In This Episode
This week’s continued market selloff had some high-profile casualties – and brings to mind a great Warren Buffett quote that, “Only when the tide goes out do you discover who was swimming naked.”
One of the biggest casualties was beleaguered GE stock, down another 15% from just last week. Buck shares an amazing finding with Extreme Value editor Dan Ferris – turns out, if you’d bought GE in 1994 and held on, your shares would be worth the same amount of money today.
Dan thinks the worst may be yet to come. In fact, he says the stock has a chance of going to zero. “I’ve never said that before.”
Meanwhile, Amazon’s just decided which two locations in the country it will drop prosperity bombs onto by setting up its headquarters there, and Dan explains why its decisions make all the sense in the world for the company, and why the favors rained down on Amazon by state and local governments are nothing more than China-style crony capitalism.
The two are joined by this week’s podcast guest, Rahul Saragi, the founder and managing director of Atyant Capital Advisors. Over the last 14 years he’s focused exclusively on Indian markets and made it his mission to pinpoint the best 10-15 opportunities out of thousands of publicly traded Indian companies.
He’s calling India both “an unpleasant place to live,” and “a paradise for value investors” and is ready to explain why.
NOTES AND LINKS
For more information on Dan’s latest work – Extreme Value
1:14: In the wake of GE stock’s most recent collapse, Dan explains why the fear hasn’t taken over the bond market – yet. “I don’t know that there’s outright panic… but there’s definitely concern.”
5:06: Buck asks Dan why tech stocks from Facebook to Amazon are continuing to get clobbered. Dan explains why Facebook has unique problems. “I’ve been calling it the biggest surveillance operation in the world.”
8:05: Buck explains how rising resentment over perceived political biases and privacy violations are fueling something that would have been unthinkable five years ago. “You’re seeing startup social media companies again.”
11:12: Dan recants his description of Facebook as the biggest surveillance operation now that another company’s stolen the show. “I have my phone on me right now, and even though I have locations turned off, Google knows where I am.”
18:09: Now that almost every midterm race has officially been called, Buck asks Dan for traders’ verdict: “Has the market spoken?”
21:01: Dan explains why heady valuations just needed a little push to set this selloff in motion, why he’s a “preparer,” not a “predictor.”
25:12: As oil prices cap their 12-day losing streak, Buck asks Dan what’s going on with the world’s biggest commodity. Dan reveals a headline he saw that explains a major part of the collapse: “The United States is officially energy independent.”
30:36: Buck introduces this week’s podcast guest, Rahul Saragi, the founder and managing director of Atyant Capital Advisors. Over the last 14 years he’s focused exclusively on Indian markets and made it his mission to pinpoint the best 10-15 opportunities out of thousands of publicly traded Indian companies.
37:34: Rahul explains why all of India’s problems actually create glistening investing opportunities rather than the pitfalls most investors associate them with. “Don’t get dissuaded by the macro noise.”
Announcer: Broadcasting from Baltimore, Maryland and New York City, you're listening to the Stansberry Investor Hour. Tune in each Thursday on iTunes for the latest episode of the Stansberry Investor Hour. Sign up for the free show archive at investorhour.com. Here are the hosts of your show, Buck Sexton and Porter Stansberry.
Buck Sexton: Hey, everybody. Welcome back to another episode of the Stansberry Investor Hour. I am syndicated radio host Buck Sexton. With me, the one and only editor of Extreme Value, Mr. Dan Ferris. Mr. Dan Ferris, great to have you, sir.
Dan Ferris: It’s great to be here once again, Buck. I’m enjoying our weekly get-togethers.
Buck Sexton: Me, too. Hopefully everybody listening is as well. That’s kinda how we hope to plan the whole thing out. We’ve got a bunch of important things to discuss this week, GE’s stock. Also, we can talk about a supplier to Apple, Amazon, what’s going on there, Facebook, basically the FANG stocks had an interesting week or so, but you’re the expert, Dan. Where do you wanna start on this one? Do you wanna talk about the GE stock collapse?
Dan Ferris: Yeah, I do wanna talk about GE. I spoke about this previously and I did not see the sense of panic in the bond market, but I went and looked at roughly 460 odd bonds that are issued by GE and related entities, and I don’t know if it’s out-and-out panic, but there’s definitely concern. There are a number of issues trading blow par. There are a number of issues trading below 90, below 80, and in the 70s there, and there’s a couple of them that are around 60-61.
Of course, they’re all kind of – the Bloomberg data didn’t give me the exact size of the issues, but I’ve seen some things posted here and there on Twitter and other places to suggest that there’s been a real spike in the GE bond yields. I don’t know if it’s out-and-out panic at this point, but there/s definitely some concern among some GE debt holders about this thing blowing up potentially, and I think at this point I’m kind of ready to say that the equity looks like it actually has a chance of being a zero.
I’ve never said that before. In fact, I’ve said kind of the opposite that I didn’t see the panic in the bond market, but I think we’re seeing the beginning of it now, so, it’s getting ugly.
Buck Sexton: If somebody listening to this, by the way, from what I see here, if they bought GE stock in 1994 and held it all the way through, and obviously there were some big upswings, it would be worth what it was in 2018 from 1994.
Dan Ferris: Whoa.
Buck Sexton: That’s not good.
Dan Ferris: Not good at all.
Buck Sexton: Not good. $8.40 on January 29th, 1994, and today it’s at $8.58. So, if you’ve been a long-term GE holder, it has not been pretty unless you got out in some of the bigger moments back in like 2000-2001.
Dan Ferris: So, that’s really unfortunate for GE shareholders, but it kind of shows you the value investors all say the market is not a voting machine, it’s a weighing machine in the long-term, voting machine in the short-term, and the weighing machine has really just brought this thing home to roost because the culture under even Jack Welch, who was supposed to be so great, the culture was terrible under him and he hasn’t been around for, what, 20 years or something?
So, it’s kind of not a surprise. I mean, Porter has been talking about GE almost the whole time I’ve known him, been talking about it in a negative way since the late 90s. To some of us, maybe this isn’t a huge surprise, but it sure took a long time coming.
Buck Sexton: What happens from here? Is GE even – is it salvageable in your opinion, or does it become a very different company with a whole lot less value over the long-term?
Dan Ferris: Oh, it has to break up. It’s never gonna be what we all thought it was before. It’ll be a totally different thing and it’ll probably be broken up into various entities, and I’ll bet you they’ll rename them because nobody wants to seem to be called General Electric anymore, and it’ll be nothing like what it has ever been in the past.
Buck Sexton: Why did some of the tech stocks get clobbered in the last week or so? Facebook had a really bad day recently. What do you attribute that to? I feel like a lot, myself included, I own some of these FANG stocks. I feel like me and everybody else who’s invested in the market own some of these FANG stocks. Why are they getting hit so hard right now?
Dan Ferris: Well, in the case of Facebook, the news has just – they’ve had a terrible year. I mean, the news has just kind of gotten worse and worse, but I’ve been talking about this thing since September 2017 and warning people, and I bet this thing that I’ve been saying about Facebook is something you know all about, Mr. former CIA analyst, because I’ve been calling it the biggest surveillance operation in the world.
People are basically allowing Facebook to surveil themselves, and indeed, Facebook came out that they had sold some data to Cambridge Analytica the political consultancy. And I just thought, you know, there’s gonna be regulatory backlash. There’s gonna be cultural backlash. And it’s sort of stagnating around 184 million daily active users, around 2 billion monthly active users.
So, it’s still like the biggest thing that human beings have ever done. It’s bigger than communism and Catholicism and any other ism you can name, but obviously the cultural backlash and the regulatory, the potential for regulatory backlash I think are hitting the stock. And they came out recently, too, Buck, I don’t know if you saw this, there was a Fortune magazine piece, and they went around and they surveyed thousands of Americans and they said, “How much do you trust each of the following companies with your personal data: Amazon, Apple, Microsoft, Google, and Facebook?”
Well, Amazon was the best at 49 percent. People said they trusted them with the data. Facebook was 22 percent. 78 percent of the people said, “No way, don’t trust Facebook with my data.” So, I think this is like evidence of the cultural backlash that’s happening.
Buck Sexton: And to that point about the cultural backlash, there’s a lot of news stories and commentary around what is at least perceived, I know people get very testy about whether this is real or not, but perceived as political bias in the way that some of these – well, one, the algorithms themselves work, what you see, shadow banning, which is the term that’s been used for Twitter, and there have been some very shady things that have gone on whether it was intentional or not, right?
All of a sudden, any company that has “gun” in the name you can’t advertise for on Facebook. What if I’m selling water guns? And also, what’s wrong with guns? It’s legal as long as you’re going through the right processes. So, I think that there’s been such a backlash, I know there’s been such a backlash, that now you’re starting to see something that I think even four or five years ago would’ve been unthinkable. You’re seeing startup social media networks again.
Maybe it’s just a cultural thing. It’s a little niche. I’m gonna have my patriots who love the Second Amendment in America social media platform, or my Bernie Sanders loving, the democrat, but this is a thing that’s happening now. People are actually starting these little offshoots, whether any of them go anywhere. We know that 99.9 percent of them probably don’t go anywhere, but maybe one of them does, I don’t know.
Dan Ferris: Yeah. They’re moonshots, but I agree, at this point if people keep – it seems like every other person I talk to says, “I deleted Facebook from my phone” and I did it, too. I had it on my phone. I used to do all the same stuff, posting vacations and what I’m having for lunch and all the rest of it, but I got it off my phone. I didn’t want Facebook surveilling. I didn’t wanna volunteer as a surveillance subject anymore.
Buck Sexton: Well, the internet and the social media platforms in particular, I mean you mentioned being a – I was an intel analyst in the past. We’d all joke around that Silicon Valley has created the greatest surveillance platform ever devised in the history of the planet. I mean, what they have on you is well in excess of what even the Stasi at its height with a couple hundred thousand secret police in East Germany, what they could’ve compiled on a massive population, meaning that they’ve got stuff on everybody.
They know where you are, they know what you’re buying, they know what you say, who you talk to, and they know that about everybody that’s interacting with these platforms, so it is kind of amazing. Although I think that while people are really concerned about the privacy, I’m also of the belief that these different systems and these technologies that exist now are actually changing behavior in some ways in a very positive way.
Put aside how now you can’t have Thanksgiving dinner without your Uncle Morty telling you, “I can’t believe you voted for fill-in-the-blank.” I mean, that’s one of the ill effects of Facebook.
Dan Ferris: Right.
Buck Sexton: But the fact is now even from a law enforcement and an overall regulatory perspective, there’s so much more information and it’s so much faster to get and have access to. I’m really thinking from a law enforcement perspective. It’s all so much more efficient now. It’s all so much faster. You know where people are all the time to find them. You know where people are if you wanna know where they were last night.
One of the oldest tricks, or I shouldn’t say oldest tricks, easiest tricks – that’s the way to put it – one of the easiest tricks that they’ll pull is they’ll bring you in now for law enforcement, and they’ll bring up something that’s completely irrelevant to what they really wanna know. If they wanna know about a murder they’ll bring you in and say, “Hey, you got a friend named Bob down the street? He says that his car was stolen. Were you there last night in Queens when Bob’s car was stolen?” And you go, “Oh no, I was in the Bronx.”
Well, because of your Facebook geotag or because of Twitter or because of your cell phone tower that’s been pinged, they already know where you were, and once you’ve lied, now they’ve got you. So anyway, there’s just a lot of interesting implications to this that I think folks don’t really always consider, but there’s definitely a backlash especially against Facebook because I think that Facebook was always the, “Oh, we’re like a bunch of college kids from the dorm room who created this incredible way to communicate that’s gonna change the world.” Well, there’s a dark side to all that, too.
Dan Ferris: Yeah, and Facebook isn’t the only one. I think I was wrong, I think Google is a bigger surveillance operation. I had my phone on me right now and even though I have location services turned off, they know where I am. They know my address. They know where I’m moving around in the world and I’m not sure if I’m crazy about that. It’s potentially even bigger.
Buck Sexton: Yeah, and also the fact that they’re scanning emails. The laws are still being written on a lot of this stuff. It used to be the case for those who care about surveillance and privacy stuff, it was the case until I think a couple of years ago that if the cops, if the FBI wanted your email content, which is not just the more basic when an email was sent and to whom, ‘cause there’s a different level of scrutiny for that than the actual contents of the emails, but if the email was older than 90 days, it fell under the lesser level of – I think you needed reasonable suspicion instead of probably cause.
So, just because your emails were older all of a sudden, “Yeah, I wanna see it” and they could read your emails. I mean, reasonable suspicion is like I think this guy might’ve done something at some time, so let’s take a look. Anyway, it’s been amazing how all that stuff has changed. By the way, I’m down here in the swamp in DC. Not everyone calls it the swamp. I like to call it the swamp. Speaking of FANG stocks and the big tech companies, Amazon has decided who’s getting the HQ. What do you think about this move? Two HQs.
Dan Ferris: You know, these guys, they could’ve gone anywhere. They could’ve dropped a prosperity bomb in any city in the country, but of course it’s a business. It is a business and it’s a large business, so of course they wound up in New York and where? DC area, northern Virginia.
It makes all the sense inf the world, but the thing that kills me, somebody asked a question this morning about all these incentives. It’s like $2.5 billion in tax and another few hundred million. I think New York City is paying them like $300 million plus just in cash as an incentive, and somebody asked the question this morning, they said, “Can you please explain to me how this isn’t just like China?”
Buck Sexton: I was gonna ask you this question, so I’m glad that somebody else asked.
Dan Ferris: Yeah. I can’t explain how it’s not just like China ‘cause it is.
Buck Sexton: Yeah, I mean, people are saying that this is essentially crony capitalism. I mean, this is taxpayers subsidizing companies to come into an area and this then turns into some pretty extreme proposals that you hear from people in the more redistributed side of the political aisle who are saying now they have to agree to do a certain number of jobs that are already local residents, and they have to agree to a certain level of minimum wage, and there’s gonna be all these demands.
But it’s hard to say, “No, no, the market has spoken” when no, actually the government has decided to just shovel a lot of taxpayer money to these companies and especially in the case of Amazon, Dan, can you help me with this? How is this justified? Just ‘cause it’s such a glorious thing to have the Amazon HQ in the area? I mean, it’s a great area to be in.
Dan Ferris: It’s like building a stadium. It’s a huge boondoggle. Everybody thinks it’s wonderful. Everybody talks about the jobs. They’re talking about 50,000 jobs, and of course to a businessman, jobs are an expense. You better darn well give me billions of tax incentive and hundreds of millions in cash to create this 50,000 new jobs worth of expense.
So, it’s perfectly understandable on Amazon’s part and it’s perfectly understandable that this is how a politician thinks. The only people who don’t get it are the people who wind up paying for it, taxpayers. The rest of us, we’re like, wow, you wanna redistribute to one of the most successful businesses in the history of human commerce. You wanna redistribute from my pocket to theirs. You’re not giving the money to poor people, you’re giving it to Amazon. It’s just ridiculous.
Buck Sexton: It reminds me of how people have this, and I’ve always found this to be interesting because there’s such a widespread perception that incredibly expensive athletic programs at universities are a huge cash draw for the school, which means that there should be all this high level recruiting, and it means also that student fees often go to subsidize, there are specific student fees that go to subsidize the athletics program whether you’re on the Michigan State basketball team or not, and this is true of programs of all sizes across the country.
What you find out is that actually very, very few sports programs in American collegiate sports make money for the school, very few. It’s a tiny percentage overall. They’re all losing money. And so, then you figure out, oh, you mean that – and they say it’s about alumni donations. That’s also not true. That’s been disproven. It’s sort of like a city getting a stadium. We make the call, we think this is cool, so we’re gonna take money from people and funnel it into this project.
You see that literally in the case of with stadiums at some of these big schools where also the money goes to that. So, it’s just the perception issue, I guess. I sit around as an aspiring free market capitalist my friend, Dan, and I’m at a loss to explain how this isn’t crony capitalist boondoggle stuff. I can’t really do it.
Dan Ferris: Oh, it definitely is. In the case of the schools, too, there’s a very real effect once again of redirecting money to make someone rich. You look at the highest paid government employee in every state in the union, and in almost every state it’s like the football coach or the basketball coach or whatever. It’s crazy. It’s insane. Well, you know, we could sit here and foam at the mouth about boondoggles for the rest of our lives.
Buck Sexton: Well yeah, I’m in DC, which is boondoggle central, so there’s a lot of that stuff going on here. I did wanna ask you, now that we’ve had a week and we still have some elections outstanding in Florida, in Georgia, we’re not yet able to tabulate the final results of all these important contests, but has the market spoken? I mean, is there a consensus on what happened?
It was kind of a both ways thing, right? Republicans gain a little in the Senate, lose a bunch in the House. Did that have an effect on the market that’s appreciable? Do people like me just ‘cause I work in politics always assume it’s gonna have more of an effect than it does? How do you gauge all that?
Dan Ferris: Okay, this is like markets responding to near-term political and news items, it’s somewhat outside my bailiwick, but you can’t ignore it because it just happens in your face every day. We appear to have bounced off in the S&P 500 a little bottom there, but it ain’t over. It’s still weak. It’s around 2,700-something today and all the traders I know are saying if this thing breaks below 2,600 it’s over. That’s the end of the longest bull market in history.
So, people do like to get rid of uncertainty, and generally speaking when you get something like a midterm election, it comes up, people are uncertain, then it happens, and no matter which way it goes they just kind of breathe a sign of relief and get on with their lives. And certainly, historically I think just about after every one of the last I don’t even know how many, I wanna say 18 or 20 midterm elections the market has been up a year later.
So, short-term who the heck knows, and really, from my personal perspective as kind of a long-term investor, who the heck cares? We’re still in extremely overvalued territory as far as U.S. stocks are concerned.
Buck Sexton: I was gonna ask you because I’ve got a few ETFs for example that I’ve been holding for the whole year obviously, and hasn’t been fun.
Dan Ferris: No, this is not fun, not fun.
Buck Sexton: What’s going on with that? I thought look at all the previous years’ returns. I’m saying, oh, I can just buy this ETF, that ETF, it’s gone up 10 percent, 12 percent, sometimes it’s gone up 17 or 18 percent, and this year I’m down. I’ve been a good low-risk investor going for a low-cost fund and I’m losing money.
Dan Ferris: Right. So, as long as you’re a true long-term investor you should be fine, but if you’re buying the stuff within the past year, we’re at extremely elevated valuations. The last month of August on the S&P 500 we ticked the most overvalued moment in history including the dot com peak and 1929 peak. So, that was it. That was the most overvalued moment in history by the S&P 500. So, wow, of course we’re gonna be down 10 percent in October.
Buck Sexton: But are we heading for sideways or are we heading for something really ugly in the next year you think?
Dan Ferris: I am not a predictor and I don’t believe in predicting ‘cause I don’t know anybody who predicts this stuff with any kind of consistency. I’m a prepare, don’t predict. Now, having said that, a value investor is naturally prepared, he should be naturally prepared at the top of the longest most expensive bull market in history because you will have sold hyper expensive names out of your portfolio, and you will be just really, really unable to replace the overwhelming majority of those.
We found a few bargains in Extreme Value, but overall, it’s been really difficult the past two years, really, because things have been so expensive it’s hard to buy them. So, I’m kind of naturally prepared for a big top. It may not arrive for two more years and I’ll look like an idiot, but in the short-term I’m probably not the guy to talk to, although some people who I kind of think are real smart, one of them is our guy here Greg Diamond at Stansberry. He thinks if we don’t break below 2,600 on the S&P 500 that we could be above 3,000 by middle of next year or so.
Buck Sexton: So, I ask a lot of very elementary questions, but it’s good to have an expert to actually answer them. In ten years’ time, you’re a long-term value investor, what do you think is the likelihood of if you’re willing to hold some of these stocks, Amazon, Facebook, Google, alphabet now, all these big names, and if you hold them for ten years from where they are right now, do you think it’s likely that they’ll be higher? I look at that GE chart, I go, wow, you could’ve been America’s company, GE, held it for over 20 years, you’ve made no money.
Dan Ferris: Right. So, that could easily happen. The analog here for me is Sysco Systems at the top of the dot com bubble. The peak was $80.00 a share, and the thing has made it just a little better than halfway back to that. I think it’s still in the 40s, it might be 50 by now, but long, long time to be not even breaking even. And indeed, when the S&P 500 has reached levels as expensive as it’s been in the past couple of months, and really kind of throughout the year, the subsequent ten-year returns are very poor.
I mean, you could wind up on a ten-year basis from August or September highs, you could wind up flat or even slightly down over ten years, but you will get I believe a massive opportunity if you’re an ETF S&P 500 holder, you’ll get a massive opportunity at some point between now and that ten-year point to kind of average back in and buy again, and then your returns over the ten years ought to be pretty darn good.
Buck Sexton: So, oil took a bit of a hit in the last week, Dan. What is going on there? What is pushing prices down?
Dan Ferris: Well, oil is the biggest global commodity, really oil and iron ore, but oil is huge. Oil is a huge globally traded commodity, and in the United States over the past ten years here we’ve just found a whole bunch of it and started producing a whole bunch of it. I saw something recently, it wasn’t a big news item, but it said the United States is officially energy independent. By what measure at that moment I didn’t know, but it makes sense that we’re about there with all the oil we produce.
So, you have to wonder when Saudi Arabia says, “We’re gonna cut and we’re gonna” basically do all the stupid garbage they do trying to make announcements and then actual cuts to support the price and it doesn’t work, and then they’re saying, “Well, okay, we’re pumping oil again.” It makes you wonder like are they ever gonna be able to do anything again?
Now that the United States pumps so much oil out of the ground and has so much more, will Saudi Arabia ever again be able to hold us up the way they used to? I think the answer is probably no. I think it’s over. That period of history has come to an end.
Buck Sexton: That’s also part of the changing geopolitical relationship between our two countries. Some people even tie it into this terrible murder of this guy Jamal Khashoggi in the consulate in Turkey where they say that MBS, Mohammad bin Salman who’s the crown prince of Saudi Arabia, he was thinking the U.S./Saudi relationship from 20-30 years ago where it was like, “Hey guys, I know that it’s a despotism and women can’t drive and all this, but we really need that oil.” That’s not quite the same anymore. The relationship isn’t quite the same. So, that’s changed some of the attitude toward how the U.S. deals with Saudi Arabia.
Dan Ferris: Yeah, and you tell me, Buck, if this is the case, if we’re right and the age of Saudi influence in oil markets is well behind us now, you tell me what that country’s political situation looks like in ten years because I’ve always maintained that they need our dollars more than we need their oil, and now there’s lots of evidence for that.
Buck Sexton: Yes, well, the Saudis essentially try to buy us off not now with oil quite as much as they do by being a buffer against Iran. Our main Sunni Arab state in the Mideast that we could work with was Egypt until Tahrir Square and all that stuff happened with the Arab Spring, and we’ve really shifted and now Saudi Arabia is kind of our biggest buddy in the neighborhood, and Iran and the Saudis hate each other stretching back really for over a millennia.
So, the Saudis and the Iranians are engaged in this struggle for dominance in the Mideast, and we kind of backed the Saudis against Iran. So, that’s how – and there’s all these little proxy wars playing out, most notably now Yemen which is the biggest humanitarian crisis in the world, and that’s where you see the Saudis saying, “Don’t push us too hard” and then internally, you asked about the politics of the Saudi kingdom, they’ve always been able to do essentially a version of what the Pakistani military/civilian leadership do, which is to say, “Look, it’s either us or the real radical crazy type, so you guys better play ball with us.”
Under the surface in Saudi Arabia there would be some real problems. Honestly, the Arab Spring, too, people look at that and they say, “Okay, so, when Egypt actually could vote, the Muslim Brotherhood came into power. We don’t wanna see what comes into power in Saudi Arabia.” So, there’s some pretty cynical political calculations being made about all this stuff.
Dan Ferris: I see your point that Saudi Arabia is the kind of good guys on the block that we wanna do business with because what’s the worst thing that happens to you if you go to Saudi Arabia? You just get your head chopped off. You know what I’m saying? So, it’s a good group to hang out with.
Buck Sexton: I worked with people who are Mideast experts, and the way that they would refer to Saudi behind closed doors was always pretty – the regime specifically but also a lot of the ideology was let’s just say very critical. People are not fans of how the Saudis conduct themselves, and the Saudis also have a terrible reputation regionally and around the globe for throwing around a lot of money and being really arrogant and being kind of full of it.
But they have a lot of sway in U.S. media. They own a lot of property here. They pull many more strings behind the scenes than people realize, which is I think why the MBS thing was a little bit of a surprise to some folks because it had just come after the crown prince of Saudi Arabia had this whole charm offensive and met with kind of the who’s who of the power structure in this country.
Dan Ferris: Charm offensive.
Buck Sexton: Yeah, such as the Saudis do it, and then he goes and he sends an assassination team to beat, torture, and chop up into little pieces a guy in a consulate in Turkey. So, Saudi has got some bad stuff going on, no surprises there.
Dan Ferris: Saudi Barbaria.
Buck Sexton: Rahul Saragi is the founder and managing director of Atyant Capital Advisors, advisor to the Atyant Capital family of funds. In the last 14 years he has focused exclusively on the Indian markets. His mission is to consistently identify the best 10 to 15 investment ideas from among the thousands of publicly traded Indian corporations.
Rahul’s value-based investment philosophy stands apart due to his belief in the paramount importance of corporate governance, specifically how management operates within its minority shareholders in mind. Rahul is the author of Investing in India: A Value Investor’s Guide to the Biggest Untapped Opportunity in the World, a definitive guide on navigating the Indian markets. Please welcome Rahul Saragi.
Rahul Saragi: Thank you.
Dan Ferris: So, Rahul, it is very nice to hear your voice. It’s been a long time. Before we kind of get into value investing and India and how difficult that is and how you go about it, I just wanna give our listeners an idea of who you are. There’s some very interesting things. For example, tell me about, you are a practitioner, are you not, of something called vipassana yoga?
Rahul Saragi: Yeah, it’s – go ahead.
Dan Ferris: You told me about this when I visited India years ago with you, and I kind of looked into it and I thought, wow, that sounds like a really good thing, but you have to go somewhere for ten days and you can’t talk to anybody and it’s quite a commitment, isn’t it?
Rahul Saragi: Yeah, absolutely, but you know, Dan, I did my first India retreat in 1998, so it’s been 20 years, and I’ve been a practitioner since, and I will tell you that it’s the best ten-day investment of my time that I made the first time I did it. It’s hard, but I think it gives you – we’re bombarded with stimuli from outside all the time, especially so today, and I think to figure out our inner self, I think disconnecting yourself, it really helps. It gives you a different perspective of things, and as I mentioned, it helps you see things as they really are.
Dan Ferris: Wow. You know, actually having met you before and spent time with you, I can sort of vouch for that. You’re one of the more objective kind of thinkers that I’ve met before, and there are a lot of people like that, a lot of smart people in the value investing community. For example, I just wanna take this one example from your book because it kind of blew me away. On the one hand in the book you had said, “India is a very unpleasant country to live in and to visit.”
You flat out made that statement. And on the other hand, of course, you’re calling it the biggest untapped opportunity in the world and a paradise for value investors, and I read your book before, but this most recent reading the connection between your Vipassana yoga training and your objectivity and then these statements, these very powerful seemingly contradictory statements, it all made sense.
Rahul Saragi: Thank you, Dan. Absolutely, isn’t it? Just take a step back and think about it, is if something is as beautifully marketed and sold to you and you get a singsong welcome and everything, the likelihood that there are a lot of people there to begin with is pretty high, and you’re probably gonna be paying relatively high prices. So, as a value investor you want to go to unpleasant places but obviously those that have potential, otherwise they’re just value traps.
Dan Ferris: Right. So, you characterize India as a value investor paradise, and I think it was on the same page within a couple sentences, “But it’s loaded with value traps.” But most people don’t understand what you just said, which is you want it to be loaded with value traps in one respect because that means other people aren’t paying attention.
Rahul Saragi: Yeah. You want me to comment on that? Absolutely, Dan. I’ll share just one nugget of perspective, and I’m sure your listeners and your readers can relate to that. Everyone who has invested in India probably has an India investing horror story, right? And I think that the way the human mind works just with _____ stakes and short cards, we make that assumption that because you have a few bad experiences that every experience you’re likely to have is gonna be bad, and that’s what I’m alluding to when I talk about that.
Dan Ferris: I don’t wanna get into the investing stuff just yet, but just talk about India a little bit because I’ve found that sense of paradox all throughout your book, this sense that things are really wonderful, and things are really terrible kind of at the same time, and that India is at this place and has been at a place for a couple of decades now and will probably be here for a couple more at least. It’s a time of great change in India is what I perceive because you – it’s a poor country, but it’s a country full of kind of optimistic entrepreneurial people, and it’s like a politically difficult country, isn’t it?
That’s the reputation. India has a reputation of being really politically difficult, and I haven’t spoken to you for years. I assume that hasn’t changed a great deal.
Rahul Saragi: It has not. So, Dan, I want to sort of talk maybe for a minute about the first thing that you spoke about which is the paradoxes, right?
Dan Ferris: Right.
Rahul Saragi: I will give you a recent paradox. If you pick up Bloomberg, which a lot of people in the financial market read, if you log into the terminal, the one thing that you will hear is Delhi, which is the capital of India, is one of the most polluted cities in the world, right? And then we go out and invest in a company, and it’s bursting on the seams because 50 percent of India is under the age of 30. All these people are moving to the cities. The infrastructure in the cities are not keeping up.
So, things are actually getting worse on the one hand, but the paradox that you rightly pick up is the entrepreneurs and the opportunity that presents and that has delivered over time is what makes it exciting. As a value investor what’s not important, Dan, is for everything in India to work great.
As long as we can find risk rewards that are better than other places and we have a good margin of safety and a good upside, those make for compelling investment opportunities, and that’s what I’m alluding to which is don’t get dissuaded by the macro noise. You touched on one more thing. Can you refresh that for me?
Dan Ferris: After talking about the paradox, I was just asking you if in the last five years is the political environment still as difficult as it has the reputation worldwide for being for investors?
Rahul Saragi: You know, Dan, this is a very, very important point that you have raised. I want you and perhaps your readers to think about this for just one minute, right? India is about as politically difficult a place as the United States because both are ugly, messy, argumentative democracies, right? And what that brings with it is individual property rights. The reason it becomes hard for India is India became a democracy before it became rich.
When you’re a poor democracy versus a rich democracy, some of the narratives and dynamics are different. So, if you have a political logjam in a rich democracy like the U.S., it may sometimes be a good thing. But when you’re a developing country in a _____ hurry, it can sometimes be frustrating.
So, I wouldn’t evaluate it in a silo and say, hey, the political system is bad, but I would actually look at the glass half full side of that and I would actually take a step back and think that if you were to allocate capital to someplace for a really long period of time, you would want to do it first and foremost not where there is opportunity but where your individual rights to property are gonna be protected.
So, just like in the U.S. one head of state or one elected House of Representatives cannot unilaterally take away an individual’s property. The same thing is true of India. If somebody wants to build a bullet train from Mumbai to Ahmadabad and you read an article saying that the government is having an incredibly difficult time acquiring land to build that, I actually take that as a very good thing, Dan, because if you’re a poor illiterate farmer and the government just cannot walk in and take your piece of land, that’s a great thing for you as an investor, and you need to think about that to some extent.
Dan Ferris: I couldn’t agree more. I will never forget, Rahul, when I visited we drove into what I took to be a pretty new kind of office park, and we were all in a van or something and we had to stop and let the farmer with his – in the office park we had to stop and let the farmer with his goats cross in front of us, and I said, “What’s going on here?” You said, “There’s probably a deal with the guy who actually owns the land that he can keep his goats here still” or something, and I thought, that is great. In fact, it’s true that property rights and owning your own property, the sanctity of that, it’s a much longer tradition in India than it is on this continent because it’s only a couple hundred years old on this continent and it’s over 1,000 years old on yours.
Rahul Saragi: Absolutely, Dan. I couldn’t agree with you more.
Dan Ferris: And I think that’s wonderful, too, and it’s one of the – as an Indian investor, how many times a week do you hear somebody say, “What’s wrong with India? Why can’t it be like China?” And this is one of the profound differences. You don’t own anything in China, right?
Rahul Saragi: You don’t own anything. Think about the Interpol guy who went back to China, right? You’re not safe from the Chinese state even if you’re overseas. It’s not like you can escape from that state.
Dan Ferris: That’s right.
Rahul Saragi: Are you ever wealthy as a person living in China? I don’t know.
Dan Ferris: Right, because if you’re wealthy you own a whole bunch of something, but what do you own if you live in China versus if you’re wealthy in India, you’re wealthy in India.
Rahul Saragi: Yeah. I mean, look, this is a very interesting thing. This is something Mr. Buffett talks about, right? I think that the investing community, especially, look, the predominant amount of investing literature is from the U.S. and the U.S. does not have these concerns, so I don’t think it’s written about enough, is the power of the state over private wealth.
I think it’s a construct of the government’s outcomes over very long periods of time, and I think that’s a dynamic to keep in mind. I mean, again, I am not an expert on Russia, but if you’re a billionaire in Russai are you really a billionaire or is it all just Mr. Putin’s money? I don’t know. Can Mr. Putin just throw you out when he feels like it? You can’t do that in India.
Dan Ferris: Yeah, throw you out? You better hope he only decides to throw you out.
Rahul Saragi: Right. I don’t wanna comment about Russia. I’m not an expert. I don’t know much, but I’m just talking about estate versus private wealth.
Dan Ferris: Yeah. I hear you loud and clear. I couldn’t agree more. There are some specific challenges. For example, you make the point in your book that India is not a single common market, and this kind of affects economies of scale where you don’t have this problem like in the United States where you can kind of get natural resources from one part of the country and then you can manufacture in another and ship to another. These things are truly difficult in India, are they not still?
Rahul Saragi: Yeah. So, I will comment on this at two levels, Dan. So, one thing is that I wrote the book about five years ago and on the indirect tax front, India passed something called the goods and services tax two years ago, which was really landmark because it was the largest ever tax reform in India’s independent history. So, India actually integrated its entire market into one national market.
Now the change is so large and so new that it’s probably gonna take us 25 years to get the full benefit out of that because things and entrepreneurs and behavior changes only slowly, but the direction for that has been set. My comment is also at another level which is not just a regulatory level but a human behavior level. You might have seen all of this when you were in India, Dan. I think Europe is a bad analogy, but India has 100 languages, different foods, different _____, and it has not tried to impose a dominant culture across the _____ _____ _____.
The impact of this on investing is actually pretty deep, and I see this happening with some of my peers all the time, right? So, there’s a company listed on the Indian markets called Page Industries, right? And it has the franchise in India for Jockey underwear, and it’s primarily a men’s underwear company. It sells a premium product.
It has been a very successful story over the last decade. The stock rates at maybe about 80, 90, or 100 times earnings, but you know what, Dan? It’s a $300 million revenue company and it has been struggling to grow its top line over the last three years despite commanding 90 times earnings multiples.
This is something which investors need to keep in mind. So, one starts to think, hey, you have a country of 1.3 billion people and the premiere brand is struggling to grow beyond 300 million. I think this goes back to sort of understanding the market and saying, hey, how large is this market really, and how large is the segment that this company or this product actually caters to?
If you could have a situation in a $300 million top line, that company might have captured 80 percent market share in that market, and the risk is only to the downside because now competitors know how valuable it is. So, the top of that market share somebody is gonna sell you a narrative that, hey, India is this great consumer market. Come in and buy because everybody is gonna be wearing Jockey underwear so you can pay 90 times. The outcome is actually gonna be very poor.
Dan Ferris: I just wanna make it clear to the listener, Rahul is saying the thing is priced for hyper growth and it’s not going – the actual top line is not going anywhere, so, it’s probably a pretty bad bet here, right?
Rahul Saragi: It’s not one large homogenous market.
Dan Ferris: Right, but I hear you though about the goods and services because what I also want the listener to understand is there has been in the past, labyrinthine, archaic cascading and building up of taxes from one region to the other so you didn’t have any scale. But you’re saying the goods and services tax is through, and that should help in that regard, yes?
Rahul Saragi: Yeah, and you know, Dan, if I talk about some of the changes that are underway, they’re just mind-boggling. I don’t know how much time we have, but I will try my hand at a small piece of humor.
Dan Ferris: Okay.
Rahul Saragi: So, a Russian guy, an American guy, and an Indian guy sort of get together, and they’re talking about how awesome their countries are. So, the Russian guy says, “We started digging and we found aluminum cables from 1,000 years ago, and so we had connectivity then” or something like that. The American guy says, “We started digging and we found fiber optic cable from 1,000 years ago. That’s how awesome we were.” And then the Indian guy says, “We’re so awesome we dug and we dug and we dug and we didn’t find anything because 1,000 years ago we were wireless.”
I apologize for the poor joke, but what I’m trying to tell you here is that given what has happened with technology, the GSE in India is actually the most superior indirect tax administration system in the entire world. Can you believe that statement, Dan? The impact of that is gonna get felt over the coming decades because it’s all online. It’s unreal the way it works. I’ll give you one more example.
Dan Ferris: Okay.
Rahul Saragi: India has been infamous for corruption, right?
Dan Ferris: Yeah.
Rahul Saragi: The Indian government and let’s say government owned companies, they buy something like that $80 to $100 billion worth of goods and services a year. Any time there’s a purchase there is scope for corruption. Now what the government has done is it has mandated all of these purchases to move to an online marketplace a la Amazon. Everything is happening anonymously. You can have funding, you can have credit, and the system is slowly moving on there. When that gets completed in one fell swoop you eliminate a problem that has probably festered for hundreds of years.
Dan Ferris: Yeah, okay, I can see why you’re saying that’s the greatest thing that’s ever happened. There was another thing that I wanted you to touch on for me. I’m getting a lot of these questions from the book, and as you say it’s five years ago, and it’s nice to get an update from you. One of the sort of paradoxical elements in the book was this tradition that you talked about where repaying debt in village life over millennia in India is sacred.
Repaying debt is sacred, and if you don’t repay your debts it’s up to the successive generations, and the belief is that it can even follow you into the next life, the consequences of not repaying your debt. So, on the one hand, we have this deep cultural belief in the repayment of debt, but then elsewhere in the book you described how bureaucratic and messy the court system is for banks and lenders, and I just thought, wow, there’s another Indian paradox. Has anything changed in the five years since you wrote about these things in the book?
Rahul Saragi: Yeah, absolutely, Dan. So, I think fortunately the cultural affinity to meeting one’s obligations has not deteriorated, and I caveat that with a yet, I don’t know when that starts to dilute with integration. But on the court side what India did is in 2016 it passed a landmark new law called the insolvency and bankruptcy code. So, for the first time through an organized process, lenders and creditors can take over businesses, take over assets, and recover whatever it is that remains for whatever it is worth.
Now, I just want to caveat this statement again, is the law is so new that the case laws and the exceptions and the rules of engagement of that are currently being debated, being tried, and being tested. So, I would suggest that one look at this in the spirit of a major overhaul, and I think the implementation of this will become smoother over time.
One of the things that you would’ve probably picked up from what I’ve said so far is the number of landmark changes in the last few years have just been completely turning things around 180 degrees. One of the beauties of India that I see is that all of the gains, while the pain is immediate, the gains will accrue over the coming decade and more.
Dan Ferris: So, great long-term opportunity. These are all the reasons basically that prompted you when you got out of Wharton and you had studied economics, you’re basically telling me that the reasons why you went back to India instead of taking jobs that you were offered here, it’s coming true. It’s happening as you would’ve hoped.
Rahul Saragi: Yeah, absolutely, and then some, Dan. I’ve been doing this for 20 years and I feel like I’m just getting started.
Dan Ferris: Yeah, and you’re doing pretty well, too. You sent us some of your literature and last year, 2017, you had one heck of a fine year, did you not?
Rahul Saragi: Yeah, we did. I think we made it to the top of the charts even on a three-year basis, so we’re pretty satisfied, although you know how this business works. Those things ebb and flow.
Dan Ferris: Right. So, I saw your results and then I saw the Sensex, the sort of Indian stock exchange index, but I know the index is not a great necessarily gauge. It’s not like as good as it is in the United States. We look at the S&P 500. It’s a pretty decent gauge. But would you still say that about the Sensex? It’s not the greatest gauge of the overall stock market, and how would you gauge the opportunity right now? Is there a lot of overvalued stocks; a lot of undervalued?
Rahul Saragi: Yeah. So, two questions there. So, the first one is the Sensex is the least worst we have, the Sensex or the NSC Nifty, which is like 50 names. Terrible name I must tell you, but nonetheless that’s what it’s called. And I’ll sort of give you a little bit of an explanation as to why. Most indexes with the exception of the Dow are market cap weighted indexes. If you take the S&P 500, that’s the 500 largest names in the U.S. market by market capitalizations and represents about 70 percent or so of the U.S.’s market cap. That might’ve changed somewhat.
In India, however, given the nature of the economy, and a lot of the economy’s basic materials, the top 15 or 20 names probably make up like 60 or 65 percent of the entire market’s market cap. The top 30 names make up maybe 80 percent or 75 percent of the market cap of the entire market, and the challenge it creates is it creates an unbelievable amount of skew because while these companies are very large, and we find opportunities in the large names all the time, but these are not necessarily where all the action is.
Having said that, if you were to take an index and construct it based on let’s say the next 70 names, which is what a lot of the smaller indexes do, that’s actually even worse because it doesn’t represent anything. So, index construction unfortunately is a little bit challenging, but we use the Sensex or the Nifty as a reference because it’s the least worst yardstick to sort of track what’s going on in India.
Dan Ferris: Right. It’s yet another thing that you better know what you’re talking about ‘cause it’s different in India. Well, we’re running out of time here, Rahul, but I wanna take some time here just to tell everybody Rahul’s book is called Investing in India: A Value Investor’s Guide to the Biggest Untapped Opportunity in the World. He’s actually packed so much insight into less than 150 pages. It’s incredible. The forward of the book is by our own Steve Sjuggerud, editor of True Wealth, and if you go anywhere near India without reading this book, you are a fool. It is an absolute must read for anybody who wants to get near India with real investment dollars. I just read the whole thing again in the past couple days and I love it to death. It’s an excellent book.
Rahul Saragi: Thank you for that, Dan.
Dan Ferris: You’re quite welcome. Loaded to the gills with case studies. There’s a case study practically every other page, and then there’s a website connected with it that you could get lost in the website for a week or two. So, it’s really pretty cool what you’ve done here. Final words. What does the opportunity look like right at this moment? If I never heard of you before and I said, “Should I put money in India right now or is it looking as toppy as the United States?”
Rahul Saragi: So, I will leave you with a nugget, and then I will answer that question and perhaps we can wrap with that, Dan. The Indian currency, which is the Indian rupee, has over the last 30-40 years on average declined about 3 percent versus the U.S. dollar, and the underlying stocks performed significantly better that they compensate for that. By U.S. dollar terms, you will be very happy investing in India.
Having said that, there has not been a single year when it has declined 4 percent. So, what I mean is that in the last five years the rupee declined _____ percent, but in the last one year it declined 15 percent. And this has been the characteristic of the rupee to do step declines. Now, I don’t have a crystal ball and it could decline further from here, and a lot of it depends on what happens with other emerging markets.
But in our view or in my view, _____ these step declines, all else being equal, are very interesting times to buy the rupee and hence the Indian markets. So, although I’m not a market timer, and although investing is all about picking up those bottom-up names, I would encourage you and your readers to think about that impact and think about it like a 15 percent discount on an already exciting underline to compound gains in the future. That basically is my view also.
Dan Ferris: Okay. Good answer. I think that actually is a wonderful place to leave it, and I just wanna say thank you so much, Rahul for being with us today.
Rahul Saragi: Always a pleasure connecting with you, Dan. Thank you so much for everything.
Dan Ferris: All right, buddy. I hope we’ll talk to you again real soon.
Rahul Saragi: Take care.
Buck Sexton: Okay, let’s get to the mailbag. Remember, if your feedback is something you wanna share, it’s easy to do. [email protected] We read them all. We try and respond to every single one, even the ones that make me sad on the inside. Don’t be too mean or I’ll go tell Porter on you. Just kidding. Porter would laugh at me even more. Let’s get to the bag.
Email number one. “Gentlemen, I really like the latest episode, however, I think I’m an insignificant minority. I think the discussion about risk and its latest manifestations was great. Even if the hate comes in, please don’t succumb. Keep up the good work, Joe M., long time and long arm listener.”
Dan Ferris: Well, thank you for the question, Joe M. If the hate comes in, I’m just gonna frankly disagree with them because I agree with you. The discussion about risk with Chris Cole that we had was really great. Look, anybody who’s concerned about volatility needs to hear what this guy has to say. Thanks for your support on this and if the hate comes in, man, I might just ignore it, okay?
Buck Sexton: Email number two. “Hi guys, just wanted to give a shout-out to Dan Ferris for his latest show, which was his best yet, I believe. I think that he’s become more comfortable behind the mic and his sound has improved as well. Furthermore, Chris Cole was fascinating as he presented a very insightful and compelling point of view, and Buck, totally agree with your take on the next two years. We’re in for a really nasty two years and beyond. Question for you, sir, what is the endgame to all of this? Thank you for your good work and I look forward to your response, Jeff B.”
Well, Jeff, from my perspective as to the endgame, this is just all going to be about who gets power in 2020 and whether the country trends toward democrat socialism or continues on a path to restoring more limited government and capitalism. That’s a very simplified version of a very complex argument, but I do think you’re going to see a level of vitriol, a level of nastiness in political debate for the next two years that will be unlike anything we have seen since the 1960s.
Dan Ferris: And I would just like to add thank you, Jeff B. for the shout-out. It’s much appreciated, and yeah, I’m more comfortable behind the mic. Can’t take credit for the improvement in sound. That’s Jimmy in the booth.
I totally agree, Chris Cole is a fascinating, smart guy, and I strongly encourage you to check out his website, ArtemisCM.com. You can get lost in there for days. There’s lots of wonderful stuff there. Thanks again, Jeff. I really appreciate it. And if everybody wants to see what I’m doing in Extreme Value, you can just go to the notes section at InvestorHour.com and click on the link there.
Buck Sexton: That concludes another episode of the Stansberry Investor Hour. Be sure to check out our recently revamped website where you can listen to all of our episodes, see show transcripts – we get lots of emails about that – and where you can enter your email to make sure you get all the latest updates. Just go to InvestorHour.com. That’s gonna be it for this week, folks. Love us or hate us, just don’t ignore us. Thanks for listening.
Dan Ferris: Thanks a lot, everybody. Talk to you next week.
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