Episodes

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 Jim Osman. Jim specializes in special situations investing. We'll talk all about that, and he's got some good ideas for you.

In the mailbag today, actual questions about financial statements. We hardly ever get those. It's awesome. And remember, you can call our listener feedback at 800-381-2357. Tell us what's on your mind and hear your voice on the show. For my opening rant this week, it's impossible for some investors to avoid fraud and mega-bubble valuations, but you are not one of them. That and more right now on the Stansberry Investor Hour.

Yes, yes, it's impossible for some people to avoid fraud and mega-bubble valuations. Who are these people? Well, one group I think is venture-capital investors. And to say that it's impossible for them to avoid fraud is kind of – it may be seen as controversial because they mostly have avoided it. They mostly do avoid fraud, and it's unusual, for example, that a Silicon Valley entrepreneur is convicted of fraud but that happened this year.

It happened in January with Elizabeth Holmes. She was convicted on a few counts of fraud, and her ex-boyfriend, partner and former COO of her company was convicted on 12 counts. I think she was convicted on four, and he was convicted on all 12 of his counts. She had 11 counts against her but three of them, they couldn't make a decision and they convicted her of four of them. And then she was found innocent of the rest.

You may recall Elizabeth Holmes. She was the somewhat attractive young woman with the sort of intense unblinking stare who wore black turtlenecks like Steve Jobs and spoke in a very deep voice, which turned out to be faked. She was faking this deep voice. And she had a company called Theranos, which she founded when she was just 19 years old – dropped out of Stanford.

And she claimed to be able to do rapid blood testing for 240 conditions, including cancer and diabetes and all the usual stuff you get tested for with your blood, very rapidly with just a few drops of blood. You know how this works, right? You go to the blood-draw center or wherever that might be, and then you sit there and they slap your arm down and stab you with a needle, and it's like one vial full of your blood, then another vial full of your blood, you know, and they're pushing and pulling on this needle. It's semi-unpleasant.

Some people, you know, get sick and some people pass out. It's not fun. I mean, I've never had a real problem with it. You know, the needles are pretty sharp I notice, and most people who've done me are pretty good, so I've never had a problem but I know some people do. Anyway, not fun. If somebody could disrupt that industry and make it a lot more pleasant and just do it with a couple drops of blood from your finger like Elizabeth Holmes was claiming, it would be great.

But it turns out that their technology didn't work nearly as well as they said, really if at all. I can't even establish that it worked at all because they were using traditional analysis on the blood that they collected. So maybe they could collect a few drops of blood. That's not hard, right? But their system, which they called Edison – named after the famous inventor Thomas Edison – did not work as advertised at all, so they were convicted of fraud.

But this woman, Elizabeth Holmes, she raised almost $1 billion, like $945 million, and she had people investing in the company like the Walton family of Walmart and Rupert Murdoch, the media mogul and others, and former Secretary of State George Shultz was on the board for a while. [Laughs] I mean, it was a lot of heavy hitters involved with this thing, and it turned out to be a fraud. Now to be clear, I don't think she set out to commit fraud. I think people get caught up in things, and they get to a point where it's just not working the way they were just so convinced that it would and they've got a choice to make.

You can either say, "Hey, this thing doesn't work," and then, you know, you're a big failure, or you can say it really does work, and try to commit fraud to try to convince people to give you more money. She did the latter. It didn't work out. She's going to be sentenced sometime next month, in the month of October – I think it's October 19 – and she could get 20 years in prison.

And recently she filed another petition – two petitions, really – alleging that there's new evidence because one of the people who used to work for her, the government's star witness who testified longer than anybody, he was on the stand for like five days, he came to her house unannounced and talked to her husband, to Elizabeth Holmes' husband, and told her all this stuff. He felt bad about how it went down and the government made it all seem like it was worse than it was and just a lot of emoting and feelings. And then he kind of threw in that he felt like he had done something wrong during the trial.

We don't know what that means yet, but maybe it means that he's just emoting more, or maybe it means he lied or misrepresented something, right? So I think Holmes has a right to know that. I hope she gets her trial. She filed another one that said that the relationship between her and her ex-boyfriend was not as represented. The government represented it one way in his trial and another way in hers and, you know, pick which one. It can't be both.

And of course the government, you know, represented it one way to get him convicted and another way to get her convicted. So, you know, I think she's got – it sounds to me – I'm no lawyer, OK? I read the first petition. I'm no lawyer, though. It sounds like she has a reason to expect to get another trial. We'll see.

The point is it's rare... looks like she committed fraud to me. It also looks like she might have a reason to get another trial. I don't know. But I started thinking about all these people caught up in this, you know, and the investors... I don't think they could've avoided it. I don't think they reasonably could've avoided it.

And I started thinking about venture-capital early-stage investing in general, and I'm surprised that we haven't seen more of these cases, and I do believe we're going to see many more of them partially because we're living through the biggest mega-bubble ever in history, so that would kind of imply that you're going to see more fraud than ever in history because, you know, the capital starts flowing and people who are willing to tell whatever story they need to tell to get it to start coming out of the woodwork. The VC investors, the venture-capital guys, I could see where they would be in a position where they're like, well, we can't afford not to participate, because we need to throw 100 little bets out there and hope one of them just becomes the next Amazon, and we're going to have to accept a certain amount of fraud. And they've always been able to accept a certain amount of failure because it's risky, early-stage investing is.

So I can see how they would just be able to accept that they're going to be exposed to fraud and huge mega-bubble valuations, right? People financed – we work up to a $48 billion valuation. I think it went public for $9 billion. I think the market cap's like, what, $3 billion or $4 billion or something lately. I don't even know lately, but it was some much lower number even than $9 billion, let alone $48 billion.

So I don't think these people can avoid it. I think there's intense competition. They can't afford to let somebody else get the early round of financing in the next Amazon, so they do it. You can though, see? This is an important way that you are not like professional investors, and that's a good thing. You can avoid, mostly avoid fraud I think if you stay away from the risky companies, right?

If you're investing in Waste Management and Costco and Starbucks and stuff like that, I think you're going to avoid fraud mostly. And you can also avoid mega-bubble valuations like you have no career risk, right? The VC investors and the money managers, they've got to keep investing. They have to attract clients. If they say it's a mega-bubble and we're just going to hang on to all the cash you give us, investors will crucify them and take their money back and they'll be out of a career, right?

You don't have that problem, and that is a very, very good thing. That means that you as an individual investor have a distinct advantage, which is multiplied many times, in my opinion, at this moment in history over all the professional investors, and I think you should use it and exploit it to the maximum that you can. How do you do that? Well, they have to follow mandates. If they're running an oil and gas fund they have to buy oil and gas. That's been a good bet lately, but I'm just saying.

You know, if they're running a tech fund, they've got to buy tech even though it's getting murdered. You don't have to do any of that. And if you want to hold cash, you can. You can prepare for a variety of outcomes, of future outcomes in the market. They can't do that. And you know my prescription has been the same. I think you should hold plenty of cash, don't buy at mega-bubble valuations, don't buy any more tech garbage, period... don't buy anymore risky tech garbage.

That stuff will eventually get cheap. You remember in 2002, there were little tech companies trading for discounts to the amount of cash they held. We're not there yet. So hold plenty of cash. By all means, hold the stocks of high-quality companies. I mentioned a few a second ago, Starbucks, Waste Management, Costco, Berkshire Hathaway, and I think you should still hold some gold and silver.

You know, I sold my bitcoin because it doesn't appear to be doing what I really, really hoped it would do. It just trades like a tech stock, like a volatile, risky tech stock, and I didn't want it to do that. So yeah, you can prepare, others can't. That's the rant for today, and that is a very, very good thing. Exploit this position to its maximum. That doesn't mean sell everything and go to cash, right?

It means prepare for a wide variety of outcomes, right? Cash, stocks, gold, silver, maybe some other things that you know more about than somebody else. All right? OK, that's the rant for today. Let's now talk with Jim Osman of the Edge Consulting Group. Let's do it right now.

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All right. It's time for our interview once again. I am very pleased to tell you that today's guest is Jim Osman. Jim brings two decades of fundamental spinoff, special situations and activist ideas experience, which is used to help his partners identify not only investment ideas, but more importantly, identifying the specific needs of the money manager's investment process while adding additional intelligence in a modern market where valuation alone is not enough to make a return on capital.

Let me also mention he is a married father of two and regularly competes in triathlons – Ironman and Half Ironman distance. Holy heck, Jim, that's awesome. [Laughs]

Jim Osman: Well let's not lead me up too much. Thank you for having me.

Dan Ferris: Yeah, it's good of you to be here. I thought I would actually begin, as we talked earlier today, with my classic sort of first question, which is usually like for people in the money management business or, you know, research analysts or folks like yourself who help investors do what they do, allocating capital. So the question is simply, you know, if we ran into each other at a bar and I found out you were in finance and I said, "Hey, Jim, what kind of investor are you?" What would you tell me?

Jim Osman: Fantastic. That's a great question in terms of what we do, what I do. So I'm involved in identifying and analyzing special situations. Now, you know, when you put that term across people kind of think, well hold on a second. I don't do that. I don't even know what that is. In fact, I'm a little bit embarrassed to even ask what that is.

Dan Ferris: That's right. [Laughs]

Jim Osman: And that can be a problem for what we essentially sell to our subscribers. So what is a special situation? Well, a special situation is an atypical, unusual event that will alter the price of the stock sometime in the future. Now someone's going to say to me, "Well done, Jim, everything alters the price of stock. That's why stocks move." But more specifically, I'm talking about an actual event that you can identify and you can quantify and analyze and look at the risks and look at the rewards of that and decide whether you want to play it. So that's in the simplest sense that I think, and hopefully that makes it clear.

Dan Ferris: Right. And we'll flesh that out as you describe some of these specific strategies. This is also called event-driven investing, for example.

Jim Osman: It's event-driven, yeah, that's right. So some sort of event future that you can quantify.

Dan Ferris: All right. Actually, before we get into the specifics though, I'm really excited to have you on at this particular moment in time because most people are spending every day, you know, in between changes of underwear, they're like watching the market fall and wondering what the heck they should do. So they feel very much exposed to the market movements. But special situations and event-driven, that's not necessarily the case with that, correct?

Jim Osman: Well, absolutely. That's a great point. I mean, we're in the midst of updating our study for release in the next month or so where we have 22 years of data and looking at specifically spinoffs, which is one of those which we can talk about in a second, but an event, of company breakups, should we say, is a spinoff, that can really provide value to the investors. But yeah, that's essentially what we're looking at in terms of event-driven, but yeah, they perform basically over any sort of market environment, and that's a good thing because they're very, very specific and they're not market directional. Of course, they get moved around with the markets, and I can talk a little bit about that in a minute, but essentially you're betting on that catalyst event that happens sometime in the future.

Dan Ferris: It's not a defensive strategy, per se. It's all-weather. This is something you do all the time in all market environments, not just –

Jim Osman: Yeah, absolutely. I mean, you know as well as I do that – you know me by now. I don't care for the market.

Dan Ferris: [Laughs]

Jim Osman: You know, of course we all get our stocks here moved around by the market.

Dan Ferris: Sure.

Jim Osman: But, you know, like Buffett says, at the end of the day everything goes to value, and if you can stomach those – and that's the whole point. I've talked a lot about emotion recently and ways you can curb that emotion, or not even curb the emotion because we're all emotional creatures. It's whether you can recognize it. If you can recognize your emotion and handle that, you know, your actual thesis will just play out. So that's a big thing we can also discuss as well, but it's definitely a place if you're not looking at it. It just takes a little bit more work than normal, but I think this whole market requires a little bit more work than normal to be in.

Dan Ferris: Yeah. You bet. Before we get in, I do want to talk about spinoffs, honest I do, but can you talk a little bit about – you alluded to it a second ago – analytical edge versus behavioral edge?

Jim Osman: Yeah. Absolutely. Let me give you a little bit of background, because I've done a lot of work on this, and I think a good investor doesn't beat the same drum over all the markets, right? If I'm one of those 24 million new investors that come to the market in the last two years and I'm just buying the stock as it goes up, I'm the greatest thing ever, you know? When it comes to the stage where the market goes down and I'm thinking, hold on, why aren't I the greatest investor ever?

Because I haven't done any work, because I just jumped on the back of it, right? So good investors will last for a longer period. But again, we've got to understand what drives markets, and ultimately there's a few things that drive markets. And again, recognizing this is – 80% of it, it really is your emotional behavior to the markets, and one really is that emotion. You know, we are driven by genetics, stress, diet. We come in the morning and we go, oh, I feel really crap today or we feel great or the sun's out, it's raining.

All these things we've got to take into account. They drive us. Crowd behavior. Now that was a great one in the runup in 2020, '21, you know? Someone said, "Well you've got to get in this one. Oh, Peloton, oh this, oh that," and all these names that are running around. We're going to miss it, you know?

Fear of missing out is a great one, and as investors, we are dragged toward that. Dan, you better get in this. Well, we're all in it. What? You're not in it. I'll run, let me get in there. And what it's kind again is the fear and the greed. You know, if you look back in hindsight it's a wonderful thing, and I get it, but you look at the top of the market and you could see the amount of greed that was there, you know?

There were some stocks in there...you know, Peloton essentially was a stationary bike with an iPad on it, you know? Everyone wasn't going to buy those. A handful of people bought those and probably used them for great clothes dryers now. So you kind of got to step back sometimes because it's the greed at the top. And now we're seeing the opposite end of that. And like I say, part of that is recognizing the environments of that, and when you get the real fear, that's when you get real opportunities because you get discretionary selling and just indiscriminate selling really from investors.

So there are kind of three things I want to highlight initially, and we'll get to special situations in a second. But I just wanted to give you the background on how we get there because I think it's very, very important to understand I'm not just giving you, hey, just look at this strategy because it's great. So that's the first part. And the second part is in this sort of market, the investor's got to realize that there's something called "efficient-market hypothesis." And what is that?

It's essentially that all the information out there is in the price of the stock. You can't beat the stock for information. Years ago, when I was young, and maybe when you were young, we could go down, we could get a report from the stock exchange, get back, read it before anyone's got it, and get in, right? That's gone. You know, you're never going to beat the market that way as well. So again, so you've got this whole kind of emotional thing going on, background, you've got market sort of fishing, and you're sitting there thinking, well what am I going to do?

The market's gone down, these things are cheap, they're getting cheaper, and what am I going to do? So we've kind of got to develop a process, and I'll bring it back to your question in a second, but kind of a bit of a process into what is key and how you're going to make money in the market. What is your edge? What is it?

And as far as I'm concerned, there's only three ways to make money in this market, only three ways. The first one is you just know someone that other people don't know. You know something about a stock, right? That's called insider trading, right? We see what happens. You go to prison, right?

You can't do that. OK. You've got lots of disseminating information. We've got clients that read 401(k)s instantly or other stuff instantly. They just search for words, boom, it's in their system, they execute the trade. You'll never beat them either. So that's gone as well. And the last part is where special situations come into play, and it's smarter than everyone else and look where no one else is looking, and that's always hard to decide because you're going to say, "Well Jim, yeah, of course you're going to say that, but where is the place to look?"

Well I'm giving you that pool of ideas, and the main office is called corporate breakups, and there's about 30 to 40 decent-sized ones that happen in the year. I've got three examples that your investors or listeners will be familiar with at the end and we can go through those. But really, I guess you say to me, "All right, Jim, great. I'm getting it. But what is the spinoff? What the hell is a spinoff?"

You know, it's one of those things where if you're not looking you probably won't find it, and it's sad really because in our work with our study with Deloitte over 20 years now, spinoffs outperform the market by an average of 10%, so there's definitely – I won't say they all make money, let's say 30% or 40% of the spinoffs that go for a year are zero or negative, right? So there's some pitfalls. But – and this is a big but – we had Joel Greenblatt. And I know you're familiar with Joe.

Dan Ferris: Yeah.

Jim Osman: And he wrote a great book, and it's one for your listeners to look at. It's called – it's a rather stupid title – Who Wants to be a Stock Market Genius?

Dan Ferris: Yeah. [Laughs]

Jim Osman: But, you know, it's probably one of the best books out there, but don't tell anyone.

Dan Ferris: It's excellent.

Jim Osman: And Joel was at our conference last November, and what he said was a very – one quote he did say resonates with me, and his stuff always resonates with me and he's a great guy, but he said, "X marks the spot where you want to dig for gold, and that's spinoffs." So, you know, you can dig. You might not find everything but you're going to find stuff there, and that's our point in finding ideas, just to look around where those spots are and dig, right? So that's the whole kind of spinoff area where we're involved in, and I can talk a little bit more about that if you want me to expand on what that is.

Dan Ferris: Sure, yes. I know spinoffs is one of the biggest topics in Greenblatt's book, which like there are hedge funds that require you read that book even though it is called You Can Be a Stock Market Genius, it's crazy.

Jim Osman: Yeah. I require all our people to read it. And there's another one of insiders as well which I quite want to read. I think it's just gold. It's so silly people are like, "Well, I'm not going to read that. I'm reading Buffett's book, and then I'm going to tell you about value investing. I'm going to tell you about –" well hold on. Everybody's value investing now. Everything's cheap. [Laughs]

Dan Ferris: Yeah. That's right. And, you know, to be fair, Greenblatt's got another great book that's really about systematic value strategy. But anyway, let's stick with spinoffs. Tell me – first of all, let's just assume our listener is unfamiliar and we're just talking, and how do you tell me what a spinoff is without getting into technical gobbledygook?

Jim Osman: Yeah. Absolutely. So let me just start with an example. You know, people know PayPal, people know eBay. How many people knew that PayPal was a company within eBay and it was forced to break up? And they separated and, you know, the rest is history. One was very good and then eBay kind of stayed still and PayPal flew, right? The rest is down the line, but that was a long time ago.

But that's one of the more familiar ones everyone's with. But the point is, a spinoff is a separation of operations of a company in two or more paths. So if I'm a medical company and I've got a banana factory within it, and I say, "Well hold on, these companies don't fit together. They're worth more broken up than they are together." There's value in analyzing that. So the difference between say a spinoff and an IPO, and everyone knows what an IPO – and that's why I'm using the example – is I'm going to come to you and I'm going to say, "Dan, I've got this great company.

I'm bringing it to the market. I want you – it's so good, Dan. You better just reach high as you can to pay me the most amount of money. And by the way, I've got a lot of shares I'm going to sell you in between." And you're going to say, "Oh, Jim, great. I want some of that. I'm happy." Then the share price drops to the floor, right?

The difference is spinoffs are different because they're given to existing shareholders of the parent stock. So if I'm a shareholder of eBay and they spin off PayPal, I'm giving you shares of PayPal. Well, it's not necessarily free but essentially just giving you them. You don't have to pay for them, you don't have to pay up for them, you just get them. Now a lot of your listeners will know it's along the line they've got shares on their accounts which are a result of having shares of the parent, and they don't really know what they are because they've got lots of weird and wonderful names.

Just as I remember, one guy came up to me in a conference, he said, "Jim, I had McDonald's years ago" – this was back in the early 2000s, and he said, "I've got these shares of Chipotle." He said, "I got them for like $13. I didn't really know what they were," and Chipotle was just kind of starting, "and they went up to $21 and I sold them. I thought I was the greatest investor ever, and now they're at $1,600." So what spinoffs do, Dan, is they give you shares of new companies but you don't have to reach up for them and be the subject of marketing.

And that's great. That's one of the benefits of spinoffs, and they come along every now and then. So there's no roadshow. There's no – in fact, management has incentive to get the prices low as possible and keep the deal as low as possible because they want their share options struck as low as possible, right? If you're a manager of a big company and you've got a great company spinning off, I don't want to tell too many people about it if I'm getting stock options, right?

You just want it as low as possible, because the stock options are struck usually in the runup to the spinoff, and that's interesting because I want to keep very quiet, I want the stock as low as possible, I want options to come down there, and then post spin I'm kind of, when the stock hits the market, ramping that stock up. So this is incentive to get the stock price down. So if you can look at these things, there's a lot of value in them. So not only can get you great businesses, but you can also get very focused businesses, you can get entrepreneurs in those businesses, which if you analyze them correctly with incentives, and you've got other stuff like IAC and Match.com.

Match and IAC – and if you say to me Match, Expedia, LendingTree, if you talk to me like that, everyone's going to know. If I said to you they all come out of a stock called IAC, you'll go, IAC? You know, IAC is one of those companies that have been spinning off forever, which on the face of it is a small enough stock that it creates about $115 billion worth of value. These spinoffs can really create value. But again, you must be on the lookout along the lines. Hopefully – I've said a lot there, but does that make sense on what a spinoff is?

Dan Ferris: Sure, sure. Absolutely. And there's another phenomenon too with spinoffs that we covered them years ago but we stopped doing so. There wasn't much of an interest in them. I notice there was a dynamic at play sometimes where the spinoff would actually be sold for a few months because it's not part of the index or something, you know?

Jim Osman: Yeah.

Dan Ferris: And people just kind of ejected like the guy did with Chipotle. It's just like, well, I don't want this. I just want McDonald's.

Jim Osman: Yeah. Absolutely. And Chipotle is one of those stocks where we sort of know about. If I put on something like – a listing one spot the other day, NEOG? N-E-O-G. You'd be like, what's that? We've done the analysis on the company, we've done the analysis – the fact that the parent pulled out of debt on it, we've done the analysis and we tossed out an index. Now the stock's fallen through the floor, right?

So I'm not telling you guys are going to short it, but I'm saying it provides along the line some sort of value. But to your point, index funds, if they get a spinoff within one of their holdings and it's not big enough for the hold in their index fund, they have to sell it. There's no two ways about it. It just goes. There's no analysis... it just sells.

And we as a firm quantify – we call that a technical of the amount that's selling that can be evolved. It's the same way exactly what you say when a small investor just doesn't know and they just see something appear on their balance sheet – or sorry, their trading account, and they go, "Oh, well what's this? I don't know." And it looks like a positive P&L, because it will look like a positive P&L, the market's going down, and spinoffs are the first things that go in a market fall like they are, and that makes them very, very cheap and a very, very good hunting ground because people don't understand there's no street coverage, people don't know what they are. It's just new companies. Orphan securities is what we call them.

Dan Ferris: Yeah.

Jim Osman: So very, very interesting place to look, and we look at fallen spinoffs all the time really to look where the value is, and that can be just out there and just the wrong price.

Dan Ferris: Right. So I'll give you the option, Jim. Do you want to tell me about your spinoff ideas or do you want to save that and talk about another type of special situation that you like?

Jim Osman: Yeah. Listen, I'll talk a little bit more about spinoffs because then I'll – and then I'll give the three ideas and you tell me when we're running a little bit "dinner time" now, Dan, and I'll give you those ideas and for the guys to look out. But I think that in any sort of catalyst situation there's soft and there's hard catalysts, right? The hard ones are where there's an actual event occurring in the future that you can quantify, and I think they're the best ones for you to look at. There's softer ones like, you know, director's buy-in, corporate change, restructuring. These things can happen over time and it obviously depends on the management.

But the real hard catalysts where you say, hold on, we got one stock here and then we have two or more stocks down the line, and actually these two or more stocks are valued differently because they're different industries, they value different peer groups, and that could be some real breakout value. And we work on the basis of "the sum of the parts is greater than the whole." So when these things do break up, that's that. But yeah, spinoffs certainly have a lot of advantages over IPOs, as I said.

They're just not sold to you. And they're the first investments, like I say, particularly relevant now with people scratching their head and where to look, of the first things to be sold in a downturn. They're misunderstood. There's little to no coverage. Our research shows over one year, they move to market about 10.5%. And another one that's an interesting one is around there's a two-year tax for spinoffs that when they spun off you're not allowed to – well they can be approached, but they require us to pay the tax.

Now that two-year rule is very, very interesting because what we know is in our study – and again, we'll have the full results of the updated study in a month – 35% of those spinoffs are acquired around that two-year time frame because they're very, very focused businesses and people like them. And sectors there have included – the best sectors, the most outperformers have included materials, consumer, tech and industrial. So that's what we kind of look at in the spinoff space. But here's the rub on this, right? It's like everybody wants everything for nothing, right?

Everyone wants to tell you, you know what? Apple will come out with some new phones, which they are I believe, or some new air pods and they're going to be great and we better buy ahead of that. You know what? It's again efficient market theory. Everybody knows that. Is it going to go up? Might go up, might go down. It's nothing you can put your hands on.

It's a soft catalyst event. This stuff is harder. And what we do is provide research in terms of that space and we do all the valuations for you. But do the work in terms of this and you'll get results out of it. You know, it's not easy in this market. It's totally not easy for me as well. But I know where to look.

We know where to look. Our clients know where to look for value in this sort of market. So I just want to highlight spinoffs really have a hard catalyst event that people should look for.

Dan Ferris: That's actually a great point because we used phrases like corporate events or whatever, coming out with a new iPhone is not the kind of event that we're talking about. [Laughs] Spinning off an entire other company, that's a hard event. That's actually a great distinction.

Jim Osman: And I'll mention one thing. I remember what you asked me now. I kind of get carried away sometimes, but I do listen to you.

Dan Ferris: That's all right. That's all right, Jim. Get carried away. That's why we brought you here.

[Laughter]

Jim Osman: You said to me, what's The Edge mean or something? And I said there's a couple of things in this market. You need to spot what the market isn't looking at. And like I say, spinoffs are a great place to spot. So you need to not only have an analytical edge – that's the first spin, right? Everyone's going to come to – everybody can pick stocks, right?

More people pick stocks than you think. Everybody's quite good at it. What they are bad at is managing the risk because they don't start with risk, and that's what you should always start with is risk, but they fail in their emotion, OK? The market's going bad. Oh, I'm selling. Macro stuff comes in.

Got to sell it. Oh, macro stuff's great now. Got to buy. You know, that'll kill you at the end of the day. So that's what hurts people.

The second part is the behavioral edge. Now not many people talk about the behavioral edge, but what it is essentially is it's into two parts. Now you need to firstly establish your analytical edge, right? We get that. Cheap isn't one of them. You know, everything is cheap.

What are you seeing now down the line that the masses are not, OK? Assuming your 80/20 theory, you've got to be part of the 20% to beat the market in this sort of environment. So establish the behavioral bias. What is your behavioral edge? Establish the behavioral bias for or against the name in the market, right?

Does everybody hate it? Does everybody love it? You've got to go against that. You've got to be a bit of a contrarian as well. Be aware of these and use that to your advantage. And also look at your own behavioral biases, you know?

People say, "Oh yeah, you know what? Amazon is great. Always liked Amazon. It's the best thing ever." Well is that you speaking or do the numbers say that? So like I say, you need to break it down into your analytical edge and your behavioral edge. Once you got those in place and you separate the emotion and you've got a good place to dig, now we're talking.

Now that's when we look for good ideas, right? Now we'll know about the numbers. Now I want to see what's going to go on down the line. Now I want to start with risk. Now I want to see my downside versus my upside.

And we do a lot of that really in terms of our analysis. So I just wanted to fill that in because I know you asked me that, but that's how I look at the world, certainly in this environment, where you've just got to be better than buying stuff that's cheap because it'll be 10% cheaper tomorrow.

Dan Ferris: Right. Yeah, you are – I guess I feel like you're describing you need to have the right analytical approach, right behavioral approach, and it also helps to fish in a well-stocked pond that other people aren't fishing in. Yeah.

Jim Osman: Absolutely. And you and me had this conversation, right? It's like not enough people are made aware of this space, which essentially is the gold's down there. But if you don't want to do the work and you're not digging, well you're not going to get it, right?

Dan Ferris: Right.

Jim Osman: No one's going to come along in this market and give you the golden stuff, right? Stop kidding yourself. Get out of there, do some work, employ someone to do the work, and you'll get a return, you know? That's the whole game. It was too easy the last couple of years, and I think a lot of those people have come to the market who thought they could give up work and do stock training for a living, and have gone back to work, right?

So, you know, you don't want to lose money. It's incredibly difficult to make money, and that's what people never say. It's incredibly difficult to make a return, but just don't lose it. Manage your risk. One of these characteristics of special situations in my view over the years is the fact they give you a natural downside protection in terms of the event, and that's very important.

Dan Ferris: Right. Yeah, right now that should be like hugely appealing to everyone within the sound of our voice. You know, a catalyst that moves the stock other than Jerome Powell giving a speech at some conference or something, right?

Jim Osman: Yeah. I mean, look, investors also have to analyze what they do right more than they do wrong and always promoting don't go too far down the line there, but you should be looking like "Did I buy on Mr. Powell's coming up speech, or did I buy on Apple iPhone coming up?" Never, ever do it on news. Never. You'll long term be a loser. Do it on hard events, do it on numbers. Ignore the wider market.

Give yourself – identify the risk first and then the P&L second. Start with risk. Always start with risk. What is my downturn? How much can I lose? That's what people start – and that's what most people don't do. They say, "Oh, we could get great upside."

Well what if that doesn't happen? Where are you now? And that's the problem with a lot of people... for losing money.

Dan Ferris: Yeah, yeah. Everybody was all about all the money they could make until they start losing it and now they're terrified and running for the exits. So Jim, I think we've arrived at the moment that I know a lot of people are waiting for. You said you had what, three ideas to share?

Jim Osman: Yeah. So we have sort of 30 to 40 spins a year, Dan, of decent market size. There's a lot of small ones, and we don't get involved in too many small ones because of the liquidity issues, but there's three names that your listeners would've heard of and they can go away or even come to us. We do a small, light product for the small investor as well, but they can experience what it is to look at these events. Now the first one, they're all going to know this one.

It's General Electric, right? General Electric, in my view, and I wrote an article in another resource, a free resource if your investors just want to log onto my Forbes page as well, "Jim Osman – Forbes," and they'll see stuff like – GE is one of those ones where every single American got forced into it. This is GE. You won't go wrong. It's like an IBM.

If you buy IBM you won't go wrong. You know what? When Immelt came along – it was great when Welch was there, it was great in the '80s. That was the thing to do. What he did was perfect in the '80s, and then he handed the reins over to Immelt, and Immelt just let it go and actually so much – if you saw my article on this, there's a scathing attack on GE. He's absolutely destroyed value, and it took a lot of money from the firm as well and just destroyed the company. But what it's left with, it's left with a lot of regular investors still believing in GE because that's what they were brought up to do, and it isn't quite what it was.

But what it is doing is it's breaking up into three parts. Now some people might not even notice, and it's breaking up into health care Q1, 2, 3, energy Q1, 2, 4, and it's kind of left with the aviation business. So all that multiconglomerate company that people grew up with, and it's spun off a few bits before then as well recently, it's going to break up. And that's very interesting to us because then we start adding up what's the value of the sum of the parts? What's the value of the health care?

What's the value of the energy and what's the value of the aviation? You know, people have seen stuff like this before because, you know, Honeywell is a great example. They spun off Resideo, they spun off of – you know, Resideo was another one, Raytheon was another one, Dupont was another one. These are all big companies that your listeners would know about, the spins, and some of them more successful than others. It does come down to analysis as well, right? So this is not like a sure bet.

Do not invest in every spinoff. You know, you're going to get some real howlers. Like Honeywell, for example, dumped – and this is the interesting thing in spinoffs – they dumped $1 billion of their debt on the spinoff company and Resideo – sorry, Garret Motion and Resideo, they spun off – Garret Motion came out of bankruptcy on that basis. They just dumped the whole debt. Honeywell flew and the other one went to zero.

So when the spinoffs happen it's not always a spinoff company. It could be the parent company that benefits, and Honeywell took out of Jersey and they went to, I don't know, Carolina or somewhere and the stock flew. So there's another one to look at, which is happening earlier next year, General Electric is one for your calendar. So I'm going to go through and just cross over them a little bit. There's a lot to it.

The other one is one everyone's going to know, Johnson & Johnson, you know? How many people know they're going to sell off their consumer health business? Just like Pfizer did. Pfizer actually explained that Pfizer insiders, and we analyze the insiders as well which is a very, very important part of companies because people own companies. They had a great track record of buying their own stock.

They were buying heavily in Pfizer as a spinoff and the stock flew. But it's the same sort of scenario as these other companies – Pfizer, GlaxoSmithKline separating the consumer health segment, and Johnson & Johnson is going to retain the pharma medical devices. They can be valued differently, and things like that. So that's kind of when you dig into the weeds a little bit more because these are kind of high-level stuff which people should have on their calendar, and that's going to complete in 2023. But again, you won't hear much of it until you wake up in the morning and go, hey, what's this?

It's got a weird name. You've got some odd amount of shares on it and you go, hey, it's got P&L. I don't know what it is. Just get rid of it, right? And sadly, we haven't come any way in terms of knowledge for 20, 30 years. This was the same 30 years ago, people were doing exactly the same thing.

Don't tell me the market's got more sophisticated on this. They haven't, right? So that's sadly missed education or noneducation of people I guess like me not pushing the message across, which people should learn. And I'm passionate about people learning. The last one is – you're going to know this company, Kellogg. Who knew Kellogg would spin off?

They're going to have a three-way split by the end of next year, three-way, and they're going to separate the cereals and snacks and plant food-based businesses from the fast-growing global snacks business. The world is changing, you know, and it's a great place to look, is this thing that breakfast was pushed by all the cereal companies because they just want you to eat their breakfast and cereal. We all know that cereal is probably one of the worst things to eat in the whole of the day when we thought cereal was the best thing to eat every day, right?

It's like, you know, you should be intermittent fasting till 12 o'clock is the – you know, and I'm doing it and it's great. But that's the thing. Make sure your kids eat your cereal and they'll be fine for the rest of the day. It's the most important meal of the day, right? Now we know different. So, you know, this is going to break up into three. It has a great portfolio. Everyone knows Kellogg's, Pringles, Pop-Tarts, Cheez-Its, all these sort of things, and it's going to provide significant value for shareholders. And for the longer term, you know, these are good takeover targets as well.

So I just wanted to give those three ideas. And obviously, we've got all the analysis and that to back up, but the thing about spinoffs as well, Dan, is all the information is not just given right away. It's process. Now you've got to monitor the filings and what we do and monitor the filings, monitor where the incentives are placed, who's doing the management, what sort of distribution is going to be to the existing shareholders, how those can be placed, and all that stuff, all that noise is out there and it never gets communicated until that thing lands on your Schwab account or whatever you use, and you're just going to sit here and you're just not going to know. And I want to educate investors to say, you know, what is this?

What have I got? Is it of value? Should I be buying more? I've had some questions for Barron's over the weekend. It's on there, it's called something like analyst ratings, right?

And it is exactly how things play out. I was asked why do you think of analyst ratings to buy, sell, hold, and all that sort of stuff? I've got my views on that. But more importantly, more specifically is something like GE, I know one of the analysts said, "You know, what, Jim? After the breakup, I won't be covering GE anymore because it's not what I do."

So you get a natural dislocation with the analysts to say, "Well, I was covering cereals, I was covering health care, I was covering GE, but you know what? They're all different businesses and I don't cover it anymore." So then it drops out, it drops out of the whole universe of analysts, and we're now acting analysts again on the street. So again, these stocks are orphans.

They've got no one to look after them, yet they were big companies, and you're seeing it and going, "Well hold on a second. I don't know what this is. I'm going to sell it." And people like me are waiting for that opportunity because I like cheap stocks that no one wants or likes to look at, and that's where I grab my value. So I just want to encourage people to have a look at that space because it really is just ongoing in terms of value, and half a dozen people – or half the people on here will go it's not for me because they can't be bothered to do the work.

No one ever said that investing was easy. It's, in fact, very, very hard work. Extremely hard work. And the market has a fun way of making you think it can be easy sometimes and has a great way of following you all the time. And if you work on that basis, the market is there before you, then you probably start on the right track.

Dan Ferris: Right. Charlie Munger likes to say, "If you think investing is easy, you're stupid." I think he's probably right, yeah. [Laughs]

Jim Osman: Absolutely. There's people who make it look easy, but it isn't. So that's a real space where people can look. And like I say, I know it's difficult at the moment. My portfolio is difficult. It's under pressure, and so is everyone. And I talk to some of the biggest investors of the world and they're experiencing the same thing.

I think every now and then, just to give maybe some of the listeners a little bit of comfort, every now and then you expect to take a little bit of a hit. It's just how you manage those losses, you know? We're all going to take losses at some stage. It's how you manage them. There's no badness in just selling what you got and taking a step back and saying, you know what? Let's just have a look at this.

You know, that's not a problem. What is bad is if you just hold stuff and you carry on and you have that self-belief or opinion or confidence, which accounts for nothing really, that this one's going to come through and your investment thesis has gone to tatters. So just have a little bit of comfort really if that benefits anyone, because I do talk to a lot of big-wig people, and they're under pressure as well.

Dan Ferris: All right. Well it's good to know everybody's feeling the pressure, [laughs] not just the rest of us. So Jim, we've actually been talking for a little while here, and it's time for my final question, which you're new to the podcast so you probably maybe don't know what the final question is. But it is the same for every guest, like no matter what the topic. Sometimes we have folks from nonfinance topics every now and then. Same identical question.

Jim Osman: You're not going to ask me for money, are you?

Dan Ferris: No, I'm not going to ask you for money.

[Laughter]

It's funny because one of the guests answered by asking the listeners for money one time. It was funny. But the question is simply if you could leave our listener today with a single thought, what might that be?

Jim Osman: I probably said it in the podcast. I'd say whatever you do, start with risk, not P&L. OK? Whenever you go to look at a new position, new investment, what is my risk? What is my downside? You know, people are not – most people can pick stocks. Most people will win at stocks.

It's the downside they can't manage. It's when it goes bad that they don't cut it. It's when the investment thesis changes they don't cut it. It's when they keep believing it, they don't cut it. And that's what causes them losses.

Most people are good at picking stocks, and all these listeners are probably going to say the same thing, I can pick stocks. And tell me what they're bad at – they're bad at cutting their losses and it's because they don't start with risk, and no one's ever going to tell you that because they always talk about upside, upside, upside. What is it if it doesn't go according to plan? How are you left?

How cheap is it? And that encompasses a margin of safety. That's what Buffett talks about a lot of the times, right? His margin of safety. But people don't really understand that and they never start with that. But start with what is my downside? That is the thing I would leave everyone with, and that's the thing I have to keep telling myself and not get dragged into emotional... "Hey, it's got hundreds of upside, you've got 50... this thing could fly."

No. What is it if it doesn't happen? Where am I? Have I got the cheapest stock ever? Let me just give you one more thing, Dan, just to back that up.

KD, Kyndryl, was a stock that spun off of IBM, and we had to shorten it. I know you can't stand to do shorts, but institutional people do, but dropped from $21 to $9 or $8. You know, I was buying that [inaudible] times earnings, and I thought, it's not great business, but I think nobody hates it, one, they've all sold out of it, two, it's good enough to get a good 20%, 30% pop, and it's up there again. So, you know, you've got to think about what is your risk, what is your downside, what can it go to?

Yeah, sure, it can go to zero. I get it. Has it allowed me to – you know, what's the odds of it? Probably pretty small. So that's what I want to leave you with – start with risk, not P&L.

Dan Ferris: Excellent. We may have heard that from other veteran investors who have been around the block and know what they're doing. That's actually a good piece of wisdom for listeners. Thanks for that, and thanks for being here, Jim.

Jim Osman: Fantastic, Dan.

Dan Ferris: I really enjoyed talking to you.

Jim Osman: Thank you, Dan. Speak to you soon.

Dan Ferris: Yeah, yeah. Hopefully we'll get back in touch maybe in six or 12 months and see how you're doing.

Jim Osman: Absolutely. It would be a pleasure.

Dan Ferris: Great. Thanks so much, Jim.

Jim Osman: Cheers. Bye-bye.

Dan Ferris: Bye-bye.

That was a really good discussion. I hope you enjoyed it because it's a really special sort of niche area of the market, and right now I would think is the time when you really want to know a lot more about it. And you can find more about Jim at his website EdgeCGroup.com, E-D-G-E-C-G-R-O-U-P dot com, and he's got some good stuff there. I love when I find someone who has a completely different strategy from most of the stuff that we talk about and still lines up with the core wisdom that everybody – like value investors and momentum growth, traders, everybody and Jim, you know, special situations guy, they all say watch your downside, know your risk first, worry about your upside later or not at all.

Just worry – cover your downside. The rest takes care of itself. You know, I love hearing that mostly because it's kind of my job to find different ways to tell you that because it's so important, and what better kind of different way to tell you that than to just get all these phenomenal investors on here and have them all saying it. And you heard I don't prompt them or anything, right? Pretty cool, pretty cool.

All right. Can't wait – I almost can't wait to talk to him again, you know, in six or 12 months. I think that was a really interesting discussion into an area that I don't even know if we've talked about it once on this show. OK, great. Let's take a look at the mailbag then. Let's do it right now.

One of the most successful entrepreneurs in America over the past 50 years is going public with his fourth and final prediction about a scenario he calls America's Nightmare Winter. Whoa. You've probably never heard of Bill Bonner, but in addition to owning an interest in businesses all over the globe, he also owns more than 100,000 acres with massive properties in South America, Central America, and the U.S., plus three large properties in Europe. And I've been to one of them. It's gorgeous, gorgeous chateau.

And I've known Bill for many, many years. He hired me into this business. And he says we're about to enter a very strange period in America which could result in the most difficult times we've seen in many, many years, and he's made three similar predictions in this 50-plus year career, and each time it proved to be exactly right, although he was mocked each and every time. And I remember all of them. This is why I strongly encourage you to read about Bonner's fourth and final prediction totally free today.

It's all spelled out in a free report that we've put together called America's Nightmare Winter. Get the facts yourself. Go to NightmareWinterScenario.com to get your free copy of this report. Even if he's only partially right it'll dramatically affect you and your money. So again, go to NightmareWinterScenario for this free report.

In the mailbag each week, you and I have an honest conversation about investing or whatever is on your mind. Send questions, comments, and politely worded criticisms to [email protected]. I read as many emails as time allows and I respond to as many as possible. You can also call our listener feedback line, 800-381-2357. Tell us what's on your mind and hear your voice on the show.

First up this week is Wade S... been a while I think since we heard from Wade S. Wade S. says, "Hi, Dan. Do you have any tips on how to judge whether a company will maintain its dividend? For example, Intel was a 4.68% dividend yield. Given the yield famine of the past few years, that seems attractive. That said, I also have been burned in the past by holding a stock during a dividend cut. Are there any balance sheet trends that correlate with dividend cuts? Thanks, Wade S."

I think the thing that correlates with dividend cuts is paying a lot more than you earn, especially than you earn in free cash flow, right? The dividends have to come out – that's cash paid out to investors. It has to come out of cash earnings. So you want to kind of make sure that they've covered the dividend with enough cash earning. You know, it should be a couple of times over, many times over. That really is the primary thing that I would do. You mentioned are there any balance sheet trends. Well certainly, you know, if a company's debt has gone up and up and up and it's maybe a kind of a cyclical business or something and there's reason to believe that the earnings will not cover the dividend at some point, then you may have a problem.

I hope that really is the answer. I don't want to dilute it with a lot of other gobbledygook. You've got to make sure the cash earnings cover the dividend and then develop a viewpoint about whether or not you think that's going to continue. Good question.

Another kind of a technical question is by Peter W. He's an Alliance member, Stansberry Alliance member. He says, "Hi, Dan. When looking at a cash flow statement, there are a number of items that imply a return of capital to investors. These include debt repayment, dividends paid, and share buybacks. How do these numbers relate to the operating and free cash flows? Thanks again. Yours truly, Peter W."

Well, so operating cash flow, like the top line of that is the bottom line of the income statement, right? That's the first thing to learn about financial statements. All three of them are interconnected, right? The things that happen in between balance sheets are earnings and cash flows. You know, they're income statement and cash flow stuff. And so then the cash flow shows those movements, right?

Changes in working capital, capital expenditures, which don't get run through the income statement, and so forth. So to get to operating cash flow, you're basically adding back – just in approximate terms, you're adding back all the noncash stuff that you took out to arrive at net income, right? So people add back – you know, they take off depreciation amortization, so you add that back, but then to get to free cash flow you subtract what they really spent in capital expenditures, and that depreciation and amortization, especially the depreciation, that represents capital expenditures on the income statement. But it's a noncash number, it's a made-up accounting plug type number.

The real number, the cash number is the one that appears on the cash flow statement, and free cash flow is just very simply operating cash flow minus capital expenditures. That's the basic definition of free cash flow, and, you know, that's how you arrive at that number. And when you get a really capital efficient business the capex line is just not that much, consistently not that much, so operating and free cash flow are very similar to one another. I believe that answers your question. How do these numbers – debt repayment, dividends paid and share buybacks.

So there's actually three sections to the cash flow statement. Those three sections are the operating cash flow section, the investing cash flow section, and the financing cash flow section. So if you look at all the operating stuff, this is where you're adding back all the noncash stuff, and then at the bottom portion of that, you get a number that's usually called something like net cash provided by operations or operations, cash flows from operations, something like that. Then you get your cash flows from investing activities like purchases and sales of long-term or short-term securities and additions to property and equipment and so forth, right?

So investments. Then you get financing activity, right? This is where you get your borrowing and your repayments of borrowings and your buybacks, right? Because you're just buying back your own stock. It's like you're repaying debt, you're repaying stocks. Same thing. And also dividend payments are in the financing section.

So it just makes it a little easier to separate these items, and then at the end of it, toward the bottom, you get the change in cash and cash equivalence, right? It's like a bank account. You start at the beginning of the month with X in cash, you pay all your bills, you pay your expenses, which would really be an operating cash flow type of thing, and then you make debt payments. You've got a mortgage, you got credit cards, whatever. That's your financing section.

And then maybe you also – you're an investor so you have an investing section too, you're buying and selling short-term, long-term securities, whatever, making additions to your property or selling property, whatever. So you've got all those same things in your real life, and the net result is at the bottom in the change in cash and cash equivalence from one period to the next. I hope this answers your questions. I'm not sure – I'm pretty sure I answered the thing about the operating of free cash flows.

But you mentioned debt repayment dividends and share buybacks, so I wanted to go through the three sections for you. Anyway, if not, write in again. You know, we can do this again. It's great stuff. And let's see.

Next this week is Aussie Stu from Down Under. Love hearing from you, Stu. Stu says, "G'day, Dan. The show is still outstanding and haven't missed an episode. Great stuff."

Thanks. And then he says, "A few questions for you. At first, are gold, silver, and the miners cyclical? They obviously have their ups and downs, but for example, other commodities seem to move based on supply and demand so they go through natural cycles like energy today. Are gold and silver based more on macro events – inflation, bear market, war, etc.? And so depending on what's happening in the world, they could stay down or up for the long term? Second has to do with position sizing and selling. Many Stansberry advisers suggest a maximum 5% maximum position size. However, if a stock appreciates considerably and, say, moves to 10% of your portfolio, some advisers suggest selling a portion. Wouldn't that then reduce the effect of compounding your returns? I'd like to hear your thoughts about this. Thanks, Dan. Have a great week. Aussie Stu."

Stu, second question first. Some people do advocate this. I don't. Look, if you've got a great position and it's doing great – like if you have, you know, Berkshire Hathaway and you start out with 5%, and it eventually becomes 10% to 15% or whatever it is, do you need to sell it to get it back to 5%? That doesn't make sense to me.

Having said that, there are professional strategies that do this. They rebalance once a year. So, you know, you've got to decide for yourself what kind of an investor you are, but I don't know. If you're in the business of doing bottom-up analysis on great companies, and you want to buy a great business and hold it for the long-term, I don't see where the rebalancing comes in. Maybe if you're in a bubble and everything's gone up and everything's sort of out of sight and you know everything's eventually going to correct, man, I don't know, maybe.

Even then, hold onto the great ones. So the first question was "Are gold and silver and the miners cyclical?" You bet your sweet bippy, they used to say on an old TV show. Yeah, yeah. They are way cyclical. Super cyclical. And yes, gold does have this sort of macro monetary aspect to it.

Silver's a different animal. Silver is mostly mined as a byproduct of other things... you know, copper, lead, zinc, etc. So that's a whole different animal. If you look at the long-term charts you can see what's going on. Gold is kind of – it's cyclical, but it's mostly up and to the right because the money printing situation is not going to ever change. You know, it'll be cyclical, but it won't change over the long term.

I personally think gold is a long-term holding. Gold mining stocks? No, they're highly cyclical. They're a cyclical-type holding. I think that you should be buying them now and holding them for several years, but eventually you will have to sell them and – you know, I'll sell my gold mining stocks, I'll probably never sell my gold. Same with silver.

I'll sell the stocks, I probably won't sell the metal. But silver is spikier. I've noticed this just on a long-term chart of spot silver prices. You see it kind of almost goes sideways and then it has these huge spikes, so selling into the spikes is a reasonable strategy. As far as – you're asking about basically the role of macro events. That was part of your question.

Yeah. Certainly for gold, right? People buy gold as a safe haven. And there's a theory out there called the milkshake theory where folks are saying, "Well look, we think that the dollar is going to suck the liquidity out of foreign markets and they're going to need more and more dollars, so they're going to inflate their own currencies and the safe haven is going to be basically everything in the U.S. and gold." The dollar, gold, and even U.S. stocks.

So that would be a good scenario for gold that you wouldn't expect, right? And right now we do have the dollar at like $1.10, the DXY index, so I think the milkshake theory is looking pretty good. But that's off the point. The point is, yes, macro events influence gold, and I think that's why you hold gold because the macro can get really out of control. Governments can and will get out of control, and I think we're there with a $9 trillion Federal Reserve balance sheet, trillion-dollar budget deficits and politicians saying spend, spend, spend.

They've lost all sight of debts and deficits, right? Tens of trillions of dollars of debt. It's all out of hand. Hold your gold. Good question though, Stu.

Next up and last this week is Mark K. And Mark K. says, "Hi, Dan. I appreciate your insights and passion toward broadening ways we may think about managing portfolios. As you've mentioned time and time again, you have a bearish outlook on the markets for many reasons to which I do not disagree. One of the many drivers of the current negative outlook has to do with inflation and the manner in which inflation is being handled by our Federal Reserve and U.S. government, to which you and I would prefer that these two entities do much, much less handling. Inflation currently seems to be heavily driven by the MMT-like policies. I would appreciate your thoughts pertaining to the effects of the heavy money printing that has occurred, especially since early 2020. It seems difficult, or more accurately confusing, to have a near-term bearish outlook – which I do when we consider the delayed effect of so much money, an unfathomable amount having been printed and not yet fully appreciated and cycled and multiplied throughout the economy. Anyway, thanks again. I'm an Alliance member and fan of the work done by you, your guests, and the entire Stansberry team. Be well, Mark K."

Thanks, Mark. So yeah, the argument here is that if the money gets lent and spent then we get what people associate with inflation as rapid, or frenzied might be a better word, economic growth, nominal economic growth. So that could mean the stock market would be going up too, so there's a disconnect. I think the disconnect is that inflation hurts everybody and it hurts every business. Just look at like the P/E ratio of the S&P 500 and take it back as far as you can get it, and you'll notice something.

Like it's under about 15 consistently during the highly inflationary 1970s, and it's 15 or better most of the rest of the time. And I think that is because it hurts all businesses. It just hurts everybody, right? If you have a business that does 30% returns on capital – low-capital-expenditure, efficient business. And inflation's 10%, well that 30% became 20%, right? Which is still nice, but it's less. So therefore, it should be discounted in the market at a lower valuation.

So that's that. And as far as the money being printed and not yet fully cycled and multiplied throughout the economy, what if it never gets that way? That's been the issue all along here. We only got inflation in the CPI when the government showed up and it kind of became – instead of the multiplying effect throughout the banking system, the government just said, "Well, we're going to print a bunch and put it in people's bank accounts and spend it ourselves." All right.

So I don't see how we get that multiplier effect if we're in a recession. Maybe we're headed into a deeper one. There's inflation. Housing affordability is – even though housing prices have come off, the affordability is still at all-time lows. That's a big expenditure that banks are involved in... like I don't see it's happening.

There's still this depressing effect of the lack of the multiplication through the banking system, and it doesn't look like there's any reason to believe that that will change anytime soon. I hope that's a satisfying answer for you because that's all I got. It's a great question and it's something – it's like an ongoing thing to think about.

Well, that's another mailbag and that's another episode of the Stansberry Investor Hour. Hope you enjoyed it as much as I did. We provide a transcript for every episode. Just go to www.investorhour.com. Click on the episode you want. Scroll all the way down. Click on the word "transcript" and enjoy. If you like this episode and know anybody else who might like it, tell them to check it out on their podcast app or at InvestorHour.com.

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