This week, we’re doing something that’s never been done in the history of the Investor Hour podcast…
It’s a two-part interview with two incredibly special guests.
The first is a new face to Investor Hour listeners. Berna Barshay is a rising star at Empire Financial Research, who in less than a year has already begun to make a name for herself with her email newsletter read every day by thousands.
During their conversation, Berna shares her unique perspective that has helped her spot massive winners the rest of Wall Street hated, like Lululemon, up over 20x since going public.
She’s even holding her own webinar for those who want to learn more about her unique strategy. You can find more info at www.empire2021.com.
The second guest is a remarkable man who started a hedge fund out of his Manhattan apartment which he grew to over $200 million…
He’s appeared numerous times on national television where he has broken some of the biggest financial scandals in America…
And he’s even climbed Mount Kilimanjaro…
The one and only, Whitney Tilson…
Whitney joins Dan this week to talk about his latest book.
It’s not a book on finance… Or a novel about his relationship with Charlie Munger or Warren Buffett… Or another one of the hundreds of books on working hard to become successful in life.
It’s a book Whitney says is aimed toward his three daughters as they enter adulthood.
Whitney’s book The Art of Playing Defense: How to Get Ahead by Not Falling Behind is one of the few books that explores what to do once you become successful, detailing how to avoid the five most common calamities Whitney says cause 98% of human suffering.
It’s a valuable conversation chocked full of fantastic advice for listeners of all ages.
If you’re looking to strengthen the relationships in your life, this is an interview you don’t want to miss.
Listen to Dan’s conversation with Whitney and more on this week’s episode.
Editor of Empire Financial Daily
Berna Barshay is editor of Empire Financial Daily and a contributing editor to the Empire Stock Investor and Empire Investment Report newsletters.
She graduated cum laude from Princeton University and earned her MBA from Harvard Business School in 1997.
Following her graduation, Barshay spent 20 years on Wall Street. She began her career in equity derivatives at Goldman Sachs and later worked as a buy-side equity analyst at Sanford Bernstein, where she covered global consumer cyclicals and conglomerates.
Later, Barshay spent five years working as a portfolio manager of the Ingleside Select Fund, a long/short fund with a focus on value and event-driven stocks. She later was a portfolio manager at Swiss Re, where she managed the Consumer long/short book on the equity proprietary trading desk.
She has additional experience as a buy-side analyst at several long/short hedge funds - including Sky Zone Capital, Metropolitan Capital, Buckingham Capital, and LaGrange Capital - where she primarily covered consumer and technology, media, and Internet stocks in the U.S. and Europe, with some additional work in financials and energy.
Barshay is a fashion enthusiast, a pop culture addict, obsessive indoor cycler, and prolific social media user. She currently lives in New York with her husband, daughter, and three dogs.
Founder and CEO of Empire Financial Research
Whitney Tilson is the founder and CEO of Empire Financial Research, as well as the editor of the Empire Investment Report and Empire Stock Investor.
He graduated magna cum laude from Harvard College with a bachelor's degree in government in 1989. After college, he helped Wendy Kopp launch Teach for America and then spent two years as a consultant at the Boston Consulting Group. He earned his MBA from Harvard Business School in 1994, where he graduated in the top 5% of his class and was named a Baker Scholar.
Tilson spent much of his childhood in Tanzania and Nicaragua (his parents, both educators, were former Peace Corps volunteers who have since retired to Kenya). As a young child, he was part of the famed Stanford "marshmallow test." Prior to creating Empire Financial Research, Whitney Tilson founded and ran Kase Capital Management, which managed three value-oriented hedge funds and two mutual funds. Starting out of his bedroom with only $1 million, Tilson grew assets under management to more than $200 million.
An accomplished writer, Tilson recently published his fourth book, The Art of Playing Defense: How to Get Ahead by Not Falling Behind. He has also co-authored two books, The Art of Value Investing: How the World's Best Investors Beat the Market (2013) and More Mortgage Meltdown: 6 Ways to Profit in These Bad Times (2009), and was a contributor to Poor Charlie's Almanack: The Wit and Wisdom of Charles T. Munger (2005), the definitive book on Berkshire Hathaway Vice Chairman Charlie Munger.
He has also written for Forbes, the Financial Times, Kiplinger's, the Motley Fool, and TheStreet.com. He was featured in two 60 Minutes segments - one in December 2008 about the housing crisis, which won an Emmy, and another in March 2015 about Lumber Liquidators. Tilson has appeared dozens of times on CNBC, Bloomberg TV, and Fox Business Network and has been profiled by the Wall Street Journal and the Washington Post.
In his spare time, Tilson is involved with a number of charities focused on education reform and Africa. For his philanthropic work, he received the 2008 John C. Whitehead Social Enterprise Award from the Harvard Business School Club of Greater New York. He is a member (and served as chairman) of the Manhattan chapter of the Young Presidents' Organization.
Tilson is an avid mountaineer, having climbed the Nose of El Capitan in June 2020 and summiting Mt. Kilimanjaro, Mt. Blanc, the Matterhorn, and the Eiger. He also regularly competes in obstacle course races and is the all-time record holder in the 50+ age group at the 24-hour World's Toughest Mudder, having completed 75 miles and nearly 300 obstacles in 2016. Tilson currently lives in Manhattan with his wife of 27 years, with whom he has three young adult daughters.
2:54 – If you have any money in a Russell 2000 fund, you’ll want to tune into Dan’s opening rant, “AMC powered 70% of the iShares Russell 2000 ETF’s advance last week. 70% of the movement in that ETF was due to the insane action in AMC. Pretty sure that’s not how index funds are supposed to work!”
5:04 – “If you own index funds, just remember, you’re not as spread out – you’re not as broadly invested as you might think…”
7:31 – We have a two-part interview on the show today… Our first guest this week is Berna Barshay, from Empire Financial Research. Berna has 17 years of experience on the buy-side including 6 years as an equity long/short portfolio manager and 17 years as an equity analyst. Today, she writes a daily email where she shares all of her top investment ideas.
10:05 – Berna shares the story of how she got incredibly lucky and landed a job at Goldman Sachs. “It was kind of a fluke…”
16:56 – “You look at people who did phenomenally for decades, or a couple decades at a time… and then all of the sudden their performance is terrible. And it’s because they were really, really married to one style [of investing] and that style goes out of favor…”
21:15 – “…Some companies will be Amazon and lose money for years and years and then all of the sudden they make money. We’ve seen that in the last year with Netflix… Then there’s going to be other companies – I’ve written about this in my daily – I’m not sure Uber ever gets there…”
23:17 – Berna explains the themes she looks for in her new newsletter, Empire Market Insider, “Really what I’m looking for are companies that are, for whatever reason, misunderstood, under-appreciated, companies where there’s sort of a hidden element that people might not be getting…”
26:31 – Berna leaves the listeners with one final thought before her time with Dan is up… “One thing I’ve tried to capitalize on in my career, is finding companies that primarily sell and market to women because I find that often it’s hard for men to understand why women choose one product versus another… One example I always point to is Lululemon…”
33:52 – Our second guest on this week’s show is founder and CEO of Empire Financial Research, Whitney Tilson. Whitney is one of the most respected and successful hedge fund managers in America, appearing numerous times on national television to break major financial news stories. Today, he is editor of the Empire Investment Report, and the Empire Stock Investor.
35:20 – Dan asks Whitney about his latest book, which is a little different than other books he’s written… “This is the only book, of the five, that isn’t an investment related book. It’s sort of a book for my three daughters, who are now aged 25, 22, and 19…”
38:56 – “Instead of a book on how to be successful, it’s a book on here are the five big calamities that account for about 98% of all human misery. Here’s what they are and here’s how you can avoid them…”
42:08 – What’s the most common calamity causing misery in America? “Simply not exercising, eating badly, and having your body become obese… so starting at age 60 for the last 20 years of your life, you can’t walk up a flight of stairs, right? That would characterize tens of millions of Americans…”
48:12 – Whitney shares the biggest thing you can do to reduce the risk of suicide for you or a loved one… “The single riskiest thing you can do that dramatically increases the odds in your household is have a gun in your household. Twice as many people are killed by guns every year via suicide than homicide…”
54:36 – Whitney talks about his next book, The Rise and Fall of Case Capital, which he says will be released later this year…”That’s a story of achieving enormous success the first dozen years or so, and then screwing it all up and basically having to close my business…”
55:31 – Whitney leaves the listeners with one final lesson he learned from Warren Buffett… “Buffett once said the most important decision anyone ever makes is who you marry… And the second most important decision you make is what career you go into…”
1:00:16 – On the mailbag this week, one listener asks Dan if he uses TradeStops for his Extreme Value picks… Another long-time listener asks about the best ways to combat inflation… and another listener asks about what, if anything, could bring down the housing market? Dan gives his take on these questions and more on this week’s episode…
Announcer: Broadcasting from the Investor Hour studios and all around the world, you're listening to the Stansberry Investor Hour. Tune in each Thursday on iTunes, Google Play, and everywhere you find podcasts for the latest episodes of the Stansberry Investor Hour. Sign up for the free show archive at investorhour.com. Here's your host, Dan Ferris.
Dan Ferris: Hello and welcome to the Stansberry Investor Hour. I'm your host, Dan Ferris. I'm also the editor of Extreme Value published by Stansberry Research. Today we'll talk with not one guest but two. Empire Financial Research founder Whitney Tilson will talk about his new book which is not about investing. Then we'll talk with one of his top analysts, Berna Barshay. I've been following her work for months and I'm betting you'll be as impressed with her as I am.
This week in the mailbag, we have questions about Hugh Hendry. We have questions about the housing market, preferred shares, and other things. In my opening rant this week, you'll want to pay close attention if you have any money in index funds, especially a Russell 2000 fund. That and more right now on the Stansberry Investor Hour.
So, why do you want to pay attention if you have money in a Russell 2000 Index fund? Well, we talked about this stock, AMC Theaters or AMC Entertainment Holdings, and they own movie theaters. It has been going absolutely nuts. The valuation has been up in the 20 billions – close to 30 billion and higher. It has been higher than that. But it's one of these meme stocks. People get on Reddit, they pump the thing up and it has lost all relation to any fundamentals in the company or in the industry. To the point where when the management recently filed to sell some new shares, they said exactly that in the disclosure. They said, "Our share price has no relation to the industry or business fundamentals," right? The thing is crazy. I'm sure you probably know about these. If not, go to Yahoo! or wherever you get quotes and just type "AMC" and take a look at a year-to-date chart. It's insane. It's true insanity.
So, you know, AMC is this crazy thing. AMC is in – like so many stocks today – is in index funds. In particular, it's in the Russell 2000 Index and therefore it is in Russell 2000 ETFs and other kinds of funds. So, a Bloomberg article that came out June 5 says that "Last week AMC" – this is a quote straight from the article – "AMC powered 70% of the I-Shares Russell 2000 ETFs advance last week." 70% of the movement in that ETF was due to the insane action in AMC. Pretty sure that's not how index funds are supposed to work, where one stock just pushes the whole thing along. It's supposed to be a diversified holding across many sectors, broad exposure. But that's obviously not how it's working. That's not how any of them work, even the SPY – S-P-Y – the S&P 500, every dollar you put into that, 27 cents of it goes into 10 stocks out of 505. It's a little crazy.
Recently, I looked at the weightings and Tesla – more of your money goes into Tesla than like Berkshire Hathaway, JPM (JP Morgan), or a lot of other, like, actual businesses, [laughs] you know, profitable, good businesses that aren't crazy meme stocks.
Anyways, so AMC is shoving this index around. My quote of the week is from this same article. I'll just read it now to tell you, kind of, what the problem is here. This is Tom Essaye, a former Merrill Lynch trader, founder of the Sevens Report newsletter. He said, "For index investing, the appeal is that human decision-making, human emotions, are taken out of it. That works all well and good until a stock that is supposed to be 50 basis points of the fund now becomes 6%." So, for index funds, they're market-cap-weighted, so if something has a giant market cap, more of your money goes into that stock than into the other ones in the fund. I guess he's telling me that maybe AMC was 50 basis points of the fund down to 6% just in one stock out of 2,000. It's a little crazy, isn't it?
So, you know, if you own index funds, just remember you're not as spread out, you're not as broadly invested as you think. That really is the main point there. Also, I don't know what happens on the other end of this. What happens if all of the stocks like AMC and other things where their market caps have just gotten way out of control, you know they're going to crash at some point. There's no way AMC is worth 20-plus, 30 billion, whatever it is now. There's no way. I don't know that the thing is worth one or two billion. I don't know. The revenue collapsed 80% and was declining anyway because the movie theater business is in secular decline and has been for at least a decade. So, what happens when reality returns, when these things come back to earth? Will the Russell 2000 just sort of cave in? I don't know. I don't know what happens. Will that fund just cave in? I wouldn't want to be holding a lot of it, I know that.
So, just be careful. If you own index funds – and I know a lot of people own index funds in their 401(k)s. Think about this. Think it through. That's all I have to say on that. My quote of the week was from Tom Essaye, former Merrill Lynch trader. Just saying hey, if a stock is supposed to be 50 basis points of the fund, now it's 6%, you might want to think about that a little bit.
OK, let's talk with not one but two guests. Whitney Tilson and Berna Barshay. Let's do it right now.
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Today, we've got something special. We're not going to do one interview... We're going to do two. It's a couple of the folks from Empire Financial Research. The first one is Berna Barshay. I've been reading Berna's stuff for I don't even know how long. I've been reading her daily e-mails and I remember I started reading them and I went, "wow." I knew we were going to have her on the show at some point and here she is. So, Berna, welcome to the show.
Berna Barshay: Hi, Dan. Thanks for having me.
Dan Ferris: Berna, I think I know less about you than other Stansberry affiliate analysts, so maybe you can just tell us a little bit about who you are, starting with when did you first get an inkling that the financial world was your career destination? How old were you?
Berna Barshay: Probably my senior year in college, senior year, second semester, actually. So, I was not one of these people who was investing their birthday money when they were 12.
Dan Ferris: OK, so what happened in your senior year? Did you take a course or meet somebody?
Berna Barshay: Well, no, it's actually kind of funny. I mean, I had taken some macroeconomics in college and I did like that, but I was actually a comparative literature major and a theater minor. I was thinking that I wanted to go get a PhD. My father is actually an academic and he thought that the job market was changing a lot for academics and that it was a difficult path. He wasn't sure that it was a good personality fit for me anyway.
So, both my parents begged me to go get some real-world experience and just go get a job for a couple of years before pursuing more education and made it pretty clear that I was on my own financially. If I wanted to go for more schooling in a couple of years after seeing some other options, they would support me in that decision, but, "Go get a job." I had been incredibly not focused on careers. I was at Princeton doing very esoteric academic kind of intellectual pursuits. I kind of panicked. I started interviewing for literally everything. I interviewed for investment banking jobs, management consulting jobs, and jobs at places like Procter & Gamble, and really was very unfocused and got unbelievably lucky in getting a job at Goldman Sachs.
It was kind of a fluke, but the person who was running the equities division from a CFO standpoint at that time was kind of a renaissance guy. He decided to really grow me on the topic of my senior thesis, which was the Irish author Samuel Beckett. He actually knew enough about the writing to know that I really knew my stuff and he was like, "Well this is hard. Stocks are easier. If you can do this, you can definitely succeed at Goldman." So, he – I really came in very green, not knowing the difference between a stock and a bond, but with good math skills and sort of a natural analytics – I'm a very analytical person.
He had good success in hiring people with nontraditional backgrounds into the equities division at Goldman’s. So, I started out in a job working for him in his department. Within a year or so, I was moved to a desk and actually ended up on the equity derivatives trading desk. So, I was an options trader trading mostly over-the-counter derivatives, but I also did some listed trading as well for both hedge fund customers and high-net-worth private clients.
Dan Ferris: That's very cool. I was a music major in college.
Berna Barshay: Oh, OK! So, you get it.
Dan Ferris: Yep. Oh, I totally get it. And we've had guest, after guest, after guest who has said, "I was a literature major, I was an English major, I was a fine art major, I was a music major, and then I had to get into the real world and make a living." So, I definitely get it.
But it's interesting to me because your background and the sort of research-intensive focus and the diverse kind of background – or, non-financial educational background, right?
Berna Barshay: Right, although I later did go to Harvard Business School. So, I got some formal education in this area later. But yes, I came into this with an unusual background.
Dan Ferris: Right, so to me, that explains your content. I read your daily e-mails from Empire Financial. I think they're great. I think they're some of the best stuff that we put out in terms of a daily e-mail because there're so many different topics. That's what I was getting to. I thought, well this is a very "renaissance woman" kind of approach. You've got this arty background and it sounds like you sort of accidentally wound up in finance anyway. So, your approach is slightly different, probably, or comes from a different perspective.
You wind up covering all of these different topics. Like just looking at some recent ones, the latest one I saw was about ESG investing. Then, you know, there was one, "Welcome to the Summer of YOLO." The phrase "YOLO", you only live once. I mean, what do those two things have to do with one another? Not a lot, but the insight offered each time is really cool. What do you read? What do you normally – do you read a lot of books? I imagine you consume a lot of research. What do you read in a given day?
Berna Barshay: Oh, it's interesting. I'm a really eclectic reader. I wish I read more books. I think in those four years of college I read a lifetime of books. [laughs] When I do read now, I tend to read nonfiction because I read so much for work. I don't get through as many books as I would like, but I read just an incredible amount of long-form articles – and short-form ones, too. So, I mean, I glance at all the standard stuff. You know, the Wall Street Journal, Barron's, and the New York Times. I also look at some papers in other cities like the LA Times, Chicago Tribune.
I do that, but really where I would say my best insights and inspiration come from is much more vertically targeted sources. So, for retail and apparel, I love Women’s Wear Daily and the Business of Fashion website. For media, I read Variety, The Hollywood Reporter, and Deadline. For finance, Institutional Investor. You know, so it's – I found that going to more targeted industry sources is much better for getting deeper insights.
If something's in the journal, any good – at least institutional – the investor is going to know what's in there. I'm very rarely surprised by anything in the traditional business journals. But, you know, you can get a little bit different of a take going to the industry sources, I think.
Dan Ferris: That sounds like... Jim Rogers was probably the first person I ever heard say that. Then, you know, Stanley Druckenmiller is another guy who I heard talk about different industries and sectors and trying to get deeper research doing that. That's pretty cool.
So, if I asked you, Berna, with all of this eclectic reading and background and everything, what kind of an investor, then, are you? How do you – are you a value investor? How do you characterize yourself?
Berna Barshay: It's interesting. If you had asked me this question 20 years ago, I would have said I'm a deep-value investor. If you had asked me this question maybe 12 years ago, I would have said I was more of an event-driven investor. I guess now – if you had asked me a few years ago I would have said I'm an internationally oriented investor because I was subspecializing in Europe then. But now, I would say I am an opportunistic investor in the sense that I was – I've been adding tools to my tool set over the last 20-plus years and I think that styles, sectors, all these things come in and out of vogue. You look at people who did phenomenally for decades, a couple decades at a time, and then all the sudden their performance is terrible.
It's because they were really, really married to one style and that style goes out of favor. Or, they were married to a sector and that sector goes out of favor. So, I know I'm more naturally comfortable in value situations and event-driven situations because I've been doing them longer. But I've spent a lot of the last five years or so getting more comfortable with growth investing. Because if you can't – it would have been very hard to outperform the last few years if you couldn't do growth investing.
So, you know, I'm honest with myself about the fact that my level of conviction is probably always going to be higher in these value and event situations. But when the stars align, there's a growth stock, and it also is in a sector or industry that I really understand well and I can be comfortable on some kind of valuation basis going way out into the future, I've learned to add growth as a different tool in the kit, I guess.
Dan Ferris: Yeah, that sounds like – I won't say "typical," but it's a more common evolution nowadays. Anyone who says, "Well, I used to be a value investor." Actually, Empire Financial, your boss at Empire Financial is Whitney Tilson, he's a good example. He was calling himself a "value investor" for a long time, and now he calls himself a "make-money investor" because he just wants to own great businesses. He does other things besides that, but I notice he focuses on the really great businesses.
Berna Barshay: I mean, that makes sense. I think you learn a lot when you miss stocks that you could have been in during the years. I think for me, it all goes back to value investing, because when I started at Sanford Bernstein – which is a long-only money manager – I guess they have hedge funds now. But a sort of stalwart of value investing which was my first buy-side job, because at Goldman I was servicing clients... I was on the sales side as a trader. In my first buy-side job I was trained in deep value, which to me, more than anything, was driven by free-cash-flow analysis because earnings, EBITDA, all these others things that people talk about can be made up and at the end of the day, cash is cash. So, we wanted to buy free cash flow cheap.
As I have transitioned over the years to sort of doing things that aren't deep value, a lot of that has to do with forward forecasting, and when it comes to growth stocks, parsing the ones that I think will have free cash flow in the future once they hit some kind of inflection point that have the leverage and the business models to ultimately print money versus the ones that I don't see ever getting there. That's sort of how I split up the growth universe – the ones where an industry analysis, a financial analysis of the different levers in their income statement gets me to a lot of profitability eventually.
So, I guess growth investing is – the difference between value and growth investing, to a certain extent, is whether you're looking at this year or next. If you can find the free cash flow in the 2021-2022 financial statements, you may be dealing with value, whereas if you're looking at 2025-2026, you're probably looking at a growth stock. So, learning to get comfortable with making forecasts that are that far out when you're not looking for reversion to the mean, but you're looking for a whole new thing to develop. That, to me, is the essence of growth investing. I think the way that somebody who believes in free cash flow gets comfortable with that is really acknowledging that some companies will be Amazon and lose money for years and years and then all of the sudden they make money.
Actually, we've seen that in the last year with Netflix. Years and years of no making money and now they're really hitting that inflection point. Then, there are going to be other companies – I've written about this in my daily – I just am not sure that Uber ever gets there even though it's got a huge market cap and everything. There are obviously people who do but I'm just not sure. So, that's not a growth stock that I'll wade into.
Dan Ferris: OK. Gotcha. Let's talk about the new product that you're launching, because I've been reading your stuff. It's like a regular column at Empire Financial. But now, we're actually going to get your stock-picking advice on a regular basis. So, you know, what's the product called?
Berna Barshay: The product is called Empire Market Insider. We'll begin launching it imminently. It is really going to be a "best ideas" portfolio for me. I'm launching with three stocks that all fit into one specific theme that draws on one of my areas of expertise. Then, going forward, it will be one idea a month. So, the sectors that will be covered... it will probably lean hard into the things that I've covered for the longest in my career, which is the consumer sector broadly, which is everything from retail, and apparel, and gaming, lodging, and leisure, and consumer products, as well as what I would say, the consumer-facing side of TMT, or tech, media, telecom.
So, things like media, traditional media, Internet companies, gaming, video game companies, that kind of thing. But, you know, it's eclectic. I'm not saying there won't ever be an industrial or an energy in there, but really what I'm looking for is companies that are for whatever reason misunderstood, underappreciated. There's sort of a hidden element that people may not be getting with them.
So, you know, maybe it's a small cap that has poor coverage. Maybe it is a company where there is phenomenal business that's weighed down by a less attractive business and everybody focuses on the less attractive business while the great business starts to take off. It might be something international. It could be a company that the future is going to look very different from the past because they're going through an operational restructuring, or financial restructuring, or a change of management, or they've made a transformative acquisition.
So, my picks tend to be eclectic because I'm a bottom-up investor. It's not like I start with the theme. I really am just looking for great companies that have what I think are a good reward-to-risk ratio, which I think is becoming more important after such a strong 18 months or so – well, not the whole 18 months – but you know, the last year has been super strong for the markets. That comes in the context of the larger bull run that goes back to basically the market bottoming in March 2009.
So, you know, we are at an interesting point in terms of where are interest rates and inflation going? I think it's going to be a little harder going forward than it has been the last year. This recovery trade was, you know, a really great thing in the market, but it's sort of getting long in the tooth. So, onto the next and finding new opportunities in a market where maybe we don't get a tide that raises all boats.
I think idiosyncratic ideas that are very specific and that also have some margin of safety built into them are going to be a good thing to look for now.
Dan Ferris: That sounds great. I can tell you, having done this since 1998, the way you describe Empire Market Insider, that's exactly the kind of product you want to put out. You're not married to a sector, an industry, or anything. You can just go where the opportunities are – all cap, U.S., international, whatever. Judging by your daily e-mails and that description of the Market Insider, you're going to be able to do this probably as long as you want to.
Berna Barshay: Thank you.
Dan Ferris: So, we've been talking for a little while here. I do – we're going to do another interview right after this with Whitney Tilson from Empire. But before we do that, Berna, I want to give you a chance to answer my standard final question that I have for all my guests. It's the same question for every guest. That is very simply: If you could leave us with one thought today, what would it be? If it's a pitch for Market Insider, if that's the thought you want to leave us with, you know, go for it. Whatever you want. One thought to leave us with today.
Berna Barshay: OK, well, this is – I'm probably... I don't know how many women you've had on your podcast. I'm certainly – I've often spent a lot of my career as the only woman in the room during my 20-plus years on the buy-side and almost 30 years on Wall Street. I've certainly felt a little outnumbered – not uncomfortable – but outnumbered. I think in terms of – people always say, "Turn your weaknesses into strengths" and different platitudes like that, but I think in investing, there is something to that. When you have a lot of people coming at stocks with the same perspective, the same life experience and background, there are certain things that will be intuitive for them and there are certain things that aren't intuitive to them.
So, one of the things that I've tried to capitalize on in my career is finding companies that primarily sell and market to women, because I find that often it's hard for men to understand why a woman chooses one product versus another. I mean, obviously, with something like a handbag, "Why does she want this handbag versus that handbag?" But other things, too. Like why this restaurant and not that restaurant? Why this resort and not that resort? Why this car and not that car?
So, you know, women make up over 80% of the consumer spending in the household, but men are buying on the institutional level. It's over 90% men making the investment decisions. There have been just countless times in my career as an investor where it has been hard for men to appreciate when a company that is primarily targeting women.
So, the classic example of this I always give is Lululemon. When it went public, I think it was 2007. They were selling $90 yoga pants and everyone was – all the men I knew wanted to short the stock when it came out and doubled because "Who's going to pay $90 for yoga pants, and isn't everyone going to copy them from the Gap to Nike?" And, you know, everybody did copy them, but Lululemon is probably up – I don't have it in front of me – but at least 20 times since 2007. There were elements that made them successful.
Their fit was amazing, and that's not something you can understand unless you're actually trying on the pants. Their durability was amazing because they just hold up in the washing machine. Most women do their own laundry. And, you know, the in-store experience was amazing for women. So, you put that all together. Now, obviously, Lululemon has a great business selling to men, as well. At the time, it was just sort of a – everybody wanted to be short this thing except for the women that I knew who do this business, because we knew how great the product was and how athleisure was taking off, and all these other elements that I just talked about.
So, you know, I think that when you're looking at stocks, there's always the deep financial analysis like digging into the balance sheet, the income statement, the cash flow, all that stuff, the competitive analysis. You know, everybody sits on an equal footing with that. But there are these qualitative, je ne sais quoi kind of elements to a stock, like how much customer loyalty they have and how much they really target and speak to the customer. These kinds of things are not something that you're going to find in the financial statements. These are qualitative, not quantitative judgments.
You know, this is where I feel like I can use my difference to my advantage in picking stocks, and I have historically. My new newsletter is going to draw on that, and I fully admit that if you wanted to pick which fantasy football league is better than the other, I would not be the person to come to for that. [laughs] They used to always ask when I was at a hedge fund, if it was raising money for investors, "What's your edge? What's your edge?" – which was a question everybody hated because any true, true edge would be illegal. I guess it's just another way of saying, "What do you think you have that other people don't have?"
In this case, I think for me, it's this qualitative judgment because I'm competing in the markets with more men than women and, you know, I can bring this unique perspective. Well, maybe not unique, but unique as that there aren't that many women out in the markets investing for over 20 years in a professional capacity.
Dan Ferris: OK. Wow, that's actually, as you point out, we haven't had a lot of women on the show. So, therefore, that answer is one that we have literally never gotten before, so that's a great answer. Berna, real quick, I know you have a webinar that's going to be all about your new product. Is there someplace we can send our listeners so that they can take a look at that?
Berna Barshay: Yes, absolutely. They can find that webinar at the website Empire2021.com.
Dan Ferris: Sounds great. Empire2021.com. I highly recommend it. I'm betting that everyone within the sound of my voice has probably – very few of you at least – have probably heard of Berna, so I envy you the discovery you're about to make. Go to empire2021.com and meet Berna and hear what she has to say. It's really great. All right, thanks, Berna. Thanks for being here. We will definitely, definitely, definitely be inviting you back.
Berna Barshay: Oh, thank you so much. This was really a lot of fun. Thank you so much for having me.
Dan Ferris: A deadly disease that affects more people than diabetes, kidney disease, and HIV/AIDS combined now has its very first viable drug treatment, and it's curing patients. In a rare on-camera interview, my colleague Dave Lashmet reveals the name of what he believes will be the biggest drug in history, why his research suggests it could climb two-and-a-half times higher in the coming months, plus three U.S.-listed stocks that could each soar 1,000% long-term. Don't miss this rare opportunity. Go to messagefromdave.com for full details. That's messagefromdave.com. Check it out.
All right. Let's talk with Whitney Tilson now. Gosh, I've known Whitney for a long time, since he started the old Value Investor Conference, which was probably the best, regularly scheduled investment conference I ever attended in my life. It was fantastic. He's now the founder and CEO of Empire Financial Research, as well as the editor of the Empire Investment Report and Empire Stock Investor. Prior to creating Empire Financial Research, Whitney founded and ran Kase Capital Management, which managed three value-oriented hedge funds and two mutual funds.
Whitney is an avid mountaineer, having climbed the nose of El Capitan in June 2020 and summiting Mount Kilimanjaro, Mont Blanc, the Matterhorn, and the Eiger. Wow! He also regularly competes in obstacle-course races and is the all-time record holder in the 50-plus age group at the 24-hour World's Toughest Mudder. Whitney recently published his fourth book, The Art of Playing Defense: How to Get Ahead by Not Falling Behind. Whitney, welcome back to the show. It has been a little while.
Whitney Tilson: Yes, thanks so much for having me.
Dan Ferris: So, I want to talk about your book. I haven't been through the whole thing but you can just go to the introduction and the table of contents and there's... Right away this is different. You point that out in the introduction. I'd rather have you discuss how your book is different than me telling everyone. How is it different?
Whitney Tilson: Well, first of all, it's the first book I've written, and I've actually written a fifth book which we're just waiting for six months before we publish it called The Rise and Fall of Kase Capital, the story of my hedge fund career. It's sort of an investing/entrepreneurship book. This is the only book of the five that isn't an investing-related book. So, it's very different in that way.
It's sort of a book I wrote for my three daughters who are now age 25, 22, and 19, having just gone through birthday season in the last month. I was teaching a seminar three or four years ago to a group of young guys and they were – I was sort of sharing that a lot of my friends were getting divorced and what a total calamity that was. They were super interested in that. They didn't want to hear the next investing case study I had prepared – they wanted to hear about this. I realized, you know, as part of this week-long seminar I was teaching, I could help these guys out in a very important way in their lives by sharing with them some of the lessons I had learned about marriages that had gone bad and how I was doing things, learning from this, to make sure my own marriage – now at 27 and a half years – didn't go bad.
My oldest daughter who now has been with her first boyfriend now for six years, she's 25 now, is starting to think about is this the guy she wants to get married to. So, I realized I was completely failing as a father to be teaching this group of 12 young men who were really mostly strangers to me – they were people signing up for my seminar – and not teaching this to my own daughters. So, I decided to start writing it down. That sort of got me going on other life advice that I should, at the very least, share with my children. So, really, this book was written for an audience of three, my three daughters. But I think it's good advice for all people, particularly young people.
My mother-in-law asked me, "Should I read it?" I said, "It's not really aimed at geriatrics," and we had a good laugh over that. But the book is different in the sense that when I started to write it, I was writing a book about, "Here are all the things you should do to be successful in life." And after I wrote the first three chapters or so, I lost momentum and I didn't write another word for six months. I tried to figure out why. I'd lost enthusiasm for the book. I realized, eventually, the reason why is because there are a million books out there talking about "work hard, be nice, have high integrity" and that kind of thing.
What was really interesting as I was fleshing out this book is, I was actually channeling my inner Charlie Munger who always talks about "All I want to know is where I'm going to die so I never go there." By that he means, once you've reached a certain level of success in your life – not billionaire-level like him but like you and me, the average person – once they've taken care of their – you know, if they're happily married, have a decent job, and they have nice kids, and have good relationships with them, etc., etc. – their main goal in life should be not to screw it up.
So, when I inverted the book and I said, instead of a book on how to be successful, it's a book on, "Here are the five big calamities that account for about 98% of all human misery. Here's what they are, here's how you can avoid them, and here's how I've been trying to avoid them in my life." So, it shares a lot of personal stories about those five calamities. So, once I inverted the book, I developed a lot more enthusiasm for it. I said, "There are a million books on how to be successful. There are no books that I'm aware of on how to avoid the calamities that will wreck your life." So, that's really how it's different.
Dan Ferris: Yeah. We talk a lot on this show – every now and then at least – about what Nassim Taleb calls via negativa, right? Defining things in negative terms, what to avoid, what not to do, what a thing is not, what someone has not said versus what they have said. As soon as I opened your book, I was like, "Yes! Whitney is in the via negativa club!" Because, you know, it's just – the first five chapters are these five massive calamities that can derail a good life.
Whitney Tilson: Yeah, and why don't I just summarize them for you and then you can feel free to – we can dive into any of them if you wish. Here are the five chapter titles that are pretty self-explanatory: "Calamity No. 1: Loss of Reputation and/or Wealth," "Calamity No. 2: Loneliness and/or Suffering a Permanently Impaired Relationship with a Loved One," "Calamity No. 3: A Bad Marriage Often Ending in Divorce," "Calamity No. 4: Addiction and Abuse," "Calamity No. 5: The Death, Serious Injury, or Illness of Yourself or a Loved One."
So, you know, my two favorite among those are the chapter on marriage. Both marrying the right person and then maintaining a healthy marriage. Or, using the inversion, how not to let a good marriage go bad, which is much more common certainly among my friends and family. I'd say two-thirds to three-fourths of the marriages that ended in calamity (divorce, generally), it wasn't a mistake on the intake. They were both good people, they were well-matched for each other, and they had a happy marriage for the first five years. And it didn't end suddenly. It ended gradually, painfully, over five, to 10, to 15 years. So, that's the second half of that chapter. The first half being how to find the right person to marry.
Then, you know, as you mentioned in your introduction, I climbed mountains. I'm up there dangling on a rope 3,000 feet above the valley floor of Yosemite on El Capitan. So, I think a lot about managing risk in the kinds of adventures and activities that I do.
Dan Ferris: Right, calamity No. 5.
Whitney Tilson: Right. That's calamity No. 5, getting yourself killed or permanently injured. You know, that ranges from – by far the most common type of calamity in that category is simply not exercising, eating badly, and having your body become obese. Even if you're not obese, just your body falls apart. So, starting at age 60, the last 20 years of your life, you can't walk up a flight of stairs.
That would characterize tens of millions of Americans. So, there's just very basic advice at that level. All the way up to, "Hey, if you want to climb mountains like me, that's great but you should recognize that you're an amateur and I'm an amateur and you should pay for a professional guide to guide you every moment you're in the mountains where you can die. Because if you don't hire that guide, your odds of dying go up about 100 times."
Dan Ferris: Wow. Yeah, and I've read a few things – I live in the Pacific Northwest and there's a lot of mountain climbing around here.
Whitney Tilson: I'm going to be climbing in the Cascades for a week with my guide at the end of September.
Dan Ferris: No kidding? You'll be right in the neighborhood. What specific peak are you going after?
Whitney Tilson: You know, we haven't figured it out yet. We've penciled out the week. I'm going to actually be climbing the end of July with him down in the Southern Sierra Nevada mountains in California. We're climbing Mount Whitney, my namesake, which is the tallest mountain in the continental United States. So, we're going to climbing Mount Whitney, right next to it is Mount Russell which is about 10 feet lower altitude, and then a peak called Charlotte Dome – we're going to do a week backcountry. So, that's the end of July.
Then, end of September, I'm renting an RV with my wife after we drop our youngest daughter off at college, south of Minneapolis, at Carlton College. We're renting an RV in Minnesota and my cousin is getting married near Yakima in Spokane in western Washington. So, we're picking up the RV in Minneapolis... we're dropping it in Seattle. We're going to drive across the country. I'm going to climb Devils Tower, and we're going to be at Mount Rushmore, and Black Hills, the Badlands, and Glacier National Park. We're doing a trip.
With the climbing I've been doing with my guide, I've just been overwhelmed with awe at the magnificent beauty of this country and the idea of what's called "van life." You know, you camp out of a van as opposed to being in town at a hotel is something that's really caught my fancy. I'm trying to persuade my wife that van life is a good thing. She's sort of likes her creature comforts, her five-star bed and breakfasts is her favorite thing. So, she's agreed to at least give van life a try with me. So, she's going to drop me off after my cousin's wedding. I'm meeting up with my guide. We're probably going to Mount Hood, I don't know, Mount Baker, I don't know the names of the peaks but he knows that area super well so we're going to go spend a week climbing peaks. I love climbing mountains and standing up on top of a mountain.
Dan Ferris: Yeah, I guess you would. I guess standing on top of a mountain would be a pretty cool thing to do.
Whitney Tilson: Yeah, it's so beautiful and magnificent. It's just a feeling like there's no chair lift up there. The only way you can get up there is through pretty hard, vigorous slog hiking. Not that many people do it so there's a sense of achievement and beauty. It's sort of addictive, I must say.
Dan Ferris: Yeah, great metaphor for life. Great one.
Whitney Tilson: Yes.
Dan Ferris: But, you know, of all the calamities, that is the one. Like, "Calamity No. 5: Death, Serious Injury or Illness of Yourself or a Loved One." Because there are ways to avoid this that – I don't know – they almost seem too painfully obvious. If you're doing something dangerous – if you want to climb mountains let's just say – you better know what you're doing. It sounds like you really know what you're doing. You've done it a bunch of times and you do it with people who are probably a lot better at it than you, I'm guessing, it sounds like is your style.
Whitney Tilson: Yeah. And look, this is high-class problem because it costs money to be able to hire a guide and go do these things. But let me just rattle off – ex-COVID, this is pre-COVID which is now the third-largest killer in the United States in the past year – here, let me just rattle off quickly the 10 leading causes of death in the United States (other than just old age, of course) that account for 75% of all deaths in this country: heart disease, cancer, accidents, chronic lower respiratory disease (meaning smoking/lung issues), stroke, Alzheimer’s, diabetes, influenza and phenomena, kidney disease, and suicide.
Well, the top three, by the way, are 50% of all deaths. If you think heart disease, that's what I was talking about. If you don't do any exercise and you eat very badly and you get significantly overweight, heart disease odds go through the roof. Like, that is very much – it is not random who dies of heart disease. Similarly, cancer, we all know horrible stories of someone who's never used any tobacco product in their life who's stricken with some sort of lung cancer or some sort of cancer that might be associated with smoking, let's say. But I'd say – I don't know – 80% to 90% of all people who get cancer get it because someone who smoked all their life gets lung cancer. Well, that's not surprising, right? These things are in your control.
So, a lot of this – it's sort of funny – accidents is No. 3. I talk about climbing accidents, biking accidents, car accidents. No. 10 is suicide and I have a section on there on the single riskiest thing you can do that will dramatically increase the odds of a suicide is have a gun in your household. Twice as many people are killed by guns every day via suicide than homicide. There's such an irony here that people usually get guns to protect themselves. They think they're protecting themselves and in fact, they are introducing into their home something that dramatically increases the chances that somebody in their household gets shot. But not from some intruder, by suicide! Right?
This gets back to, my whole career has been managing risk in the investment business and thinking very unemotionally. Looking at steadies, doing research, looking at statistics, weighing odds, and making bets financially, right? Well, to some extent what I've done in this book and in particular, this chapter, is to bring some of that rigor. I'm not taking any positions on Americans' rights to own a gun, or Second Amendment, and I'm not trying to wade into the politics. I'm just trying to show the statistics of, "You should think hard about this before you introduce a gun into your house. If you want to have a gun, if you like to hunt, great. Keep that gun out at a hunting club. Or, if you have a house out in the country, keep your gun there. Don't have it easily accessible in your household. If you do, keep the bullets locked up someplace else, not in the gun." That kind of thing.
Dan Ferris: Well, yeah, that would certainly go if you had reason to suspect one of your family members is not doing so great and might do that as well. But, you know, we've got 400 million guns in this country and I think the suicide numbers are in the tens of thousands if I remember correctly.
Whitney Tilson: And rising. I mean, the other thing you have to think about is if you have a teenage child. The bullying and shaming that goes on in social media for example. Then you throw in, popularly among wealthy households, eating disorders are rampant particularly among teenage girls. So, the suicide attempts have gone way up among teenagers in general. Then, do you really want to have a gun in your house? Women, generally, women have twice – young men and young women attempt the same number of suicides but men die by suicide at double the rate. Why? Because they're much more likely to use a gun. Women are much more likely to use pills. Guns have an 86% success rate and pills have a 2% success rate.
These are the kinds of things that nobody ever writes books about, right? Sounds like this book's a real downer. But, boy, let me tell you, there is no bigger downer that will ruin your life. I've had friends lose children in car accidents, to eating disorders, to suicide. That's what will wreck your life faster and more permanently than anything else. So, you throw, you go to think about these things, "How do I mitigate that risk?"
Dan Ferris: It's funny, I can't tell you the number of times I've started talking to any trader, investor, whatever – we're not even talking about investing – and the conversation comes back to risk mitigation. Like, we can't escape it. We can't get away from this topic if we tried. It's amazing. And you and I are talking about anything but investing and yet, here we are. We're back at risk mitigation.
Whitney Tilson: Right. Well, to some extent, that's because it's something I know and I address in the introduction of my book. What is a guy like me, why am I writing a book? Why should anybody listen to me when it comes to these topics? I think in part it's because I've done a pretty good job of mitigating these risks. None of these five calamities have happened to me. That's prettily deliberate because I've recognized them and I'm taking steps to avoid them, No. 1. But No. 2 is because I may not be a qualified expert. I don't hold a graduate degree in marriage studies or something. But I do have a lot of training in thinking very rationally about evaluating risks, mitigating risks. So, that's woven throughout this book.
Dan Ferris: Well, that alone – a book by you knowing you as I have over the years that features a large component of risk mitigation (and there's at least five chapters of it), to me, that makes it a must-read. It's Whitney Tilson, The Art of Playing Defense. Which, if I had to guess titles of books by Whitney Tilson, I would never guess The Art of Playing Defense but having seen it happen and having seen you do it, it makes absolutely perfect sense. In fact, I can say this book is so Whitney to me, it's perfect. This will become – I haven't read the whole thing yet – but this is rapidly becoming my favorite book of yours.
Whitney Tilson: Well, thank you. I appreciate it, Dan.
Dan Ferris: You bet. But I'm looking forward to the other one you said you're working on.
Whitney Tilson: The Rise and Fall of Kase Capital. Believe it or not, it's actually finished. I'll send you a draft of it personally. I can't release it publicly yet. But I've been working on both of these books for about three years and they both sort of ended up, I finished both at roughly the same time. But you know, everyone tells me, "Oh, you have to space them out." Right? You can't go to your friends and family and ask them to buy two books of yours the same week or the same month.
So, the other book, The Rise and Fall of Kase Capital will probably release at the end of the year. That's a story of achieving enormous success the first dozen years or so. Then screwing it all up and basically having to close my business after seven years of trailing the market. The investing lessons, the entrepreneurial lessons, that I think – certainly for anyone who is starting up a business and growing it, how not to screw it up and lose it – but a lot of good investing lessons in there, too. I'm proud of that book, as well.
Dan Ferris: Looking forward to it. Yeah. I got my final question for you. You've been on the show a few times, I wonder if you even remember what it is. My final question is the same for every guest. It is very simply, if you could leave us with one thought today, one piece of advice, or just one thought, your pick, what would it be today?
Whitney Tilson: You know, Warren Buffett once said the most important decision anyone ever makes is who you marry. The second most important decision you make is what career you go into. He said, "I don't even know what No. 3 is." Like, those two are so much more important. So, I suspect most of your listeners probably already are married so it's like, "Well, it's too late now." But what I alluded to earlier, you can absolutely – it's just you and one other person who are 100% responsible for the health of that marriage and whether it's a healthy marriage. And by the way, the divorce is not the calamity – the divorce is often the release valve at the end of 10 years of misery, right? It's the 10 years prior to the divorce that's the calamity.
My general theme of how to maintain a healthy marriage is you need to just be – most importantly you have to be aware and asking yourself periodically – not every day – but you know, "On a scale of one to 10, how healthy do I think my marriage is and what would my spouse say?" And are those answers similar? Every marriage goes through ups and downs. Over 27-and-a-half years of marriage, 30 years of being with my wife, we've probably bottomed out at maybe even a five or a six. But most of the time, I'd say anything above an eight is healthy. Most of the time we've been up there but the key is, every marriage goes through stresses and ups and downs. The key is when your marriage gets down to like a six, successful marriages, the couple recognizes it, and talks about it, and takes steps to get it back up into the healthy eight-plus range.
Unsuccessful marriages, when it's cruising along at an eight, then something causes it to go down to a seven or a six, but they don't recognize it, don't talk about it, continue the bad habits or the stress points, not helping out with the kids, whatever is causing the stress in that marriage. Then it drops from six to a five. Then a five to a four and three, two, one, boom. The key thing to think about is one, what's the healthier marriage and two, if you are anything much below an eight, why is that and what can you do, and what conversation can you have with your spouse to get it back into that healthy range.
Often, it's just little stuff. Um, people get into bad habits and they treat their spouse the way they would never treat their friends. Why? Because their friends, if you treat your friends badly for very long, they'll just ghost you. They won't be your friends anymore. They won't go out to lunch with you anymore or whatever. But you can treat your spouse really badly, just sort of be mean to them, not listen to them, and leave your dirty clothes all over the place, and dirty dishes in the sink, and just take them for granted. You can do that for years and they won't leave you, right? But it will poison a relationship for sure.
Dan Ferris: Great answer. Fantastic answer. Thank you for that. Well, thanks for being here. I appreciate it.
Whitney Tilson: My pleasure, bye-bye.
Dan Ferris: OK, what a really cool day. You know, two interviews, I've been wanting to do this for some time. I think we picked two really great folks. Somebody we've had on the program a couple of times and someone brand new to you guys. I hope you enjoyed both Whitney Tilson and Berna Barshay.
Alright, let's do the mailbag. Let's do it right now.
Dan Ferris: If you listen to this podcast, you know that our mission is to help you become a better investor. At the start of every show, I tell you I'm the editor of Extreme Value published by Stansberry Research but I always stop short of explaining it. Well, I spend hundreds of hours each month poring over balance sheets and SEC filings to find stocks trading at huge discounts to their true net worth, giving subscribers a large margin of safety on their picks. Look, I'll be honest with you, Extreme Value isn't for every investor... it's not in everyone's price range. But over many, many years, it's been proven that our method works. Extreme Value picks have earned us one of the most impressive track records in the industry. Learn more and purchase my Extreme Value newsletter right now at investorhourdan.com. That's investorhourdan.com. Check it out.
Dan Ferris: 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. I won't read them if they're too long. There were some long ones this week. You can also give us a call at our new listener feedback line, (800) 381-2357. Tell us what's on your mind and get your voice on the show.
First up this week is Tim M. I've met Tim M. and talked with him at Stansberry functions over the years. Look forward to seeing you again. Hope you're at our meeting this year in Vegas, Tim. Tim says, "It appears to me that using TradeStops Health Indicators in combination with your Extreme Value picks accomplishes pretty much what Marc Chaikin's Power Gauge system does. That is, combine good, solid, fundamental stock analysis with technical analysis consisting of price, momentum, volatility algorithms. Do you utilize TradeStops Health Indicators in your work beyond the basic use of trailing stops? As always, thank you for providing classy interviews with top-notch guests. Stay well. Regards, Tim M."
No, Tim. I don't use – we don't use TradeStops in Extreme Value. I don't know that you get the same effect of Extreme Value plus TradeStops as you do at the Power Gauge. The Power Gauge, to me, looks like a trading tool. Extreme Value is a bottom-up, one-at-a-time, value-focused, long-term-oriented stock-picking service. So, I think they are quite different as a matter of fact. But it's good to ask. Thank you.
Next comes L.T. L.T. says, he's talking about Hugh Hendry who we interviewed a few episodes ago. Hugh Hendry discussed tech giants Amazon and Netflix who benefited from both the lowering of market interest rates as well as the greater use of their services during COVID. He goes on to call them "riskless business with no intellectual ceiling on their valuation." He previously referred to South American sovereign debt in the '70s as "thought to have been riskless." So, his use of "riskless" here is ambiguous. I'm going to stop you right there, L.T.
I think he truly does think that there is a probably riskless or near riskless to those businesses. I don't think he ever thought the South American sovereign debt was riskless. I don't think he's inconsistent or ambiguous there. Then you say, "Yet, on the other hand, he paints the picture of Paul Volcker playing poker for 18 months until everyone else folded. So, if you view the Fed as Volcker then Amazon and Netflix will keep going up if you use Hendry's stock picks. How did you view these comments on the tech stocks and the Fed as indictment or an endorsement? L.T."
I don't know if I need to interpret it either way with Hugh. I think, for a guy like that, intellectually speaking, he's less about indictment or endorsement and more about, "What is the situation and how can I exploit it as an investor?" That's my guess. We'd have to ask him. I probably should have shot him an e-mail but I don't think it's that big of a deal. I really do think he's sort of more intellectually – less binary. He wants to know the situation. He wants to place a bet on it or not. But it's a decent question, that's why I included it.
Next is Wade S. Wade S. says, "Really enjoyed your guest Hugh Hendry and David Collum. Very interesting insights. One question I had on Hugh's social mood idea is the statement that banks aren't leading or entrepreneurs aren't taking risk or borrowing. Does he mean banks aren't lending relative to the amount of interest-free money they have access to?"
So, Wade, I think you're in the ballpark there. I think he's saying they're loaded to the gill with reserves and relative to that, they're not lending. Because, as you point out, lots of sovereigns and corporations have record-high amounts of debt. Households are not that way. Households have de-levered since the financial crisis. Good question. That's where I am on it.
Next comes Ludwig H. He says, "Hi Dan, is inflation not the result from monetary policies from the Fed, ECB, and Bank of Japan? How could we counter inflation next to physical gold as an investment? Is real estate and agriculture investments the best method to – " I think he meant protect the cash flow and hedge the inflation, Ludwig H.
I think, real estate and farm real estate or agriculture investments you're talking about there, you know, physical gold, real estate, I think all of those things will be good stores of value over the long term. How they are over any – even like five- or 10-year period is anybody's guess. But over the long term, I think they're great places to sort of preserve and maintain value because they're not part of the financial system, right? They're ex-currency.
You ask, "Is inflation not the result of monetary policies from the central banks?" Well, yeah and no. I mean, they can certainly quantitatively ease to their hearts' content. They can just print, and print, and print. But look at the example of Japan. They really went absolutely ape and it took a long, long time (like the better part of two decades) to kind of even resemble any kind of stimulus that you could see in the economy. So, the effect of those monetary policies, I think it's supposed to be inflationary but it doesn't seem to be very good at it. You know? But you can't deny that there's inflation. Stuff costs more. Why that is the case, is it because the Fed printed money to buy securities? I don't know. Doesn't look that way to me but we know there's inflation.
We know that lots of Fed money-printing and increasing of the balance sheet for sketchy reasons is not a good thing, too. But I'm less and less inclined to want to say that I know the exact mechanism of this over time. I used to say, "Oh, the Fed's causing inflation" just classic. Then, I sort of thought about it, read about it, and learned about it, and thought, "not really."
Next is Phil K. He says, "Thanks for the work you put in on the Investor Hour podcast. I'm interested in hearing your thoughts on what can bring down the housing market. Do you have any thoughts on what the risk might be? What about some sort of contagion effect from another bubble bursting like stocks? I'm not sure if I'm on a solid line of thinking here but hopefully, you can add some of your professional insights. Thanks again. Love the show. Looking forward to listening for many years to come. Regards, Phil K."
Thank you, Phil. I don't worry myself about this. Look, housing is kind of a commodity business. It's a fairly – most home builders – fairly capital intensive depending on the model that you use. The pricing is market pricing. They don't tend to have a lot of pricing power. Their margins over a full cycle aren't necessarily that great. And as we know from the housing crisis, housing can crash... housing prices can fall. I'm not saying they will soon or that's what's going to crash the market. But no, nothing goes up forever. Nothing goes up in a straight line forever. Maybe housing ends up being a really good hedge on inflation so for many years to come you'll want to have a house and you'll want to borrow – have a fixed mortgage on it to maximize the effect. But as far as housing stocks go, eventually, this demand will be met by more than enough supply. When that happens, I don't know. But I don't need to be a good investor. Good question, though.
Michael E. Last question this week. Told you we had lots! Michael E. says, "I recently started a lifetime subscription to Extreme Value and appreciate your insights. I read two articles highlighting the preferred shares of a company that's in the Extreme Value portfolio. My question is: If a company has solid financials and the common shares appear to have a margin of safety, is it reasonable to conclude that the preferred shares are also safe? I realize preferred shares have other risks such as interest rate risk, redemption risk, and, of course, the current market price. Thank you for any information you might provide. Best regards, Michael E."
Yeah, there's not – that's the sound proposition to me. I mean, as long as the preferreds aren't priced out of sight, right? That's what is the problem with every interest-bearing instrument today is that the yields are tiny and they're just priced out of sight. I mean, if you're making 2% a year on a preferred share, you have to ask yourself if the risk and worth it and if at that point, you wouldn't just rather own the common stock? That's my problem with preferreds, I can't find good deals in them. If the common stock is sound, the preferred is probably sound, too. With the caveat being the pricing, right? Good question.
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. Just go to investorhour.com, click on the episode you want, scroll all the way down. Click on the word "transcript" and enjoy.
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