so, I just started listening.

I thought, "Well, what's financial?" I had heard on the radio ads for Rich Dad Poor Dad, so I just started listening to those books, and I listened to a few of those and then I thought, "This doesn't really seem right for me. I don't want to own a business. What else is out there?" So I thought, "Well, I had heard this name Buffett," so I googled Buffett, and then I found, "Oh, there is some books from Mary Buffett where she talked more about the stock market and this stuff."

So, I listened to a few of those, and then there was also Jim Cramer I'd heard of. So I listened to a few of Cramer's books. And eventually I started to think, "Well, I don't want to have a side business. But, I do think the stock market could be a good place for me." So after I listened to some of those – after I went through some of the Buffett stuff, it started making more and sense. And so, in April 2013 I bought my first stocks, and this was just with some of my retirement funds.

So, I had a 401(k) and IRA that I had had just kind of sitting in mutual funds for years. And so, I just took a few percent of that, and I thought, "I'll buy stocks with this." And my first stocks were these big – the Mary Buffett books talked about these companies he owned that were 100 years old and that he could predict out what they would look out decades into the future. So I bought those types of things like Microsoft and Union Pacific and whatever.

And as time went on, I just kind of went smaller and smaller into where I am today, which is very, very small stocks. And so, I have had no formal education. I have read many books. I don't know how many – 30, 40 books on different things, charting and all the stuff from Benjamin Graham and Greenblatt. And I blog about my stuff, and I read a lot of other blogs, but I've never had a finance course. I majored in engineering and computer science. I did have one econ class, I think, in college, but that's about it.

 

Dan Ferris:                 Do you find parallels between your educational background and your career and investing?

 

Dan Schum:                There are some because it's analytical, and so, the Buffett stuff made a lot more sense to me than Cramer for example. Jim Cramer's style seems to be this built-up experience over decades. He just kind of feels it in his bones or something. I don't know. And the Buffett stuff was very much more numbers-based. And then one book that I came upon through old school value's recommended booklist was F Wallstreet, which that book really is one of my favorites. And that one went through a DCF, and this was the first time I had seen a formula. Here's the financial statements, here's the growth rate and the free cash flow, and this is how you calculate that.

And then you put it all together, and you can calculate a value of the company with this DCF, discounted cashflow calculation. And that gives you when you should buy and when you should sell. So when I read that stuff, it really was like a lightning bolt in my head that it was just like, "Wow, this is something I can grasp." I mean, it's equation-based. All my engineering stuff, of course, there's a lot of equations and mathematics in that background.

I don't do so much – there are people who do a lot of computer modeling and stuff and look at all this big data. I don't do that. So that would be more the computer science part of my background, which I don't really use that investing. But, for sure all the reading numbers and calculating things that side of things.

 

Dan Ferris:                 So Dan, you do DCF calculations. How heavily do you really lean on that? Is that the Bible for you? Or is it just like one data point and then you have other things that are more important?

 

Dan Schum:                It's very small anymore. When I started, I didn't really know what to do. So I was just reading these books, and then the DCF stuff really I love because it gave me a sell point. So when I read these Buffett books, he never talks about a sell point. It's like he wants to hold forever, which is just ridiculous because I can't put food on the table with the stock I'm holding. I need cash. So I have to sell at some point.

So, I started doing DCF after F Wall Street, and that's when I started really valuing these different companies. But eventually, it just got to the point where I mean, I don't see – it's this attempt to be very precise, which I don't think you can be in the market. So I try to find these stocks now that are so cheap that it just doesn't matter what growth rate you think is going to happen. So all the numbers I do now, I pretty quickly look at balance sheet and income statement, and I'll just look at how much is revenue and earnings, if there is earnings.

Most of my companies lose money, but I'll look at book value. And I don't look much at the cashflow statement. I just look at those things to give me a rough estimate. If a stock is trading for $1, and they have $10 in revenue annually, then that sounds pretty cheap. So then I'll look deeper. But, I don't really do any of the trying to calculate return on invested capital or anything like that. I do a lot more – the style I've moved to is more like situation-based, and I do a lot of looking at charts.

Greenblatt's book about looking for inflection points and changes is one thing I look at heavily. But, if I'm looking at a stock, the first thing I'll do is go to a chart, and I'll look... Long-term, is it at a low, five-, 10-year low? Is it at support? I'm looking for long bases. And then from that, I would look deeper. The types of stocks I look at are all of the same kind of family where they're tiny, tiny. I'm looking for very illiquid, very small, low-priced, low-share-count... low price in an absolute sense. So if something's over $5, it's gets too expensive for me. I'm looking for things really in the pennies ideally.

And I want low share counts because it's all supply and demand, so if it's less share counts, it's going to move more once the demand comes. And I really try to go where no one else will go. So many of the stocks I buy have been kind of left for dead. And the market prices them down to just absolutely nothing, maybe the market cap's half a million or a million or something. And all they have to do really to be a winner from that point is not die. So a lot of these I look at and it's some small company, and they're struggling, and they might be selling off divisions to keep the lights on.

And I just try to look at and evaluate if I think, "Well, will this company even exist, say, five years from now or 10 years from now?" And a lot of them they're trying new things. So they're investing in new technology or they think there's some new high growth area that they can move into. And so, that's the change component. They're trying to change. And they're not all going to be successful, but the ones that are, you can see huge returns where they just go from like if people are pricing it at a tenth of revenue to, all of a sudden, if it becomes a growth story, then it can be priced at 10 times revenue that's a pretty big gain.

And so, I don't look that deeply into the businesses, and I don't look that deeply into the numbers. But, I'm trying to find these situations where the market just is really, really pessimistic and it's very illiquid. So the bigger players can't come into it.

 

Dan Ferris:                 I see. So if you're not looking terribly deeply into them, you're just trying to find the right situation, I assume then that you have a portfolio with quite a few of these in there not just like five or six.

 

Dan Schum:                Yeah. For sure. I have about 50 or 60 stocks I own probably right now. I have some that are down 90% or more. I have a couple that I think don't exist anymore. The stock still trades, but there's a couple that I think the company's just gone. There's no one there. And then I also have a number of stocks that have gone up, 5 times, 10 times. My biggest winner went up some 8,000% or something. And so, I'm really betting that these big winners can make up for the losers that don't survive.

A lot of them, they just kind of cost along because, like I said, I'm buying these – I'm trying to buy at long-term low spots on a chart. If you look at a 30-year chart, 20-year chart, something really long, and it's some small company, you can look at that and just say, "Think of all the craziness that's happened over the last 20, 30 years. Wars and different political parties in charge, different ideas of how we should tax the expansion of other countries. It's just the amount of stuff that's happened is crazy. And you can look at this long chart and tell yourself, "Geez, this stock is at the lowest it's ever been in the past 30 years, so how much worse can it really get?"

So, I buy a lot of them at that point just with that thinking in my head. Okay well, they have no debt, so it's not that hard for them to survive. They're very small already, so it doesn't take much to pay the bills. A lot of them, they might have only debt to the owner who borrows themselves money. And so, a lot of these little companies they're kind of built to withstand these long periods when kind of nothing is going on. They might be losing money, but they have reserves from when their last product took off or whatever.

And if you can buy one of those at this long, long term low spot, then as long as they don't die, they're probably not going to go lower. So I'll have some just sit flat for years and years, whatever. But eventually, something will catch on. At least that's my hope.

 

Dan Ferris:                 Interesting. On your website, which is really cool, it's called nonamestocks.com. You talk about dark companies. And there's a funny sentence. I mean, it says, "Dark companies have shirked their fiduciary responsibility while the SEC who is supposed to protect us allows this to happen." It doesn't make it sound very attractive, but indeed, you kind of specialize in this sort of thing. So tell me about dark companies. What's the appeal?

 

Dan Schum:                The main appeal is that other people won't go there. So I'm looking for less competition. If I'm going to go out and buy Microsoft then I am telling the world that I know something they don't. I'm trying to play in this arena that has just so many eyeballs, I don't see what advantage I can have. I don't have an edge there. But, if I'm looking at these dark stocks, which no one else looks at, and which people are scared of and people sell because they just think it's something they should not own.

Then there's, I think, more of a chance that I might have an edge and that I can do better there. But, what a dark stock is is a company that has deregistered from the SEC. The SEC has these rules about how often companies have to communicate with the public. You have to file quarterly reports, and they have to include such and such information, plus you have to file 8Ks any time there is a material something that's happened. They have to file the form 4s about insider trading and all that stuff. But, small companies are allowed to deregister, and it's not even small companies actually.

It's like they had these ridiculous rules that if you have less than 300 shareholders you're allowed to deregister, and the rules are a little different for financial institutions versus industrials. But, basically, if you have less than 300 shareholders of record, you can deregister. And once you deregister, you no longer are bound by any of the SEC rules. So these companies, if they want, they can just stop communicating at all. They can have all these shareholders out there and just never talk to them again. It's a-OK with the SEC because they've deregistered.

They're still bound by state law, so many state laws require companies to post an annual report to all shareholders that ask for it. But, they're not required anymore to file any reports in the public eye. So the reason that the SEC lets them do this and it's so bad on their part is that they have this definition of shareholders of record, which counts all shares held in street name as one share. So let's say you and me and 10,000 of our closest friends hold shares through Fidelity or Schwab or TD Ameritrade. Well, according to the official books, the holder of record is one. Everyone who holds through Fidelity is counted as one shareholder.

And so, there can be really giant, giant companies that have less than 300 shareholders. And it's only a matter of time before these bigger companies start deregistering. But, they usually don't. It's usually these smaller companies. But, still there can be thousands of shareholders, and in the SEC's eyes, it's 100 or something. So a company will deregister, and they'll just disappear. And oftentimes, the stock will just drop to nothing. I mean, it'll drop 50% the day it's announced, and it'll just keep going if the company stops communicating.

And a lot of the companies then – a lot of them still do communicate, so there can be good opportunity. They communicate in different ways and probably less frequently. So a lot of them will still talk to investors, but they'll only do it annually. So they'll put out just an annual, and they'll just put it on their one webpage or something. So it's no longer on the SEC site. Some will still file quarterly reports. Some will mail out an update that doesn't even have full financials. A lot of them are not audited. Some still do.

But, if you're willing to work for it, there can be some opportunity because there's less information available, and it's not as easy. You can't just search the SEC website or anybody who relies on any kind of data feed to give them financials through the Edgar doesn't pick these up. So you can have some informational edge if you're willing to go and look and find these things. And there are good companies that are just trying to save money and saving money I think is behind a lot of the deregistrations.

I've heard estimates from half a million up to over a million dollars just costs to be SEC complaint, and that's a huge thing if your companies only $3 million market cap.

 

Dan Ferris:                 Wow. Yeah. So back in the day, I used to dabble in some of these, and I read a book I think it was called Walker's Manual of Unlisted Stocks. Do they still have that? I haven't even thought about that until just now. I haven't thought about this thing in 10 years. Do you ever use that?

 

Dan Schum:                Walker?

 

Dan Ferris:                 Yeah.

 

Dan Schum:                I mean, I know people who have copies, and there's people who talk about it, but he doesn't do it anymore. I don't know exactly when he stopped. But, people in this space still do refer back to those older Walker manuals. Because a lot of these, they change slowly, so the information can still be beneficial even if it was five, 10 years old.

 

Dan Ferris:                 Actually, I just spotted it all the way across the room on the bottom shelf. I still have the thing, haven't looked at it in forever. Do you want to talk about a name or two? Is there a particular name that you like? I mean, before you answer yes we're going to have to tell people these are highly illiquid if you go in and buy them and the share price triples, it'll screw everything up for everybody else. But, is there a name that you like that you want to talk about?

 

Dan Schum:                Sure. I can tell a story. I'll tell you about one that has come up a lot from when I first talked about it. So there is this company called Sonics & Materials, SIMA, and they trade on the gray market, which – well, actually, they just recently got off the gray market, but they deregistered long ago. When they first deregistered, they were a money losing company. And so, they were losing money. The book value was negative. Things were not pretty. But the share price was a few bucks a share or something. So they deregistered, and they just stopped talking and the stock went down to nothing, to pennies. And it stayed there for decades.

I mean, it was like two decades or something. And since they didn't communicate, shareholders don't even know if they exist. But, they were actually still communicating if people bugged them enough. So what they'll do, and they've changed things recently, but they would send only a paper copy of the report if you called them a lot. And finally, they would send you a copy. So I found them in September of 2016 or in the summer of 2016. Someone told me about them, and at the time, they had revenue around $20 million. They had cash of over $12 million. Their net income was about $2 million, book value is over $20 million.

So, you have cash and securities over $4 per share, EPS $0.60 a share, book value is $6.50 a share. But, the stock was trading for $0.60. So it's trading for 1 times earnings. This was a stable company that's earning that every year over and over, and they had over $4 in cash. So this is like a $10 or $15 stock trading at $0.60 because nobody knows they exist. And so, I bought shares as low as $0.20 up to over $1, and you feel bad for the people who are selling because they just have no idea what they own.

But, I bought it, and I wrote about it, and then the price started going up because I talked about it. And now it's up over, I don't know, latest price is $11 or something like that. But, they recently made a change. So they had one guy running the company forever, and this is common in these little stocks. And then he handed over the reins to his daughter. And then a few months ago, they got off the gray market.

So, they were trading on the gray market, which the gray market has even been worse than the OTC. The gray market means there's no electronic quota. So if you look on OTC markets or wherever you get your quotes, there would be no bid, no ask. So you would have to just look at the chart and kind of take a guess at what you want to pay and put it in weight. Well, they got off the gray market just about six months ago, which I asked OTC markets about, and they said some market maker sponsored them or something to get them an electronic quote. So that was very exciting.

But, then the company sent out an NDA, and they said, "We're going to stop giving out reports unless you sign the NDA. So now they've gone from gray market, and you could just – I at least go the reports, and I could talk about them, and now I had to sign an NDA to get the latest reports. But, they scheduled an annual meeting and it was their first annual meeting in, I don't know, at least a decade, which also is breaking state law because they're supposed to have one every year.

They had an annual meeting where people could call in and listen to them. And they did answer a few questions, but then they just cut off the call. And so, this just shows you there's great opportunity because here's a stock that I bought for between $0.20 to $1, and it's now up at $11. But, there's also risk because now they're kind of retreating into the corner again with this NDA.

 

Dan Ferris:                 Wow. Yeah. I'm looking at a quote of $10.84, and the lowest price on the chart is $0.10 in 2016.

 

Dan Schum:                Exactly.

 

Dan Ferris:                 And the market gap at $10.84 it says it's $2.6 million. I mean –

 

Dan Schum:                And there's more of those. But, that right there tells you why look at these dark stocks and why try to go there because there is this opportunity. There's another one, HemaCare, HEME, that I bought as low as a quarter that recently got bought out for $25. There's another one, Comtrex, COMX, that I bought mostly for around $1.50 that got bought out a couple years ago for $10.

 

Dan Ferris:                 Wow, man. That is awesome. And you know, the portfolio you describe and some of these big winners, I've heard of other folks who do exactly the same thing. One of them is solely focused in mining, and he has made stupid good returns, unbelievable in various parts of the cycle. And he gets all his return, and it might be something like 50% a year over a decade. And all his return comes from less than 10 names out of a portfolio of over 100. So it's a special kind of discipline.

 

Dan Schum:                Yeah. That's what I'm hoping for. But, I do have some for sure that are down to nothing.

 

Dan Ferris:                 Right. But, that's the way it works. You've got zeroes. You've got mega 50, 100 baggers, and a bunch of stuff in between, and that's the way it goes. It's interesting, isn't it? It sounds like you buy 50 or 60 stocks and wait, but even that requires a special type of discipline, don't you find?

 

Dan Schum:                Yeah. Definitely. Also, just buying – you have to be comfortable owning these very illiquid stocks that you can't get out of. So I buy – I can't get anything – as much as I want in that one day. So I buy over a period of weeks or months. There's some stocks I've been buying for years. And then I have this knowledge that I can't sell it until there's an event. So I'm waiting for an event. It's very much like a lot of these – they'll put out a press release or they'll announce one good quarter. Or if they haven't talked in a long time, they'll just put out one filing.

And they're all low share count, low priced to when that one thing happens, the volume and the price will spike way up. And that's what you have to wait to sell into. So you have to have this patience to buy, and you also have this kind of you hold through these long periods of boredom where there's no information. You'll get this one annual report. And it's like, "Great." You read it and 10  minutes later, back to waiting till the next year. And then even when you want to sell, you can't really sell until that even happens. I'm waiting for the event all the time.

 

Dan Ferris:                 Yeah. I dabble in these things from time to time. I don't have any of them right now. But, I remember one of them was a little Bermuda reinsurance company called ESG Re, and the thing had – it was like $1 or more of book value, and I think the thing was trading for $0.02 a share. Actually, I remember exactly. The spread was two and 13. So I could buy for 13, and then next thing I knew it would be quoted at two. So I'm constantly paying 13 and seeing it quoted at two , right? And then I'm stuck and I'm waiting and eventually some guy showed up and wanted to change everything and paid $0.30 or $0.40, and I got out of it. But, just sitting there waiting while I'm down 80% the entire time I own it was not fun. It wasn't hard because you can only get so much money. But –

 

Dan Schum:                Yeah. That's the game.

 

Dan Ferris:                 You know where I'm coming from.

 

Dan Schum:                Yep. That's where you'll see these – every once in a while you'll see some buyout announced, and it'll be like 500% of whatever the stock price was last, and it's usually one of these tiny little stocks that was just not – the public didn't know about them. They didn't talk or whatever, but it happens. Eventually there's some event, and that's what I'm looking for. Sometimes there's even spikes when there's no news. I think just like pump and dumpers catch these same types of stocks because they're low – it's low share count.

I'm looking for things that are easy to move because I want movement. And so, the same people I think that look for things they can pump and dump in a chat room and so, sometimes I'll wake up in the morning like at market open and one of these stocks is up 100%, 200% just on nothing. There's no news or anything. But, volume's through the roof, and it's there, so I'll sell into it, and then it comes back down in a day.

 

Dan Ferris:                 Yeah. So that feeds right into my next question, which is, how do you hold one of these long enough to get a multibagger out of it? If you get a 50 or 80 bagger or whatever, you're going to have to hold through that first wave of liquidity. The thing goes up 50% in a day or something. But, to get the multibagger, you've got to believe that there's something beyond that. And that's really hard for me, I have to say. I never hold past the initial bump, like never. How do you do it, man?

 

Dan Schum:                Yeah. It always depends on the stock and the situation. Some of the ones I own, I just think they're a junk company, but there's something about them. There's one STRI that I own that I recently wrote about that I don't think it's that amazing of a company, but they have a ton of cash. So you're just kind of waiting and hoping that something happens. Where there's other ones – there's one I own right now, PEYE, that's up, I don't know, I bought around $0.50, now it's at $1.80.

So, I'm up 3 times or something, but I'm still holding and actually bought more recently because I think that long term it has a lot of potential because it's an exciting field. They do these micro-optic things, so it's an exciting field that I think has a lot of potential. And the one I mentioned before about the $25 buyout, HemaCare, HEME, I sat on that thing for about five years as it was going up 2 times, 3 times, 4, 5, 10 times, and I was still holding it just because the company was growing like a weed, and it just – they not only survived and didn't die, but they moved into an area that was just so ripe. And they just kept growing.

So, it's really like oftentimes these things, if they're dark and they rarely communicate or they're not shareholder friendly, they never get the same multiple as something that's on Nasdaq or the New York Stock Exchange. So even though they might come up, a lot of times they're still cheap from an acquisition point of view because they don't have the liquidity. So people just don't bid them up as much. So even Sonics & Materials, SIMA, that we were just talking about, yeah, it's up to $11 or something. But, it's still cheap. It's still like if they happen to sell it would be $15 or $20 for sure. So I still hold it even though I'm up a lot.

And it's just – if it's still cheap, why not just keep holding it? It's most of the money I'm investing is retirement, which I'm not going to touch for decades.

 

Dan Ferris:                 So, Dan, it sounds like you found a good method and had good luck buying things that other people don't want and then waiting until other people find them. But, that's the question I always get. Any time I ever say, "I wouldn't go where other people don't go. Nobody's buying this, and I'm buying it and all that." The first question out of somebody's mouth is, "Well, if nobody's buying it, why the hell do I ever want it?" It's like, who's ever going to buy it and why?

 

Dan Schum:                Yeah. It's changed. It's really like something will change, and if the stock – it's kind of this idea that – like I was talking about – looking at a long-range chart and just – if you don't think it's really going to go lower, something has to happen. If you're going to hold this for 10 or 20 years, eventually the old CEO is going to pass it on to someone or die or sell it or eventually they're going to get so desperate they try a new business line. Or eventually, some activists will try to take over.

There's one stock I own that – there's a couple I own that there's activists who push for change and who do a proxy battle, and they start putting people on the board. And then the stock doubles, triples, quadruples because now there's, like, oh, shoot, this value that's there that was there before but it's just like people didn't think it would ever come out and now there's a chance. So it gets bid up. But, a lot of it is this waiting for change or waiting for that press release. If they just make one announcement, if they haven't talked in five years and they just make one announcement, the stock will go up a lot.

And I have some stocks like that that they weren't talking forever and then finally they did. So I'll buy it because it's like there's some change there. Something's happening, so there's some potential. But, you can – HemaCare, the one that got bought out for $25, the guy who told me about it had owned it for years and years prior. And he held it through the whole drop down to nothing. So if you're in the game long enough you'll have those situations. These ones that deregister and then they drop down to nothing. Even though it's upsetting to watch your stock do that that can be some opportunity for the rise, if there's a rise.

 

Dan Ferris:                 And I just want to let listeners know, check out Dan's website. It's really cool if you're into this stuff, nonamestocks.com. And he's even got his portfolio performance on there, which he's been kicking butt the past few years, I'll tell you that. And I'll let you check it out for yourself. So Dan, we're just about at the end of our time here, and I like to ask all my guests the same question at the end. If you were forced to leave our listeners with just one single idea, and it doesn't even have to be about investing, what would that idea be?

 

Dan Schum:                You should try to go where others won't go and just be different. That's where my investing mindset comes from.

 

Dan Ferris:                 Sounds good to me. Okay, Dan, thanks so much for being here, and I hope that we'll get to talk to you again because this is really interesting stuff and not a lot of folks are talking about these stocks and you specialize in them. So you're going to be my go-to guy from now on for these, and I just hope you'll come back and talk with us.

 

Dan Schum:                Yeah. This has been fun. Call me anytime.

 

Dan Ferris:                 You bet. Thanks a lot, Dan. And we'll talk to you soon, but bye-bye for now.

 

Dan Schum:                All right. Bye.

 

Dan Ferris:                 Okay, everybody. That was really, really neat. This is such a weird area. You really are on your own because the stocks are so small you get very, very few people writing about them, and Dan's website, NoNameStocks, is a really cool resource if you're this kind of investor. Obviously, we talk. It takes a strange kind of discipline to buy something you can't unload and just wait for someone else to show up. It's very, very different from trying to buy the next Google or Facebook or whatever. But, people do it.

And I often wonder when Warren Buffett says, if he only had $1 million to manage, he knows he could make 50% a year. And indeed, last few years Dan has made more than that, which you can learn when you go on his website. But, he's got to be talking about some of these stocks, got to be. So really cool stuff. Let's see what's in the mailbag now. [Music plays]

This is where you and I get to have a frank, open, honest conversation about investing or whatever else you have on your mind. You write in with comments, questions, and politely worded criticisms to [email protected] I read every single one of them, and I get back to and respond to ask many as I can on the show. And so that's, once again, [email protected] And I have to say, all the criticisms, like 99.9% of them have been very politely worded, and I thank you for that. And we have one today, very polite gentleman.

But, first, let's hear from Brian W. And Brian W. says, "Hi, Dan. Longtime reader of Extreme Value and big fan of your podcast. Two quick questions." And the one he's asking about iTunes, and he says he prefers Spotify to iTunes. "Does it help the show more if I'm subscribed on iTunes as opposed to Spotify?" Well, a lot of people look at iTunes, and they look at that Like. But, I think a lot of people use Spotify, and they hit "Like" on there too I think. So whatever works for you. We just want you to download the show every week and listen to it. That is my frank appeal to you. Please download the show every week and listen to it. And if there's a Like button anywhere near where you're downloading, hit Like. I hope that answers your question.

Your next question, Brian W.'s next question was, "My other question is that I have often read to avoid certain ETFs because they 'bleed value over time,' what does that mean exactly. Appreciate your help. Brian W." I believe you're referring to ETFs like those that, for example, there's one ticker symbol VXX. Actually, any of the VIX-related ETFs, they all do the same thing. They're based on usually a moving average of the front two months or some number of months of the VIX futures.

There's a problem with this because if you look at the long-term charts of these things, you can see that they're way high a long time ago, and they're way, way low now. So in order to get any value whatsoever out of them, you have to time your purchase and sale rather perfectly. There's a problem with the underlying, the VIX futures when the VIX itself – if you look on a historical chart, you'll notice if the VIX doubles or triples really fast, the ETF that's supposed to represent the VIX might go up 50 or 60 or 70%, or something like that.

So, the reason for that, I believe, is because these VIX futures, there's no deliverable. You can go long gold futures and get 100 ounces of gold delivered to you if you want to do that. Most people don't, but you can if you want. There's a physical deliverable commodity. So as the futures contract approaches expiration, it tends to converge with the cash price of the thing that you're trading. But, there's no cash price on the VIX because there's no VIX that you can buy for cash. It's just based on option prices.

And because of that, the VIX futures are fundamentally broken. They never perform. They just basically don't work. And then they go and they base an ETF on not the front month's futures contract, the nearest one, but the first two. And if the first one goes – you know, I said the VIX triples, the first one goes up 50%, the second month goes up 20%. So then you average that out, and it's like, "Oh, crapamundo."

So, over time, you're going to put money into this thing, and it's just going to keep rolling over these contracts and losing you money every month. I hope that makes a little bit of sense. But, it's roll. It's the roll phenomenon. It's negative roll yield if you want to google something for further research. And I agree. They will bleed you dry over time. They're not long-term. Good question. Very good question. I've talked about those things before. I hope people are avoiding them.

Next question is from Steve, no last initial, just Steve. And Steve says, "Thank you for reading my e-mail last week. However, there are a few points I would like to clarify. First, Pont-l'Évêque, – I think I said Pont-l'Évêque – is often rated as the stinkiest cheese in the world. Then he graphically describes the smell, and he said, "That's why I used it in reference to media hype, media frenzy regarding the coronavirus. Something smells. Even Doc Eifrig, Stansberry's Doc Eifrig, thinks the hype is over the top.

"Second, unfortunately, I believe you missed the point I was attempting to make regarding the virus. Forget about percentages. 14,000 people have died in the U.S. due to the flu, whereas less than 3,000 have died in China from coronavirus. Sure, the death rate from the flu is substantially lower, but 26 million people contracted the flu and 250,000 have been hospitalized. Both numbers are substantially higher than what we are seeing with coronavirus.

"Basically, China has been quarantined by the rest of the world. Thousands of flights to and from China have been canceled. Factories and manufacturing facilities have been closed. Internal travel's been restricted or in many cases banned altogether. The country and the economy are in lockdown. China is and will be suffering some real economic pain because of this virus. What better way to impair a competitor than to handicap him, right? China tourism down. China exports down. Chinese GDP down. China will take a long time to recover from this. And globally, confidence in China will be slow to return.

"He says as Professor Collum," Dave Collum from a recent episode of the podcast. He said, "Ask Professor Collum. I bet he has a conspiracy theory on this one. Thanks again, best regards, Steve." I'm sorry, but the point about the coronavirus is still the same, and we're going to have to agree to disagree. I don't care if 26 million people go the flu and 250,000 have been hospitalized. We know the numbers. We know what to expect. You can get a flu shot. We know the tales on that. We know what to expect.

We have absolutely no idea what to expect from the coronavirus. And I disagree with Doc too. I don't think it's over the top. I think it was too little too late. It was too little earlier, now they're trying to make up for it. But, it's very concerning. We have no certainty about how it'll turn out. You can't compare it SARS. You can't compare it to MERS. You can't compare it to the flu. It's different. You don't know. And it's not just in China. It's all over the world. It's in new countries almost every day. So we've got the CDC saying it will definitely spread more in the U.S., and we don't know how much.

That uncertainty is real, and you don't know the tales. So we're going to have to agree to disagree on that. Thank you for correcting my pronunciation of Pont-l'Évêque. And yeah, China's in trouble, and other economies will be in trouble took I believe. All the tourists who normally go to – tens of millions of tourists who probably aren't going to Italy now. What if Spain gets involved? Right. Tens of millions of tourists. I think Spain even gets more tourism than Italy. That affect those economies too. This is bigger than the market thinks it is.

Next and last is Dan, just Dan, Dan S. And Dan S. says, "Hi, Mr. Ferris, I wonder if you see the inconsistency between your investment advice and your apparent position on climate change. In investing I take this message away from you. You don't know what will happen, but the evidence is stacking up that the market is due for a large correction. So position yourself safely in gold and cash.

"On climate change I hear you say you all don't know what will happen, so don't do a doggone thing. Stacking evidence year after year, we set the hottest temperature records in just a couple hundred years we replaced millions of carbon-eating oxygen producing trees with smokestacks. The size of prize-winning fish continues to decrease. We have smaller and fewer glaciers. We have islands of plastics floating in the ocean. We don't know what will happen. You're 100% right. We don't know what will happen in the market either. You have strong opinions based on historic fact pattern, but at the end of the day, it's just opinion.

"The irony is if you were right about the market in for a massive correction, you preserve capital. If you are wrong in your assertion about climate, it's existential risk that makes all the capital you preserve worthless. You're completely entitled to your opinion, but in my humble opinion, it seems you're contradicting your own philosophy when you speak about climate and you're talking way outside your circle of competence. Greta is regrettable, I agree, a 16-year-old does not have the experience or knowledge to speak deeply about these issues. But, that does not mean her issues should be dismissed out of hand. Best, Dan S."

I think her issues should be dismissed out of hand because she doesn't know what she's talking about. With investing, I'm not saying you should position yourself safely in only gold and only cash. I said, "Have plenty of cash. Buy some gold and buy value stocks when you find them. Buy value in stocks when you find it." We continue to recommend long equity positions and Extreme Value. That speaks for itself. And in climate you hear me say you all don't know what happens, so don't do a daggone thing.

Well, you mentioned plastics floating in the ocean, and I think that's a horrible crisis that needs to be fixed. I'm not 100% sure what you're telling me here because I'm not operating outside my circle of competence. I'm telling you that 90% of everybody who's talking about this is operating outside their circle of competence. And that 99% of the people within the sound of my voice do not have intimacy with the datasets, and this historical stuff, there's no historic fact pattern here. Depending on who you check with, we have more ice in certain places and less ice in others.

So, that's not black and white either. So what gets me is that some people do try to represent it in the way you do, as being a very strict fact pattern that points in one direction. Nothing remotely close to that is the truth, and no real scientist says anything other than that. Period. Absolutely period. Extrapolating in a straight line manner from these, what you say are fact patterns, which are a bunch of datasets, some of which have been made up and doctored up, which who knows what they are, but not all of them are.

A lot of the conclusion has been based on models on those data sets that extrapolates in a straight line pattern, and it is a fact at this moment that over 100 of those models have been wrong in the direction of too much warming. And I don't even care about any of that. I just know that 99% of everyone talking about this is not intimately familiar with the appropriate datasets and that doesn't even have the expertise to understand if they've been doctored up or not. And there's lots of other discrepancies too.

This is not a global warming show, but it's too rich with possibility for making up a bunch of stuff so that you can steal my money and say you're saving the planet. It's too much pure B.S. And that's not hard to figure out. That is within everyone's circle of competence. There's not enough skepticism within everyone's circle of competence. Or at least a reasonable number and certainly within mine. So we're going to have to agree to disagree.

So, I've agreed to disagree with two of the three e-mails that I have chosen this week. There are a lot of e-mails that really liked our episode on Dave Collum. So go to investorhour.com and listen to it if you haven't yet. People really were entertained by it, and they like hearing from Dave, and I certainly love talking with him. Other than that, hey, thank you so much. It's a privilege to come to you this week and every week. And please, do go to iTunes and download the show and subscribe to the show. Subscribe to Stansberry Investor Hour podcast and hit "Like," and that'll help everybody out. That'll push us up in the rankings. It'll invite more thoughtful people like yourself.

The folks who wrote in today with their very thoughtful e-mails and criticisms and things, I love hearing from such folks. I love it. This is a real conversation we're having, and it's very exciting to me, and I hope you find it very valuable too. Go to www.investorhour.com and check us out there. You can listen to every single episode we've ever done. You can see a transcript for every single episode we've ever done. The latest episode sometimes the transcripts take a few days to show up, so just give it time and thank you once again, and I will talk to you guys next week. Bye-bye for now. [Music plays]

Announcer:                 Thank you for listening to the Stansberry Investor Hour. To access today's notes and receive notice of upcoming episodes, go to investorhour.com and enter your e-mail. Have a question for Dan? Send him an e-mail at [email protected] This broadcast is provided for entertainment purposes only and should not be considered personalized investment advice. Trading stocks and all other financial instruments involves risk. You should not make any investment decision based solely on what you hear. Stansberry Investor Hour is produced by Stansberry Research and is copyrighted by the Stansberry Radio Network.

 

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