Across the entire U.S. stock market, going all the way back to 1926, a small fraction of stocks are responsible for the lion’s share of the market’s gains.
Dan examines this phenomenon with a deep dive into the Bessembinder Study and comes away with a few key takeaways for individual investors trying to beat the market.
Then on this week’s interview, Dan invites Kevin Landis onto the show.
Kevin was born and raised in Silicon Valley and has over 30 years of experience in market research, product management and investment in the technology sector.
And today, Kevin is the Chief Investment Officer at Firsthand Capital Management, an investment advisory firm he founded in 1994. He currently manages two technology sector mutual funds and a publicly traded venture capital fund.
Dan asks how Kevin and his firm were able to identify stocks like Roku, Twitter, SolarCity, and Yelp before they became the massive winners they are today…
The two also discuss how the current incentives in the asset management industry typically hurt your ability to make large gains… and how his firm works to break that mold.
And finally, the mailbag is filled with some great questions this week. One listener asks Dan an interesting question about Tesla that tests his value investing philosophy…
Then a listener writes in supporting the retail investors in GameStop, giving a different take on the situation. Is there more to this story than we’ve been told?
And another listener from Australia has some questions on gold’s price lately and the potential of a top in the crypto markets…
Listen to Dan give his take on these topics and more on this week’s episode.
Chief Investment Officer
Kevin Landis is the Chief Investment Officer for Firsthand Capital Management, and investment advisory firm he founded in 1994. He currently manages two technology sector mutual funds and a publicly-traded venture capital fund for the firm. Kevin was born and raised in Silicon Valley and has more than 30 years of experience in market research, product management, and investment in the technology sector.
Stansberry Investor Hour Episode 202 Timestamps
3:10 – How much do the big winners move the rest of the market? Dan looks to answer that question as he takes a deep dive into the Bessembinder Study.
4:30 –“When stated in terms of lifetime dollar wealth creation, the best performing 4% of listed companies explain the net gain for the entire U.S. stock market since 1926…”
10:13 – This week’s quote comes from Warren Buffett’s 2008 Shareholder Letter… “Beware the investment activity that produces applause; the great moves are usually greeted by yawns…”
14:44 – This week, Dan invites Kevin Landis onto the show. Kevin is the Chief Investment Officer at Firsthand Capital Management, an investment advisory firm he founded in 1994. He currently manages two technology sector mutual funds and a publicly traded venture capital fund for the firm.
15:25 – Kevin explains what being born and raised in Silicon Valley was like, “I certainly crossed paths with a ton of interesting people…”
21:16 – Kevin shares the philosophy behind some of his firm’s big wins… “I can recall investing in ROKU when it was just a hair under $1 billion…”
26:14 – Dan asks Kevin how he spotted some other big winners like Twitter, SolarCity, and Yelp… “Of those, probably the biggest one was Twitter…”
30:36 – How does Firsthand Capital differ from many others in the asset management industry? “The incentives in place for most people involved in the institutional asset management industry is to make the really sober conservative play…”
34:30 – Kevin likes one popular fitness company that’s performed incredibly well in the COVID era… but Dan explains why he doesn’t like their long term prospects with some personal anecdotes.
43:20 – Kevin talks about one of the deadliest things he sees that consistently takes down start-ups…
47:11 – Dan asks, “Is there anything right this minute that you’re excited about? One particular name or two?”
50:00 – As their time winds down, Kevin leaves the listeners with one final thought, “If there was a straightforward way to beat a game like this, everybody would know it… and then it would no longer be a straightforward way to beat the game. So you can either choose not to play, and be an index investor, or you can have a different way of looking at things…”
52:47 – The mailbag is overflowing this week. The first listener asks Dan an interesting question that tests his value investing philosophy, ‘at what price would you consider buying Tesla?’ Then a listener writes in supporting the retail investors in GameStop, giving a different take on the situation. Is there more to this story than we’ve been told? And finally, a listener from Australia asks Dan about gold’s price lately and the potential of a top in the crypto markets. Listen to Dan give his take on these topics and more on this week’s episode.
Announcer: Broadcasting from the Investor Hour Studios and all around the world, you're listening to the Stansberry Investor Hour. [Music plays] Tune in each Thursday on iTunes, Google Play, and everywhere you find podcasts for the latest episodes of the Stansberry Investor Hour. Sign up for the free show archive at investorhour.com. Here's your host, Dan Ferris.
Dan Ferris: Hello and welcome to the Stansberry Investor Hour. I'm your host, Dan Ferris. I'm also the editor of Extreme Value published by Stansberry Research. Today we'll talk with Kevin Landis of Firsthand Capital Management, the Silicon Valley venture capital firm. And Kevin was born and raised in Silicon Valley. This should be interesting. This week in the mailbag, lots of good stuff. GameStop, bitcoin, gold, Tesla, and more. In my opening rant this week, I'll talk about how hard it is to pick individual stocks one at a time – including a look at the Bessembinder study. Phew. That and more right now on the Stansberry Investor Hour.
A couple of weeks ago on Episode 200, we talked with Tucker Walsh from Polen Capital. That was a good interview if you hadn't listened to it. He's a small-cap guy, and he gave us some good ideas, stocks he likes right now. It was a really good interview if you haven't listened to it. He instantly became like one of my go-to people on small-cap stocks OK? And during that interview, we talked about the small-cap effect, right? The small-cap effect is simply the small-cap stocks tend to outperform big-cap ones.
But you also might remember during the interview that we pointed out that that effect of outperformance – that superior performance over large-cap stocks – it's all attributable... 100% of it is attributable to like 5% or fewer of the small-cap names. Wow. Like, there's just, say, 10 or 15 or 20 – there's some massive number of these stocks depending on how you measure them. I can't give you an exact number. It just depends on how you measure it. But just say 20,000. OK? You know, versus – I don’t know – just say 5,000 or 10,000 or something of the bigger cap. There's a lot more of the smaller-cap ones, right? And that means that it's harder, right?
Because you got to – if you really wanted to get the outperformance by picking individual stocks from the small-cap universe... right? If you said, "Well, if small-cap outperformed better, I’m going to perform even better by picking individual names." Then you go in among the small caps and pick the good ones. That's really, really, really hard. OK? Really hard. Because very, very few of them account for that performance. OK? So that's one thing. It turns out – and we should've just said this at the time, maybe. But it turns out that, you know, the whole stock market's like that.
And the whole stock market's like that. And there's something called the Bessembinder study. And the Bessembinder study was done by Hendrik Bessembinder – and some other folks just academic people studying stocks – and they found that... this effect just goes for the whole U.S. stock market back to 1926. And I'll just read a little bit from the abstract, right? The little paragraph at the top of the paper that tells you what they found. And so, at the top it says, "Four out of every seven common stocks that have appeared in the CRSP database since 1926 – just this database of stocks. I don't know what it is. Doesn't matter – "have lifetime buy-and-hold returns less than one-month Treasurys."
You get that? [Laughs] Four out of every seven, right? So that's a little more than half have lifetime buy-and-hold returns less than one-month Treasurys. "When stated in terms of lifetime dollar wealth creation, the best-performing 4% of listed companies explain the net gain for the entire U.S. stock market since 1926, as other stocks collectively matched Treasury bills. These results highlight the important role of positive skewness and the distribution of individual stock returns." Blah, blah, blah. "The results help to explain why poorly diversified active strategies most often underperform market averages." Right?
So, you know, when you see these statistics and things like, "Most funds underperform the S&P 500," or something like that, maybe that's their problem. But the thing that just grabbed me was 4%. Four percent of the companies explain the net gain for the entire U.S. stock market from 1926. And I think this is through 2018. So wow, first of all. And second of all, if you know people are good at picking stocks and done well over time, kudos to them because it's hard.
And, you know, that's why we exist. [Laughs] I guess this is a massive commercial for Stansberry. That's why we exist, right? And at this moment in time, I would suggest, as someone – when we get to the mailbag, someone will suggest the same thing... That it's kind of hard to pick stocks if you believe as I do that the overall stock market is really in a precariously, I would say, overvalued, highly speculative frenzied moment here.
And I mentioned one of the guys at Stansberry before, a guy named Alan Gula, who works on Stansberry's Investment Advisory among other things, I believe... really smart guy. When I'm really bearish and I turn out to be wrong for another year, Alan's always saying, "No. No. There's no reason to be bearish." And he recently sent around a little e-mail and he said, "You know, the market's above-trend. Credit spreads are super tight." He said, "Beyond tight. And retail investors are really bullish." And I've seen other things that... the bearishness of retail investors is also collapsing, right?
And I would call this the most expensive moment in history where three times sales in the S&P 500 – that's never happened before. And it's an interesting moment too because we're [laughs] hopefully, I think – I pray – coming out of this pandemic. We should be at some point, right? We're talking about the reopening trade all the time in the news. And so, that would kind of – that seems bullish to me, right? It just seems bullish that if you know everything's going to open back up, everybody's going to go back to business and start selling things – and even right now, if you're just sort of – if you haven't been completely flattened by the pandemic, you still have money and you're still operating kind of as normal, there are shortages of things.
We're trying to move into a new house. And so, we're having to rent a place. And the rental market is so tight, and the house situation is so bad they've pushed us out from the house being done and ready to move in end of March to end of May. It went – end of March, end of April. Now it's end of May with whisperings about the first week of June possibly because materials are hard to get in the building industry right now. Some of them. And then, the rental market is screwing with us too. We're going to move [laughs].
We're going to live in three different rentals potentially – through definitely two, maybe a third different rental before we get into our house. Because they're all booked up. And by the way, if you have needs like I do – I need a place to work and we need a place that will take our two pets – then the rental market shrinks even more, and we're paying an ungodly sum to stay in a normal like three-bedroom house for a month. I don't even want to tell you. It's horrible. And so, it looks – you know, it looks like, "Wow. The world just can't get back to normal fast enough." You know, and yet if you didn't know that and you look at the stock market, you'd say, "God. This is unsustainable."
It's as exorbitantly expensive as it's ever been. It's now above the trend, momentum-wise, and in the credit markets. You know, that situation was as great as stocks at the bottom of the COVID bear market in March 2020. And now, that's beyond tight. In other words, the prices of credit instruments have soared out of sight as well. And, you know, there's – it looks like there's nowhere to go but down. It's an odd moment. And coupling with that odd moment is just the fact that it's really hard to pick stocks anyway.
Because if you want to do at least as well as the market or outperform it, there's very few names that over the long-term account for that outperformance. All right? It's a tough moment. That's really all I wanted to say today. OK. I'm going to do a quick quote of the week now, and then we will talk with Kevin Landis. This week's quote of the week comes from Warren Buffett's 2008 shareholder letter. I mean, I could just probably take most of the week from Buffett's shareholder letters for the rest of my life and do this program for 30 years.
And this one I think – we talked about how frothy the stock market is and how hard it is to pick really great stocks anyway. And, you know, this quote I think speaks to that a little bit. And we're also in the mailbag today, too... we're going to talk about GameStop, and we're going to talk about Tesla and a few other things that are really signs of the time. Just super speculative, frenzied moments in the stock market right now. And so, Buffett – his 2008 shareholder letter said, "Beware the investment activity that produces applause. The great moves are usually greeted by yawns."
"Beware the investment activity that produces applause. The great moves are usually greeted by yawns." I remember when I saw the film Amadeus. And they showed, you know – it was an exciting film. There was lots of drama, OK? And it was all about the life of Mozart and Salieri and this idea that Salieri was working against him and all this stuff. So I noticed that when... and I also saw that film with Gary Oldman who played Beethoven, right?
So they made these big films about these big composers. And when they're doing their thing, when they're doing the thing that excites everyone so much, they're just sitting in a room scribbling on a piece of paper. Like, if you were a fly on the wall of their life at the moments when they created greatness, you'd be like, "OK. Wow. It's like dust settling or something." And I think that's the way investing is... a lot like, if you saw some of the stocks that we recommended recently in Extreme Value, you'd go – we were so excited about them.
And you're like, "Really? A grocery store? Another discount store?" Whatever. Whatever they've been. They're just not exciting. They're not exciting businesses. And I sat there trying to write about – you know, I want to get my readers excited. And I tried to write about this latest one that we did. And I was like, "You know, there's just no way around this, man. This is – I think it's a great move. It's a fantastic business at a fantastic discount unlike anything that we've found in the market for several months now... for a few months at least.
And, you know, it's like Buffett says. It's not going to be greeted by applause because it's so exciting and wonderful. It's going to be greeted by yawns. And that's what I think you should look for. Look for a really great situation that is not the most exciting thing that everyone's talking about. Because if it's the most exciting thing that everyone's talking about, there's a good chance everybody already knows the story and has priced it into the stratosphere. OK, I hope that helps. Let's talk with Kevin Landis. Let's do it right now. [Music plays and stops]
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Today's guest is Kevin Landis. Kevin Landis is the chief investment officer of Firsthand Capital Management, an investment advisory firm he founded in 1994. He currently manages two technology sector mutual funds and a publicly traded venture capital fund for the firm. Kevin was born and raised in Silicon Valley. Now, you don't hear that – I don’t hear that often said of anyone. And he has had more than 30 years of experience in market research, product management, and investment in the technology sector. Kevin, welcome to the program, sir.
Kevin Landis: Thank you very much.
Dan Ferris: So, you know, I have to follow up on that. Born and raised in Silicon Valley.
Kevin Landis: Yep.
Dan Ferris: Did you like hang out with Steve Jobs or anything? I mean, what was that like?
Kevin Landis: No. Steve and I managed to miss each other. [Laughs] But I certainly crossed paths with a ton of interesting people. You know, as a kid growing up you always hear stories about people going out and seeing the world and learning all sorts of things. And I just couldn't believe how lucky I was that the world came to me. Or at least a very, very interesting slice of it. Silicon Valley went from suburbia to highly cosmopolitan in the course of just a few decades. And I was lucky enough to be dropped right in the right place at the right time.
Dan Ferris: I'll say. And your firm has been, you know – it's not like started up yesterday either. I mean, founded in 1994. I'm curious. What were you doing in 1994 in Silicon Valley?
Kevin Landis: So there are a ton of people in Silicon Valley who have undergraduate engineering degrees and then, of course, late-20th century going out and getting MBAs and then trying to figure out how to build a career in tech off of those two degrees. And I was one of those. And so, yes. I had worked as an analyst at a high-tech market research firm. My dad used to – I told my dad, "I'm the 'they' in 'they say.'" And he said, "Just make sure you're not the 'they' in 'They don't know what they're talking about.'" And that was a great job. You got paid to talk to everybody in tech, and your job was to keep educating yourself.
As great of a job as that was, it wasn't a job that you wanted to get stuck in. You needed to get up and get out at some point. So I worked in the chip industry as a product manager for about two and a half years before starting Firsthand. And I guess I just – at some point, I realized that markets were not as sufficient and not as ripe all the time as I had been led to believe in school. So yeah. What I was doing was working in tech. But it turned out that I was doing better as a tech investor than I was as a tech professional. And I realized that I was missing my true calling.
Dan Ferris: Your true calling. Yeah. I just asked because a lot of people had the true calling of, you know... in the '90s, let's face it – the '90s put investing in technology companies kind of on the whole world's radar screen. And, you know, we have – there's so many guests who I ask them just, "When did you get into the stock market at all?" "Well, you know, the dotcom boom," etc., etc. "In 1996," or whatever. But one of the things that I wonder about – one of the reasons I wanted to talk to you is that you're a venture fund – right – but you have these publicly traded vehicles.
Kevin Landis: That's right.
Dan Ferris: And when I saw that, I was like, 'Oh, that's really cool." And then, my first thought was, "Why don't more people do this in your business?" You got an answer for me there?
Kevin Landis: Well, you know, first of all, the premise there is that if you're looking at a widget company or you're doing your homework on the widget industry, you should look at all the players. Not just pure-play companies but the widget division of a big company and not just public companies but private companies as well. Otherwise, you're building in blind spots. And I always thought it was odd – again, back when I was the analyst – and I would get calls from professional investors asking me questions about an industry but saying, "Well, just tell me about the public ones."
And I thought, "Well, OK. I'll leave out these two that might run you over, and that'll be fine." And so, this goes to kind of the core idea of a mandate. People who hire professional investors as asset managers spend a lot of time being careful about their investment mandate. But if you're not too careful, that investment mandate gets to be almost too small of a keyhole through which to view the world. And, I mean, you can just imagine someone deciding, – well, you don't have to imagine actually.
Back when Google Glass was first being launched, Kleiner Perkins launched a venture fund that was just going to invest in companies making software to run on Google Glass. How do you think that fund did? So I've always been a big fan of having the flexibility to make adjustments because there are so many surprises you're going to get in the world of tech. But that does cut pretty hard against the grain of this overall industry's desire to have very specific investment mandates.
Dan Ferris: So, I mean, it sounds to me like the answer is something like you're willing to do this and everyone is so narrowly focused that they just – maybe they're not concerned with having a publicly traded entity. Is it something like that?
Kevin Landis: Well, I think so. And there are just... it gives you a nicer – a certain perspective that I think can be helpful. So for example. A lot of people for the last 10 years have thought, "Well, I want to invest in a unicorn. Something that's worth $1 billion or more." And I can recall ourselves investing in Roku when it was just a hair under $1 billion. And one of my co-workers said, "Kevin, are you sure you want to pay up this much for this company?" And I said, "Well, go look at our public fund. Go look at the market caps out on the public markets. $1 billion is a small number.
In fact, $1 billion is in danger of being too small of a market cap to get included in most portfolios out there." So seeing over the last decade or so how the public valuations have kind of gotten away from the exit points that people thought they were shooting for... I think it makes sense now that people talk about deca-unicorns. And when the company goes public and has a market cap under $1 billion, it doesn't even get noticed. And it almost just doesn't even show up on people's radar screens. Again, this is a structural blind spot that's built in there. And we're trying to understand where everybody else's blind spots are and take advantage of it as best we can.
Dan Ferris: Right. And as I read through your website and it's got some stuff about your process... is it still true that your investment size is typically $1 million to $10 million each? And so, that would mean you'd be looking at the smaller things, not necessarily the $1 billion, $10 billion?
Kevin Landis: Yeah. That's true. You know, I would say a little over 10 years ago when we put money into Facebook we made over $20 million. Nearly a $20 million investment in Facebook. It's probably $18 million I think. But that was a very late-stage company that we all figured was about to go public. And it turned out it went public very shortly after that. We almost missed it. But making those late-stage venture investments became much harder because companies didn't like losing control of their cap table when they were trying to tee up their IPOs.
So the way they adjusted was to redraft some of their shareholder agreements so you couldn’t go out and buy shares. So part of our adjustment was to – again, rather than buying the late-stage company at nearly $1 billion and watching it grow into many billions, we steered over more towards kind of the unwanted stories that were just smaller in scale because we felt that was an even less efficient market.
Dan Ferris: Yeah. I'll say. Like when you invest $1 million, if you say your range is $1 million to $10 million... how much of that company are you buying? Like 10%? Or does it just change – what's the average-sized company that you're looking at?
Kevin Landis: Oh, right. So it's kind of all over the map. And most people do try to give themselves a mandate that says, "This is our formula," and we sort of stick to it. "This is our recipe, and we're going to copy exactly."
Dan Ferris: Right.
Kevin Landis: We try not to do that just because, again, we think that's one of those sort of rigid heuristics that causes the inefficiencies in the markets. But what I would say is this. You know, there's... most companies that are raising money, they come back for more. And I like to say there's two reasons that companies run low on cash – startup companies run low on cash. One is that things are going really, really well. The other is, things aren't going well. So it's only those two cases where they come back and ask you for more money.
Dan Ferris: And it's probably pretty easy to figure out which one it is too, right? [Laughs] The job gets easier.
Kevin Landis: Yes. Well, you know, hope springs eternal. But of course, you actually want the company that comes back quickly and asks for a lot of money because that means they need working capital and they're ramping up. The tougher one is the company that doesn't quite hit that inflection point and is struggling with the "why" of it but still has payroll to make and rent to pay. So there's an old saying on trading desks that, "Most big losses started out as small losses." It's true in venture investing as well. You know, you can dig a pretty deep hole $1 million at a time.
Dan Ferris: So you mentioned already – you mentioned Roku. You mentioned Facebook. And there's a list just for our listeners. Firsthand has a really cool website that tells you what they're all about. And it says your other successful exits have included Twitter, SolarCity, and Yelp. Were they also like later-stage or no?
Kevin Landis: Those were also later-stage. And of those, probably the biggest one was Twitter. You may recall that when Facebook filed to go public, it was sort of the event of the Century. And everyone just thought it was going to go to the moon immediately. And so, obviously, it went public at $40 and then proceeded to get cut almost in half. And then from there, it became the best stock ever to own – or one of them. Well, while all of that was happening, there was a secondary market for shares in Twitter.
And the week before Facebook's IPO, people were asking a really princely amount. I forget the exact number, but they were asking a huge amount for their Twitter shares. And you could get them, but you didn't want to hold your nose and pay the price. But about a month after the Facebook IPO, it was a very different story. And people were really frowning and fretting over the Facebook stock chart and watching their money dwindle away.
And that's when we stepped in and bought ourselves... I think it was 1 million shares at $17 a share. And somehow, the round numbers kind of stick with you there. And that turned out to be a great investment. I think we nearly tripled our money in that. And so, that was nice. But again. That was, again, kind of trying to cut against the grain using the Facebook IPO flop as a way to get a good entry on Twitter.
Dan Ferris: So as we talk here, you're painting an interesting picture. You know, you said those late-stage situations aren't as easy to find now. And you said, "Well, you're going after the stuff that's under other folks" – off the radar for other firms. And the picture that you paint for me is one of certain kinds of investors I know who are also like you. They say, "We don’t understand this thing about only looking at certain market caps."
You know, they wind up being all-cap investors because they just want to own the best situations with the most – you know, the best risk-reward. And it never ceases to amaze me. Maybe there's not much of a point here. It just never ceases to amaze me that there's so few people like that and so many people in that other sort of bucket that we started talking about in the beginning. You know, they're just so narrowly focused on such a narrow mandate. It just seems like there's kind of something broken in the financial world that there's so few people like you.
Kevin Landis: Well, what I'd say is it's not – first, I agree with the observation. And I would say it's not a function of investment. It's a function of asset allocation. And to really understand that, you have to take a look at just where the biggest pots of money are controlled, how many people are involved in that, and how many layers of process they have – not for making investments but for allocating investments. And you have to take a look at – I hate to say it this way, but there's a lot of career defense being played by people in the asset allocation function.
Dan Ferris: Diplomatically put. [Laughs]
Kevin Landis: So you are going to get fired if you accidentally allocated capital to burning it off.
Dan Ferris: Right.
Kevin Landis: And you are probably going to get fired if you made an allocation to somebody who didn't know what he was doing and you should've known it if you'd just done a Google search on it. You're not going to get a proportionate share of the upside if you allocate to somebody who's great at what he does. And so, the incentives that are in place for most people involved in the institutional asset management industry is to make the really sober conservative play. It's somebody else's money. And if you want to keep doing what you're doing, you should try not to get fired.
And the way you get fired is putting in one of these out-of-control renegades who is just all over the map, and you just can't pin them down on an investment mandate. So that basically opens the door for a few of us to go out and look like investors that don’t fit the mold And that's great. And by the way. If a lot of people espouse that philosophy, then we would be insufficiently contrarian, and I'd be worried.
Dan Ferris: Right. When everybody starts showing up doing what you're doing, that's when you start scratching your head.
Kevin Landis: We can't all be contrarian. [Laughs]
Dan Ferris: Right. Right. That's what Henry Singleton – you know, when everybody started... everybody started buying back shares, he's like, "I don't know what's going on here, but I know something's wrong with it," when he made a fortune buying back shares.
Kevin Landis: Yeah.
Dan Ferris: So, you know, what's out there right now? What's going on right now that you're really excited about?
Kevin Landis: Well, I think one of the things that people are talking about quite a bit is the reopening trade or sort of the stay-at-home trade versus the reopening trade and talking about maybe the stay-at-home trade as sort of the work from home trade, which is maybe the work-from-anywhere trade and all that. And this has been said already by others. But it bears repeating. A lot of the work from home is really work-from-anywhere. And a lot of the work-from-anywhere plays aren't going to unwind. What's happened is, people were forced to consider new solutions to things.
And once they adopt a new solution, then they'll keep going with it I think. And so, that's true for lots and lots of software companies and electronic, you know, tools companies like DocuSign. And then, there's this other class of stock that we don't quite know about like – Peloton's a good example. You know, everyone says your Peloton's going to end up being a clothes hanger, and you're not going to be using it in six months. And we don't really know just yet.
We don’t know how much Peloton's going to take a permanent bite out of the fitness clubs or whether people will all go back to the fitness clubs. So that's pretty interesting. and watching and figuring out which parts of the last 12 months bull market in tech stocks around work from home... which of those shifts are going to be permanent and which of those shifts are going to largely unwind. That whole sorting process is going to be very, very interesting I think.
Dan Ferris: I'm glad you mentioned Peloton. I have a very specific view about all of this type of equipment having spent tens of thousands of dollars on it. And maybe you know where I’m headed here. But, you know, when I see something like that, I can only think of it as a – you know, it's a speculation... it's a bull market play. It's something that as soon as we get into some kind of serious recession or something – not COVID-induced where we're all at home with nothing to do, right?
But a real live recession or something. You know, you're going to be able to get a used one for a few hundred bucks or something after they paid $2,000 for it. And it's just my personal view because I own so much exercise equipment that we just don't use. You know? We're all excited about it for a month or two and then, as you say, it's a clothes hanger. And I'd love to know – just sort of whack me on the side of the head. Just get me out of my little box thinking about this stuff. How does a guy like you think about a Peloton? I mean, you sound like you're "wait and see." Is that the extent of it?
Kevin Landis: Well, no. No. No. I mean, we got into Peloton a few months into the shutdown, frankly because it looked like it was just a great trade. And it turned out to be a great trade. And then, we sort of got comfortable with it. and I said, "You know what? Let's just pay attention to how our fitness clubs reopen and how much those fitness clubs change." Because there's a bundle in here of exercise and socializing that takes place on Peloton. And it also takes place for some people at the gym. Not for me. I just kind of do what I do and get out.
But a lot of people hang around and socialize there. Which I guess is – it's better than hanging out and socializing at the waffle house. So the issue, though, is how many of those people will just stay on that Peloton and not go back to their fitness club and how many of them will find that "No, actually, this is my circle of friends now." We don't know that, and we're kind of... I think that's one of those decisions that I've just decided I'm going to get more information. I'm going to force myself to wait before really fully coming to that opinion there. And I'm going to let – I'm going to let people vote with their feet, and I'm going to pay attention to that, and I'm going to see what I can learn.
Dan Ferris: OK. yeah. You're not trying to predict anything. So tell me about – tell me about your target characteristics. Because they sound very familiar to me. But already, we've established that your firm is kind of different. You know? You haven't narrowly squeezed yourself into a mandate because you're terrified of career risk. So when you say things like barriers to entry, game-changing technology, strong competitive positions, viable exit strategy, I mean, experience, management team, established financial sponsors – I mean, you agree with me, right? Like, everybody says this. There has to be something different about the way you approach these things. Because there seems to be something different about the way you approach the whole business.
Kevin Landis: Sure. Sure. And yeah. You're right. I mean, it's kind of like going to the NFL scouting combine and saying, "Yeah. I want someone who can run – has a really fast 40 time." Well, of course you do. [Laughs] That's not exactly insightful. I guess what we would say is this. There are two amazingly common reasons why startups fail. So one way to look at this question is to just turn it on its head and stop asking yourself why it is that companies succeed and start asking yourself why it is that companies fail and what you can learn from that. And then, will that give you a better answer to the first question?
Dan Ferris: Brilliant.
Kevin Landis: Yeah. So No. 1 reason why companies fail is, they're just on the wrong mission. You know, if your mission 10 years ago was to catch this wave of wearable technologies and you were going to build a set of eyeglasses – some poor man's Google Glass or something like that... unless you were Oculus and you got Zuckerberg to buy your company, this sort of ended in tears for you. No matter how good your product was and no matter how great it was. And, you know, someday that market might happen. But in the meantime, being early just feels like being wrong. And it almost didn't matter anything else. You were digging for oil where there was none.
But the other one is – and maybe that's a fairly obvious thing. And you don’t want to place all your bets... you're not going to de-risk your portfolio, for example, 10, 15 years ago by betting on all of the solar companies. That didn't seem to help. On the other hand, even when you're on the right track it's amazing just how many companies fail. And it's sadly predictably that they fail because their team is incomplete. I don't want to say they fail because of some imperfections or failing in the people. But it is about the team, and it is about all the skillsets that are brought together.
And so, if you don't have someone who is really good at going and sitting and talking to your potential customers and understanding how to help them and getting them comfortable kind of conspiring with you on coming up with solutions to their problems, then it's not going to matter how great your technology is. On the other hand, if everybody is looking at coming up with the best EV technology and your technology is second-rate and it's just doesn't pencil out as well as the others, you're probably going to lose. And it doesn't matter how chummy you are with the customers because they'll just explain to you that, "We did a bake-off, and your technology sucks."
And whatever your weak link is, it's kind of like if the patient's kidneys fail. That's going to be the most important thing about that patient. And if the patient's lungs fail, that's going to be the most... well, each one of those things is a piece of that leadership group. And there are a lot of pieces to have to get right. We sort of take that for granted with public companies that the team is OK and it's all about the products in the markets. We take that for granted because they've already gotten far enough along that all of those early mortality companies have been washed out already. And whatever they've got, it seems to work. But for startup companies, boy, you really have to keep adding really good people and don't ever stop.
Dan Ferris: Adding good people and don't ever stop. You know, that sounds like something out of a Steve Jobs biography or one of his [laughs] – it sounds like something you could never fail. You know? If you just add the best people you can get and never stop. Actually, you know something? That's another thing everybody says, isn't it? Like, who says, "We just want – you know, we can't get very good people. So we're relying on," whatever. I mean, nobody. Nobody says otherwise, right?
Kevin Landis: Well, look. There is a dirty secret that doesn’t get told in school. Because it's an unpleasant thing to say to most people. And that is that we're not all "A" players. And actually, the number of really, really strong "A" players is – it's a pretty small segment because they're people who can communicate well. They're people who actually have an area of specialization that's really, really relevant, and they're really excellent at it. And part of what that means is that most successful startup companies... it's not just that they're good at hiring people. They're also good at firing people.
Dan Ferris: Ah, right, right. Get rid of the – what was it at Apple? Get rid of the bottom 10% or something every so often?
Kevin Landis: Well, it's absolutely true. And, you know, the fact of the matter is that in... I don't want to say corporate America. Just in life in general, if you're not a strong performer but you're able to just sort of muddle through, you tend to be kind of like the guy in the Dilbert comic strip and Wally walking around with his coffee cup. You just sort of settle in and find a defensible location. [Laughs] And, you know, that's great if you're working for a medium to big-sized company. But at a startup, it's really deadly because you can have a false sense of security that you've got a certain thing covered and you really don't.
Dan Ferris: Yeah. I just want to put in a little plug for those of us who are really just world-class muddlers. I mean, [laughs] you know, I'm a solid C-plus player. I just want everyone to know.
Kevin Landis: And you know what? That's fine. That's absolutely fine. All I would say is, for goodness sake, please don't go work for a startup because you'll – it'll be bad for everybody.
Dan Ferris: Yep. Yep. I mean, it's true. Well, what I often tell people about myself – I mean, since we broached the topic here – is that I'm a decent painting, but I'm hanging in the Louvre Museum. You see? So on the way to seeing the Mona Lisa standing in line for four hours or whatever it is now, you know, you're going to pass by me on the wall and you might say, "Hey, look at that." And then, you know, you'll keep going. And the "Hey, look at that" is the best I'm going to get. But I wouldn’t get it if I weren't in the Louvre Museum of Stansberry Research.
Kevin Landis: OK. [Laughs]
Dan Ferris: And there's a whole – like, I read a whole book about this. There's a guy named Derek Thompson. And he wrote this whole book. I wish I could even remember the title, now, about how people get successful by doing things like that... by, you know, the first six or seven or eight or whatever it was Impressionists are famous because they were the ones chosen for this big, early Impressionist exhibit at some famous museum. I think it was like Musée d'Orsay or something else in Paris. And then ever since then, they're the ones. They're the ones – the Monet and the Manet and whoever else was in that group. You know, so some of us are lucky to get in that group. But what we're really talking about is the difference between people who are absolutely Michelangelo attracting other Michelangelos, I feel like. And that's really hard.
Kevin Landis: Yes. Yes. And it's not that everyone in every company needs to be a superstar, because you're going to run in the Lake Wobegon effect pretty quickly. The real issue is, "Do you have people who are really, really great at the specific job that they have?" And if the specific job that they have is not engineering the world's next great technology but being a great manager of engineers and making sure they have the resources that they need and understanding what keeps them working well and being strong enough technically to give them good advice and support from time to time but mostly just cultivating them, that's fine, right?
So, I mean, the manager of a baseball team doesn't need to go out there and take round balls. He's still important. And so, I mean, there are – I don't want to say that it's just nothing but an all-star team at every startup company, but you have to be an all-star at whatever it is you're doing. And I think that's the key thing.
Dan Ferris: So I was going to ask you for specific – you know, when we get people in your business who are managing capital and making selections, I always ask them for one or two fish, right? You're teaching us how to fish by telling us all this stuff about your industry. But, you know, are there one or two fish out there that you like right now? I mean, I can see some of the holdings of your Firsthand Technology Opportunities Fund. We can look at that. Roku, Chegg, Cree, Zscaler, or Pinterest, etc., etc., etc. You mentioned Peloton. Is there anything like right this minute that you're really excited about? One particular name or two.
Kevin Landis: Well, you know, I think Cree is sitting at a pretty interesting confluence. Cree's not a young company. They've been around since the late-1980's. And they've always been – although they're a chip company, they're not a Silicon chip company. They're a silicon carbide chip company. Which is a really, really hard material to work with, and it's sort of a kind of fringe little branch on the semiconductor tree. And it's often been a solution in search of a problem. But it turns out that Silicon carbide is a wonderful material for building power electronics. And it turns out that as the whole world goes to EVs, you're going to have much more efficient and much better power electronics if you can use silicon carbide power ICs.
And so, here it is. A company with a $13 billion valuation – you can buy the whole company for $13 billion. So there's plenty of headroom. And it's right there on the confluence of both the EV trend and the U.S. getting much more serious about the domestic semiconductor industry. So I think all the headwinds are kind of blowing in the – I'm sorry. All the tailwinds are blowing just together to really push this company along. And I think they're just very, very well positioned and so on. Although the stock is quite a bit over the last year, a year-and-a-half, well what's not? I think that it pretty certainly has a lot of room to run.
Dan Ferris: Very nice. Thank you for that. Gosh. I feel like I wish we did 90-minute interviews instead of 40 [laughs] because I really enjoyed this. But we've been talking for a little while here. I mean, I hate to get to it. It seems like we've been talking for five minutes. But I do have one final question for you that I – this is my final question for every guest that I ever interview. It's the exact same question. And that is, if you could leave our listeners with a single thought, a single idea today, what would it be?
Kevin Landis: Just on investing, right? Not on pro sports or anything else?
Dan Ferris: [Laughs] Anything. Anything you want, Kevin. Anything at all. Life. You know? Life. Anything.
Kevin Landis: Well, there's too much to say about life. But if we just focus in on investing what I would say is this. If there was a straightforward way to beat a game like this, everybody would know it and then it would no longer be a straightforward way to beat the game. So you can either choose not to play and be an index investor, or you can have a different way of looking at things. And for all of the particularly young students who just want to know, "What's the formula, or what's the algorithm," there really is none.
And that's all you really need to know. But that's OK because the world is such a mess. It is so far away from perfectly worked out and efficient. Look at all the madness going on in NFTs right now. Look at all the crazy things that are happening and keep happening. The world is a very inefficient place. And you don't have to play every trend, you don't have to do everything and you don't have to search for some magic formula. You just need to find a place – just one facet of it – that you know is a little bit out-of-whack and put yourself in a position where when sanity returns you'll do well.
Dan Ferris: Wow. I have to tell you, Kevin, that is one of the better answers to that question. Like, you had me at your first sentence or two, and it just – it stayed really, really good the whole time. Thank you for that. Excellent. Appreciate it. Yeah. We're definitely going to invite you back, man. We're going to invite you back in six to 12 months for sure.
Kevin Landis: Well, thanks, Dan. It's always a fun talk when you're talking about something that interests you. And so, this has been great.
Dan Ferris: All right.
Kevin Landis: Bye-bye.
Dan Ferris: Bye-bye. OK. Now, you have to admit that was one of the – I mean, I'm just going to go ahead and call it one of the all-time great answers to my final question. That was really, really good. You know, the world is chaotic, man. You got to make your way through it. You got to feel your way through it. Go with your gut and just all the other things he said about investing not being, you know, a formula. An easy formula, right? And if it were an easy formula, everybody would do it and then there'd be no easy formula. I thought that was brilliant. I thought he was going to stop there. It was awesome. Kevin Landis. Man. That's cool. All right. Let's do it. Let's look at the mailbag. [Music plays and stops]
In the mailbag each week, you and I have an honest conversation about investing or whatever is on your mind. Just send your questions, comments, and politely worded criticisms to [email protected]. I read as many e-mails as time allows and I respond to as many as possible. You can also give us a call at our listener feedback line, 800-381-2357. That's 800-381-2357. And tell us what's on your mind. OK. Last week, we had nothing. This week, we had tons of stuff. So I'm going to dive right in. L.K. writes in and says, "Hi, Dan. Thanks for all the work, Dan. You are genius." [Laughs] Thank you, L.K.
Continues. "I learn a lot about value investing after subscribing to your service. I'm just curious. What is the price you'd buy Tesla stock for? Thanks. L.K." OK. I just don't like Tesla as a business. I don't like car companies. It would have to be a really steadily profitable car company, you know – almost like a Toyota or something – that I'm convinced could generate a good, steady stream of after-tax cash profits and had a really good brand name, which is really tough in the car business. And it's capital-intensive, and it tends to be kind of economically cyclical, right? Sometimes people can borrow money to buy a car, and sometimes they can't. It's just Tesla's not my kind of business.
I'm not saying that you can never make money owning Tesla. Obviously that would be wrong. And also, I have to admit for me the jury is still out on Tesla, and I don't even know if it's going to exist in another ten years. So I just, you know... that space, that electric-vehicle space, I don’t think you can make any assumptions. Just my take. And if you'd look at the early years of the automobile business, I mean, there were like 100 different car companies. And, you know, like five of them made it. So don't take anything for granted in the electric-vehicle space.
Next is Taylor S. Taylor S. says, "Hey, Mr. Ferris. I understand your position on GameStop. But with all due respect, I believe you're missing the point. Originally, it was led by one poster on" – said one Redditor, right – "on the WallStreetBets forum of Reddit," is what they're talking about here. So I'll continue. Originally it was led by one Redditor who took a huge gamble on a $50,000 investment in GameStop which turned into millions because he bet against hedge funds trying to short GameStop."
Got it. "The Subreddit created a David-versus-Goliath scenario. What you see is hedge funds. You also see in corporate media, like CNBC, telling these Redditors that they're manipulating the market. Meanwhile, hedge funds like Archegos do whatever they want to the market while the SEC stays silent. GME investors still care about technical, but now they're buying and holding out of spite. They're also supporting GME by becoming active shareholders who vote and are pushing for an overhaul of the company led by chewy.com founder, Ryan Cohen. Will GME turn it around? Only time will tell. But I figure you as a libertarian like myself would be on the side of retailers" – meaning retail investors – "trying to stick it to the man. P.S. I own no shares of GME. This is my personal observation of the Subreddit. Have a nice weekend."
So yeah. I mean, I get the whole... I was cheering David on during this thing. Yeah. Great. Love it. They're shorting the heck out... or, you know, the hedge funds are shorting the heck out of it, and the retail investors are just short-squeezing the daylights. Or they were. I think this thing is over now, right? And so, you know, within a several-month period it was a 100-bagger, and within a pretty short period of time – it was 50 or something like that. So great. David beat Goliath sort of. Those big hedge funds. You know, they're still in business, but they lost some money. At least one of them we know, right?
Melvin lost money on its GameStop short. But when you say things like, They're buying and holding out of spite," real investors don't buy and hold out of spite. OK? And when you see the action in this thing going straight the heck up from like start of the year, less than $20, and then went to $480, and most of that was within like two trading sessions, I think – one or two – it was insane. It was absolutely insane. And those charts, when they go straight ballistic like that, they crash. And it did crash 90%, and then it bounced back up. You know? Which I would consider a massive dead cat bounce. I mean, my position hasn’t changed. You know, the people buying this thing and trying to trade it and make money really fast, you know... it usually ends in tears.
It's not a strategy – it's not a real strategy. And God bless the fella who made millions off of $50,000 investment. You know, I hope he didn't go back and lose it all trying to do it again in the same stock. And I have nothing against the company, right? Their management did a smart thing in raising equity recently. We covered that. It was smart. But I wouldn’t buy it. You know? [Laughs] I don't think the thing's worth $12 billion or $11 billion or whatever it's been. It's crazy. And will they turn it around? Eh. Most turnarounds don't, Warren Buffett teaches us. And what they own is just not very interesting.
So they're going to have to own something else, I think, or do something with what they have that nobody sees coming... which, you know, is highly unlikely I view, I feel. So my position hasn’t changed. I get what you're trying to say. But I've already thought through that stuff, Taylor. I really have. Good question, though. Alan W. is next. He says, "Dan. In your most recent rant about GameStop, it seems to me an excellent company to short." And then, Alan W. goes through a bunch of stuff. And I’m not going to talk about the rest of what you said, Alan. Not that I have a problem with it. We just only have so much time.
I don't know if it's an excellent short. When something can go from [laughs], you know, whatever it was – I forget. It was like $20 to $480 just in a blink of an eye... talk to Melvin Capital. Talk to the other firm, Citadel. Talk to the other people who are short this thing when it went to $480 and ask them if they think it's a good short. But it might be. Whitney Tilson's made some good calls about it recently from Empire Financial Research, an affiliate company of ours.
And every now and then he does make just a pinpoint, brilliant bearish call like that. Like, sometimes to the hour I've seen him do it. And he did really well with GameStop in the same regard. But a good short? No, I’m not standing in front of that freight train. You know, it could drop 50, 80, 90% and then be back up 200% in the blink of an eye. That's not a good short to me. Good shorts are hard to find. Shorting is very hard. Next comes Aussie Stu, from Down Under.
And Aussie Stu, says, "Great work. I still haven't missed an episode. The guests this year have been fantastic." Thank you, Stu. "A few questions. First, gold. It seems that everything that could possibly be in gold's favor exist, yet it is going down. Is gold really only worthwhile if there is a crisis?" I don't know if it's only worthwhile, Stu. I’m going to answer your questions one at a time, obviously. I don’t know if it's only worthwhile in a crisis. It's just something that I don't want to be without. That's really it. That's why I think it has a place in what I would call a truly diversified portfolio. It's something I don't want to be without.
And so, in that regard, I'm not monitoring its short-term performance much. I understand that over the long-term it's done a really great job. It's 40- or 50-odd bagger or something since 1971, and it's been around for 5,000 years, and an ounce of gold is still an ounce of gold. And I don't know. I'm not worried about the performance. Let me put it that way. If you're trying to predict the movements of the gold price, you're doing something different from what I'm doing. OK? I just want it to be in my portfolio to do what it does over time.
Your second question is, "Stansberry and Extreme Value recommend stocks at good value and prices. However, if we are at historic highs in a bull market and the market is bound to come down, would I not be better off waiting to buy these value stocks when markets fall and those stocks with them?" OK, Stu. Sure. I just want you to tell me when that moment will be [laughs], right? That's the problem. And the truth is that when we say the overall stock market is at an extreme high, it's really led by a small group of stocks to those extreme highs. And it doesn't mean that there aren't individual stocks that are definitely worth buying at current prices.
We found one this month in the current issue of Extreme Value that just came out last Friday. We found one that has a 60% margin of safety to the best of our ability to assess it. And my cohort, Mike Barrett, chief research officer of Extreme Value – he found this one. And he showed it to me. And he ran it through our model, and I was like, "Wow." And yet, at the same breath, you'll hear me agree with you that we're at historic highs in a bull market... market's bound to come down. So it's just not that simple.
"Lastly, I wanted to give you my own cocktail part indicator moment, although it was at a barbecue. A man in his 60's knew nothing about cryptos before this year and has been day trading them. He learned some technical analysis and is trading over a few hours and making some decent gains. He follows YouTube videos to get tips. Everyone is in this market. Nuts. Thanks, Dan. Love the show. Lifetime Subscriber, Aussie Stu." Thanks, Stu. It's good to hear from you again. I like when you write in. And yeah. I worry about cryptos too. I worry about bitcoin. I'm constantly worrying out loud about bitcoin on Twitter. And so, somebody the other day said, "You know, I own it and I hate it."
And I thought, "Yeah. That's about where I am too. I can't not own it." Right? But I hate the fact that the chart is ballistic. Next is Uris S. Uris S. Uris S. says, "I enjoy listening to your Investor Hour weekly podcast. I appreciate the different guests you have and enjoy learning about different investing styles of value, quant, technical, social index, etc. I am at best a novice retail investor and paid-up Stansberry Alliance lifetime member. I pay Stansberry fees to have someone else pick potential stocks and investments, not having the time or knowledge to research stocks efficiently on a de novo basis."
"I enjoyed listening to your two guests from Episodes 200 and 201 who seemed to be value investors in the small-cap and emerging market fields. That really piqued my interest in trying to invest in those arenas which tend to be riskier and more volatile. Any thoughts of having your Extreme Value newsletter delve into those areas? Small-cap and emerging markets for stock recommendations. Appreciate your work on the podcast. I like your thoughtfulness and your process for picking and recommending stocks."
So, Uris, obviously I couldn’t read your whole thing. I just picked out the good parts. But your question is about Extreme Value newsletter. Yeah. We'll recommend a small-cap or emerging market stock if we find one. We're not solely focused on the U.S. That's just, you know, where most of what we look for trades. But sure. You know, in the meantime we have products like Venture Value also, which focuses on the small-cap value space.
And we have a product like American Moonshots which focuses on the small-cap value space. As far as a focus on emerging markets, you'll just find emerging-type plays scattered. Here and there. I know True Wealth looks at some of them. And, you know, we look out there too when we find things. But yeah. We don't do a lot of emerging. You know, we do small-cap when we find it. So we're already there. Maybe we're just not doing it as much as you'd like us to.
But it's a good question. Thank you for that. Well, that's another mailbag, and that's another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as I did. We provide a transcript for every episode, but sometimes it takes us a week or so to get it done. Just go to www.investorhour.com. Click on the episode you want and scroll all the way down and click on the word transcript. If you like this episode, send someone else a link to the podcast so that we can continue to grow. Anybody you know who might also enjoy the show, just tell them to check it out on their podcast app or at investorhour.com.
You can subscribe to our show on iTunes, Google Play, or wherever you listen to podcasts. And while you're there, help us grow with a rate and a review. You can also follow us on Facebook and Instagram. Our Handle is @InvestorHour. Follow us on Twitter where our handle is @Investor_Hour. If you have a guest you want me to interview, drop me a note at [email protected] or call our listener feedback line, 800-381-2357. 800-381-2357. Tell us what's on your mind. Till next week, I’m Dan Ferris. Thanks for listening.
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