It’s been a huge week for the auto industry, with developments rippling beyond Volkswagen’s $50 billion push into Tesla’s territory of electronic vehicles. Dan unpacks the decision by Audi, BMW, Mercedes, Volvo, jaguar, Land Rover, and Mini to boycott the Detroit Auto Show, and concludes it marks a permanent shift in the industry. “The way we buy everything is changing.”
And on the heels of a podcast episode that examined why Tesla is truly vulnerable to competitors, Dan breaks down Volkswagen’s decision to build an $800 million electric vehicle factory in Tennessee, part of its plan to pour $50 billion into electric vehicle production by 2023.
Then, with Eddie Lampert’s eleventh hour deal to save Sears finally on the books, Dan muses on the wave of creative destruction hitting retail right now – and the sector’s latest victim, poised to close 900 stores nationwide.
He then introduces this week’s podcast guest, Aaron Edelheit. Aaron is the CEO and Founder of Mindset Capital, a private investment firm. After being of their first investors, Aaron was also the Chief Strategy Officer of FLO Technologies and helped the company grow from a pre-revenue startup to raising $28 million and launching in over 500 Home Depot stores.
Aaron also founded and ran a successful money management firm, Sabre Value Management from 1998 to 2011. Released last year, his first book, The Hard Break: The Case for a 24/6 Lifestyle makes the case for taking one day a week off from work, email and smartphones for a more productive, healthier and more creative life.
CEO and Founder of Mindset Capital
Aaron M. Edelheit is the CEO and Founder of Mindset Capital, a private investment firm. After being of their first investors, Aaron was also the Chief Strategy Officer of FLO Technologies and helped the company grow from a pre-revenue startup to raising $28 million and launching in over 500 Home Depot stores.
2:03: Dan makes sense of the latest decision by Audi, BMW, Mercedes, Volvo, Jaguar, Land Rover, and Mini to boycott the Detroit Auto Show this year. He agrees with one analyst that the auto show model itself is becoming obsolete, because “the way we buy everything is changing.”
3:48: With children’s clothing store Gymboree planning to file for bankruptcy and possibly close all 900 stores, Dan games out the big story in creative destruction in the retail world – culminating for now with a deal reached by Eddie Lampert for Sears.
7:45: A recent podcast guest pointed out Tesla is facing a storm of high capital costs and low margins in a highly competitive industry. Now Dan mulls over Volkswagen’s $50 billion investment through 2023 to its own brand of electric vehicles, starting with an $800 million factory in Tennessee.
11:50: Dan doesn’t get political on this podcast – but he knows investors often get nervous about the noisier political issues. The two noisiest ones right now – Brexit and our border wall battle – can no longer be ignored with their threats to millions of jobs in the world’s first and fourth largest economies.
20:30: Dan introduces this week’s guest Aaron Edelheit. Aaron is the CEO and Founder of Mindset Capital, a private investment firm. After being of their first investors, Aaron was also the Chief Strategy Officer of FLO Technologies and helped the company grow from a pre-revenue startup to raising $28 million and launching in over 500 Home Depot stores. Aaron also founded and ran a successful money management firm, Sabre Value Management from 1998 to 2011. Released last year, his first book, The Hard Break: The Case for a 24/6 Lifestyle makes the case for taking one day a week off from work, email and smartphones for a more productive, healthier and more creative life.
22:49: Dan asks Aaron about the journey that brought him to write a book on reclaiming one day a week from work, and Aaron explains how, as a workaholic, “I’m driven in ways I don’t completely understand.”
33:23: Aaron explains why the real key to success is increased creativity and innovation, and explains how you can mold yourself to be more of both.
40:27: Aaron explains why Leonardo DaVinci is a great example of a genius who demanded his downtime. “Do we care about DaVInci’s work habits, or do we care that he created a masterpiece?” Dan chimes in to bring up Steve Jobs’ non-negotiable vacations.
1:00:51: Dan reaches into the mailbag with a question from Harold S., who compares Apple and Amazon’s landmark valuations with Microsoft’s $500 billion valuation just months before the 2000 Nasdaq collapse. He notes Microsoft stock converted to dollars could buy 2.57 billion ounces of gold in 2000 – but only some 650 million ounces today. So – has Microsoft gained 50% of its value (in dollars) or lost 75% of its value (in gold)?
To see more of Dan’s work in Extreme Value – Click Here.
Announcer: Broadcasting from Baltimore, Maryland and New York City, you're listening to the Stansberry Investor Hour.
Tune in each Thursday on iTunes for the latest episode of the Stansberry Investor Hour. Sign up for the free show archive at InvestorHour.com. Here is your host, Dan Ferris.
Dan Ferris: Hey everybody, welcome back to another episode of the Stansberry Investor Hour. I'm your host, Dan Ferris. I'm the editor of Extreme Value, a value investing service published by Stansberry Research. So let's get to it and see what's been happening lately in the world.
Now, as you know, we have been discussing these several weeks a few topics that I would like to revisit. One of them is the auto industry. I don't know if you remember, gosh, maybe six or eight podcasts ago, we talked about how auto sales were off? And of course the audio industry is kind of – it's an economic bellwether. It's kind of something that you wanna keep track of from the top down. And this week, we see kind of a – the way that cars are being sold is changing. The way everything is being sold is changing. And specifically what's happening is: every year in Detroit, every January – January in Detroit, if you can imagine somebody decided that was a good idea – they have this thing called the North American International Auto Show. And all the big car companies, all of 'em come every year and show off their latest model.
Well, this year, here's the list. Audi, BMW, Mercedes, Volvo, Porsche, Jaguar Land Rover, Mitsubishi, and Mini are not coming to the Detroit auto show this year. Now, part of this – they think: well, some car companies are choosing to go to the Consumer Electronic Show which was held recently in Las Vegas. It's more focused on newfangled electronic and just technology products, and cars are increasingly going that way. So it makes a little bit of sense. Plus it's in Las Vegas and it's warm and nice and you can have outdoor demonstrations. So the organizers of the Detroit auto show are gonna move it from January to June next year.
But this one fellow, Jeremy Acevedo, who's a auto industry analyst at Edmunds.com – and you can look up Edmunds on the internet. It's just auto industry analysts. And he says that really the auto-show model itself has a finite shelf life and is kind of getting near its expiration date. And the way we buy everything is changing.
And this is one of the good things about Tesla, which we'll talk about also in just a minute: they have a different model for selling their cars and they don't have this dealership model where they kinda give somebody a little kingdom. They don't give somebody the Tesla kingdom in a given area and eliminate competition. They just sell them like you'd sell anything, in strip malls and various places. Which is good. That's a net benefit. I don't think Tesla's gonna make it as a business, but it's a net benefit for the consumer. And it's more evidence that the way people buy things has just changed permanently.
More evidence in that general category – and in the general category, "the retail apocalypse," which we keep kinda revisiting every now and then – is Gymboree, the children's clothing store. They're planning to file bankruptcy soon. Well, within days. Maybe this week. And possibly close all 900 stores. Nine hundred stores. But they have another little business called – it's called like Jack and Janie I think. It's like a higher-end children's clothing. I'm not sure what that looks like. I guess people can spend a lotta money on anything, including kids' clothing. They're gonna try to sell that before the bankruptcy as part of the process.
But, again, at any given time there's a limited amount of economic resources around. And when more resources and when more resources and capital go into one thing, there's a what they call creative destruction happens in the old way. So we're selling more things online. We're selling fewer things in physical stores. And this process of creative destruction continues in the retail world.
And of course the big story here in retail has been Sears, hasn't it? We've talked about this a buncha times. And I feel like we've been in the 11th hour of the Sears bankruptcy – you know, "Will Eddie Lampert save the company?" question – for weeks now. I thought the deadline had come and gone at least once. But finally this morning a deal has been reached and Lampert's gonna buy – I think about 425 stores will remain open after it's all said and done. It depends on a hearing that'll take place on February the 1st in New York. But the judge at the hearing – he has encouraged Lampert to make an offer and save the company and save jobs and all that. So, you know, maybe the hearing is just sort of an administrative matter at this point.
But Sears – they had 700 stores when they declared bankruptcy in October and then they closed 200 of 'em, and now they're gonna stay in business with maybe 425. So the news is saying this morning. But you know how I feel about this. You know how I feel about Sears. It was always a bad idea to base an investment company like Berkshire Hathaway around a retailer. You just can't do it.
Berkshire Hathaway's based on an insurance company and that balance sheet has liabilities that're really like assets, right? It's got the insurance float, which is all the money paid in from all the insurance policies that eventually may have to be paid out again one day. So it has to be on the balance sheet as a liability. But it acts like cheap financing. Sometimes if you make money selling insurance it's like you're being paid to borrow money, with all the float. And that is a source of leverage in Berkshire Hathaway. And some people estimate – leverage of about 1.6 to 1 over the long term has helped Berkshire Hathaway's returns.
Whereas Sears has – at this point I don't know exactly how much. They had $7 billion of assets in the bankruptcy. And, you know, one of the big ones is inventory, which is the opposite, right? It's an asset that acts like a liability. Because it's just retail inventory; can go obsolete any minute and have to be marked down 50, 60, 70, 80 percent. So that model was always doomed. And I said so in Extreme Value back in 2012, and it's just went down, down, down ever since. I think they had like 2,600 stores in 2006. Now they're down to 400? Crazy. And this is all – you know, at least the retail stuff: it just feels very fin de siècle. You know? End of the cycle. And I feel like a lotta the news – maybe I just gravitate towards that type of news here on the podcast. But a lot of it has been kind of end-of-cycle-ish.
So, speaking of car companies as we were a minute ago, of course we always have to talk about Tesla. Because it's such a crazy situation. We had a great discussion with Mark Spiegel, a Tesla short, a couple of podcasts ago. We got a lotta good feedback on that. So please visit our archives, InvestorHour.com, and check that out. Of course after you listen to this one, right? And so Tesla – one of Mark's big points was that Tesla is facing, among other problems – it's a crazy business, right? It's highly capital-intensive. You gotta spend a lotta money and invest a lotta capital before you make $1.00 of sales. Low margins. Just really difficult.
And on top of that of course, such businesses tend to be highly competitive. And that was one of Spiegel's big points when he came on the show. He says, "The competition is just coming outta the woodwork from real car companies, real car companies that've been around for decades who know how to make money selling cars, which Tesla does not know how to do yet." And the latest one of course: Volkswagen announced this week what they're gonna do is invest something like $50 billion – they plan to commit $50 billion, close to $50 billion anyway, through 2023, toward the development and production of electric vehicles and kind of the digital services that go with the electric vehicles. And they're gonna spend $800 million to expand one of their US factories in Tennessee and they're gonna produce, outta that factory, the next generation of electric vehicles. So VW – Tesla has to compete with VW. It's a little insane.
Speaking of Elon Musk ventures like Tesla, SpaceX – you know, that's his rocket ship company. He wants to go to Mars [laughs]. He's got this rocket ship company where they're gonna try to make space travel just a regular thing like any other type of travel. So they're not doing so great. Of course, SpaceX, the technology – Mark Spiegel discussed this as well. One of his points was that Musk has a reputation as this genius who does all these big projects. But if you talk to people who really know about each of these things like rockets and other things, Musk is not exactly on the cutting edge. The only thing that's cutting-edge about any of it is that he's trying to make businesses out of these things, right?
So SpaceX is letting go of around ten percent of its workforce. And they had an all-hands-on meeting on Friday at SpaceX headquarters in Hawthorne and they're gonna restructure. "Restructure" is always a – it's a buzzword that means "We screwed up. Things went against us. We've gotta scramble and fix this and try to save it." And part of that is by firing ten percent of the employees. And they're gonna be left with about 6,400 after they restructure. And, again, highly capital-intensive business that – in a way you're competing with NASA but not really. I mean, the technology – NASA's way ahead of you on technology. Just put it that way.
Wow. It sounds like all the news is bad [laughs]. And it's not all bad. But there are a few other things that aren't exactly pleasant that I feel like I should address. Now, look, you know me. You know I'm not crazy about politics. But I just feel like I should mention sometimes some of the noisier issues, right? Look, this is the Investor Hour, and it's about investing, so don't worry about that. I'm not gonna become like political. But I just feel like investors wonder about the noisier political issues.
And two of them right now – the two kind of noisiest ones to me. The first one is Brexit, right? So Theresa May's bid to kind of work out a deal to separate the UK from the European Union failed and it's alleged that she's facing a vote of no confidence. And the speculation in the news is that this – if it's what they call a "hard Brexit" and no deal is worked out to make this transition smooth, that a million people will lose their jobs and it'll be absolutely a disaster for the UK economy. You'll never hear me say that I know that that is the case, okay? One way or the other.
And that is my point. When you tune into the news, they need to keep you tuned in so they can sell you things in between the news on the commercials so they're gonna try to make it as exciting as possible, and exciting usually means dire. You know? It usually means: "Oh, it's an emergency. It's a crisis. Things are gonna be terrible. Things could be terrible." And things could be. I don't know exactly how it's gonna turn out. And I think anybody who does think they know how it's gonna turn out is probably wrong. Right? You don't know the future.
And here's the thing: I liken this to certain financial events. And I could be wrong in that. But I liken it to things like the 2008 crisis. The talk back then was: if the government didn't step in and fix everything and make a deal with all the banks and all this stuff that it would've been the Great Depression 2.0 and things would've been much worse than they actually have been since then. I don't know that that is the case. And, in fact, we know that when you refuse to sort of let the market work these things out, you create more problems. In fact, you could even argue that you create more problems than you solve. What you do is you solve short-term problems and you create larger long-term ones. And long-term doesn't last forever [laughing].
And that's sort of how I feel about Brexit: maybe there will be a so-called "hard Brexit." Maybe there will be some unemployment resulting from that, right? If you're not allowed to trade with another country anymore, if there's some stupid law in place that says, "Now that you're not part of the European Union, you can't do trade with companies in Europe anymore," you may have to lay off some workers. I mean, that's a travesty. I think that's a sign that government is too deeply involved in all of the commerce between these areas, these geographical areas, and not that there's too little. And I think if there's less, there is short-term pain and long-term gain.
And I feel the same way about the other noisy, noisy, noisy political issue which is alleged to be a potentially big economic problem, which is the border wall. I'm so tired of hearing about this. Look, it's real simple: without a giant welfare state, you don't need to protect your borders that way. Right? And without drug prohibition, you don't need to worry about your borders in the same way that we worry about them now. So, again, is there too much government involved in these things or too little? And I'm leaving you with the question, okay? I'm not going to say that I know how it works out.
I mean, there are real costs to these things. Right now the government is in a shutdown. And, for example, the Delta CEO, CEO of Delta Airlines – biggest airline in the world by market cap and total assets, if I'm not very much mistaken. And they say that the government shutdown is gonna cost them $25 million this month. $25 million in revenue due to the partial government shutdown. Longest ever government shutdown; 800,000 federal workers furloughed or working without pay. So, look, I'm not saying there aren't real economic consequences and then, in turn, real consequences for investors from these things. But just as a general principle, we sure do interfere a great deal with commerce around the world, and we tend to blame it on – we blame it on capitalism; we don't blame it on government often enough in my opinion.
I think health care is exactly the same way. When there are 16 or – I forget what the number is now but at one point it was 16 administrative people involved in every transaction between you and your doctor, that's a problem. That's why it's so expensive. And it got that way – over time, there were things like – you know, in World War II, labor was scarce; men were fighting in wars so there was less labor here at home. And there were wage controls so you couldn't offer to pay people more so what did you do? Well, you offered to give 'em health care. And that is one way that that got started as just a normal thing that employers do. And you needed to offer more and more benefits over time to stay competitive because people expected it.
And now you've got 16 administrators involved in every single transaction between you and your doctor and people are wondering about the high cost of health care. And there's too much government involvement in these things, not not enough. There's too much regulations, not not enough. And there are some real consequences for investors. But, like I said, I'm gonna get off the soapbox here because I don't want people to say, "Oh my God; he's going political." Okay? So let's just kind of – I'll just sorta move on, all right?
And just a last item I wanna get to that I thought was kind of interesting. Airbnb says it's been profitable for two years straight as they head into their upcoming IPO. This is some good news if you like Airbnb. They expect to hit 500 million guest arrivals by the end of the first quarter of this year. So that'd be 100 million new guest arrivals at Airbnb properties since the last time they published that total in August of 2018.
And I know a fellow who is traveling around the world throughout Asia and Africa with his family and he's publishing things on Instagram and so forth and he published this photograph of him and his family in this gorgeous, well-appointed sitting room in an Airbnb in Egypt. And it was like $35.00 a night and it came with this gorgeous – I think it was like a lunch spread or something, or breakfast. And he said the food was fresh and delicious and the place was gorgeous. Had bedrooms and a big sitting room that they all took this photograph in.
So the news isn't all bad. And they're one of several so-called unicorn businesses: private, usually technology startups gearing up for – this one's actually gearing up for a public debut, for a public offering. I'm not saying it's a great business and that I would invest in it. But I'm just trying to give you guys some good news [laughing] because we had so much bad news. And there's some good news there.
All right. I'm very excited about this week's guest. His name is Aaron Edelheit. Aaron is the CEO and founder of Mindset Capital. It's a private investment firm. And after being one of its first investors, Aaron was also the chief strategy officer of Flo Technologies. And he helped the company grow from pre-revenue startup to raising $28 million and launching in over 500 Home Depot stores. In his previous role as CEO of The American Home, Aaron founded and grew a company from 16 rental homes to one that owned 2,500 single-family rental homes, and it was sold in April 2015 for $263 million to a publicly-traded real estate investment trust. Aaron also founded and ran a successful money management firm, Sabre Value Management, from 1998 to 2011.
In 2018, Ideapress published Aaron's first book, The Hard Break: The Case for a 24/6 Lifestyle. The book makes the case for taking one day a week off from work, e-mail, and smartphones for a more productive, healthier, happier, more creative life. And Aaron's been featured and quoted in all the big publications: Wall Street Journal, New York Times, Bloomberg, CNBC, among others. He's given lectures on business and entrepreneurship in the US, Canada, and South Africa. Welcome, Aaron Edelheit. Thank you for being here, sir.
Aaron Edelheit: Thank you so much for having me.
Dan Ferris: So, Aaron, I'd like to talk about your book first, and then maybe we'll talk about whatever investment ideas are on your mind these days. And I encourage everyone listening to read Aaron's book, The Hard Break. I read it, loved it, underlined it, read it again. And, Aaron, I wonder if we could just start at the beginning. In the beginning of the book you talked about a really difficult time in your life. And I wonder if you could just talk about that a little bit and what prompted you ultimately to write this book.
Aaron Edelheit: Yeah. Thank you so much, and thank you for having me on your show. I appreciate it. So I'm a workaholic. And I'm driven in ways that I'm not sure that I fully understand. And with today's technology and the information flow and the access to information, someone like me who's a workaholic – work is infinite. It never ends. There's always more to learn. There's always more to do. There's always more to accomplish. And so very early in my career when I started managing money, I experienced tremendous success. From '98 to 2002, normally associated with the dot-com crash and a very tough time for people, I actually averaged about 25 percent annualized returns.
Dan Ferris: Nice.
Aaron Edelheit: Yeah. No, it was a wonderful time, very exciting. I was king of the world. And then not having the maturity or experience to realize that everyone underperforms, especially after such a strong period of outperformance, especially when markets change, I started underperforming and a series of bad things just happened to me. I got sick. The doctors didn't know what was wrong with me. I got into a relationship and we broke up and then I took on a business partner and we started fighting and business performance started suffering.
And it wasn't really until I started getting _____ _____ that that I started – my first thought was: "I'm gonna double down. I'm gonna double and I'm gonna triple down and work even harder." And after a while realized my businesses' _____ were not – they weren't improving. And so really outta desperation I thought to myself, "Well, maybe I just need to carve out and give myself a little break." And it wasn't until I started that break – and I literally started with baby steps. Like it's kinda crazy to think. I would turn my phone off on Friday night right before I went to bed. I'd try to make it till noon the next day. And it seemed like this Herculean task, right? And then eventually after a couple of months, I built that up to going for a full day.
And it transformed my life. Transformed my personal life, my business life. My business returns started improving. My mental outlook. And so then – and do you know what the returns were that drove me to this dark despair in 2003? Well, you read the book.
Dan Ferris: You mentioned this in the book. Go ahead and tell us.
Aaron Edelheit: I was down five percent.
Dan Ferris: Yup [laughs].
Aaron Edelheit: Just to show you kind of the nonrational state I was in. And so that really helped me in 2008 when the world felt like it was literally coming to an end and I had – while it was very difficult and hard, out of that, I started saying, "Well, hey, where are there opportunities? How can I think creatively?" And in the tough, turbulent times, instead of falling apart, I started looking and I kind of uncovered the opportunity to buy single-family homes, fix them up, and rent them out. Even though I had no experience; I had never bought a home before 2008. And so, for me, the reason – and then I went through this – and I describe in the book: I went through this crazy experience of going from 16 rental homes to 2,500. In 1 year, I bought 2,000 homes individually. We went up and down and had – you know what the story is.
When we finally sold the company and I looked back and I said to myself: one, there is no way I could've survived this experience if I didn't take a day off, if I wasn't able to process, not be CEO-Aaron, but just be Aaron and breathe one day a week. And I saw all this work behavior inside the company, around the company, that was both good and bad, and a lot of pain and suffering from this belief that you need to kill yourself, that you need to burn yourself out.
And I see a lot of – I was reading a lot of stuff out there, especially in startup culture and entrepreneurs and Wall Street that you need to 24 hours a day 7 days a week and this is the price you have to pay for success. And I said, "No, that's actually not the price you have to pay for success." And I spent three and a half years researching and interviewing some incredible companies and executives and people out there that actually attribute their success to not going down that path. Companies like Chick-fil-A, which is closed every Sunday, to venture capitalist Brad Feld, who takes _____ _____ sabbath.
And there's 200 footnotes in the book. I actually had to remove dozens of 'em from all the studies and research that shows that shows that the way that we're interacting with technology and working is not beneficial in any way.
Dan Ferris: Yeah. I was fascinated, Aaron, by all of the little details that you put in there about various studies. I totally agree. It's one of the wonderful aspects of the book. For example, if you don't mind us kind of discussing one of them, this thing –
Aaron Edelheit: Sure. Of course.
Dan Ferris: – called the Zeigarnik effect.
Aaron Edelheit: Yes.
Dan Ferris: So this is the tendency to dwell upon and refuse to let go of any task that has not been finished. And Zeigarnik was someone who did some research and found out that people were twice as likely to remember uncompleted tasks as completed ones. And I identified with that right away. And it's part of – it seems like the electronic culture that you described, the always-on culture, feeds that – turns that into a gigantic problem. Does it not?
Aaron Edelheit: You're exactly right. And this is the problem. Modern work life is a giant Zeigarnik effect. It's from Bluma Zeigarnik, a Soviet psychologist who noticed that waiters could immediately remember unfinished orders but had trouble remembering completed orders in a restaurant. And this has been duplicated a number of times. And if you think about the modern e-mail and the tasks, there're always unfinished tasks. So this is part of that whir of technology, of e-mail, of notifications, that there's constantly someone to reach out to, to respond to, something to do. And that's why you're all always on the phone. And that's why it's so exhausting.
But what they found is that one of the ways to kind of guard against the Zeigarnik effect – one way is just to write down what you have to do. But another one is to just shut off and say, "For this period of time, I'm not allowed or I'm not going to respond. This is not the time for me to do my tasks. I've written them down so I remember I have to do them. And I will get to them when I turn back on." The way that I view kind of this sabbath and this day off is it's this incredible, wonderful tool that has actually been around for thousands of years but is probably more valuable today than it's ever been.
Dan Ferris: So another reason why – I think it's a fantastic idea. And I guess Nassim Taleb would say this has Lindy effect, right? It's been around for thousands of years, and would tend to be around for thousands more by the Lindy effect. But human nature, as you sorta point out in the book – I think this one passage that way – we need a sabbath or some kind of hard break because human nature sort of works against us. And all the self-helpers and the advice books – as you point out in the book, they kind of boil down not only to working hard and telling you to work harder but showing other people that you work harder. So there's this kind of social proof in it, you know? It's insidious, isn't it?
Aaron Edelheit: That's exactly how you know that something is wrong: when it's more about – and this is what I found in my own experience: a lot of the work hours, a lot of the behaviors have nothing to do with productivity, have nothing to do with great output, creative output. It's about signaling: signaling to others your dedication to the organization, signaling how you're more virtuous because you're willing to sacrifice. And what we should care about today is outcomes. We shouldn't care about the struggle to get there. In the sense that: signaling to others that you are really really grinding hard. And then, again, part of the reasons why I took three and a half years doing the research is I wanted to prove every single point that I make in the point. The idea is this the case for a 24/6 lifestyle. So I wanna refute almost every argument against that.
And one of the most fascinating things that I found in the book was: if you think about what makes people successful today, it is not about consuming more information.
Dan Ferris: No.
Aaron Edelheit: It's not about sending more e-mails. It's not about responding and grinding. What really success is about is thinking creatively. It is being innovative. So you think about: how can you be more creative and more innovative? Whether you're in investments and you're thinking differently in a divergent way than other people, whether you're creating new companies or inventing, whether you're _____ _____ say the arts. So the fascinating thing is that when you're not working, when you're decompressing, when you're relaxing, daydreaming, there's a part of your brain called the default mode network that – this part of your brain goes into overdrive.
And so what is the default mode network? Well, that's the part of your brain that processes information and experiences and tries to form patterns and gain understanding. And so what happens if you're working all the time, if you're glued to your phone, your computer, your e-mail? You're actually not giving your brain a chance to process information and to form new patterns. And so you're actually hurting your chances to innovate and be creative and think differently. And so if you think about: you walk down the street or you're walking somewhere and then all of a sudden some solution to some problem or some idea hits you, or you're in the shower, the proverbial idea in the shower?
Dan Ferris: Right.
Aaron Edelheit: Why does this happen when you're supposedly not even thinking about it? It's because you don't know it but there's a part of your brain that's processing. So the more chances you can give to actually decompress and to give your brain a break, the more chances you're coming to come up with these solutions and ideas.
Dan Ferris: You know, that's a great point. I feel very lucky in my life because I studied music. I was a music major in college and a classical guitarist. And my teacher said, "If you practice four hours a day, don't practice one time. Practice two or three or four times a day and take breaks in between" for that exact reason. And I've tended to carry that through. And of course now I'm doing a lot of writing in my current job with Stansberry. And I've just found that it's sort of like – the problem with some of these things – it's like Warren Buffett says, "You can't get a baby in one month by making nine women pregnant. It takes nine months and that's all there is to it." And that's the same thing. Your brain just needs time to process. And if you don't take a break, you don't get it.
So, Aaron, there's a point you make in here, though, and you started by saying that you're a driven, ambitious guy, and there's an interesting point that I thought you made in the book. It was kind of work/life balance for the driven, ambitious person. And you said, very wisely I thought, "Don't try to balance it. Instead, separate it." So I can [laughs] hardly imagine what you're like six days a week [laughs]. But –
Aaron Edelheit: Yeah, no. That's exactly right. I just think this idea that you're trying to balance – and this comes from my own experience and talking to lots of people, both during when I was researching the book and after I wrote the book: if your phone's on and you're getting e-mails, can you really be there with your family? I know I can't. I'm incredibly distracted. There's actually a lot of research – there's a wonderful article The Atlantic about this: that parents are actually spending more time than ever before with their children but the quality of that time is garbage 'cause they're so distracted by all of the technology.
And I know that when I'm playing with my daughter, my five-year-old daughter, and I go to turn on her favorite song or I go to take a picture of her 'cause she's being very cute and I all of a sudden look and, "Ooh, I have an e-mail; oh, someone's texted me," immediately I'm down the rabbit hole. And in literally five or seven seconds, my daughter will turn to me and say, "Papa, will you play with me?" My first thought is: "I am playing with you." But she knows that she doesn't have my full attention. So the quality of – when Saturday comes around, my phone isn't on, I am completely there for her. And the quality of interactions – the quality of conversations with my wife. It's just very different. There isn't that pull to see: "Ooh, what's there?" I'm addicted to my phone just as much as everybody else, if not more so. And so it's really about not being distracted.
And I'm an investor, right? And you wanna invest in the long-term things that matter. So it's making sure you're investing in good companies, that you're investing in your health, exercising, trying to sleep, et cetera. But also your relationships. Those relationships in our lives are the most important things. They are what give us satisfaction. They give us happiness. And so for me, this is just another way to think about carving out time so that you can invest in your relationships and you're not balancing; when you work, you work. When you're not working, you're not working.
And, you know, if you look in the sports world, the sports world and the arts, the music world, is completely reliant on this. When you look at LeBron James or how people – any kind of athletic pursuit, it is complete focused practice and complete focus, and when they're not, they're off. And there're many examples from – it's in my book. One of my favorites is – I think LeBron James calls it "Zero Dark Thirty" or something. And when playoff time comes, the phone's gone. There is no phone in his life when it's playoff time.
Dan Ferris: Yeah. That makes a lotta sense. And I noticed too – I mean, there's so many aspects to this. You know, you talk about, in the book, just sort of overall benefits in your life and health and the studies – I could spend an hour, it looks like, just quoting all of the studies about the toll that overwork takes on your health and family and the benefits you get from taking a break. I mean, I wouldn't even know where to begin. I'm sure you have a favorite. But: wow. It's just one after another after another after another. And there're studies with women; there're studies with men. Everybody – overwork is bad for everybody all the time. And yet, as a society, we don't like to take vacations. That was one of the findings in the book: we don't like to take vacation. Why don't we like to take vacations?
Aaron Edelheit: Well, you know, it goes back to the whole – the point of the book was – I think everybody kinda knows: "Hey, being on your phone in all your time isn't good." And it's not surprising to people that there's health problems – like you're at much greater likelihood to have a heart attack, to get injured, to have mental health issues. All of that – everyone be like, "Oh yeah, that makes sense to me." Right? But I think the point that I wanted to make is: not only are you getting all those negative externalities. But you're actually not getting what you want. What you want is: we wanna achieve; we wanna provide for our family; we wanna succeed. And it's actually gonna hurt you. That was the point.
And so you mentioned vacations, about not taking vacation. So there's all these studies that: how good vacation is for you. And then we're reading in The Wall Street Journal stuff like workation. I'm just like, "No." And it comes back to the whole creativity and innovation piece. Literally one of the best, most imaginative, most innovative Broadway plays, musicals to come out in decades: Hamilton. How was it created? How was it founded? Well, it was only when Lin-Manuel Miranda decided to go on vacation and he was going through the airport bookstore and picked up Ron Chernow's Hamilton book.
And it was when he was on vacation reading this massive book that he started thinking and saying, "Ooh, this is" – you think about: who would come up with, "I'm gonna come up with a musical about the treasury secretary and I'm gonna have a multiracial cast rapping"? Like you have to be crazy to think of that.
Dan Ferris: Yeah. If he had pitched that to me, I would've said, "No thank you, next" [laughs].
Aaron Edelheit: Yeah. You're like, "How is – wait, what?" You know? So this is the whole point: that if you want to really think differently and really achieve – but then there's the whole productivity. There's decades of research that shows that once you work past 55 hours a week, it's garbage. There's no difference in productivity. And once you work past 70 hours a week for a couple weeks, your productivity starts _____ _____ a couple of months, you become less productive than a person working 40 hours a week. You're more likely to get sick. You're gonna make mistakes. You're just gonna really struggle. We all kind of intuitively know this.
Dan Ferris: You know, one of the reasons I think people do this – or one of the ways they justify it – not the reason. One of the ways they justify this is: you know, we all have heroes, right? And we point to people like Warren Buffett. He famously kind of works constantly and says he's tap dancing to work and it's a lotta fun. Any creative person that you could name – like Leonardo da Vinci or Steve Jobs or any of these guys in history who have done something remarkable.
Aaron Edelheit: Well, da Vinci is a great example actually. There's a part in my book: how his patron is literally – is quoted yelling at him, "Get back to work. Why is it taking you so long to finish what I paid for?" And da Vinci said, "Hey, sometimes I have to go for a walk and I need time off." I'm paraphrasing. But the Patron was super upset with him because he was taking so long creating The Last Supper. Now, look back in time; literally one of the great masterpieces of all of humanity, and the guy who commissioned it said, "Why aren't you working harder?" Do we care how – the work habits of da Vinci? Or do we care that literally he created a masterpiece?
Dan Ferris: Yeah. Well, you sorta beat me to the punch. That's where I was headed. I mean, Jobs took off and went on extended vacations with his kids and all of that. And they couldn't be who they were without taking a break I guess.
Aaron Edelheit: Yeah. But then there are other examples – I don't know if it's related or whatever. But we highlight – we put on pedestals these people like Elon Musk and Jeff Bezos. And this was another reason I wrote the book. And these people are truly exceptional people, right? They're big outliers. And they work and their dedication to their companies – we see this. And I highlight a number of examples. But look at their personal lives. You know, divorce, multiple marriages, real ups and downs and roller coasters. And I _____ _____ _____ _____ be like, "Hey, is it possible to be successful and try to achieve while still having a family life and still spending time with your family and investing in those relationships?"
Now, I have no idea if a sabbath or anything like that would've been – but I see this and I personally don't wanna go after a strategy where I don't get to spend much time with my kids or I become estranged from my wife and, you know – even another reason. Isn't it possible to do both?
Dan Ferris: That's a good question. Because – to make it more concrete for an investor, would Amazon perform the way it does if people weren't driven and working all the time? Or would it be even better if they kind of instituted a hard-break policy company-wide?
Aaron Edelheit: Look, I don't know.
Dan Ferris: Because you gave numerous examples of people who were working for companies – there was the Facebook guy, you know? He says he wish he had slept more hours and exercised. He doesn't wish he had worked harder.
Aaron Edelheit: That's exactly right. So Dustin Moskovitz who looks back – he was one of the co-founders of Facebook – with regret. He has ongoing health issues because of his work habits, how he treated himself. He looks back and says, "I was a terrible boss. And I made lots of mistakes." So he restarted a company called – when he started a new company afterwards – it's called Asana. Very remarkably, it's a productivity tool company. It is ranked I think the number-one company to work for in the country according to Glassdoor. Number one or number two. And the work rules: you're done at like 5:00. This is a very different company. It's being very successful. I think it just raised money, a $3 or $4-billion valuation. He's showing that you can be successful in a company – you can do well by not grinding people into the ground, by not grinding yourself into the ground.
Dan Ferris: I'm glad to hear that [laughs]. I'm sure everyone is. So, Aaron, listen, we don't have a whole lotta time left but I wanna talk – you forwarded me kind of one of your latest investment ideas: a publicly-traded company called Bluerock Residential. The ticker symbol's BRG. And, you know, we've got five minutes or so here; I wonder if you could just tell us a little bit about it.
Aaron Edelheit: So what's really interesting is – I stopped managing money in 2011. And what's really interesting about Bluerock Residential is that I think it's an example – one, there's research out there – I think O'Shaughnessy Asset Management put out research that the REIT market – real estate investment trust market is very inefficient. And it's driven in ways that creates a lot of opportunity for inefficiency. And so what was really interesting is: last year in October someone filed a 13D. And you file 13D when you acquire more than five percent of a company's stock and you mean to kind of agitate for change.
And the company filed a 13D, and in very vague language, said, "Hey, the company isn't being operated right. And, oh yeah, we offered a substantial premium to buy the company and we were rejected and then we increased our offer and we offered again and was rejected. So we pulled our offer and we think the company should be sold." And that was it. There were no articles. There were no research reports. And, very remarkably, the stock was kind of flat for a couple of months. You know, it went up and down. It went down initially. And I looked at it and I couldn't believe – and I know that we're seeing that the market's becoming more automated, more quantitatively invested, more ETF-related.
And I realized that none of these computers, none of these automated strategies are reading 13Ds. And so that actually makes me very bullish that you have a lotta fund-strong-driven investment compared to maybe seven, eight, ten years ago where you had a lotta people focused on companies like this. You wouldn't have this just kind of ignored.
And so what's happening right now – what I believe what's happening with Bluerock Residential: you have a company that owns apartments – pretty boring business – in places like Austin, Texas; Orlando, Florida; Atlanta, Georgia; Charlotte, North Carolina. All very fast-growing, demographically-driven markets that're gonna be attractive for a while. And you have another – someone who now is in the stock who wants to buy them. The company pays approximately like a 6.1-percent dividend. And basically the idea is: while this plays out – and I don't know how it's gonna play out. But I believe the company's in play. And while this works itself out, you get to collect dividends, a pretty significant dividend, in a relatively safe company.
And so it's a small cap. And also know I own it so I'm talking my own book. But what I like about it is that you basically – I get to sit and eat popcorn collecting dividends while I wait to see what this company that is trying to buy the company does.
Dan Ferris: Right. And the stock's around $10.20 cents today. And you're guessing – it looks like in the report you sent me you were having to guess at the buyout offers and you guessed $11.50 and $12.00 per share. So pretty good premium to where we are now. Why did you have to guess?
Aaron Edelheit: Well, because they didn't put the numbers in the 13D. They just said, "We offered a substantial premium to the 60-day moving average. I believe that's correct. And so I just guessed: "What's the percentage?" And I guessed 20 percent. And when it was trading, it was trading at $9.55. So 20 percent of that would be about $11.50. And then if you increased your offer from there, maybe it's $12.00. Again, I'm not sure. I don't know. But basically I believe that what's going to play out is that this company or another company or something's going to happen.
Management probably is pressure now. Because when stock IPOs _____ 2015 at $15.00. So it's been a disappointing investment if you've been part of this since the beginning. And so this is a pretty opportune time. So management's probably gonna start doing some shareholder-friendly actions as well to respond to a buyer trying to come in and agitate for change and buy the company.
Dan Ferris: So of course I always – being a value guy myself, when I see, as you point out, a lot of apartment REITs trading with yields below four percent, why are we over six percent here?
Aaron Edelheit: Well, one, I think that this is a small cap. Two, I believe that the company in the past has disappointed investors. Also I don't believe that management is pursuing the right strategy. They are issuing – they are financing the company by issuing expensive preferreds – preferred equity at expensive interest rates. And I think that Wall Street's kind of gotten fed up with it and discarded this. So a lotta times Wall Street'll be like, "Ugh, this company – it's an underperformer. I'm just gonna discard it."
And if you also look how REITs are generally focused on in terms of analyst coverage, in terms of investment flows, the top 25 REITs I think get half of all the investment dollars in almost all of the research. And so you have this small-cap REIT that's about a $250-million market cap, and it's a little small. Like why would any large investor focus on this? Or any analyst?
Dan Ferris: This is a very interesting situation. And I can tell you, even just sorta looking at the numbers now, it's kind of not quite big enough even for my newsletter. If I recommended it, the stock would probably go up 50 percent in 2 minutes. So the argument makes sense to me.
Aaron Edelheit: Yeah, no. I mean, _____ _____ _____ _____ opportunity. Yeah. So what I'm trying to look for is: do I think this is gonna go to like $50.00? No. To me it's like: what's the downside of this? The downside is maybe I just earn a small dividend and it doesn't really go anywhere. But the upside I think is, I don't know, 30 percent, 25 percent.
Dan Ferris: In a potentially kind of short period of time here, maybe in a year or two or three or something. Yeah.
Aaron Edelheit: Yeah. That's right. And _____ _____ _____ I have to worry about the tariffs and the craziness in the market. And to me it's like I'm looking for low-risk investments – I'm looking for the singles and doubles. This is not a home run or a grand slam. This is something that I can invest in and feel confident in and won't – this isn't the wild ride that a lot of the market's been on the last couple of months.
Dan Ferris: Hey, I hear you loud and clear. Believe me. It's looking very end-of-cycle here and it's hard to find great deals and this looks like it might be one of 'em. Aaron, thank you so much for being here. This has been wonderful.
Aaron Edelheit: Oh, well, thank you for having me. I really appreciate it. Happy to come on any time.
Dan Ferris: Great. Maybe when Bluerock does a deal we'll have you back on to talk about it or something. I don't know.
Aaron Edelheit: That sounds great.
Dan Ferris: All right. Thanks a lot, Aaron. Hopefully we'll be talking to you real soon.
Aaron Edelheit: Sounds great. Thank you.
Dan Ferris: Okay. It is time for the mailbag once again. And, remember, your feedback is important to the success of this show. And you can e-mail us with any questions or comments that you have at [email protected] We read them all and we try to respond to every single one, even the hurtful ones. We have actually three bits of mailbag today. And let's start with the first one, which is from Jason L.
Jason L. says, "Just wanted to let you guys know I have really enjoyed the recent podcasts with Dan Ferris. I'd heard a few interviews with Dan before the recent string of podcasts and I always thought he was just a really negative guy who had a bad outlook on everything. But now that I've heard him on the podcast for several weeks in a row, I realize that he's just really committed to value investing. It's a good reminder that one of the strengths of Stansberry Research is that there are so many analysts that have different views on the current state of the market and the best way to invest over time. Thanks for everything you do."
Thank you, Jason L. I [laughs] have to address this idea of being a really negative guy who has a bad outlook on everything [laughing]. You know, I promise you, Jason, that if you actually knew me, you wouldn't think that. And I don't know where this idea came from, frankly. Folks at Stansberry sometimes call me a curmudgeon or something but I don't – I don't know. I don't see it. I think I'm a pretty kind of upbeat guy. I mean, you gotta pay attention to risks in investing. This e-mail's part of the reason I was trying to deliver some good news and we talked about Airbnb, whatever that might've meant to you earlier in the program. But I hear you, Jason, and I should acknowledge that Jason now realizes that I'm not a guy with a bad outlook. So, thank you for that, Jason.
Okay. Here's one from Andy G. Andy G. says, "Dan, just wanted to send you a note and thank you for the recent podcast episode with Shane Parrish. That was one of the best conversations that I've heard on any podcast. I find the podcast series very interesting and helpful and really enjoy when you introduce listeners to new people and ideas like those that Shane discusses with Farnam Street." That's Shane's website. "Excellent job and thank you again for the work you do on the podcast." Boy, there's lots of good stuff in the mail today. You are quite welcome, Andy G. We're happy to do it.
And I totally agree: I could've kept Shane Parrish on the phone for hours. That guy's head – it's like an encyclopedia of the best ideas of all history and humanity. And you can see it on his website. You can see: this guy – he writes like all that stuff, or the overwhelming majority of it, and it's really great. I mean, we discussed over 100 mental models, these different ways of thinking about things, on his website. Just really an amazing guy. I totally agree. That was last week's episode. And, by all means, I strongly encourage everyone to listen in to that one.
All right. One more. And this is from Harold S. Harold S. says, "Hi, Dan. Nothing is better than walking my dog and listening to your latest podcast." Boy, that's nice. Thank you. Thank you, Harold. "Your financial guidance to the individual investor is simply superb. You recently highlighted how individual companies reaching landmark valuations – i.e., Apple at $1 trillion – was an indication of a market getting extremely high. A previous landmark valuation for the first company to reach $500 billion was Microsoft back in March, 2000. In March, 2000, one could've purchased 2.457 billion ounces of gold for $500 billion. So Microsoft's market cap at that time.
"As of January 11, 2019, the market capitalization of Microsoft is $797.7 billion, for a gain of some 60 percent over some 19 years. As of January 11th, 2019, Microsoft, valued at $797.7 billion, will only now purchase 619.4 million ounces of gold, or only 25 percent of what it would purchase back in March, 2000. My question to you: over the past 19 years, has Microsoft gained 60 percent or has it lost 75 percent of its value? My answer explains why I'm buying more each day of Extreme Value's best gold company as it trades 13 percent below the buy-up-to price." Actually, 15 percent below today, Harold. "Thank you," Harold says. And you're most welcome, Harold.
Wonderful question. I think I can help iron this issue out for you though. Basically you're trying to value Microsoft in gold or gold in Microsoft shares, either way. But what you're really doing is expressing gold in dollars. That's all that's happening here. The price of gold in dollars changed over that time. And this change in the value of Microsoft – I promise you: Microsoft is a better business today than it was in 2000. It's got a wider moat. It's a better business. It's a cash-gushing – it's one of the greatest businesses that's ever been created. There're well over a billion users of Microsoft Office in the world and they have no reason to ever do anything different. Whether it's on their phone or on their laptop or wherever it is. Those products are embedded in our working lives.
So the intrinsic value of Microsoft has risen. Substantially I'd say. And it is a great business. And so the intrinsic value is one thing. The price of gold in dollars is a separate thing. So we don't want to make the mistake of going from the price of gold in dollars through to the intrinsic value of Microsoft, which has certainly not lost any of its value in the time frame that you describe. But it's a good question and you made me think. And you provided our listeners with a fun little exercise. And I thank you for it, Harold.
And that's another podcast, folks. We love doing this every week. This is like one of the best gigs I've ever had in my life and I hope you will just keep tuning in. So be sure to check out our recently-revamped website where you can listen to all of our episodes and see transcripts from the shows. And you can enter your e-mail to make sure you get all the latest updates. Just go to that same address, www.InvestorHour.com.
Well, that's it for this week. Love us, hate us, just don't ignore us. And thanks for listening and I will talk to you all next week. Bye-bye.
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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 copyrighted by the Stansberry Radio Network.
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