In This Episode
In this episode, Extreme Value Editor Dan Ferris discusses teen climate change activist Greta Thunberg’s speech to the UN, and why one expert says there’s too many variables for anyone to speak on the subject with certainty.
He then gets to the other headlines – including a lawsuit on “corporate waste and unjust enrichment” against Tesla, and an important reminder about your chance to see and hear from him and some Investor Hour guests in a whole new medium.
Tickets to join Stansberry’s annual conference in Vegas next month may be officially sold out – but Dan has arranged a way for Investor Hour listeners to have the entire conference streamed to their living rooms for less than what most attendees might spend on drinks.
You can expect to hear Dan lay out what the dawning golden age of value investing will really mean for investors, explain why the tech mania in markets is already over, and most importantly of all, unveil a recommendation he believes could double in the next year.
It’s also your chance to hear from a multitude of Investor Hour guests, such as award-winning financial journalist Diana Henriques, short seller Marc Cohodes, Whitney Tilson of Empire Financial, and this week’s podcast guest, Joel Litman.
Joel is President and CEO of Valens Research, a global corporate performance and investment research and analytics firm. In the role of Chief Investment Strategist, Joel advises institutional investors in equities, corporate credit, and macroeconomic strategy. He is also a member of the Board of Directors of COL Financial Group, a leading brokerage firm in Asia. Joel has been on CNBC, quoted in Barron’s and Institutional Investor, and interviewed in Forbes.com. He has published in Harvard Business Review, is a top contributor to SeekingAlpha, and co-authored the highly-acclaimed book, DRIVEN: Business Strategy, Human Actions, and the Creation of Wealth.
After hearing his expose of common accounting gimmicks and outright deception the SEC has sanctioned, you may never view earnings reports the same way again – and you’ll want to check out his firm’s method of cutting through the spin, to judge every company on the same, apples-to-apples metrics.
NOTES & LINKS
- To get your special
investor hour discount on Joel’s work with Altimetry click here
- Don’t miss a second of the sold out Stansberry Vegas Conference click here
- To follow Dan’s most recent work at Extreme Value, click here.
Dan Ferris: Hello, everyone, and welcome to the Stansberry Investor Hour podcast. My name is Dan Ferris. I’m your host. I’m also the editor of Extreme Value published by Stansberry Research. We have a lot of stuff to cover today. Got a lot of crazy news, a lot of weird stuff in the news. And we have Joel Litman as our guest who has created this new product that I think every investor should have. I’m kind of jealous of him because he thought of it and I didn’t. And I can’t wait to get my hands on it and we’re going to help you get your hands on it too. We also have a ton of good feedback in the mailbag, some really good questions, and we’ll get to that later in the show. But right now, I want to tell you a couple things. I did an interview last week with a guy named Andrew Stotts who has this really good podcast called My Worst Investment Ever. And I want to talk about what I told him, and then I’m going to add more to the story. OK?
Now my worst investment ever happened some years ago when I was a young man, a foolish young man with more money than brains. And I was kind of figuring out what to do in life, and I was waiting tables and saving cash. I didn’t even own a car, OK? I was leading a frugal life, saving money, getting my act together. And of course I was young and full of that kind of young, stupid energy, and I wanted money. And I got something in the mail one day that kind of sent me on a wrong pathway. And it’s the irony of this is so heavy because I’m in this business today where we send people things in the mail and try to convince them to do our investment ideas, and that’s what I responded to. I forget exactly what it’s called but the guy he’s not even around anymore. His name is Ken Roberts and he’s from southern Oregon where I wound up moving some years after this episode. Very odd. And he had this whole thing about commodity training and futures trading.
If you know anything about futures trading, you know that it’s insanely complicated and difficult. And the really good people like maybe they’re right 30 or 40% of the time, and it’s just their ability to get out real quick when they’re not right that enables them to stay in the game and then when they are right they’re right in a big way and make plenty of money. But I didn’t know any of that. I didn’t know anything. I knew less than nothing. All I knew was I wanted a lot of money, and I thought financial markets were the place to get it. Sound familiar? A lot of people think that, don’t they? So I bought this guy’s product and I did all the stuff he said to do. I got a commodity trading account. Now I had $5,000 to my name in the world at that time, and I took $2,800 of it and I made an investment that is still with me today. It’s in the other room from where I’m recording right now and it’s a handmade classical guitar. And I still have it and I still play it. I will be playing it in a few weeks here at the annual Stansberry conference in Las Vegas at the VIP reception at the conference.
- So good investment, long term, still with it. The other thing I did was put $2,000 into a commodity trading account. And of course nowadays the commissions on commodity trading are a lot lower than they used to be. Back then what they call a round turn, which is like you buy or sell at the beginning of the transaction, and then you complete the transaction with the opposite maneuver. You buy at the beginning and sell at the end, or you sell at the beginning and buy at the end. And the whole round trip was called a round turn, and round turn commissions were 100 bucks back then. [Laughs] And so I had 2,000 bucks, here I had paid 100 bucks of round turn, basically $50 a trade. I mean what a horrible rip-off. And the people who took my money never should’ve taken my money, but of course this was one of the recommended brokers, of course.
Anyway. So I put this money in this account, and I’m reading all this garbage and bought this charting service and they send you these charts in the mail, and they teach you how to draw lines on them and all this stuff. [Laughs] And after six months, I turned $2,000 into $268. Yeah. Yeah, the number 268 is pretty much tattooed on my psyche for all eternity. All you have to do is say 268 and I kind of bow my head and say a silent prayer. And then when I think of things that can go wrong, I just think, "268, yeah I think this is a 268 situation." [Laughs] So not a good experience, worst thing I ever did with money. And it’s a good thing I did it early, right, because if I had done it later in life I might have had more money and I would’ve lost all of that, right? So it turned out as well as a disaster could possibly turn out, let’s just put it that way.
But of course I was young, so I didn’t learn anything, and I moved on to the next thing, which actually was my first successful investment. And I tend to be really critical of myself, but my second investment did have a little more thought put into it. And what I did was I had read this book by a guy you’ve probably heard of named Doug Casey, and it said in the book to buy – he said to buy shares in this one particular money management company, back then was called United Services, because he wanted you to get exposure to small-cap mining stocks, because he was always predicting a big run in them. And he said the best way to do it is to buy this company because they offer products that offer this exposure, right. And instead of buying the stock, I bought one of their mutual funds, the one mutual fund they had with exposure to small-cap mining stocks.
And as luck would have it, there was a little runup in gold in the mid ‘90s, so as luck would have it I stupidly kind of fell into a double. I put 1,200 bucks in this mutual fund and got a year to a year-and-a-half. I’m sorry, my memory is not great about this. I just remember the basics of it. I know it was 1,200 bucks and I know that I sold within I want to say like a penny or two of the top in this fund when gold sort of ran up a little bit there in the mid ‘90s. And it took about a year to 18 months I want to say, something like that. And I made 1,200 bucks, and of course I was young and stupid, and I thought that meant I was smart. But I kind of stayed out of securities markets for a little while and I was trying to do some more homework and learn something. So the overall outcome, maybe I wasn’t a complete idiot, right, but I certainly started out that way, didn’t I? I knew nothing. I put 2,000 bucks in a commodities future trading account. I knew nothing about that. And of course, the logical outcome of knowing nothing and putting money into it is that you lose money.
So there’s definitely some lessons that I’ve taken away from all of this, and they’re pretty good lessons. And one of those lessons came out of a book that was recommended to me by a guy who I won’t tell you his name, he’s pretty famous, but he became kind of a mentor to me. I’ve known him for 20 years. And he recommended that I get this book, The Intelligent Investor by Benjamin Graham. And you’ve heard me talk about it. I always say read chapter 20 of The Intelligent Investor. And one of the things in that book that kind of went oh, slap-you-on-the-side-of-the-head moment was at the very end of the book it says "Graham’s Four Principles of Business-Like Investing," because as it says here at the end, it says, “Investment is more intelligent when it is most business like. It is amazing to see how many capable businessmen try to operate in Wall Street with complete disregard of all the sound principles through which they have gained success in their own undertakings. Yet every corporate security may best be viewed in the first instance as an ownership interest in or a claim against a specific business enterprise. And if a person sets out to make profits from security purchase and sales, he is embarking on a business venture of his own, which must be run in accordance with accepted business principles.”
And then he says the first of his four business-like investing principles is know what you’re doing, know your business. Well I certainly didn’t do that, did I? He says don’t try to make business profits out of securities unless you know as much about security values as you would need to know about the value of merchandise that you propose to manufacture or deal in. Ladies and gentlemen, that is when the lightbulb went on for me. Stocks are businesses, the business of trading the garbage I was trading. And the thing I was trading back then is a business that only a very few people should ever be in in the first place. I was trading something called "TED Spreads." You know what they are, right? No, you don’t. Most people don’t. It’s the spread in interest rates between a three-month Treasury bill and the three-month LIBOR rates, which are paid on what they call "Euro dollars" – dollars deposited in European banks.
Now right away there’s enough layers to this thing where you’re shaking your head and going, “Boy, you really were an idiot, weren’t you, because there’s too much going on there.” And the people who should be in that business know a lot more about finance. These are people who they probably got finance PhDs and went straight to Wall Street when they were twenty-something or thirty-something years old, whatever. They did it a lot different than I did, that’s for sure. [Laughs] So know your business – that was the big first thing. And I have to say maybe I didn’t know the business of gold mining when I bought that gold mining fund. I certainly learned more about it since then, but I knew a little because I had read this book by Doug Casey. And he said, “Go read about this company,” and I did read about the company. And I read about the fund and I looked at all the stocks that were in the fund. So there was some amount of work that went into that. It wasn’t a total, blind do-what-somebody-tells-you.
I actually did what he told me, but what he told me was kind of a responsible thing to tell someone. You know, do your homework, go look at this thing, see what you think. Whereas the other thing was, “Oh, this is really easy, anybody can do it. Just follow these simple steps and you can lose 1,700 bucks in six months.” [Laughs] So know your business, that’s the first big lesson. Investing itself, no matter what you’re trading, no matter what you’re buying or selling, it is a business. And if you’re in some other business, you know what it means to know what you’re doing already, right? If you have a job of any kind, if you’re the fry guy at McDonald’s, you know all the steps to making good French fries and you probably know more about that than you do about TED spreads, let’s just say. [Laughs] OK, so know your business. That’s the first thing.
The second thing I learned about all this was the success of that second thing. The first thing in commodity futures, oh total failure. The second thing I met with success, and I have to realize, I’m sorry to say I didn’t quite realize it at the time, but you have to realize that success can be due to luck. We had Michael Mauboussin the program some weeks ago, not too long ago, and that’s one worth listening to if you didn’t listen to it. Really smart guy, one of my favorite people in finance. And he has this whole book about the difference between luck and knowing what the heck you’re doing, and you have to know that in the stock market. it’s really hard to know it, but you have to think about it and be aware of it, because otherwise you stumble into something and think hey, I’m good at this. And lots of people do it and they all get washed out in the bear markets in the corrections. So know the difference between success and luck and how you get to real success.
And finally, you know I was a young man back then, and young people are always in a hurry – they’re in a hurry to do everything. And it strikes me maybe even as I tell you that that maybe it’s even a little unfair, but I’m just going on my own experience. I was young when these things happened, because let’s face it, lots of people are in a hurry even if they’re not young. And in the stock market especially people seem to be in an especially great hurry to dump their money in there in the hope of getting a whole lot more back real quick. And that just isn't the way this works. If it’s going to work at all, if making money in markets is going to work for you at all, it’s a business. You’re going to be in it for decades, and you had better learn to survive and not do stupid things and not lose money, not lose too much of it anyway. It’s inevitable that you’re going to take some losses, because nobody is right 100%of the time. Nobody, absolutely no one.
And in fact, you can do really well and most people who’ve done really well aren’t even right necessarily like more than about 50 or 60% of the time. If you’re right 60% of the time in the stock market, you can make a ton of money, but you have to do it right. So those are my three lessons. It’s a business. Run it like a business, know it like you know a business. Know the difference between luck and really knowing what you’re doing. And be honest, look at yourself in the mirror and know whether or not you’ve been lucky. And the third thing is you don’t need to be in a hurry. You can’t be in a hurry because it just takes time. It takes time to make money in financial markets. What do we say? What did I read you from The Intelligent Investor? It’s a share in a piece of a business. Well, businesses don’t make you rich the first day or the second day or the first month or the second month. It takes time, and that’s what you own a piece of when you’re buying stocks, OK?
So that’s it for today. I’m going to leave it right there, and I’m going to leave you with that episode of my life and those lessons. I did mention the Vegas conference, and I've got to tell you something, we’re sold out. So even if you want to go, you can’t, because we sold all the tickets so you can’t get in. And it cost a couple thousand bucks – it’s expensive. Plus, you've got to fly to Vegas. You've got to get a hotel. You've got to spend a lot of money on drinks. You've got to lose half your money at the tables. It’s expensive, I want to tell you. So we did something that I’m so grateful that we did this, because this is how I attend a lot of conferences. We are going to stream the conference for you, and I’m going to give you a special website in a second that you can sign up for the streaming. And the streaming costs a lot less than attending the conference – it’s like $399 instead of thousands. And I do this with conferences I go to because I like the ability to kind of rewind. You get to rewind, and you get to go back and listen to the presentations you liked.
There’s a lot of information in a two-day conference, and there’s no way at the end of two days you can say, “Yep, got it all. I took it all in, I’m good to go.” And you can take it all in if you can go back and fill in all the holes in all the stuff you missed. And you might remember somebody had a really great idea, but you don’t quite remember what it is. OK. So the way to kind of fix that situation is to stream the event on the Internet. So we have a website called InvestorHourStreaming.com. And you go there, you pay $399, and you can listen in on all the presentations. And you can rewind and get all the ideas that you like and take notes and make sure everything is really clear in your mind. I’m pleased as punch that we’ve done this. InvestorHourStreaming.com. 399 bucks, pretty darn good deal. People like Dennis Miller, Danielle DiMartino Booth, and folks that you’ve heard on the podcast like Chris Irons, Mark Spiegel, Diana Enriquez will be there, Marc Cohodes will be there, lots of other folks too. It’s going to be a great event. lots of ideas, lots to take in. InvestorHourStreaming.com.
"What’s new?" you ask? "All kinds of stuff," I answer. The first thing, look, I don’t normally talk about this kind of stuff, OK? Just get that out of the way. But I can’t ignore this. I can’t not talk about this. So this teenager, Greta Thunberg, I think that’s how you say it, I don't know, she addressed the United Nations. [Laughs] And she’s this little 16-year-old girl who took a boat across the Atlantic Ocean, and she is a climate activist, an environmental activist. And she gave this very emotional speech, and she said, “How dare you!” And she’s accusing the current generation or the people at the U.N., you and me, who knows, of fowling the earth and ruining her childhood and ruining her life and all this stuff. And one of the quotes, when she says, “How dare you!” The quote that I got here in Bloomberg it says: “You have stolen my dreams and my childhood with your empty words. People are suffering. People are dying. Entire ecosystems are collapsing. We are at the beginning of a mass extinction, and all you can talk about is money and fairy tales of endless economic growth. How dare you!”
And she was on the verge of tears – there’s a video of this. She was on the verge of tears saying all this stuff. I don’t want to get too into it. But one thing of which I would bet real money is that little Greta, little 16-year-old Greta, has no freaking idea what she is talking about. A friend of mine is a Cornell chemist, and we mostly interact on Twitter – actually, I met him once at a conference and we interact on Twitter. But he’s a good guy. He’s a Cornell chemist, did I say that already? Cornell chemist. And I’ve asked him about this a few times, and every time he says, “You know something, it’s so unbelievably complicated I can’t even begin to express an opinion,” something like that. And he says, “I don’t think anybody in the world really has any clue about this, and I think that when they’re saying that they’re certain and they’re crystal clear.” All you have to do to attract all the nuts on Twitter is say climate, and they all come out of the woodwork. And everybody says they know something that they don’t know. I know they don’t know it, because they’re so completely certain, and this little girl is so certain.
Obviously, when you’re 16 you’re just parroting what adults have told you, right? It’s extremely rare that a 16-year-old would know anything, especially if it’s something nobody else knows about. The whole thing is ridiculous. It smacks of a propaganda move. They use children in all the big propaganda episodes in history, and I hate to say Nazi Germany because that’s the hyperbolic example everybody uses, but the Khmer Rouge sure used children, didn’t they? They pulled them right out of their homes and indoctrinated them, and it was horrible. This little girl wasn’t pulled out of her home, but somebody should’ve said, “You really have no stinking idea what you’re talking about.” Anyway, that’s that. When you don’t know, you need to say I don't know.
My friend the Cornell chemist asked I think he said eight freshmen, eight incoming freshmen, I forget the exact question, it was on Twitter. He said something like do you think that there is manmade climate change, and maybe some other variable he threw in there. And most of them said, “I really don’t have the expertise to comment on this.” One of them said "yes," one of them said "no." And one of them said, “I trust the experts.” But five of them said, “Beyond my expertise.” And that’s the right answer because learning to say I don't know, I mean that puts them in rare company, and it kind of precludes a career in politics, which is nice to see in a young person these days. So I’m going to get off of this. I don’t want to be that guy who talks about stuff like this. But it’s important for investors to be able to say, “I don't know.” Really important. Don’t form an opinion based on stuff you hear at parties and even stuff you read in newsletters. Question that stuff too, and look in and ask a question at least, if not do your own digging. So I’m going to get off of that, OK?
The next thing I've got to talk about: We work again. We talked about these guys a couple weeks ago, and now the CEO Adam Neumann has been pushed out. He’s not CEO anymore. In fact, he is now the non-executive chairman, which is a job you’re supposed to get after you’ve done a great job for 40 years or something and you don’t want to work anymore. Well, he’s not going to work anymore, but it’s not because he’s done a great job. [Laughs] So now they have two co-CEOs – the CFO and the vice chairman are taking over as co-CEOs. Another wrinkle in Mr. Neumann’s fortune is that he no longer has control of the company, because the way the shares were structured before he got all the voting rights, but that’s no longer true either. So he’s not just done – he’s out, out, out, out, out. [Laughs] And of course, there’s been all kinds of things in the news.
I even saw one thing that said there were allegations of drug use or something. I don't know if any of that’s true, but you really don’t need that to want to get rid of them, because the business is crazy. It doesn’t work. It loses a ton of money. Every company that’s ever done it has gone bust. Yes, IWG is an existent company that does this, but their U.S. unit went bankrupt back in I think 2003. So it’s just a terrible business. It doesn’t surprise me at all that he’s out as CEO. And not only is he out of CEO, because the other part of this is that their biggest investor is really unhappy. SoftBank has put almost 11 billion either invested or committed into this thing. And who knows, the IPO valuation, if it ever happens, which I doubt, would be less than SoftBank has invested. So that, right, SoftBank and WeWork and it’s all falling apart.
- So the next thing in the news is you’ve heard of Ken Griffin maybe, the guy who runs this big hedge fund called Citadel. And he’s this big billionaire, and he’s in the news every now and then paying way too much money for some fancy piece of real estate. And a headline caught my eye, and I couldn’t not share it with you because it just kind of made me throw up a little bit. It’s Wall Street Journal. “Citadel’s Griffin reaps windfall from company’s bond sale.” Then the subhead is, “Company sold $500 million in investment-grade bonds this month to fund dividend to owners.” And that’s what the story says, and it talks about his Manhattan penthouse, which he paid $238 million for. Oh yeah, and there’s a whole story, he started investing at 19 years old in his Harvard dorm room, blah, blah, blah. But I don't know, I guess it’s legal but how is this any different from some of the stuff that made me so upset with Adam Neumann?
Of course, there’s one giant difference, right? Citadel is making money for investors and WeWork is taking money from investors and lighting it on fire. I get that. I get that all day long – don’t write in and tell me I don’t get that. [Laughs] But would you do this? I don't know. I’m not a Harvard genius who started out at 19 years old and just paid $238 million for a Manhattan penthouse. But would you ever do this? Would Warren Buffettt ever do something like this? Put it that way. He’s a billionaire. Ask yourself that question about any great investor. Would they sell a bond issue and use the proceeds to just pay themselves? I don't know. And I’ve heard of other deals. I realize this isn’t the only one of these that’s ever happened. But the guy has so much money that you’d think the fees and stuff that he gets from owning the business would be enough and that he didn’t have to pull it forward in time through a bond issue.
And who bought the bonds knowing where the money was going? I guess they figured well, you know they’ve got enough to pay it back, so yeah, we’ll give him $500 million that he can go buy a jet or another penthouse with. It just strikes me as something – if somebody did that and I had a lot of money with them, I’d call them up and say, “You know I don’t care if you buy a penthouse and I don’t care if you make a lot of money on the fees that you charge me, as long as I’m doing well. But this just smells wrong.” All right, enough of that.
So this company called Thomas Cook went out of business. It’s a 170-year-old travel company, and this guy, Thomas Cook, started out in the 19th century in England. He was a Baptist missionary. And he got the travel bug, and eventually he took rich people to places like across Europe and up the Nile River and stuff and to North America and whatever. And Thomas Cook Group PLC is this company that’s evolved over 178 years. It’s an all-inclusive. You know they specialize in these travel packages and say, “It’s no-hassle travel, right? Don’t just book it, Thomas Cook it,” is the quote here in the Wall Street Journal article about it. But they’re out of business. They were forced to liquidate. And this caught my attention because my wife has been in the travel business. Yeah, people actually still do that. There are still travel agents in the world, although she’s toned it way down. It’s the biggest repatriation mission since the Battle of Dunkirk in 1940 when Britain had to rescue almost 340,000 people on the beaches of Dunkirk in France.
And now there’s a half a million people stranded around the globe because they just forced this thing straight into bankruptcy and with marooned travelers all over the place. Let’s see, actually the estimate is 150,000, so the biggest thing since Dunkirk, not bigger than Dunkirk. But it was my impression at one point I did hear the name 500,000 – maybe I got that wrong. So 150,000 then, say that’s the number. And they’re all the place and they've got to bring them home because they were forced into liquidation, and instantly like wherever you are your trip is over and you've got to come home and Thomas Cook isn't helping you out. It just seems crazy to me. My wife told me this and I said, “No.” [Laughs] And I go up to my office and I read this article and I go, “Yes, unbelievably.” And it did say in the article here more than half a million modern-day globetrotters were hit after the company entered into compulsory liquidation. So maybe the other 350,000 got home, but then they’re saying they've got to bring home 150,000 marooned travelers is what it’s looking like. Whatever it is it’s a ton of people who got stranded because they forced this thing into liquidation. Did they think about that? Did the creditors think, “There’s 150,000 people. Oh, who cares, we’re forcing them into liquidation.” It just struck me as insane.
- We’ve done a lot of news but there’s certain things that we can’t not do. [Laughs] And one of them is talk about Tesla. So just real quick, Tesla is back in the news. There’s an investor has – a shareholder has sued the company. They sued the company last year, like over a year ago, in June 2018. And the allegations were corporate waste and unjust enrichment. So unjust enrichment means just what it sounds like, somebody is getting rich unjustly off of the shareholders. And he didn’t like that, so he filed a suit. And the judge in the suit in Delaware, right? All these companies are incorporated. Lots of companies like to incorporate in Delaware. And this Delaware judge says the board is going to have to defend Elon Musk’s multibillion-dollar pay package. I don’t even know what the total package is – it’s $2.5 billion or something. Let me see here. Yeah, $2.6 billion from the 2018 proxy statement. wow. So yeah, that’s insane.
If Tesla’s market value ballooned – this is from a CNN article. If Tesla’s market value ballooned as the payment plan predicted, those stock awards could be worth nearly 56 billion, according to a public filing. Come on, nobody’s worth 56 billion just for lighting money on fire, just because the stock goes up. It’s kind of insane. So yeah, you should have to defend that in court, sucker. And obviously we’ll try to keep an eye on this and report how it comes out. It shouldn’t come out very well for Elon or the board or future characters who try this garbage with shareholder money, but you never know. All right, that’s the news. Let’s talk to Joel Litman now. I can’t wait to talk to this guy.
Looking forward to this one today because our guest is Joel Litman. Joel Litman is president and CEO of Valens Research, a global corporate performance and investment research and analytics firm. In the role of chief investment strategist, he advices institutional investors and equities, corporate credit, and macroeconomic strategy. He is also a member of the board of directors of COL Financial Group, a leading brokerage firm in Asia. Joel has been on CNBC, quoted in Barron’s and Institutional Investor, and interviewed in Forbes.com. He’s published in Harvard Business Review. He’s a top contributor to Seeking Alpha, and he coauthored the highly acclaimed book Driven: Human Strategy, Human Actions, and the Creation of Wealth. Joel Litman, welcome to the program, sir.
Joel Litman: Thank you, Dan. Thanks for having me.
Dan Ferris: You bet. Joel, the first thing I like to ask folks who are in your line of work, how old were you? When you started out, how old were you when you first got an inkling that a career in finance was for you?
Joel Litman: Yeah, it didn’t start in finance – it started in accounting. And at the time, I had no interest in being an accountant per se. I just thought that when I was studying for – I was deciding on a major in business. My mother gave me this advice, and my mom said, “Look, if you’re going to go into business, study accounting and that way nobody will ever pull the wool over your eyes, because accounting is the language of business so you need to know that language.” And it made sense. So when I started a business degree, I said, “Why don’t I focus on accounting?” And at the time, this was the late ‘80s and my first public accounting job was in 1991, late ’91. And that was a recessionary period, so looking at accounting as a very safe place to be sure I’d get a job seemed smart. It was very conservative, and I had no idea that 25, 30 years later I’d be doing nothing, but it seems like talking about accounting and what’s wrong with it. At the time, I just thought it was going to give me a base for going into some business path.
Dan Ferris: And when did accounting turn to investment strategist? When did the accountant become the investment strategist?
Joel Litman: Yeah. I moved from accounting into consulting where I was at Deloitte. And I started consulting management on the true numbers and say, “Look, if you look at the GAAP – "generally accepted accounting principal" numbers – there are all these distortions that we’ve realized because of electives, and there’s no apples-to-apples playing field around looking at earnings or P/Es.” And we realized it, so we said, “Well, let’s help companies with this.” And it was a fun job, but I was helping one company at a time, and only one. So I left and went to Credit Suisse in investment banking where they gave me the opportunity to do something similar. And in that role, I got a bit more of a microphone, I guess, to help spread the word. But at that point still with a very small I’ll say group of the users of the financial statements of the world.
Dan Ferris: Well I have to tell you learning anything at all about accounting is something that most people you know as soon as you say the word accounting [laughs] their eyes glaze over and they get bored and they’re in danger of falling asleep on you. But you got into it and you stuck with it. What is it about the basic discipline? I mean you must be a natural kind of detective, or there must be something about your personality that’s kind of special that you got so deep into it.
Joel Litman: Well this is the issue, when you get into accounting, you realize how bad it is. And unless you are a full-on hardcore accountant that’s deep into understanding the rules and if you’re reading note 47 or note 57 or note you know whatever 60, these 100-page financials, you really have no idea what the true earnings of the company are. And it’s a mass deception, if you will, to the investing public that every day on CNBC and the Wall Street Journal people are reading about here’s the company’s earnings, and that number has nothing to do with economic reality. And if you don’t have a ten-year base of accounting, how would you possibly know that? Nobody reads the notes of the financials, and I mean I say nobody, 99% of the investing public doesn’t. The top institutional investors in the world they care about this stuff. The people that are managing billions of dollars who are my clients they absolutely care about this.
But you go back to Wall Street research and it’s all about here’s the earnings number and did they hit it or not. And so it’s a nonsense number that everyone is spending time focusing on, and then they do a price-to-earnings ratio telling you that oh, this is going to tell me the valuation. Well, if the "E" is wrong, then of course the P/E is wrong, there’s no way to rely on it. And that’s when frankly it wasn’t the accounting that got exciting, it was the fact that the earnings numbers and the assets based on as-reported accounting are such nonsense, such a distance from the real numbers of the firm that we said, “Well wait a second. What if we back out all the accounting distortions, which our firm seems uniquely qualified to do because we’ll spend the time in the weeds, back out all these numbers and let’s get to the true earnings numbers and the true P/E.” And it is night and day different, night and day different, from what people see when they look and read about this stuff in the headlines.
Dan Ferris: OK. So we were bound, you know we were always headed to get to this point. In a conversation about investing with you, we’re always going to get here. And I’m sure maybe some of our listeners at least are wondering well, if accounting is the language of business and these are the people you go to – to find the truth but the numbers that they’re reporting – in your words, nonsense. How does this come about? I think there were accounting rules that led to those numbers being published.
Joel Litman: And that’s the difference, Dan. Accounting rules are so open to electives and choices that they’re not really a set of standards. In fact, it’s silly to call it a set of standards, because there is no standard. Companies are free to choose between do they want to value inventory based on the price they just paid or based on the price they first paid when the inventory entered. If you’re talking about a winemaker and they’re sitting on bottles of wine that last eight years, big difference between costing the grapes and the glass and the cork at eight years ago versus today. So the exact same company cash flow is two totally different earnings numbers. When you think about research development costs, the accountants still call R&D to this day an expense as opposed to an investment, which punishes the company for when they invest because it says, “Oh, your earnings were lower this year because you invested in R&D.” Well isn’t some of this for the future?
Joel Litman: And you say well, isn’t some of this for the future? Like when you spend in R&D, is that really for revenue this year? It’s a violation of the basic matching principle of accounting, which you’re supposed to match revenues against the expenses.
Now, internationally, under IFRS, they actually have started fixing this R&D issue but they haven’t in the United States, which makes it worse.
So now you’ve got – if I want to do a comparison of some big international pharmaceutical companies or technology companies, and I’m looking at R&D or Internet retail companies, you have an earnings number that has been calculated under as many languages as there are companies.
So I suppose it’s not that accounting isn’t a language of business. The problem is that accounting are the languages of business, and you’ve got to translate them all into one uniform language, otherwise you have no idea what anyone’s saying.
Dan Ferris: I’m sure you just shocked a lot of people, actually. I bet a lot of people don’t know just how worthless those accounting numbers are, the published, the as reported. You must have to do a ton of work, and what on earth?
If the accounting numbers are worthless, how do you ever know how to get to the right ones? There must be information somewhere that tells you that.
Joel Litman: Yeah, when the accountants do their job right, they account, meaning that’s their title. They’re not supposed to be valuing things, and so because you know, beauty is in the eye of the beholder.
Should the value of an asset be what the accountants say? Should it be what you or I say, or should it be what the strategic acquirer says when they get synergy?
So you know, it’s very difficult for an accountant to try to value things, and we would say they should stay away from it, and so in the notes to the financials, you do get details of the accounts.
You get the individual line items before you hit the earnings number, before you hit the financials, before you hit so many of these electives, and if you take the time, it is possible we’ve – you know we’ve calculated about 130 adjustments.
If you take the time, you can adjust by digging into the full financials, not just the financial statements but all the notes. You can get all the pieces to recreate one uniform accounting standard, and that’s basically what we do.
We put every company in the world on one apples to apples level playing field, across time, across piers, across industries, so that you could say here’s the earnings number that is not only representative of the company’s actual earnings, but is now comparable because we use the exact same accounting standard.
In the instance of FIFO and LIFO for the costing of inventory, the first-in, first-out, or last-in, first out, and I know this is a deep accounting term, it is easy to get them both on the same platform.
It is possible to say we want them both to be using the same costing of inventory, and it’s available in the notes, if you pull it out, but it’s not sitting there in the financial statements, and it’s definitely not in the earnings number, unless you take the time to dig it out.
Dan Ferris: That’s interesting to me because I thought I knew what FIFO and LIFO meant, but you’re telling me there’s an extra piece of work to do, to kind of make them make more sense.
Joel Litman: Well, and that’s what uniform accounting is. Yeah, I mean it’s – uniform accounting was first quoted by the great investor, Shelby Davis, who I know Porter Stansberry is a big fan of, and Shelby Davis actually wrote about this in several pieces, you know in the 1950’s, talking about the need for uniform accounting.
Because the companies that he was studying, he said they’re not following the same expense methodology. They’re not following the same costing methodology.
In fact, they’re grouping things differently. How can I compare a company against its peer when they’re doing different groupings? We need some level of uniform accounting.
50 years later, no one have done anything. There have been very, very little done. Uniform accounting is what we’ve tried to build, and what we’ve built now in our – we basically have a database of 30,000 companies around the world, and all those have been converted to uniform numbers.
Dan Ferris: And when you say we, you’re talking about Altimetry, the company you’re launching a partnership with Stansberry Research. Is that right?
Joel Litman: Yeah, that’s right. So Valens Research is the firm that we’ve been building for over 10... 11 years, and Valens has had an only an institutional client base.
I mean it’s a great one. I mean we’ve got some fantastic clients but relatively speaking, it’s a small amount of the world’s users of financials. With Stansberry, we created Altimetry to be a consumer and publishing arm, so that individuals and families can get access to the same – the same data, and the same stock ideas, the same – not just the same day, but the same minute that we release those to institutional investors.
Dan Ferris: Wow, that’s really cool. That hardly ever happens [laughter.] You know, the institutional guys are paying tons of money and leaving the little guy behind, but this kind of puts everybody on the same – on the same playing field, very unusual.
Joel Litman: Yeah, it’s interesting. When I was on the street, when I was working in Wall Street for you know just shy of a decade, the – it was amazing how all of the bulge bracket firms seemed to all be targeting the same 300 institutional investors, and anything smaller than that was sort of it’s not worth our time, it’s not worth our effort, why would we bother?
And so you get this publishing of stock recommendations that nobody on Wall Street reuses or relies on, no one in the investment world relies on those Wall Street numbers, and yet they’re publishing these recommendations which everyone knows are terrible, you know, 98%of analysts’ recommendations.
Some crazy numbers, like one, more than 90% – 85 to 90% are buys and holds, which means they’re long, the market.
Well, how is it possible that such a greater number than 50-50 can be, you know, long and less than 10% or even 10% are sells. This doesn’t make any sense. How is it possible?
And yet that’s exactly the numbers there are today. Right, and so does the public realize this? No. You know, CNBC still says "Hey, Goldman Sachs just upgraded a particular stock." Like that matters to any institutional investor. It doesn’t.
Dan Ferris: Interesting. You’d think that releasing that kind of information to the public, at this point in our history, would have the least amount of impact ever, because institutions make up so much of the market nowadays.
It’s like why even bother with all this, all this you know, sort of frivolous news releases and research reports, and stock recommendations by these Wall Street firms?
Why even bother anymore, if the big institutions aren’t using them?
Joel Litman: It does create trading flow. It does create churn, and you know if you’re just a buy and hold investor, how much does a brokerage make on you? If you just buy a stock and hold it for three years? You know, next to nothing.
They want to see trading, and so there is an absolute incentive to constantly be saying oh, I see something interesting, or oh, I’m going to back off, or I’m going to change this to a strong buy from a buyer, or now I’m reducing it to a hold.
I mean like a hold, a buy, and a strong buy are all long. You’re long in the stock, you’re long in the market. So what’s the difference, other than trying to generate attention and generate headlines?
You know, and if it creates some churn, then the bank makes some money on the trading, but long-term, do those recommendations matter? 98% of the time, you know, not at all.
Dan Ferris: Amen [laughter.] Not at all. So the first publication that you’re doing that Altimetry is doing with Stansberry is called High Alpha. Why is it called High Alpha, first of all, and what is – what do you guys do in there? What does that publication do?
Joel Litman: Yeah, it’s Alpha is the technical finance term for how much a stock has beaten the market, and so if you buy a stock, and it goes up 10%, and the market went up 10%, your Alpha is zero, and in fact, you took on a lot of risk, buying one stock, instead of just buying the market as a whole.
So when you achieve Alpha, you’re – it says you’re beating the market, and so when you think of the great Alpha generators of the world: Shelby Davis, Walter Schloss, Warren Buffett, Charlie Munger, Seth Klarman, and you look at how these guys have beaten the market, using frankly something other than GAAP numbers which they all say, you realize, OK, we have something that is how to generate High Alpha, and so we thought that’s the right name for the publication.
Because the recommendations we’re giving, and the database that we provide to our clients under the Altimetry brand and to – now to individuals and family investors, is a database that allows people to see the same numbers and we think that will help them achieve Alpha.
Because otherwise, you know, how can you – how can you possibly beat the market when you’re looking at numbers that are such low quality and uselessness, meaning the as reported GAAP, the Generally Accepted Accounting Principle earnings and assets, and debts.
Dan Ferris: Right, and so – and as you have said before, there’s 130 of these that you guys look at. 130.
Joel Litman: Yeah, Dan.
Dan Ferris: I didn’t know there were 130 numbers in all three financial statements.
Joel Litman: Yeah, it’s – when you look at the – when you look at how the financials are put together, it’s sort of like that political thing, the sausage is great, but you don’t want to see how it’s made. Same with the financials.
If you saw how the financials are put together in those three, four, five, six hundred pages that follow those three or four statements of – you know, the balance sheet, the income statement, the statement of cash flows, and you see the details that go into building those, you find that there’s over 130 adjustments that have to be made, so that those front three pages are actually on a uniform basis.
And if you don’t make that adjustment then you have no idea of – you really have no idea of earnings went up, simply because of an accounting change, or did it go up because there was a real change in the economics of a business?
Dan Ferris: Yeah, I have to say I deal with this on a fairly regular basis. IN my newsletter, people write in and they say you said company XYZ was making this much, but I’d looked at the financial statements and it said they were making this much, and then you got a – you know, you’re down a rabbit hole, trying to explain it to people.
Joel Litman: And yet, Dan, all the great investors changed the numbers, all of them, and they say it. Buffett, for instance, 2018 Q1, so in the great pilgrimage to Omaha in 2018, Buffett in the first – you know, he and Charlie Munger get on the stage for four or five hours doing Q&A, and in the first five minutes on the stage, before he took a single question, Buffett said you cannot focus on the net earnings number, because it doesn’t represent what’s really happening in my business.
And at the time, net earnings for Berkshire Hathaway showed -$1 billion for the quarter, and Buffett proceeded to go through his business and say, "In reality, we probably made about $5 billion."
It was not -$1 billion, and let me show you why, and everyone had to pay attention. This year, in 2019, first quarter, Berkshire Hathaway showed $19 billion in net income, and Buffett came out again, and again in the first – you know, it’s funny, in the first seven minutes, Buffett said, "Hey, you know, the net earnings number, the GAAP Rules," he called them "capricious."
They’re moody. They bump up and down a lot. He used the word "capricious" and he actually said in that first – I think it was like his first seven, eight minutes. He said, "It’s too bad not everybody studied accounting."
And so neither did we do -$1 billion last year, neither did we do $19 billion this year. It was something more like $5 billion, and then $5.5, and the investors had to deal with it because he was saying – and what he said was right.
There was some really – of the 130 distortions, one of these is this mark to market rule that really affects Berkshire Hathaway, and it can make that income number swing $10 billion either direction, you know, $15 billion, just on the date of posting.
And Buffett’s saying look, we don’t look at these GAAP numbers and please don’t ask me questions about them, because it doesn’t represent economic reality.
Dan Ferris: Right, so the mark to market thing you’re talking about is they can – they can make money on their securities holdings and if they have a really great year in the market, it wasn’t earnings, and yet that’s how it has to be reported, by the rules.
Joel Litman: Exactly. It goes up and down every day, and Buffett’s like "I can’t take that money and dividend that out." That’s not true earnings of the firm. That’s just fluctuations in the mark to market, and that’s another one of the big 130 adjustments that any one of these, you know, like with Berkshire Hathaway says we can’t trust GAAP numbers.
And if Buffett says it, Munger says it, Seth Klarman says it, all the top great investors, the great Alpha generators, well then that’s the foundation of High Alpha, of this publication is saying we’re going to follow that same rule, don’t trust the as reported numbers.
Let’s look at the true – the true earnings, and based on that, we ought to find some really interesting stock ideas.
Dan Ferris: So there’s – I feel like there’s – the things you’re telling us, there’s so much like question begging because for example, like why isn’t there a movement to fix all this?
And I realize you told us about uniform accounting, right, so that’s effectively that, but why don’t they just fix the GAAP rules, Joel? Why do you have to have uniform accounting? Why can’t you just fix the GAAP Rules? I don’t get it.
Joel Litman: Yeah. It’s – you know, it’s interesting. One, nobody – people are afraid of a wholesale change in the accounting because you know, accountants by nature are already very conservative.
So if they’re going to change something, they’re going to change it one rule at a time. So recently, you know, they’ve attacked this lease capitalization issue.
So if you’re comparing UPS and Federal Express, because of the way they lease their assets, UPS looks like it has a very heavy balance sheet.
All the planes and trucks show up on the balance sheet. You see it. FedEx, because they don’t capitalize their leases, it actually looks like FedEx has this very, very light balance sheet, meaning they don’t list the planes as assets, they don’t list the trucks as assets. They don’t list many of the warehouses, and it’s because of an accounting elective.
Nothing to do with what’s really sitting there in that balance sheet, and finally, with this glaring issue, FASB, the Financial Accounting Standards Board, and they’ve been working on this for years, have fixed that one issue to say wait a second, we can’t have some companies capitalizing leases, and some companies not doing it, when effectively, they’re leasing the exact same thing.
We’re going to force all these companies that have been previously not leasing to – previously leasing to capitalize it. Well, OK, great. That’s one, and so one of the 130, they’ve taken care of, and that took like I don’t know, x-number of years to figure out.
By the time they figured that out, some other accounting issue has popped up that’s causing problems, and it just becomes nearly impossible to do, and it just doesn’t seem like the motivation is there to create that one uniform standard, and it’s unfortunate.
Dan Ferris: Yeah, unfortunate is one way of saying it. I mean, insane is another. So Joel, we have actually a special deal for our listeners on your newsletter here, and I just want to tell people about it real quick.
They can go to InvestorHourLitman.com, that’s "Investor Hour, L-I-T-M-A-N, dot com," and the offer is $2,500 for one year, and a special chance to join the Altimetry Partnership, which is all of Litman’s publications for life – which is pretty cool – for only $5,000, and that’s at InvestorHourLitman.com.
I hope you don’t think these questions are too much but I liked – I just like it when people make things really concrete for me, and I think our listeners do, too.
So like if I’m looking at my first issue of High Alpha, you know, I’ve signed up, it sounds great, what am I going to get? What do I – what do I see when I open that up? Can you tell me that?
Joel Litman: Yeah, yeah, of course. Every month we are publishing, one stock idea that we think has the highest potential to be a three-bagger, a five-bagger, or a 10-bagger. Now that means we’re not going to be recommending – even if I like Facebook as a stock or Disney, we’re not going to be recommending those stocks in this publication.
We’re going to be recommending names that people have never heard of. So for instance – and this is one that I think has already run. It’s already taken off enough but a couple of years ago, we found Planet Fitness. At that time, people thought it was you know, the anti-gym. They thought – we had so many people saying that it was a short, and that Planet Fitness was just a bad idea.
Well, at the time, no one had realized that part of the problem was the accounting, because Planet Fitness had been spun out of a private equity deal.
There was all kinds of weird accounting that showed up when it got spun out, and it had assets that were phantom assets, sitting on the balance sheet. It had an earnings number that was far less than the real earnings number, and we did a simple return on asset calculation.
Bloomberg, Yahoo Finance, FactSet were all saying that this was a bad company, you know, with a single -digit return on assets. When we did uniform accounting, we saw return assets that was not only single digits, it was like an 80% return.
Literally, this company is like making $80 on every $100 investment every year. Every year. Now I think part of the reason for this Stansberry relationship we have now is because I was invited to the Stansberry conference in Vegas in 2017, and I showed that name, and I remembered people in the audience, and a lot of Stansberry in the audience that were like you know, wait a second, isn’t this a short?
Doesn’t this company have – you know, it looks really messy. The accounting looks like it’s not a bad – you know, it’s not a good firm. It’s got really bad returns. The databases all say it’s got a low return. Like yes, unless you dig through note 20, note 22, note 27, note 30, reassemble the financials, and we say we love this name.
Now at the time, we’d already been recommending that to our institutional investors but I was reiterating and I think the stock was up more than 190%, since that time.
So each month, we’re looking for that kind of an idea, something that’s undiscovered, something that’s not talked about, something that Wall Street hasn’t – you know, even seen, because they love jumping on momentum names, and in each issue, we’ll mention one of those that has that highest potential to be a three, five, 10-bagger.
And so we’re looking at small-cap, midcap names that are still liquid, still easy to buy in and buy out of, that have you know, super 300, 400, 500% plus return opportunity.
Dan Ferris: Wow, I want that [laughter.] Everything you’re telling me gets me really interested, but the idea of somebody who knows accounting the way you do gets me interested, and what you’re able to do with it is just amazing.
So I want to tell everybody one more time, if this turns you on, as much as it turns me on, you know, you can get access to this thing. It’s www.InvestorHourLitman.com, and you know, $2,500 for one year, and a chance to join the lifetime Altimetry Partnership for five grand.
And getting the rest of this stuff, you know, getting this stuff for the rest of my life sounds pretty great, because no one else is doing this. I mean I literally don’t know anybody else who is doing this kind of work and offering it to regular folks like me.
I mean you got your institutional people, just and that’s what everybody does, but just for regular folks like us, this is really neat. This is a playing field leveling moment.
It’s pretty cool. I mean I’m not a big salesman, but I think people need this. The world needs this. Let’s face it. Everything you’ve told us, the world needs this, and I’m really proud that Stansberry is the one offering this.
Porter always told me, you know, he was agog at the state of this industry at the beginning of his career. He said well, you know, I understand you want to sell things, but why does the product have to be such garbage?
Why don’t you hire people like Joel Litman who know what they’re doing and then offer that and get excited about that. So yeah, InvestorHourLitman.com.
Joel Litman: Porter and I have talked about all the different products that Altimetry will be able to launch, and so the reason why they’re – we’re offering the lifetime, the Altimetry Partnership is that already, we’ve built a database.
So we actually allow access to $2,500 U.S. companies where you can see two years historical, and then current for what the actual return on assets, the earnings quality number is, and you see the as reported.
And the orange is the as reported, and so another example was VIP Shops, which I think from the time we recommended it went up well over 700, 800%.
So this little company, VIPS, for VIP Shops and it was early stage, and when we were looking at the accounting again, you know, early stage companies have a lot of research and development.
So it makes the company look a lot worse than it really is. They have a lot of up-front costs that make the company look worse than it is, but when we saw how it was ramping up, we said one, on a uniform accounting basis, this company is actually making money.
They’re just taking the money they make, and they’re reinvesting it immediately, and so we see high growth opportunity. We see this return skyrocketing, and we think it’s a very interesting idea.
So VIP Shops, which is another example of the kind of stock that will be featuring High Alpha, which went up I think over time, but it was a true 10-bagger. It went up more than 1,000%.
I think from the time we recommended it to when actually, I personally sold it, it was up 700%-plus. The database that we’re sharing, people can actually type in any of 2,500 U.S. companies and actually see right away, for Disney, what is the true return on assets and what is the as reported?
And the as reported is the same number you’d see in Bloomberg or FactSet or Yahoo Finance. If you type in Yahoo Finance and look for that earnings quality number, and then we also provide in the database, a price to earnings ratio.
And so for the lifetime subscribers, you’re getting High Alpha, but you’re also going to get access to this database where for any of 2,000 to 3,000 companies in the U.S., you’re able to just punch in the ticker and see the actual numbers versus reality, both on quality, the earnings quality, and on valuation, the price to earnings multiple.
And it’s night and day difference for many, many companies, and those are the ones we think are so interesting.
Dan Ferris: My God, I have major analyst envy right now. I wish I had done this. It’s incredible. So Joel, we’re out of time, but if I could ask you to leave our listeners with one thought, what might that thought be?
Joel Litman: That’s interesting. You know, I think if there’s one thought that I haven’t said already, because obviously, I’m excited about this work. I would say you know, anyone who wants – any individual or family that wants to invest, don’t trust the Wall Street numbers, because they’re not getting paid to benefit you, the individual or the family.
Don’t trust the financial statement numbers, the earnings as reported or the assets, because those weren’t built to help the investor follow the great Alpha generators of the year, meaning the greatest investors of the world, and again, Marty Whitman, Seth Klarman, Charlie Munger, Walter Schloss, Warren Buffett.
And when you see what they say to do is they say you can’t trust the accounting. You have to do adjustments. Well, that’s what we’re doing for you. I think that’s the overriding message I can leave for your listeners, Dan.
Dan Ferris: Wonderful message. Thank you. Thanks a lot, Joel, and I hope we can get you back on the program at some point and talk some more about this in the future.
Joel Litman: Happy to. Thanks, Dan.
Dan Ferris: All right, thank you, bye-bye.
Joel Litman: Bye-bye.
Dan Ferris: OK, everybody, I just want to say it one more time, and by the way, I’m being completely honest with you. I have major envy of this guy. He’s done an incredible piece of work here, and he spends his career going in a really interesting direction.
And the ability to just type in the ticker of like more than 2,000 companies, public companies and find out the truth, you know, he’s got the truth machine. Nobody has that.
Nobody has that, but he has it, and when you consider what its’ worth to you, if you have any amount of money to invest at all, $2,500 for one year, you know, plus $5,000 for a lifetime of this strikes me as a really good deal.
I’m jealous. I hope people continue to read Extreme Value after they get this. Maybe I should type all my tickers in here before I recommend them. So it’s www.InvestorHourLitman.com. Can’t say enough about this guy. I think his work is like incredible, so check him out.
OK, everybody. It’s time for the mailbag. This is one of my favorite parts of the week, because this is where you and I get to have a conversation about investing.
So you write in to [email protected] with comments, questions, and politely worded criticisms, please, because this is the new era of civil discussion on the Investor Hour podcast and I will read every single one of them, I promise, until we just get so big and famous that there’s too many of them.
I will continue reading every single one, including the Russian spam, and I will pick out some good ones to talk about, like I did this week, like I do every week.
First one says – let’s see, this is Paul P., and Paul P. writes in now and then, he’s a good correspondent: "Hello, Dan, I hope you and your family are well this fall season."
See, nice guy, told you. "I wanted to express a thought and get your opinion, if you wish. If you listen or read many of the financial pundits and so-called investment experts usually on CNBC, they always point to the, quote, 'dumb, small investor, the ignorant mom and pop investor, or the so-called dumb money,' end quote, that invests incorrectly, or panics, or is responsible for market extremes.
"But yet, it is pretty well accepted that the computer traders... the, quote, 'algos'" (right, the algorithmic traders). He continues, "The machine black boxes are responsible for 70 to 80% of the daily trades in the market.
"Now if that is true, then the small investors, probably an even smaller portion of the remaining 20 to 30% of the non-algo traders on a daily basis, it looks like to me that blaming the small individual investor for market extremes is ridiculous when the small investor is such a small percentage of trades, and in fact, the algos are the 800-pound gorilla out there in the trading moves and volatility.
"It seems few people talk about the machine traders pushing their agendas in either direction to extremes, and if something goes wrong, it is the smaller individual investor that is sneered at. Am I missing something? As always, thank you and your staff for all the hard work, helping the small individual investor. Take care, Paul P."
I don’t think you’re missing anything, Paul, but the reason I took this question is there are two issues here. One is what you’re talking about. Yes, the trading is dominated by large institutions of all kinds, you know, algo or not, right? Black box or not.
So how on earth does the small individual investor push stocks around, big cap and mid cap names, anyway (maybe a small-cap name could get pushed around by small individual investors_.
I may have seen that once or twice, but you’re right, it doesn’t make any sense, but there’s another aspect here, and the other aspect is just to make clear that the real point here for listeners I think is that you are competing against these people, and the shorter the time frame that you hold, the stiffer the competition.
You know, because there are algo traders who are – literally, they’re trying to get an advantage of milliseconds. Literally milliseconds, so that they can trade in and our real fast, and scalp a profit, and that’s bound – you know, these things are bound to affect individual investors attempting to make short-term profits.
And that’s true – you know, I told my story about that futures trading experience I had, and like there again, an individual, an individual who’s trading futures better really know what he’s doing, and has to know who he’s up against, in order to get it right.
Because, again, big traders are on the other side of a lot of this stuff, and you know, who’s going to win – you or them? Probably them. So that’s a great question. I’m glad you asked it, so that we could discuss a little deeper there.
Next one is from Gregory H., and Gregory H. says: "In Episode 119, both you and Kevin Muir used the acronym 'MMT,' like we all should know what it means.
"I don’t, and I think I need to know what does MMT mean, please? Idea that made me think that you guys at Stansberry should have a glossary on your website, maybe."
Not a bad idea, glossary on the website. "MMT could be the very first entry. Keep up the good work. Much to know in so little time," dot, dot, dot, "Gregory H."
OK, So Gregory, this is my fault, I promise you, during that conversation, I was thinking we have to tell people what MMT means, and then I just got carried away and did not get back to it.
But here’s what I will tell you. There’s an excellent article in the Wikipedia on this. So check there. "Modern Monetary Theory" is what MMT stands for, and I’ll just read you a little piece of what it says on Wikipedia and a number of other places.
If you type "Modern Monetary Theory" into Google, you will get more explanations of it than you want. So the main tenets of it are that a government that issues its own money can pay for goods and services, and financial assets without the need to collect money in the form of taxes, or issue debt, right, before making such purchases.
If the government prints its own money, these people say, well why don’t you just print the money to buy the stuff that the government wants to buy?
OK, and another main tenet is that the government that issues its own money cannot be forced to default on debt denominated in its own currency.
Well, that’s a no-brainer. We all know that. Number three, this government that issues its own money is only limited in its money creation and purchases by inflation, which accelerates once the real resources – labor, capital, natural resources of the economy – are utilized at full employment.
Yeah, and who decides that? But it’s true, yeah, it’ll cause inflation pretty quick. You just keep printing money and buying stuff. The government that issues its own money can control demand, pull inflation, right, which is what he described in the previous one, by taxation and bond issuance, which remove excess money from circulation.
So they’d use – do you see what the MMTers want to do? They just want the government to print all the money it needs, to buy anything it wants to buy and spend – you know, on anything it wants to spend on.
And then they want to use taxing – taxation to soak up the excess. I mean this could only come from economists. It sounds insane to me, because I’ll tell you something, whoever has their finger on that money printing button, I promise you history has shown they will abuse it. It will end in disaster.
Anyway, Modern Monetary Theory, that’s what MMT is. Sorry, I forgot to get back. I meant to get back to it, and have Kevin give us a little – a little you know, tutorial in it but I just forgot to do it. I’m so glad you wrote in, Gregory H., thank you.
Next. OK, so Jean Marie H. wrote in, and she wrote kind of a long e-mail. She was very nice. She said she loves the podcast. She enjoys the podcast and she sometimes get lost by the jargon but always find it interesting.
We’ll try to – we’ll try to keep that in mind, Jean Marie, and I’m glad that that was one of the comments you made, because I don’t want anyone to be lost or confused, and I hope you didn’t get lost or confused.
We got pretty technical in the accounting stuff with Joel Litman today in the interview, but just write in. We’ll fix it. So Jean Marie says you’re obviously a smart guy who knows your stuff, and a straight shooter.
I never hear you mention environmental or social responsibility in the corporate world, which is a big deal to me. I’d be interested on your thoughts on this, and then she gives me the link to an article by Andrew Ross Sorkin in the New York Times.
And he gives this rambling article in the New York Times that says that a while ago, there was a movement. Years and years ago, there was a movement to make shareholder concerns more important, because managements were abusing their privilege.
And then he says well, it went too far, and now it’s the era of shareholder privacy, and then Jean Marie says – she takes a quote out of the article which is a quote from the Council of Institutional Investors – and they said "It is government, not companies that should shoulder the responsibility of defining and addressing societal objectives with limited or no connection to long-term shareholder value," end quote.
And then Jean Marie says it seems odd to me, especially for those who want to shrink government, that they would want to make government the arbitrator of all things other than profit.
It’s exactly because of the corporate world’s neglect of anything but profit that we have government regulations. Your thoughts, if you’re so inclined. I’m inclined because I don’t think they neglect anything but profit, and that that’s the reason why we have government regulations.
We have government regulations because large corporations collude with the government to attempt to create a situation that makes it more difficult for smaller competitors, and I believe I addressed this in a recent podcast, but just in case, a friend of mine who founded and runs a bank whose name you would recognize instantly, because they have tens of billions in assets who did a huge M&A transaction a while ago.
But I’ll keep it anonymous and he told me, he said you know, when you hit $10 billion and $50 billion in assets, all the regulations that come in cause you to have to spend a whole lot of money, all of the sudden.
And he said we just hit $50 billion in assets, and now I need another $2 billion in assets to pay for it, meaning the income from another $2 billion in assets would be necessary to shoulder this additional regulatory burden.
And of course, that creates a natural – the more expensive you make it to be a larger company, the more difficult it is for smaller competitors, and there’s another one that kicks in at $10 billion.
So you can’t say that you have to be $50 billion for this effect to kick in. So – and in general, that is what you will find. I remember ran article some years ago.
I don’t know how it turned out but H&R Block was stumping for regulation and I think licensure of tax preparers, and of course, licensure is one of the great anticompetitive scams in history that governments like to do.
You know, they want people to get licenses for braiding hair and all kinds of stupid garbage. So I’m kind of – you and I, Jean Marie, we have a different view of what’s going on in Corporate America. I think these people are colluding to prevent competition, and they are not ignoring anything but profit.
Maybe you can say well, that’s profit motivated. Yeah, but they’ve got their hand stuck so far in the government already, so the idea that they say it’s government, not companies that should shoulder the responsibility of defining and addressing societal objectives, and then this investor round-table also mentioned in the article with people like Jamie Dimon and all these other ones coming out and saying, you know, there’s more than just shareholder value. There are other constituencies.
Like we haven’t known this all along, and like corporations don’t practice this all along. Look at what Walmart has done. You’re telling me Walmart doesn’t care?
They don’t want you to exercise your open-carry rights. So if you have a gun and you’re in an open-carry state, they don’t want you in the store for that, because it scares people, they say.
You know, I don’t know if it scares them or not, but you can’t say they’re not looking out for people in this regard, and now they’re not selling certain kinds of guns. They’re not selling – they’re taking vaping tools off the – you know, all the vaping stuff, they’re taking off the shelves.
So they’re worried about – they’re – big corporations do worry about these things. A lot of them, it seems like it’s a publicity stunt more than anything, but I‘m sorry, I don’t think they want to shrink the government.
I don’t think that they don’t care about other things, and you know, that’s just my opinion and that’s the – that’s actually the mail bag for today.
So, listen, it’s my privilege to come to you every week, this week and every other week, and I want to thank you for listening, once again. I hope you enjoyed our interview.
Accounting is such an important topic. I mean I have two giant, thick accounting books at arm’s length, at all times on my desk here. It’s really important, and Joel Litman, obviously, he spent a career figuring out all the accounting stuff investors need to know.
What a guy. I’m so jealous. I am genuinely insanely jealous, and I hope you look into his service at InvestorHourLitman.com. Having said that, look, write in with comments, criticisms (politely worded), and questions, and I will read every single thing until we get so big that I can’t, and I keep saying that because it’s hilarious.
Hopefully, it happens but it’s an inside joke between you and I, and you write in to [email protected] Please do write in. I enjoy reading these things. I want to thank all the folks who wrote in this week. Even if I didn’t get to you, I did read your comments and I’ll talk to you guys next week, OK. Bye-bye.
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