In This Episode

Last week Dan talked about the master investing skill of accumulating capital.  But what do you do with it once you have it?

Here lies the big difference between being an investor and a speculator. And according to Dan Ferris, before you buy one more stock or bond, you really should understand how they are different. He provides a detailed definition of what investing really means, and how you can avoid being just a speculator.

He’s later joined by this week’s podcast guest, Chris Mayer. Chris likes sharing investment wisdom through books as well. His first, Invest Like a Dealmaker: Secrets From a Former Banking Insider, covers time-tested essential principles of investing. His newest book, 100 Baggers: Stocks That Return 100-to-1 and How to Find Them, teaches readers all the key characteristics of companies that return $100 for every $1 invested.

After two decades of investing, Chris developed a proprietary “CODE system” and investment strategy he used to outperform not only the S&P 500, but also legendary investors like Warren Buffett, Carl Icahn, John Paulson, and David Einhorn for ten years straight.

Chris will share with you exactly what is involved in his CODE system, and how you can use it to be a better investor.

Featured Guests

Chris Mayer
Chris Mayer
Chris learned the art of valuing companies the hard way – clocking a decade as a corporate banker while also earning his MBA. After 11 years with Agora Financial – during which he wrote two very successful research letters – Chris joined Bonner & Partners to develop a first-of-its-kind investment advisory. Launched in April 2016, Bonner Private Portfolio is the only trading service ever to be actively followed by Bill Bonner. In fact, Bill’s family trust has committed to invest $5 million in Chris’s model portfolio.

Episode Extras


4:38 Are you an investor or a speculator? Dan discusses the crucial difference between investing and speculating, and shares Ben Graham’s definition of investing.

6:11 Dan applies Graham’s three investing principles to some real-life examples, including Tesla. How does it shape up? (hint: not well) He then goes on to examine the FAANG stocks with these same criteria.

16:55 Do you know the importance of yesterday’s date, March 6, in the year 2009? 

23:01 Dan shares friend and colleague Whitney Tilson’s prediction for Tesla’s stock in 2019.

24:24 Target’s shares have surged after the company beat Wall Street’s estimates, and Dan relates it to Warren Buffett’s words of wisdom about retail…

26:05 This week’s guest is introduced: Chris Mayer. Chris started the only trading service ever to be followed by Bill Bonner, the founder of Agora. (Bonner also happens to be the guy who hired Dan off the street, back in 1997)

28:56 Chris explains his “CODE” system that he uses to find good investments and protect his downside. (C: cheap, O: owner operated, D: disclosure, E: excellent financial condition)

30:35 Chris shares the first question he asks himself before buying any stock…

35:11 Market cycles play an important role in value investing. Chris discusses how he utilizes cycles in his CODE system. 

37:25 Dan and Chris discuss why he’s a “bottoms-up” investor.

39:15 Chris shares a stock name that fits the bill for all his investment criteria. 

48:16 “Investing is a people business.” Chris explains what he means by that, and how you can use the philosophy to help you pick winning investments.


To follow Dan’s most recent work at Extreme Value, click here.


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

Dan Ferris: Hello, and welcome to another episode of the Stansberry Investor Hour. I'm your, host Dan Ferris. I’m the editor of Extreme Value, a value investing newsletter published by Stansberry Research. We have a great show lined up for you today, so let's just get right into it. OK. So it's time, of course, for the Weekly Rant. Now, last week in the rant I said saving money is the master skill for investors, right? I said it's a negative skill. It's what you don't do, what you don't spend that counts.

And this week I want to read to you because last week I remember I said this whole business about a negative skill was something I learned from Nassim Taleb, the author of The Black Swan and Fooled by Randomness and Antifragile and Skin in the Game. He also wrote another book called The Bed of Procrustes: Philosophical and Practical Aphorisms. And it's a great little book, and it has a whole chapter called "Epistemology" and subtractive knowledge. So subtractive knowledge, of course, is this idea that learning is about eliminating error. It's that negative thing that we talked about. And I just want to read you a really, really great quote that kind of sums up what I meant, he says, "Most people think intelligence is about noticing things that are relevant, detecting patterns. In a complex world, intelligence consists in ignoring things that are irrelevant." "Avoiding false patterns not being fooled by randomness," I think he might even say. So that's what I was talking about last week. This week, I want to go a step further and talk about what you do after you accumulate capital.

So this week's rant is really about the difference between investment and speculation – that's what we're going to talk about. So those are the two basic types of financial activity. Once you build up capital, what are you going to do with it, man? You've got to do something. If you just let it sit there, it's probably going to lose purchasing power over time, so you have to do something. And of course I would say the "something" you have to do is avoid all the somethings that you shouldn't do, and that will leave you with a few great ideas. So if you don't really understand the difference between speculation and investing or if you haven't spent time thinking about this, I would suggest before you buy another stock bond futures contract ETF anything that you had better learn the difference between speculation and investment.

And, in fact, I bet most people that think that call themselves investors – I bet you most of them are speculators, and that's really bad because it means that you're taking a lot more risk then you think you're taking and your results overtime will come to reflect that. And if you get lucky in the beginning, that's even worse because you think you've got it nailed. And in the end, you wind up losing because the bad trades always come back to get you and the weak strategy always comes back to get you. And you'll lose money instead of making it. You'll destroy capital instead of protecting it. We want to help you make it we want to help you protect it.

So let's look at a quick definition of investing verses speculation. This is from Security Analysis by Ben Graham... like the bible of – really not just the bible of value investing, but the bible of security analysis as we have come to know it. It was published in 1934 the first time. There are six editions. Graham says well he spends a whole chapter actually talking about the difference between investment and speculation, it's that important, OK? And he acknowledges all the difficulties of making a distinction once you really start trying to nail it down. But then he arrives at the following definition: "An investment operation is one which upon thorough analysis promises safety of principle and a satisfactory return. Operations not meeting these requirements are speculative." Now, you notice a couple of things right away. He's not saying speculation is bad. Speculation can be done well. I'm not a value dogmatist.

There's more than one way to skin a cat, but notice something else – there's three things here: thorough analysis, safety of principle, satisfactory return. Safety of principle is really the only truly objective one right your principle is like if you buy a bond and you buy a $10,000 bond, $10,000 is your principle and whatever interest rate you get is the interest that you earn. Well it's the same with all investing – your principle is whatever you put in and your return is whatever you get out of it. But even that objective criteria upon closer inspection, that safety of principle that kind of gives way, how safe? How safe is safe? How safe is safe enough? Eh, uh, I don't know.

So it's all subjective and it requires your judgment. So with these three items in mind, let's stop being abstract and let's just take a bunch of examples and see what we can see about them. We'll take the first one – Tesla. And my question for you, dear listener, is this, is it even possible to be an investor, to make an investment in Tesla shares? Let's see, what are our three things for investment thorough analysis? Check – you can do a thorough analysis on Tesla. Safety of principle and satisfactory return. OK, well we run into a problem there, don't we? Why do we run into a problem with safety of principle and satisfactory return of Tesla? Here is the problem – it's a brand-new company still relatively new. It doesn't make money it burns cash. The business model has yet to be proven.

So you don't really know what you're getting with Tesla do you? You don't know. It's just a pure speculation, any way you look at it. In my opinion, if you disagree, write in at [email protected] But I would say that an example of Tesla it is at this stage of the game impossible to make an investment you can only be speculating if you own Tesla shares. Next example – other end of the spectrum – Berkshire Hathaway. Is it possible to do thorough analysis and get safety of principle and a satisfactory return? I think it is. You can definitely do thorough analysis. They of course report – they send out this annual letter that's one of the best annual letters of any public company. They tell you how to think about the value of the business. How to think about the intrinsic value and they tell you their philosophy and a bit about their process, the investments they make, and how they make them.

And they generally do a better job at running a public company than most people. And you can get safety of principle and satisfactory return because it generates a pretty regular stream of cash flow, of free cash flow in excess of all expenses and taxes and capital requirements to keep the business running and growing. So I would say that it is possible to make an investment in Berkshire Hathaway. Can you speculate in Berkshire Hathaway? Well, sure you can. You can place a bet on the stock going up over some period of time, you can say I think it's going to go up 10% – boom, I'm going to buy it. And if it doesn't go up 10% during that time, maybe you're flat or maybe you made less than 10% or maybe you lost 10% or something.

Let's move on to a couple more examples. How about like Amazon – the "FAANG" stocks: Facebook, Amazon, Apple, Google – Netflix is one of the FAANG stocks, but I'm going to leave that one out. Facebook, Amazon, Apple, Google. Is it possible to invest? Well from my previous example of Berkshire Hathaway yeah it sure is because they make cash profits. So you can figure out at least you can do some basic work to figure out if you think this cashflow stream is durable and if you think the business model is going to be here in five or 10 years or more and if you think they're going to maintain their margins and all those other decisions you have to make. It is possible to invest? Now, with Amazon it tends to trade at 40 or 50 times all the profit it's ever made in its entire history. So that's another question. Is it possible for an investment in Amazon to take place at this valuation? For me it's not, for you it might be. It's subjective right.

More examples... How about Kraft Heinz – ticker symbol KHC, Kraft Heinz. So you know Kraft cheeses and things and Heinz ketchup and all of that. Is it possible to make an investment in this? Well, Warren Buffett owns 27% of the company. So I'm going to say yes. But for me, it's extremely difficult to think about investing in this because – and we'll cover this in what's new today in the What's New segment a little later on, but that industry is under assault. Technology has made things a lot different – and I talked about this before... Just one basic thing with consumer package-goods companies – and I think the same thing applies to AB InBev and other companies – advertising is not scarce like it used to be. It used to be that you could reach a huge audience because everybody was plugged into their TV every night.

Things are different now. People don't watch – they don't necessarily watch TV on TV – they can get all kinds of stuff online. You can watch YouTube, for goodness' sake. So the margins in that industry are going to come down because you can't have that intangible brand power the way you used to. It's different and I would say it's possible to invest in KHC. It's had regular cash flows over time, but there's something in that industry that makes it really super difficult. And I'm not even sure that I could say that it's possible for me to make a real true investment in that, not at current valuations. I think it has to come down a long way because of the destruction happening in consumer package goods. What about publicly traded banks?

They're not investable to me, and I'll tell you why... You can speculate on all this stuff, but publicly traded banks – most of them – the overwhelming majority of them are not investable because the loans are made and underwritten in a black box. They don't really tell me enough about what they're doing. They tell me what they've done they tell you the percentage of loans that aren't performing and all that things but that's all historical. I need to understand what type of loans are being made. Now, I suppose if you really wanted to you could kind of tail their loan officers around and find out who they're lending money to and you can get a general idea. Some of them will tell you a general idea – well some of them are loans to they're mortgage loans for homes, they're business loans, auto loans whatever they are.

They'll give you some information, but by and large I have found that the underwriting is just too much in a black box for most publicly traded banks to be investable for me. What about sovereign bond trading and negative yields? Sovereign bonds – the debt of many of the biggest and most credit-worthy countries in the world, countries like Switzerland and Germany and Japan – trading at negative yields. So if you buy them today, you're guaranteed to lose money. That doesn't meet the criteria, does it, because your safety of principle is not there. You can do lots of thorough analysis, but you can't get safety of principle and you can't get anything like an adequate returns. Sovereign bonds are speculative instruments. I would say they're toxic waste when they're trading at negative yields.

What about bitcoin. Can you invest in bitcoin? I frankly have no idea. There's no cash flow associated with it. It's just an asset that kind of gets traded – it's just like a commodity that gets traded. Can you invest in a bushel of wheat? I don't know, you can bet on the price movement but can you ever get safety of principle? Can you ever do enough thorough analysis on bitcoin to get safety of principle and an adequate return? No. It can only be a speculation. What about physical gold? You buy a bar of gold, can you get safety of principle? I think over the long term you've actually done OK with that and you preserve some purchasing power. But you might not get an adequate return. You can do thorough analysis, I suppose, on gold... but an adequate return satisfactory return? I don't think so. I think when you're buying physical gold the best way to buy it is the belief that it provides disaster insurance. It's never an investment, per se. You see, I hope you see where we're getting here. Investment is a very specific thing and it's probably a much smaller subset of anything in the publicly traded markets or anywhere else that you ever thought. What about income-producing real estate? Providing you're getting enough yield off of it and you do enough thorough analysis you can get safety of principle, I believe, and you can get it because you can insure real estate, safety of principle, and you can buy it at a price that will get you a satisfactory return.

So I hope these examples and this idea that speculation is different from investment means something to you, because you need to know every time you put money into anything, any stock, bond, future option, anything – you had better understand whether or not you are investing and have safety of principle and an adequate return or whether you're speculating and if you're speculating that's OK as long as you understand the risk of what you're doing. All right, that's this week's rant.

Maybe you agree, maybe you disagree, maybe you think I'm all wet, maybe you think I'm a complete idiot. If you think I'm a complete idiot – and you write in what am I going to do? I'm going to delete your e-mail. But write in at [email protected] that's the rant. All right, let's get on to the What's New segment. Let's find out what's new in the world today. And the first thing that's new is the date. You know what today is? Well today is actually March 7, 2019 but yesterday was March 6, 2019. March 6 – I hope that's ringing some bells. March 6 was the bottom in 2009. That was the bottom of the financial crisis – with the S&P 500 down 58%, as I recall. And it bottomed out at 666. 666, promoting all matter of speculation into divine retribution for all the bizarre financial activity that proceeded that moment. 2009 was the last year I recommended stocks at a pace of at least one per month.

And in 2012, I think we recommended three new long positions and 2015 two new long positions. It's been a horrendous decade for value investors. But I think it's about to be a really good one over the next 10 years. So fingers crossed. Ten years off the bottom. It's horrendous for value investors – all kind of speculative nonsense has taken place. Equity evaluations are near their highest levels in history, which were reached back in September 2018 and we're just within a few percent of that once again. So you know we'll see how all this works out. It's usually not good, but I still maintain that you should buy value when and where you find it. OK here's another interesting bit of news. This there's an article in something called

And this was forwarded to me by a friendly colleague Whitney Tilson. And it's all about four pieces of advice for – it's called  –Enrique Abeyta has four pieces of advice for Jorge Paulo Lemann. Jorge Paulo Lemann is the head of a company called 3G, this is the company that has taken over AB InBev and Kraft Heinz and you know it levered them up and cut costs and did all kinds of things. And not too long ago, Jorge Lemann came out and said he's terrified of what's happening in these industries he never anticipated. He thought these would be wonderful businesses forever. And of course, as we discussed in the Weekly Rant, Kraft Heinz and AB InBev are under attack they're being disrupted in an age of technology where advertising is not cheap. And you can do all kinds of things that you couldn't do before and their business models are under attack. But this article in Brazil journal has four pieces of advice for Jorge Paulo Leman who controls these big companies. Piece of advice No. 1 is: you're screwed, so accept it. No. 2: He says to create a specific-purpose vehicle. Apparently this is some sort of accounting or legal convention that would set aside some amount of capital legally from his other firm. And he said to create a specific-purpose vehicle and bet on the downfall of your competitor stocks – at least take some advantage. In other words, you should be short all the stuff that you're currently long in a big fat levered way.

No. 3: Create a $1 million venture fund and embrace disruption radically. The next $20 billion brand will come out of there. And I believe that could be true because these guys – they've made a little mistake or a giant mistake but a little mistake with a lot of money. But they know brands and they know and they're very good businessmen at 3G, and that's actually a really good piece of advice. No. 4: Finally start selling your assets. Transfer your problems to others. And this guy Abeyta, Enrique Abeyta, I saw him give a presentation last year it was our friend and colleague Whitney Tilson held a short-selling conference in New York and I went up there. And Abeyta stood in front of the audience and said you should short Kraft Heinz. Anheuser-Busch and Disney he added to the list. I'm not sure if I agree with that one, but definitely the other two. He said "I would be short all three of these stocks in good size." The wave of digitally enabled disrupters will humble these industry giants he says. And sure enough of course Kraft Heinz was down like 28% recently in one day and AB InBev was well above $100 and now it's below. So interesting stuff. Companies to avoid, I would suggest, and a whole slew of companies consumer package goods to be careful of.

One more piece of news here, also forwarded by friend and colleague Whitney Tilson, where Whitney figures into this. OK, so Tesla had a really bad time recently. Elon Musk, the founder, came out and said they're going to close most of their stores and shift to online only sales. OK well here we are early March, February 19 he said the brick-and-mortar retail strategy was important to the company. So he changed his mind. He got new information and changed his mind. And a lot of the sales personnel didn't even find out about this decision until it was published on a public blog last week. And our friend Whitney Tilson says on Friday when some of these announcements were made, he says that was it, that was the turning point and the stock is going to finish the year out at under $100. And Whitney has had a reasonable time, I mean he called the top of bitcoin – not to the month or the week or even the day but to the hour maybe a year or something ago, a year and a couple months ago.

And so he's called – he made a couple other big calls like that. He was one of the early voices saying the financial crisis is coming and that this is going to be really bad. So like any good value investor – I've done a bit of this sort of thing successfully myself –like any good value investor, he's looking at risk and he understands at least as much as what we said in the Weekly Rant that Tesla is a pure speculation. It's an unproven business model that is struggling badly, the demand is weak for their cars, competition coming out of the woodwork, etc. And Musk is just kind of weird and he makes fraudulent or nearly fraudulent statements on Twitter. It's just not a good situation. It's not investable.

One more little item. Target shares have surged in the company because the company beat Wall Street earning's estimates. So this is – it's good for Target, the comp sales, sales at stores open for at least 12 months – what they call "comp sales" in retail – were up 5.3% from the prior year. That's a great number. They haven't had great numbers in that respect over the past couple years, but that's a great one. Digital sales surged more than 25% for the fifth year in a row but net income slid 26.5%. Here is the thing, do you remember a story Warren Buffett used to tell about retail? I think he owned a stake in a company that was based in Baltimore where I grew up once upon a time he owned a stake in E.J. Korvette I think it was – it was E.J. Korvette or Hochschild Kohn's – two big retailers that were in Baltimore when I was growing up.

And he was talking about being in that business. He said, "no matter what my competitor does I have to do it or I'm immediately irrelevant." It's just highly, highly competitive – you don't have much control over pricing. Yeah, for Target they've had some good success but this thing about the digital sales surging – well they had better surged, hadn't they, if you want to keep pace in a world dominated by Amazon. So when I see news like this I go, "yeah but things are still really tough and getting tougher all the time?" All right that's what's new.

Now it is time to talk to our guest. I'm really excited for the interview this week with our guest Chris Mayer, friend and colleague. Just note that Chris is on Skype so he might be a little Skype-sounding but this should go really well. I'm really looking forward to talking to him. So after 11 years with Agora Financial Chris Mayer joined Bonner & Partners to develop a first-of-its-kind investment advisory: the Bonner Private Portfolio. This is the only trading service ever to be actively followed by Bill Bonner. In fact, Bill's family trust is committed to invest $5 million in Chris' model portfolio and Bill Bonner was the guy that hired me way back in 1997 off the street knowing little about me. He is sort of the father of all these companies of which Stansberry Research is one under the Agora umbrella.

So Chris's latest project is called Chris Mayer's Focus. It provides an in-depth hedge-fund-quality analysis on a select group of small-cap stocks with the potential to become the next Starbucks, Walmart, or Berkshire Hathaway. Chris has been a guest on Forbes, on Fox, Fox Business, CNN radio, Russia Today TV – multiple appearances on CNBC and radio. And Chris is quite the accomplished author. His first book, Invest Like a Dealmaker: Secrets from a Former Banking Insider, covers time-tested essential principles of investing.

His newest book is called 100 Baggers: Stocks That Return 100-to-1 and How to Find Them. It teaches readers all the key characteristics of companies that return $100 for every $1 invested after two decades of investing Chris developed a proprietary CODE system. That's "CODE." And we'll get into what that means. And he used this to outperform not only the S&P 500 but also legendary investors like Warren Buffett, Carl Icahn, John Paulson, David Einhorn for 10 years straight. Chris is now the co-founder and portfolio manager of the Lockhouse Family Capital Fund. Ladies and gentlemen, please welcome – I haven't talked to him in years – my friend and colleague, Chris Mayer. Chris, welcome to the program.

Chris Mayer: Hey Dan, thanks for having me on.

Dan Ferris: Boy that was some introduction I guess you're in the right place.

Chris Mayer: It was. It's going to be hard to live up to now.

Dan Ferris: Well I know you'll do your best. It's been a while since we talked and you've been busy. So but before we go on and talk about the Woodlock House Family Capital Fund and Chris Mayer's Focus. Can you tell people about this CODE system, because I think it's quite a brilliant little screen you've developed.

Chris Mayer: Sure, let me first say that yeah, I'm working at Woodlock House Family Capital, which I guess we'll talk about in a bit, but I not longer write those newsletters there. They're in other capable hands. Actually the Focus letter continues and the private portfolio has been folded. So that's out there. So let's look at CODE. So CODE is an acronym to sum up some of the key things I look for in an investment and it's really simple. So C stands for Cheap, which we both share. Looking for stocks that we can say that we think are undervalued in some way. O is for Owner Operators, or Ownership more broadly, which means I'm looking for stocks where the people in control have skin in the game and the best way is ownership in the company itself. And D is for disclosures, which as an outside passive minority investor, I rely heavily on public disclosures. So those have to be fairly clean and a business that I can understand. And then the last thing is E is for Excellent financial condition, which just means I'm not knowingly taking on a balance sheet risk if I can help it. I'm not buying companies that have an excessive amount of debt. So in combination, these are four important things that I look for.

Dan Ferris: They all sound like sources of downside protection to me. Is that accurate?

Chris Mayer: Yes, I would say it's all very extensive. All those things are. In fact I was talking to a friend of mine the other day who manages money. And we were talking about what's the first question you ask yourself when you look at a stock, and for me it's "am I going to lose money?" That's really the first thing. I don't care owning a stock and if it doesn't go anywhere for a year or two or three, that's OK. I just want to have the odds of having what we call permanent impairment being very low. So permanent impairment being of course money that you can't get back. Prices fluctuate, they go up and down, but what are the odds of you owning something over a two- or three- or four-year period and you actually losing money on it. I want that to be as low as possible and all these four things work to protect that downside. So you're absolutely right.

Dan Ferris: Yeah, so it's almost we talked about negative action and negative advice and things in the program last week and this week, and it sounds like you have developed a system of negative advice what to avoid, because a lot of public companies don't fit the CODE. Is that right?

Chris Mayer: That's right. So that's good and bad. Obviously it works with a very good filter and it's always interesting to see – I mean there's always lots of cheap stocks out there, but there are very few cheap stocks that also then have no leverage and also have a lot of insiders. And those in particular I find being the ones that are tough to find.

Dan Ferris: Yeah, I mean your universe must be – I mean, so you obviously you must look for companies all over the world in all different markets, I assume, right?

Chris Mayer: That's right, all over the world. As a practical matter, because disclosure and all, I'm confined to the larger markets in Western Europe for example. And you know there are companies in Japan that have very good disclosures, but when I say I'm all over the world, it doesn't necessarily mean I'm investing in the Malaysian Stock Exchange or in Singapore or something like that.

Dan Ferris: I see. Now you know, Chris, we've known each other for a long time. I was wondering – you know I started in this newsletter game in 1997 and you started not too long after that, isn't that right?

Chris Mayer: That's right, I started in 2004, and you remember that year, I think it was that year where you and I took that trip to Bermuda and did a little investigation on the reinsurers.

Dan Ferris: Yeah, that was a very interesting trip. I learned that reinsurance is an extremely difficult thing to invest in.

Chris Mayer: Yeah, that's what I think we learned. We learned that and we learned that they have pretty good fish stew in Bermuda. I think that was our two main lessons from that investment trip.

Dan Ferris: Yeah, the fish stew was excellent. But those reinsurers, they don't go to Bermuda because they want everyone to know exactly what they're doing. That's the first thing we learned.

Chris Mayer: That's right.

Dan Ferris: I've also learned over the years, this is kind of an inside joke between Chris and I everybody, it seems like, Chris has done extraordinarily over the long term and I've actually done pretty well too. But when Chris and I have agreed on a particular stock look the hell out below. I'm not kidding isn't that true. It's crazy.

Chris Mayer: No, that's true. It's somehow for whatever reason – when we both like a stock it almost never works out. I don't know what it is, but it has happened it seems like an awful lot I don't know why.

Dan Ferris: Yeah, I think – I mean, realistically speaking, I think it happened like two or three times, but that was enough to just jinx the hell out of it, I guess. I remember one company – it was loaded up... what was it? Railcar America, I think it was called. Just loaded up with cash. Like, how could this possibly go wrong. Loaded up with cash, no debt, and I don't know where you exited, but I think I was down about 20% or 30% when I finally threw in the towel on that one.

Chris Mayer: Yes, that's right, I vaguely remember that one as well. And I think part of that was we had just gotten the cycle wrong and so I think it went against us. It was more money lost and we took our hits on that one.

Dan Ferris: Right, and so you mention cycles, and I'll tell you something: They've come to mean a heck of a lot to me. Where does cycles play a role in your CODE system, or just your overall investment philosophy?

Chris Mayer: Yeah, that's a good question and something I've thought a lot about as far as building this portfolio as well. And ideally we wouldn't own any of those deeply cyclical names – we would own stocks that are in great businesses that are going to go up 15% every year. But of course there aren't a lot of those. I have some portion of the portfolio where – it's a small part of the portfolio – where I’m willing to go into some of the more cyclical names. Energy right now is beat up to hell and there's some interesting things to do there. And even in shipping there is a couple of things maybe I think that are interesting there.

So I definitely pay attention to industry cycles, and when things get frothy on an industry, multiples are historically high. Or actually in some cases, when the cyclical industry is doing well, all the PEs are low. But these are things that I try to avoid as much as possible, those sorts of cyclical peaks. And again, ideally I would just rather own something like a McDonald's or a Coke. Not that I own those, but I'm just using those as examples of generally businesses that are not that cyclical and have grown well over time. And you've got to do other things. Otherwise, the big macro cycles I tend to discount more, because those are so incredibly difficult to get right as you know.

Dan Ferris: Yeah, they're crazy hard to get right. I just realized I don't think I've heard you once talk about, you know, is the stock market, the S&P 500 too expensive or is this a generally difficult – maybe you've talked about a difficult time to find bargains, but that's the closest I think (correct me if I’m wrong) to ever hearing you make what might be called macro-oriented comments. To me, I think of you as the quintessential bottom-up guy. Is that right? That's the way I've always thought of you.

Chris Mayer: I think that's fair. I made a point of that too, when I was writing my newsletters all those years, that I wouldn't do that and I wouldn't comment on the overall market or necessarily say it's expensive or cheap or whatever. And part of that is I always tell people I'm not buying the S&P 500. So the S&P 500 valuation doesn't necessarily so much. And there's a lot of interesting things about that. When people think about the S&P 500, they often think they're getting a big diversified list of companies – but as you know, the weight of returns has really been driven by a handful of stocks in the S&P 500, and I think last year there was a point where something like half of the S&P 500 return was five stocks. So most of the things I tend to invest in are not in the S&P 500. And they can even be, as we talked about before, in different markets overseas. So it's less relevant for my approach.

Dan Ferris: I don't want to let the cat out of the bag here. But maybe I'll let you if you choose to let the cat out of the bag. Is there a specific name that you kind of like lately that you kind of – it may not even be something that you're buying right now, but just a concrete example of something that fits the CODE and doesn't have these hyper-cyclical characteristics that you sort of don't like or stay away from. Is there a quintessential name that you've bought in the past or maybe even own now or have bought recently that you wish to share with us?

Chris Mayer: Yeah, I mean – so let's see. I think a good example of that might be something – let's say Interactive Brokers is a stock that I recommended in the past, owned in the past, owned presently. And that is an example of a company that fits that CODE metric or has in the past. So at least as the insider, as far as the ownership goes, Thomas Peterffy is the founder. He is no longer CEO, he recently stepped down, but he's the chairman and he owns a bunch of stock. He owns most of it, more than half.

And balance sheet has always been excellent in Interactive Brokers. This is just an online broker, so this is just a simple business. Their balance sheet has always had excess capital and no debt, and disclosures of Interactive Brokers are fantastic – among the best of any company I follow. Every month they put out metrics for their business. You can see how they're doing as far as getting customer counts and their daily revenue trades and all sorts of things. and the price at different times. So this is one where it doesn't typically look classically cheap. I think if you can pay something around 20 times earnings you're getting a good deal, because again that excess capital. And it's a really good business that has grown and grown and grown. So this is a business that generates 60%-plus profit margins.

Dan Ferris: Wow.

Chris Mayer: And net revenues last year were up more than almost 30% from the year before, so you're getting good growth very high margins, and that business should trade at that kind of multiple. And I think that's a business that you can buy and sit on, and it's not overly cyclical. I mean you might think it's cyclical because it is a broker, so when the market goes down and people lose money it could hurt Interactive Brokers. But Interactive Brokers tends to make more people money the more people trade, and when things go – when we have a lot more volatility like we've had recently, there's a lot more trading. But irrespective of that, I think long term this is a business that you can say with great confidence that it's going to be a lot bigger five years from today. And even if the multiple doesn’t change or even comes down some, it does very, very well.

Dan Ferris: Well, if you're looking out five years, I understand why you're not writing newsletters anymore. But you mentioned a higher multiple but then you said but that makes sense with the excess capital. I wonder if you can explain that for our listeners.

Chris Mayer: Sure, yeah. So I see a lot of times, different businesses people will say, "Well this one trades at let's say 20 times the earnings and compares to competitors that trade at 22 or 18 or whatever," but they often neglect the balance sheet aspect of that. So a company can have a lot of debt, in which case – and let's just say all things being equal you would probably rather pay at a higher PE for a company that's got no debt verses a company that's got a lot of debt. At least I would, because again I'm being uber defensive about that and I prefer to have companies with no debt. I don't know that I’m explaining it very well, Dan – maybe you can help a little out there too.

Dan Ferris: It's just that when – the way I think of it is in terms of enterprise value, so when you take out net cash, you get at the multiple the market is assigning to the actual business. But I think one of the interesting things here about excess capital, especially in a financial name. You see some people complaining about this that it's fallow capital – it should be you should buy back the stock or do something with it or lever up or something. But you don't seem to think they should do that at all and I agree with you.

Chris Mayer: Two things about that I will say. First, yeah, your example with enterprise value makes me think of the classic example I always use with people when I talk about this, is I'll say: Think about your house if you have a house with a mortgage on it, and think about if you were only quoted the price of the equity and said "that house is worth that" and you forgot about the mortgage. That's what people do when they're just looking at PE analysis. They're just focusing on equity and they're ignoring the other piece. And depending, that could be very, very significant.

And you know, I hear that all the time as well in fact, in a lot of times with the companies I have. Because they have excess capital and they're carrying around a little extra, they get this pressure – I don't know if it's really pressure, but yeah I could see it called pressure – from sell-side analysts and others who want them to do something with that excess cash, either pay it out or lever up somehow. And I understand why people want to do that, because obviously if you run a very tight ship that way, it tends to help your equity return but you sacrifice some safety. And for me, I'd rather give up a little of the upside and make sure that I'm in a business that's going to be around and doesn't have to raise capital at an in opportune time. And that's how I would prefer to be. And again some of this is personal taste. I know people who have done very well and they only invest in fairly leveraged equities, but that's not my game.

Dan Ferris: Nor mine, usually. And the neat thing about insisting on the O in Ownership in CODE for me: in a name like this, no one is going to get control and force them to lever up. And so you have some continuity if you trust the behavior, if you know management well enough, they have enough ownership to throw their weight around, and if they're good actors, if they're people who behave well, you could really have something that I agree would be a great investment for a very long time. It all interconnects, doesn't it?

Chris Mayer: Yeah, it all interconnects. And one thing usually about owners is they're able to take a longer-term view for exactly the reason you just said. He doesn't have to worry about his job, so he can make decisions that are good for the business long-term that may not necessarily be good for the next quarter or two. Whereas a management team that's more of a hired gun and don't have that ownership mentality aren't going to do that. It comes out in other ways too. I've obviously read a lot of research on this. I mean, companies who have higher insider ownership tend to be less levered then companies that do not have that owner.

And of course it's tougher to dislodge them, so for some people that can be a downside. You're not likely going to wake up one morning and find out Interactive Brokers has been taken over unless Peterffy OKs it. So things like hostile takeovers are less likely to happen. But over the long term – and there's a lot of research on this and it cuts various ways – you can look at insider ownership. I've seen studies that focus on just the CEO. I've seen studies that focuses more on collectively on the insiders. I've seen studies that focus more on family. There's a number of family-owned companies. Companies where a family owns a large percentage of stock. In all these cases there's outperformance against their peers.

Dan Ferris: Wow, in all those cases, that's pretty cool. It's funny – I started thinking about, we were going to talk today late last night I was kind of fading off to sleep, and I kind of thought I should just sit down and look at who owns the shares for every public company I might have an interest in. Because I agree with you. I did a little bit on the program a couple weeks ago where I said most people when they're looking at a stock, they look at recent performance. And if they're thinking about – then they'll think about the process, maybe, through which the business achieved that, and then they'll think about the philosophy behind the business... and then maybe they'll think about the people running it, whereas you ought to do it in reverse. You ought to think about the people, their philosophy of business, their process through which they execute, and then the performance which it has garnered and may garner in the future. And I feel like your system is set up to take all that in the right order.

Chris Mayer: Yeah, I always tell people investing is a people business, and I think that may be the most important thing. There are always exceptions, but over my experience in doing this over a long period of time, when you get burned – even if you got a great setup and a great stock and a management team that does something self-dealing or stupid, and those things are painful. So I think you stick with people who are winners who have a good philosophy of business that you agree with and you marry that with some of these other things, I think you just increase your odds. I mean, all of investing as you know is kind of educated guesswork. You can never know everything, and even if you did it might not help you because you couldn’t predict the future even if you could find out and know everything about a company. So there's just a lot of unknowns we deal with, and the way I look at it is I just want to try to get as many factors I can to improve my odds. And over time hopefully that will come out in the results.

Dan Ferris: So let's use this little template. I've known you for a long time and we've learned something about your philosophy. What about the process? You've talked about the CODE system but maybe tell us a little bit more about the processes you use in the Woodlock House Family Capital Fund. Are you alone? Do you have analyst working for you? Do you use Bloomberg screens? Can you give us a little more concrete feel on what Chris Mayer does every day to find these rare CODE system companies?

Chris Mayer: So yeah, I'm alone but I feel like I have a very good network and resources that I can tap into. So that was one of the good things about writing a newsletter all those years is you just meet a ton of people, so I know a lot of fellow money managers, fellow investors with similar philosophies. I can tap into the vast network of Agora and all their research capabilities all over the place. And other contacts that I've made over time, companies that I've visited so there's a long list of companies that I know something about. So I don't rely on screens as much anymore as I did before. Mostly I just read and interesting things may crop up.

I'll look for some interesting filings that come up if somebody is going to sell something, a subsidiary, or if there's a buyback or an insider buy or these are things that might prompt me to take a look at something. Or otherwise I spend most my day reading and then I still do a fair amount of travel. I'll go to conferences or visit a company or go to the annual meeting, which is something I'm looking forward to doing more of and get to know some of these companies even better. So a typical day is you read in the morning do a little research, in the afternoon I reserve for e-mails and phone calls and things like that usually. And I don't use – you mentioned a Bloomberg. I use something called Sentieo, which is similar, and I get all my data through that. I'm set up on all kinds of alerts, so anytime a company I own or follow makes any kind of filing, I get a little popup notice every day in e-mail and on my phone, so that's how I stay connected to things that are going on. That's basically the setup.

Dan Ferris: That sounds like a well-oiled machine and one guy doing it all. That's amazing and I’m suddenly jealous.

Chris Mayer: Yeah, I also think – I've thought a lot about this whether it would be good to have analyst or whether it's better to be a one-man shop, and I guess there's definite advantages to being a one-man shop. One thing is that I look at everything, so I have to do all the work myself and get to know everything pretty well. But it also suits my approach because I'm not out there trading in and out of stocks a lot. I don't need a lot of ideas. And what I've told investors in the fund is I'm looking for 10 to 20, and I think right now there are about 15. And I feel like that's enough. And that 15 comes out, most of those names came out of the Bonner private portfolio that I used to run. And then there are some names out of my personal account that I've dumped in there, and now I don't have a personal account, it's just in the fund. And so you know, then I'm just sitting and researching a thing. The way that I think about it is I only need really one, one maybe two good ideas a year and that's it. So it's not even like I'm publishing an issue every month. I don't even have to worry about that. So all I've got to do is sit around think, be patient, and wait for those one or two great ideas a year, and that's the way I'm kind of thinking about it.

Dan Ferris: That is epic. You sound like Warren Buffett. It's hard to do though, isn't it? It's hard to not do anything. How in the world do you not –

Chris Mayer: It's very hard. And you know what, I'll be honest, when I started the fund, I couldn't pull away from the computer screen for the first at least few weeks. And I knew it was bad habit. I knew I shouldn't do it, but man it was hard. So I think finally – it was because it was new I suppose. But finally now I've sort of settled in. So I don't sit there in front of my computer screen and watch every tick, but you are absolutely right that is the hard part is to feel enormous pressure to do something.

And of course as you know, investing, that's when you do very little. So I'm constantly trying to find ways to keep myself focused and thinking long term and of course this structure helps a lot. In this particular fund, Bill Bonner put in – well, he's got most of the fund assets are his money and I know he's not going to pull it out. And it's my money in there, too. So it's almost like having quasi-permanent capital I can think long term because I don't have to worry about if I have a bad quarter or two, Bill Bonner is not going to say, "Hey, I'm going to take some money out." He's a very, very patient investor himself. And he buys and hold and for keeps, and so it fits very well with the philosophy of the fund.

Dan Ferris: Yeah, fund managers – I dabbled in this back in 2007-2010 time frame, which was really brutal but I did OK considering but you quickly learn basically what you just said. You quickly learn that if you don't have an investor, a limited partner, or whatever you want to call them who understands it just about as well as you do, and understands that you're in this thing and that nothing works every year or even every two or three years, you're screwed. You're going to get a call one day that's going to ruin your business. I never got that call, but I never attracted more than $1 million, so I said maybe this is not a business for me. I mean $1 million of other people's money.

Chris Mayer: That's it. That's the difficult part. You want to make sure your partners are the people that buy into it. And I've been lucky because the outside partners we've taken have all been readers who have known me for a very long time. So I feel 100% confident and comfortable having them there, and I’m not going to get that phone call that says when things go rough. So we'll see, but so far I like it, it's exciting, and I think I've got it set up really the way I want it to. I mean, all those years when I was managing newsletters, I of course had opportunities to manage money before. I had offers but it was never the right situation, never the right structure – there was always something I didn't like about it. Either because it was a monthly, quarterly reporting type thing or the partnership wasn't quite right or I wouldn't quite be able to do what I wanted to do, and I never took it. And so it's only when Bill and I had been working together at Bonner & Partners for the last few years and this is the natural evolution of all our discussions and working together and it was only that. I mean, he was the perfect partner that really made me say, "Well this is the setup to do it."

Dan Ferris: Well, congratulations. I'm glad you found that situation. I've always been a fan of your work and I suspect I will continue to be for a long time to come. And I’m afraid we've reached the end of our time. Boy, it goes by so fast doesn't it. But Chris, let's agree to not wait another like five or 10 years or whatever it's been since we've spoken last.

Chris Mayer: That sounds good.

Dan Ferris: All right, sir. Thank you sir very much for coming in and talking with us this week. A lot of great stuff. I know everybody will really enjoy it. And we'll talk to you again soon.

Chris Mayer: Thank you, guys.

Dan Ferris: OK folks, it's time for the mailbag. And the mailbag the way I do it is a frank conversation about investing between you the listener and me your host. I don't have all the answers – I may have more questions then you do sometimes – but I want to hear your questions and comments, so just send in any questions or comments to [email protected]

So let's just take a look. We just have a few of these – I'm not going to go crazy like I did the last few weeks. The first one is from D.W. and he says, "Your opening rant on negative skills is an interesting item. I am a fine woodworker and when asked what I do I usually say, 'I take large pieces of wood and cut them up into small pieces of wood and then reassemble them back into large pieces of wood again. The trick is knowing which parts to turn into sawdust.' And I'll add that needs to be as little sawdust as possible because I hate sweeping." That is very clever. Thank you for writing in. And he continues, "If Buffett doesn't think he's paying enough taxes nothing is stopping from independently writing the treasury a check for 70% of his income or capital gains. Go for it, Warren – put your money where your mouth is." I think we may have mentioned taxes at one point and that's why D.W. included that. I agree, if he wants to complain about taxes he can always pay more.

Mailbag No. 2, I love this, this is by Allan M., thank you Allan. He starts out and says, "Dan, your show gives me a tremendously relaxed feeling. I have been working at this investing game for 30 or 40 years. I consider myself a very poor investor. The only good attribute is I have never really lost a significant amount, but I have never also made many gains, either – just too conservative. But I thank Stansberry for what may be a good education with a bit fuller awareness. Unfortunately I see no way to make anything. Anyway, it's such a relief for me to hear thoughts that align with mine that the market is substantially overvalued and the years of central bank games just seem to have set up the world economy for a super failure because the investing public seems to have confidence in such artificial intelligence and such artificial money manipulation and games.

Plus the market is up and down like crazy. I simply can't believe in the stability of the economy considering the artificial games being played, the collusion of the elite and the political absurdity. The only thing that feels comfortable to me is gold." Allan M. Well Allan, I think there is more to do than just gold and I bet you're not as poor an investor as you say. I think you're being too humble because you've managed to preserve capital and it sounds like make a little bit. And that's a lot better than enduring the catastrophic losses a lot of people took 10 years ago almost to the day back in March of 2009, when I'm sure people were selling like crazy at the bottom. So you're doing all right, buddy.

One more mailbag and then we're done. "Dan, I enjoy the show each week. I really like the last show and how good investment advice is also in the negative what not to do. This is a mantra that I actually used for my success. I never had goals or plans to be something because I knew I didn't know everything, and so didn't want to limit myself. I always did however know exactly what I didn't want, and so I just made the choices that put more distance between me and that which I don't want." That's pretty wise stuff right there. This is by Nick P. Nick P. continues, "Which leads me to my point. I really like the James Grant interview, especially how he ended with companies he didn't like. Why not put a section in Extreme Value warning readers of areas or companies to avoid, especially when you don't have any new recommendations. Thanks for everything." Nick P.

That's not a bad suggestion. We tacitly avoid things in Extreme Value just by not recommending them, and I do warn you about certain things like Facebook and most stocks being overvalued and stuff like that periodically, but you know we'll think about it. That might be. We only have two guys doing Extreme Value, so we don't want to use – we want to use our resources well, and I think searching for new ideas and warning you about risks we find is probably the best thing, and adding another feature like that might be a little bit too much time used in something that maybe isn't that great. So that's it. That's another episode of the Stansberry Investor Hour. I do want to close just by telling you that we have a special offer for you for the Extreme Value newsletter and you can get it by going to

These days, most of the time I think we're getting around $1,500 for a year of Extreme Value but this is one year for $999. And over the last 10 years we just published some results. Over the last three years things haven't been that great for us value investors. Over the last 10 years overall they've been terrible for most value investors. But for the last 10 years we've averaged 14% a year, which is pretty darn great frankly, and if you have a true long-term horizon like that and you don't mind underperforming for a few years, value investing is going to be your best strategy because it's a true long-term strategy that focuses on finding really good businesses trading at cheap prices. And with no debt and disclosure some of the things that our interview guest Chris Mayer talked about today.

And a good way to start off with Extreme Value is to take advantage of this deal and do a year for $999. is where you can find that. That's my commercial. And that's the end of the episode of Stansberry Investor Hour this week. You can listen to all of our episodes, see Show Transcripts and enter your e-mail to make sure you get all the latest updates at our website, Thanks for listening once again I'll talk to you next week. Bye.

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

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