Dan leads off with a shorter Rant segment this week, about how hard it is to do short-term trading because of all the big traders with billions of dollars that you’re competing against in the market. He says it’s as hard as trying to open an online retailer to compete against
Investors can profit from actively investing their own money, but they need to be more long-term oriented. Dan also shares the “Coffee Can” story written by Robert Kirby back in 1984. It’s all about how an investor followed his adviser’s buy recommendations, but not his sell advice… and wound up making a huge amount more money as a result of holding good companies for the long term.
In our What’s New segment this week, game software provider Zynga is selling its San Francisco headquarters and making $600 million—a ton more money than it’s made on its real business.
Then Dan runs through a few “macro” bits in the news, suggesting that volatility is likely to increase over the next three years. Dan shares some personal research he did on the VIX, which he believes indicates that, the farther the VIX gets below 15, the more it resembles a “coiling spring,” set to soar.
Different articles, including one in the Stansberry Digest, suggest safe haven stocks like large-cap dividend payers and utility stocks are set to disappoint investors.
Lastly in What’s New, Dan shows how Amazon might attract regulatory scrutiny – including those calling for a breakup of the online giant – by eliminating “mom and pop” suppliers where it spends $10 million a year or less.
This week’s interview is with asset manager Mark Yusko. Mark is the CEO and Chief Investment Officer of Morgan Creek Capital Management, LLC, a registered investment adviser formed in July 2004 to provide investment management services based on the University Endowment Model of investing to wealthy families, individuals and institutional investors. Morgan Creek currently has $ 1.6 billion in assets under advisement in non-discretionary accounts and discretionary funds. Prior to forming Morgan Creek Mark served as the Chief Investment Officer for the University of North Carolina where he founded the UNC Management Company providing outsourced investment management services to select schools within the UNC system. Prior to joining UNC Mark was the Senior Investment Director for the University of Notre Dame Investment Office where he joined as the Assistant Investment Officer. Mark is a fascinating guy, with an encyclopedic mind. He discusses his background in managing university endowments.
Mark has an encyclopedic mind. After describing his background and current business at Morgan Creek, Mark holds forth as only he can on a number of interesting topics.
One of the most interesting things about Mark is that he’s a highly value-oriented investor who is also very bullish on bitcoin. Many value investors think bitcoin is a fad and won’t exist one day. Mark says he’s “super long” bitcoin in his portfolio and believes blockchain technology is the biggest wealth creation opportunity he’s ever seen in his career.
Along the way, Mark comments on gold, sound money, banking, the fascinating history of accounting (yes, it really is fascinating) and much more. There’s only one way to appreciate an interview with Mark Yusko. Sit back, relax and listen to every word of it.
In the mailbag this week, Dan reads emails from Matthew S., Jeanne S., Steve H. and Al M.
Dan let’s Matthew know he sounds like he’s doing a good job, tells Jeanne that she’s spot-on about the kind of guests he’s looking for, applauds Steve’s excellent comments about bitcoin and agrees with Al that bond ETFs could blow up if investors sell them aggressively enough.
CEO and Chief Investment Officer of Morgan Creek Capital
Mark Yusko is the CEO and Chief Investment Officer of Morgan Creek Capital Management, LLC, a registered investment adviser formed in July 2004 to provide investment management services based on the University Endowment Model of investing to wealthy families, individuals and institutional investors. Morgan Creek currently has $ 1.6 billion in assets under advisement in non-discretionary accounts and discretionary funds.
NOTES & LINKS
00:01:14 Dan recommends asking if trading is really within your circle of competence.
00:01:43 Most people confuse the ease of opening an online account with ease of making money.
00:03:08 Dan shares a quote by @mikeharrisny from Twitter, a quantitative trader
03:56:00 Well-financed investors approached @mikeharrisny to produce software the would fake individual traders into trading signals
00:05:19 “High purchasing power is the only true edge in markets.”
00:05:41 “The size of the competition is something individual investors simply don’t comprehend.”
00:06:27 Opening an online account “has a positively egalitarian feel to it, does it not?”
00:06:42 Short term trading is a lot less like growing your own money tree in the back yard and a lot more like trying to compete with Amazon.com as an online retailer.”
00:07:13 The odds of success are probably worse with short-term trading than they are with opening your own online bookstore!
00:07:34 Is so-called passive investing on the verge of becoming riskier than folks think…?
00:08:50 Robert Kirby’s 1984 article, “The Coffee Can Portfolio” is free online. Google it.
00:10:24 “Sell advice in general sucks!”
00:11:03 If you’re doing a whole lot of buying and selling, I bet you won’t do well over time
00:11:10 If you’re conscious of the kind of businesses you own, and hold for the long term, you can develop a genuine advantage in the stock market.
00:11:45 Human beings just don’t want to leave their accounts alone for very long
00:12:27 What’s New segment
00:12:38 Zynga selling HQ building for more than they’ve made in their real business
00:13:56 Dan runs through some “macro” news items
00:14:34 Low volatility stocks hit a new high recently
00:14:49 Recent press articles indicate money pouring into low volatility funds
00:16:14 Morgan Stanley strategist says yield curve does an excellent job of forecasting volatility three years in advance
00:19:24 The safe haven characteristic of utility stocks is set to disappear soon
00:19:57 Rare earth metals aren’t rare
00:21:07 The most popular rare earth metals are “fraudium, scamium and storium”!
00:21:25 Bloomberg: “Amazon is poised to unleash a long-feared purge of small suppliers”
00:23:21 Lots of folks are calling for a breakup of Amazon
00:23:37 Facebook, Google and Amazon will attract regulatory scrutiny, leading to calls to break up the companies
00:24:25 Interview segment with guest Mark Yusko
00:26:51 If you decide not to be a doctor, do it before you take the MCATs!
00:29:40 “I got the call…”
00:30:18 Mark’s first epiphany: investing is about getting asset allocation right
00:32:09 Mark talks about his company, Morgan Creek Capital.
00:32:50 Portfolio construction: an often overlooked component of investing
00:33:46 Mark’s firm invested in Alibaba, Facebook and Lyft when they were private
00:35:27 There are only four things you can own: stocks, bonds, currencies and commodities
00:36:04 Hedge funds are not an asset class, they’re an “access class”
00:36:53 We try to help people think differently about investing… including blockchain technology
00:37:09 The 14-year cycle of computing technologies since 1954
00:37:54 How economist Paul Krugman got the internet wrong
00:38:18 2024: the blockchain era begins; the internet of things; the internet of value
00:38:59 How Notre Dame turned $500,000 into $200 million
00:40:34 Mark and Dan talk about George Gilder
00:41:44 The “beginner’s mind” of youth
00:42:39 Why Mark follows Rod Collins’ work
00:44:01 the genius of blockchain technology
00:44:32 “This is going to be the biggest wealth creation opportunity any of us are going to see in our lifetime.”
00:45:18 The amount of disruption is going to be absolutely profound
00:45:29 Mark’s “Chapter Three”
00:45:48 Why Mark is “super long” Bitcoin
00:46:12 the most asymmetric risk/return profile of any asset
00:47:00 “Bitcoin is a couple things…”
00:47:18 the Bitcoin blockchain is 1,500 times more powerful than the biggest supercomputer in Switzerland
00:47:56 At it’s core, it’s a network
00:48:06 “A store of value, like digital gold”
00:49:29 Bitcoin as a store of value
00:50:05 “Gold is an amazing thing, and it’s a very improbable thing… a perfect store of value”
00:51:03 Why gold became a perfect store of value
00:52:36 Why it still takes 2 days to settle stock trades and a month to settle bank loans
00:52.56 The analog is shifting to the digital world
00:53:00 Digital storage is “far superior, more portable”… than gold
00:53:55 Everything of value will be digitized
00:54:44 Sound money vs unsound money
00:57:33 A brief history of single, double and triple entry accounting
01:01:21 Mark’s final thought…
01:03:28 How to think about your portfolio
01:05:22 Diversification, innovation and crypto
01:07:02 Mailbag segment
01:09:34 First time I bought bitcoin as an asset allocation
01:10:30 My ideal guest
01:15:27 “This time around, it could get really super ugly.”
Announcer: Broadcasting from Baltimore, Maryland and all around the world, you’re listening to the Stansberry Investor Hour. Tune in each Thursday on iTunes for the latest episodes of the Stansberry Investor Hour. Sign up for the free show archive at investorhour.com. Here is your host, Dan Ferris.
Dan Ferris: Hello, and welcome to another episode of the Stansberry Investor Hour. I’m your host Dan Ferris. I’m the editor of Extreme Value, that’s a value investing service published by Stansberry Research. Okay, let’s get to it. Let’s get to the weekly rant. Now in last week’s rant I talked about a mental model used by Warren Buffett called circle of competence. You remember this?
I said to imagine a circle. That circle is what you think you know. Then imagine a smaller circle and for some of us a much smaller circle inside that first circle, and that smaller circle, that is your circle of competence. That’s what you know well enough to say that you really know it at all. Now during my rant, I said that you should ask if buying and selling publicly traded stocks, bonds, options, whatever else you’re doing is truly within your circle of competence.
It’s a real question that I think you need to ask. I think some people just say, “Hey, you mean I can open an Ameritrade account with $2,000.00 and start trading right away? I’m going to do that. It’s easy, right?” But I don’t think it is easy. I think it’s really hard, and I think most people confuse the ease of opening an online account with the ease of making money, and the two are just not anywhere alike.
So, for most people I think this activity of trading, short-term trading is really what I’m talking about, of trading stocks or trading options, really, it’s outside their circle of competence. Now I use Twitter from time to time, and there’s a guy on Twitter that I really like. His name is Michael Harris. His Twitter handle is @MikeHarrisNY, and he’s a quant, a quantitative trader. That means he knows crazy math that the rest of us just don’t know, and he processes price data through all these crazy mathematical techniques.
So, back in 2016, Mike published a short article which he recently kind of retweeted on Twitter. It was a short article called “Hedge Fund Secrets” which I would encourage you to look him up and look that article up. It’s eye-opening to say the least. I read it recently when he retweeted it, and I thought, you know, there’s a really good quote in here, so I’m going to read a little section from this article, and this actually happened.
What he’s writing about happened to him in the early 90s, and here he goes, “I was approached by someone who worked for some wealthy investors and was asked if I would help them develop a software program that could determine the probability of some classical chart patterns forming and indicator signals occurring. I thought they needed to front run those signals, but as I found out, they actually wanted to first contribute to the final realization of the signals but then fade them and profit from pulling the rug from under retail investors’ feet, because that was the only way to make a lot of money given that trading is a zero sum game.”
So, there’s a lot in there to think about, but the basic idea if you caught it is that people with lots of money, tons of money, wanted to figure out all of the kind of chart patterns that people like, and I know a lot of people do this kind of thing. They do what they call technical analysis, what I would call very naïve technical analysis, and I equate it with seeing faces in clouds that are rolling by, or you’re in the kitchen and you’re looking at the tile and you say, “Oh look, that’s a little face in there” and it’s random. The pattern isn’t really there, but your brain puts it there.
And so, there’s all these things, head and shoulders and double tops and double bottoms and cup and handle and wedges and triangles, all this technical analysis stuff that people think is right that I question. What this quote is saying is that they wanted software to indicate when one of those signals, one of those formations or something was likely to be realized. Then they wanted to go into the market, push a bunch of money in that direction so that all of the naïve folks following these signals would then commit.
And then once they committed, these guys with a ton of money wanted to get back in and go the other way. Mike finishes his article by saying that he thinks, “High purchasing power is the only true edge in markets” meaning if you have enough money to shove prices around, you can do all kinds of things. That’s the biggest advantage you can have, right? With high purchasing power it just means you have enough capital to move markets in your favor.
Now I don’t agree that that’s the only edge, but I think the size of the competition is something that individual investors simply don’t comprehend. They don’t think about who they’re competing with. As an individual trading on a daily or short-term basis, you never know when the market is kind of misleading you or not. You never know when the signal you think you’re trading was put there on purpose by someone else with enough money to do that and fake people out or not.
Look, life is not easy if you don’t have enough money. I understand very well the desire to just quickly, easily access the stock and option markets and try to make a ton of money. It has a positively egalitarian feel to it, does it not? Anybody can open an account. Actually, I’ve seen $500 on some of these things, but it’s not easy. It’s really hard to do short-term trading. It’s a lot less like growing your own money tree in the back yard, and a lot more like trying to compete with Amazon.com as an online retailer.
Imagine somebody comes to you and says, “Hey man, great idea. Let’s open a brand-new online bookstore.” You’d laugh them out of your house. You’d say forget it, no way, right? But for some reason people get this idea, “Hey man, I’m going to go trade option and stocks, do short-term trading and make a lot of money” even though the odds of success are probably worse. You probably make a few bucks with the online books versus what you’re going to do with short-term trading.
Look, I do believe it’s possible to grow your capital as an active investor but one who’s kind of more passive and long-term oriented than that. Even the passive investing, what people call today the totally passive investing of just throwing your money in an index fund, I kind of have to question that. I saw an article recently that said 50 percent of investors in the stock market own an index fund. Now that’s not like saying half the stock market is in index funds, but I think we’re rapidly approaching that level too.
So, what happens when we get 50%, 60%, 70% of the stock market in these index funds? Maybe largely through ETFs and various index funds like Vanguard type. What happens then? Because the algorithm there is real simple, right? They get money in, they buy stocks. There’s no sell strategy except, oh, investors want their money out, oh, we have to sell stocks and that’s it. When do people want to sell? Well, generally all at the same fricking time.
So, that might not go well over time, too. It might behave very differently than folks are currently thinking. One last thing here. We had Chris Mayer on the show, Chris Mayer of the Woodlock Family House on the show not too long ago, and he likes to talk about a guy named Robert Kirby who wrote a piece in 1984 called – I think the piece was actually just called The Coffee Can Portfolio, and you can look it up online. It’s free and available.
The idea was that Kirby worked for this big investment company, and he had a client who was a woman whose husband had died, and the husband had done something interesting with their money. They actually split their money in half, and she managed her half and he managed his half, and I think Kirby was like their broker or their representative or something, and he fed them all the firm’s recommendations.
She followed all the firm’s buy and sell recommendations. He followed all the firm’s buy recommendations. He threw $5,000 at every single one of them and forgot about them for decades, and then he passed away and Kirby was instructed by the woman to merge the two accounts together, and what he found was amazing. The guy had taken $5,000, put them in every stock the firm recommended, and forgot about them, and it was a weird looking portfolio, right?
A number of these little holdings had $2,000 or $3,000 left, but some of them, several of them, had more than $100,000 and one of them was like $800,000. I think that one position as I recall exceeded the entire wife’s portfolio. So, basically this guy learned, “Oh boy, our firm’s sell advice sucks and sell advice in general sucks.” I think it was a company called – the predecessor company of Xerox he had bought, and it split and became Xerox and paid a bunch of dividends. The value of it just went crazy, from $5,000 to $800,000 or more.
So, what I’m trying to show you is there we had the quote from Mike Harrison, then we had The Coffee Can Portfolio, and what’s the difference? Time, and the general level of activity. If you’re doing a whole lot of buying and selling, I am going to bet that you’re not going to do well over time, but if you are conscious of the kind of businesses you own, and if you just put a little money in each one when you find a good one and forget about it for a long time, I think you can develop a genuine advantage in the stock market.
Now, it’s not one that anybody wants because why? Because it takes a long time to get it. You have to wait and wait and be patient and not do a whole lot, which is like something human beings just don’t want to do. They don’t want to not do anything. They want to go in and mess with their account and buy and sell a whole bunch of stuff today and tomorrow and the next day and every day, and it just doesn’t work because there are folks out there much bigger than you pushing things around in ways that you can’t fathom. In the short-term, you’re competing against Amazon.com, basically.
That’s the rant. I’m going to do some news. I’m going to do a little more news today than normal. If you didn’t like the rant, if you liked the rant, if you thought the rant was stupid or crazy or smart or funny or whatever, write to us at [email protected] and let us know what you thought. Okay, now what’s new?
So, real quick, first of all, I saw this item where it was Zinga, the gaming company, the gaming software company based in San Francisco, is selling their headquarters building, and they’re going to get a net cash benefit of roughly $600 million this year from that. They bought it in 2012, seven years ago, for $234 million. They’re going to make a fair amount of money on this building, $366 million? Is that what that is?
So, I got curious and I went, and I looked to my trusty Bloomberg and I looked at all the net income they’ve made since they’ve been a public company, and it’s negative $872 million. So, they’ve lost $872 million in their business, and they’ve made almost $400 million on their headquarters primarily I assume because it’s in San Francisco and everything there is exorbitantly expensive.
By the way, I think it’s a good move, I mean if you got a building in San Francisco that you’ve had for any length of time, selling it and leasing it back is probably a good thing. Just wanted to pass that along. I thought it was kind of funny. Okay, so there’s a bunch of macro things that I noticed. I’ll try to get through them pretty quick.
The first one is from our friend Jason Geffort at SentimentTrader.com, and he noticed that the Dow Industrials, let’s see, he put this piece out on May 28th, he noticed the Dow Industrials lost ground for five straight weeks. It was the second worst stretch since the financial crisis and among its worst since 1900 he says. He says it’s relatively unusual to see such a string of losses relatively close to a 52-week high, and over the past 40 years he says that’s led to excellent returns, but before the past 40 years not so much.
Another thing he noted was that low volatility stocks within the S&P 500 hit another new high this past week, but the high beta ones, the more volatile ones, fell to a – what did he call it – a 50-day low. And you’ve seen articles, there have been articles I think maybe in Wall Street Journal or Barons I want to say that I just looked at real quick that were saying that there’s been a lot of money pouring into the low volatility funds, and I think Grant’s Interest Rate Observer also put out a piece earlier this week saying the same thing.
The low volatility funds are kind of strange because they own stocks like McDonald’s and Coke and Disney and whatever else, large cap dividend paying stocks, but what happens if everybody wants low volatility stocks? Well, then the money pours in there and at some point, they’re not going to be low volatility anymore. It’s so weird, isn’t it? There’s no strategy you can pin down that stays in that way. There’s no factor that will always be a good idea. As soon as it becomes popular, oh, bad idea, and I think low volatility is that way, too.
So, speaking of volatility, a little piece on Zero Hedge. Actually, Zero Hedge was just reporting what Morgan Stanley said. Now, there’s a guy at Morgan Stanley who is an equity strategist named Michael Wilson. He’s been consistently bearish recently, and he says, among other things, that the yield curve has done an excellent job of foreshadowing volatility, of foreshadowing the VIX three years in advance. So, in other words, when the yield curve – actually, let’s just keep it simple.
When the yield curve does what it’s been doing lately, in the following three years volatility soars. He’s got a chart just going back to the mid-90s showing that, which I thought was interesting because I too believe that – any time for me the FIX is under 20 these days, maybe not in the past all the time, but right now the way I’m thinking of it with the market still near all-time high valuations, any time the VIX gets below 20 I’m always thinking, well, it’s going to turn around and head back up at some point, and then when it pushes down to 15, 14, those kind of levels.
Because I did some research maybe a year or so ago, not too long ago, and I found out the modal value, there’s the mean and the median and the mode, and the mean is the average, what we call the average, and the median is the number in the middle that’s in-between the highest and lowest value, and then the mode is the most commonly occurring value. That was like 12 something, around 12 when I did it. So, any time it starts pushing back toward 12, since I’m bullish on volatility, I keep thinking, well, this is a coiling spring and it’s going to take off at some point. I truly think that’s going to happen.
Now, I want to point out something that was in the Stansberry Digest not long ago, and it was – who said this? Our colleagues Justin Brill and Corey McLaughlin pointed out that utility stocks have generally been seen as a safe haven, but that – and they were actually quoting our colleagues Ben Morris and Drew McConnell who noticed something about the XLU, the utilities ETF.
Whenever the dividend yield got to around 3 percent, when the utilities rally of course the price goes up and the dividend yields fall, and utilities have rallied pretty consistently since the 2009 bottom, and they’ve had some peaks and valleys, but generally you can always buy the dips and they continue to go higher. They’re kind of at that 3 percent level now, and they’ve bumped along. Since 2015 they’ve kind of bounced on that 3 percent level the fourth time now.
And so, when you see that, and they were well below, they were down to like 2.5 percent in 2008 pre-financial crisis, and when you see that they say it’s probably just about – in the past it’s been over, the rally has been over, and this could be the bull marketing utilities and the safe haven characteristic is what they were really pointing to could be over.
I think they’re exactly right. Again, my point that I made a moment ago, when everybody thinks something is safe and thinks it’s a good idea, it turns into toxic waste eventually. I mean look, if Wall Street could turn the U.S. 30-year mortgage into toxic waste, trust me, utilities can become toxic waste too. They can perform very, very poorly.
Just looking around the world in some other kind of macro news, you’ve heard a little bit of talk about rare earth metals, and there was this highly publicized visit by Chinese President Xi Jinping to a rare earth – it was actually a magnet maker. They make magnets with rare earth metals in China. The idea was he was trying to send a message. There’s this trade war going on between the U.S. and China, and he was trying to say, “Well, we still hold some cards, buddy, because we have a lot of rare earths.”
All I can tell you is I’ve been around a lot of people in the mining business, and I just want to tell you real quickly, rare earths ain’t rare. There are rare earth deposits in Europe, United States, other places. There’s plenty of rare earths to go around. Now, if you’re talking about processing and that kind of thing and magnet-making, maybe China could hold us up a little bit and they could certainly kind of hold the smart phone industry up a little bit, but I think it’s a mistake to get too frightened about this, and that’s all I’m going to say. I think rare earths have been one of the biggest – the most popular rare earths are fraudium and scamium and storium. Those are the ones that people really need to know about.
So, moving from the macro to micro, I have to mention Amazon, and then we’ll get to our guest today. There was an article on Bloomberg earlier this week says, “Amazon is poised to unleash a long-feared purge of small suppliers.” So, Amazon, they do two things. They buy products wholesale like a normal retailer and they sell them, and they also have the Amazon marketplace where they simply offer – the supplier really becomes the retailer via Amazon, right? The supplier sells directly to their customers through Amazon.
And Amazon is saying, “Well, what we’re going to do is we’re going to purge” – and the sources for this article say basically vendors who are selling less than $10 million in products each year will no longer get wholesale orders from Amazon. They weren’t real specific on categories of products, but you see what Amazon is doing, right?
They’re trying to consolidate, they’re trying to cut costs, and they’re trying to get rid of these small suppliers that they don’t need, and it gets rid of their inventory, too, so they’re not buying $10 million or less in all these little products and keeping all these little piddly-ass inventories that probably build up to a significant number. That way then they’ll just get a slice of whatever those folks can sell, and I imagine it’ll be less.
Basically, the point of this article I think is correct, lots of little mom and pop suppliers from Amazon are going to get hurt because who’s ever heard of you? You’re selling to Amazon, you get these big orders, and who’s ever heard of you if you have to go direct to the customer through Amazon? So, people like Proctor & Gamble won’t be affected. Lego the toy company won’t be affected but lots of little businesses will.
I just thought that was an interesting article because I see a lot of stuff about people wanting to break up Amazon because they view it as having monopoly power, and these kinds of things are what attracts that attention. Amazon and even other of these big new tech companies, Facebook and Google in the ad market, they’re going to exercise pricing power and other kinds of power in the market, and they’re going to attract the wrong kind of attention, and who knows? This might be like standard oil part two where people say it’s time to break them up.
I’m not sure how that would be for investors. I think certain parts of Amazon like Amazon AWS web service is probably a phenomenal business, but maybe the retail is struggling if they’re having to do things like this, or maybe they’re just being smart. I guess we’d find out if they split up and became a separate company.
Okay, it’s time for our interview with Mark Yusko. I’m so excited to have this guy on the show. This is going to be a really good talk, I promise. Mark Yusko is the CEO and chief investment officer of Morgan Creek Capital Management LLC, a registered investment advisor formed in July 2004 to provide investment management services based on the university endowment model of investing to wealthy families, individuals, and institutional investors.
Morgan Creek currently has $1.6 billion in assets under advisement in nondiscretionary accounts and discretionary funds. Prior to forming Morgan Creek, Mark served as the chief investment officer for the University of North Carolina where he founded the UNC management company providing outsourced investment management services to select schools within the UNC system.
Prior to joining UNC, Mark was the senior investment director for the University of Notre Dame investment office where he joined as the assistant investment officer. So, please welcome to the show Mark Yusko. Mark, welcome. I’m so glad you could be here.
Mark Yusko: Thanks for having me. I’m excited to have the conversation this morning and great to be with you.
Dan Ferris: So, Mark, before we talk about what you’re doing now and what kind of investor you are, how did you get started in finance? How young were you when you first kind of got an interest in this?
Mark Yusko: I wish I had one of those great stories where I was trading stocks in middle school and was really interested in it, but that’s not the case. I would say my life has been a series of happy accidents. They have all been happy fortunately, and I kind of got here in a random way. I’ll try to give the short version although I’ll say up front that I don’t do short well, so if I ramble just cut me off.
We go back to I grew up on the West Coast. I grew up in Seattle, Washington, and then in high school my dad was one step removed from the military. He worked for Anderson Consulting. So, I went to three high schools. I went from Seattle, Washington wearing bellbottoms and long hair to Weston, Connecticut where I had to cut my hair and wear corduroys, to Houston, Texas where I had to get a cowboy hat and cowboy boots and go to the rodeo.
I learned to be very adaptable. Went to Notre Dame. Thought I wanted to be a doctor. Went all the way through, took MCAT. If you decide not to be a doctor, do it before you take the MCAT. That was a bad thing. Decided that I didn’t want to be a doctor, and there aren’t a lot of jobs if you’re coming out of school with a premed degree back then in the 80s, so you could be a pharmaceutical sales rep, and I would say since I’m not 6’5’’ and gorgeous I couldn’t do that, or you can be a consultant.
So, I had a job with a consulting firm, and the principal said, “If you could get a business degree, why don’t you go do that since you didn’t have any business training?” So, I went to University of Chicago right out of undergrad, which again I don’t recommend, but it worked for me because it was my first exposure to finance and investing and I really kinda fell in love with it, although I didn’t know how much I fell in love with it because I took the first job that was offered.
I’m a good practical firstborn son, so I got a job in an insurance company. I was a business analyst. If I was a resume inflator, I’d say I was an M&A analyst because we basically bought small insurance companies and I did spreadsheets because no one else knew how to do spreadsheets ‘cause that’s how old I am.
I did that for about nine months, and then the guy who was doing investments retired, and the boss said, “Hey, you’re a smart guy from Chicago. Why don’t you help me do the investments?” So, I learned about bond investing. I say I hired Dan Fuss before he was famous, the famous Luma Sales bond guy, so we did a little bit outsourced, we did a little bit in-house, and then again, happy accident, I met a friend who introduced me to an investment firm.
It was a really cool firm. It was the first quant shop spinout of university professors to raise real money. These two professors were using the mainframe computer at Northwestern University to do screens back before screening existed. There were no PCs back then. Long story short, I went to work for these guys. We had a billion dollars back when a billion dollars was a lot of money, and they had this edge that they got the tape from Compustat on day one, and then it went out snail mail to everybody else, so they had a four-day lead in running these screens and making investments, and that was a great edge.
Now that edge doesn’t exist today, but it was a great edge back then, and they were value guys and they taught me the idea of value and what it means to buy things below their intrinsic value, what it means to really focus on value investing as a discipline. So, I did that for a number of years and then I got the call, and again I’ll try to keep it shorter, but Lou Holtz was the coach at Minnesota back then. He had a lifetime contract unless Notre Dame called.
And I joke I got the same call, not to be the football coach, but Notre Dame called and said, “Hey, we want you to come back and help us with the endowment.” I just wanted to be back at Notre Dame, so I left. I went to Notre Dame. I was the assistant investment officer; there were two of us. We basically were learning how to build an endowment model portfolio with Cambridge Associates’ help, and we emulated the best Harvard and Yale and Princeton and Stanford.
We did some good stuff. I learned the endowment model of investing, and that’s when I had my first epiphany that investing isn’t about picking stocks and bonds. Investing is about getting asset allocation right. You could be in the best performing stock in a particular market, but if that market is out of favor like U.S. stocks from 2000 to 2010, the index was down 1.9 percent a year for ten years. Even if you pick good stocks in that tough market, you could’ve done way better being in the worst emerging market stock which compounded it 10 percent a year for the next decade.
So, asset allocation became a big thing for me and trying to get out ahead of new trends and new segments and new markets. So, I left Notre Dame in 1998, came down to North Carolina. They had never had a CIO before, so it was – I use the basketball analogy – my first year was a reverse tomahawk slam, second year layups, third year free throws, fourth year had to take a jump shot, and the fifth year I had to try some three-pointers. They basically had a stock, bond, and cash portfolio.
We introduced private equity, venture capital, hedge funds, derivative strategies, and all other ways of focusing on alpha instead of beta, again with a value discipline and a value focus, and then I got approached seven years later in 2004 by two wealthy families and said, “Hey, will you come be our CIO?” I said, well, I don’t know if I just want to work for one family, but how about we form a registered investment advisor where we could work for multiple families or other small institutions? And that was the beginnings of Morgan Creek. I’m sure we’ll talk more about what Morgan Creek does, but that’s the shortest version I can give you of a background, sorry.
Dan Ferris: Oh, that’s a great version. No, don’t apologize at all. So, tell us about Morgan Creek. What do you guys do today?
Mark Yusko: So, we started very simply as an outsourced investment office, so we played CIO for families, institutions that didn’t have staff, and we would help them with asset allocation, manager selection, and portfolio construction. Asset allocation is do I want to be in stocks? Do I want to be in bonds? Do I want to be in real estate? Do I want to be in private equity or venture capital? Manager selection is finding the best talent around the world, and that’s one of the things that we felt we did well.
We were backers of early talent, some of the first money into many of the name brand hedge funds or private equity groups or venture capital funds around the world, and then we helped with portfolio construction which is an often-overlooked component of building a good portfolio. You think, okay, I’ve got ten managers. Do I give them 10 percent each, or do I give 50 percent to one and 5 percent to the others?
That matters. It actually matters a lot, but people spend very little time on that, so we spent a lot of time on portfolio construction, and then we outsourced security selection which is only about 15 percent of long-term investment returns. Most returns come from asset allocation and manager selection. So, we built that business and then we morphed into fund of funds, so we helped people build diversified portfolio of hedge funds or venture capital or private investments.
Then we started making co-investments alongside our external managers, and then we started building co-investment funds, and then ultimately special purpose vehicles to invest in single deals. So, we’ve helped people get invested in Ali Baba when it was a private company or Facebook when it was a private company or most recently Lyft when it was a private company. We don’t really care if the price is down from $80.00 to $60.00 since our cost is in the teens. We’re pretty happy with Lyft.
So, we built those businesses, and then most recently we’ve done a little bit of a pivot to raising our first dedicated infrastructure investment fund where we’re the principle investors as opposed to an allocator or fund of funds, and we raised a fund around blockchain technology called the blockchain opportunity fund about a year ago and have been investing that, and actually have put all that money to work in the past year and are getting ready to raise fund two.
Dan Ferris: So, tell me about the infrastructure fund. Is that equities or direct investments or what is it?
Mark Yusko: Yep. Really important point, so yes and yes. We can talk about kind of my crypto journey shall we say. We’ve been in business at Morgan Creek for 15 years, and most of that time has been focused on traditional assets as well as integrating alternative investments into portfolios.
So, we’ve been big investors in hedge funds, we’ve been big investors in private equity and venture capital, energy and natural resources, commodities, as I said derivative products or hedging strategies. So, one of our big bylines, I would say there’s no such thing as alternative investments. There’s only four things that you and I and everybody else listening to this can own: stocks, bonds, currencies, and commodities. Everything is just a combination of that.
People say, “What about real estate?” Well, you’re on the equity of the deal, the debt of the deal, or the land, the commodity. Well, what about private equity? Well, private equity you own convertible bond, preferred stock, or common stock of a business. The only difference is it’s illiquid as opposed to liquid like a publicly exchange traded stock.Bonds; you can own bonds, or I can own direct lending portfolio which is the same risk as a bond. So, stocks, bonds, currencies, and commodities. Hedge funds are not an asset class, they’re an access class. They give you access to managers that own stocks, bonds, currencies and commodities.
So, our big thing was alternative thinking about investments, not alternative investments. I would say whoever invented the term “alternative investments” was not a marketing genius, right? People don’t like alternative stuff, alternative music, alternative education. They like traditional stuff, and so they’re always afraid of alternatives. I’d say if you think differently about investing and you think about being a value investor, and if you think about buying what’s on sale, and you think about being greedy when others are fearful or fearful when others are greedy and kind of being a contrarian, you end up with much better long-term results.
So, we tried to help people think differently about investing, and one of those is that we like to think differently about new areas of interest, and one of those is blockchain technology. I use those two words very intentionally and inextricably linked. Blockchain is technology, and it’s a natural evolution of a 14-year cycle that has been going on for decades across computing technology, and it goes all the way back to the 1950s.
1954 we had the mainframe, and then 14 years later we had this innovation called the microchip and it allowed for microcomputers, and then 14 years later we had the personal computer. The funny story about Steve Balmer’s mom saying, “Honey, why would you go to work for Microsoft?” She said, “No one would ever want a computer in their house” and he has 18 billion reasons to say, “Mom, I was right.”
And then 14 years later we had the internet, and there’s this crazy thing that Paul Krugman said would never be more important than a fax machine, and it’s created some of the biggest wealth in our lifetime, so it’s a little bigger than that, and then 14 years later was the mobile net. So, we had these little supercomputers in our hands. Some people called them “phone” but no one actually ever talks on them anymore, they just text and look at them while they’re sitting together.
And then 14 years later, 2024, which people say, “Wait, that’s five years from now.” That’s the point. In 2024 we’re going to have the blockchain era, and blockchain technology is the equivalent of DOS for personal computers, Android and IOS for little mini computers in our hand or supercomputers in our hand, or phones, and then 2024 will be the internet of things or the internet of value, and blockchain technology will be the operating system of that new computing paradigm.
So, when we think about investing in technology, we like to invest in infrastructure. So, if you go back to the 1990s, at Notre Dame there should be a quad called the Google Quad, because we gave a little unknown company back then called Sequoia some money and they invested in this little unknown company called Google, which at the time was the number 21 search engine. So, our $500,000.00 turned into $200 million, so there should be a quad at Notre Dame called the Google Quad.
And then you fast-forward to 2010 and we made lots of money investing in companies like Facebook that seemed like a silly idea. Why would people want to have a social media company? And today, social media is what people spend a lot of their time on.
And as we come toward blockchain technology, we thought it would make sense to build a portfolio around the infrastructure of building out this new ecosystem, and so we raised a fund that invests in the equity of companies that are building out that infrastructure, either the protocols themselves, the exchanges, the tools, the data systems, same things that we did in investing in the internet infrastructure or the mobile net infrastructure 28 years ago and 14 years ago.
Dan Ferris: Wow. That is not what I thought you were going say. That is pretty cool. You know, when you talk, I get a powerful whiff of George Gilder in your words.
Mark Yusko: Oh, we can just stop talking now. That just made my month. That is such high praise and I admire him greatly, so to be mentioned in the same sentence is awesome, so thank you for that.
Dan Ferris: Well just simply because you talked about the blockchain era, and his latest book Life After Google is about that, and you’re looking towards a specific date in the future, and he’s kind of Mr. technology prediction over the past several decades, beginning with Life After Television.
Mark Yusko: Well, what George has always been able to do is he has been able to think not only outside the box, he thinks like there is no box. What he’s able to do is see a vision of the future that isn’t based on legacy systems but is based on these new truly disruptive innovations and they only come along every half generation. Why it’s a half generation, why it’s every 14 years I actually have never quite figured that out, but it happens to be 14 years, and it coalesces around youth.
There’s a preponderance of youthful energy and enthusiasm, and I think it’s because they come from the beginner’s mind. They aren’t polluted by us old guys; we’ve always done it that way or we’ve done it a certain way and we can’t think like there is no box because we sit inside the box. So, a youthful generation, Mark Andreessen comes along and envisions this thing called Netscape, and Jim Barksdale the old guy says, “Hey, I can help you craft this into a browser, and we’ll harness the power of the internet.”
And then companies come along like Netflix and say, “Oh, we’ll do video on demand.” Well, except it doesn’t work because 860 baud rates doesn’t work for video on demand. It wasn’t until broadband technology caught up to the idea. So, you need the disruptive power of innovation and you need people like George who can see out into the future, and I follow people like George and there’s a new guy I’ve been listening to, Rod Collins, another great guy for your podcast.
He’s just an amazing visionary and he wrote about Wiki management and what Wikipedia did to the encyclopedia and just the ubiquitization – I think I just made up a word – of knowledge and collective intelligence being so far superior to any single intelligence. What Rod talks about is something that I’ve really embraced, which is all of our legacy systems were built around the hierarchical model, and the hierarchical model is all about leveraging the biggest brain in the organization, so whether it’s the CEO or the chief technology officer, whoever it is, whoever has the biggest brain, the whole hierarchy is set up to leverage that single brain.
The problem with a single brain is it’s a single point of failure and centralized systems are easy to kill, right? You can kidnap or imprison the CEO, or you can bang up their server with Napster when you did the file sharing. If you have a centralized system, it’s not very anti-fragile. In fact, it’s very fragile. It’s very vulnerable.
Part of the real genius of blockchain technology is it introduces this idea of decentralization and the idea of harnessing collective intelligence and blowing up this hierarchical model of business and saying there is no CEO, there is no governance. It’s the power of the collective intelligence of the masses and an anti-fragile system that can’t be killed by killing one node of the system, and the power of that creates an exponential growth wave.
I say all the time this is going to be the biggest wealth creation opportunity any of us are going to see in our lifetime, and to say that makes people think, “Oh, that’s just ridiculous. How could it be bigger than the internet?” Well, the internet had to build itself and the companies had to build themselves on crappy – technical term – software and hardware, right? Client server technology as really crappy software and hardware. The internet and the mobile net as the platform on which we build blockchain technology allows the exponential growth to be far more abrupt and much further reaching, and so the amount of disruption that’s going to happen from this technological evolution is going to be absolutely profound and the biggest opportunity I’ve seen in my life.
My chapter one I worked for not-for-profits. My chapter two I built a nice asset management business. My chapter three is all focused on this innovation and this evolution of technology around blockchain. And then chapter four I’ll go teach.
Dan Ferris: I want to get to one specific point. I hear you talking about blockchain, but I’m just going to read a quick tweet that is a recent tweet of yours, and it says, “I’ve been the best performing asset over the past decade and five years, and this year I am uncorrelated with all traditional assets. I lower the risk of a diversified portfolio when added to the allocation. I have the most asymmetric risk return profile of any asset.” I really want to dig into that. And it says, “#IAMBITCOIN.” So, you’re long Bitcoin is what you’re telling me there, right?
Mark Yusko: Absolutely, super long. Look, I think Bitcoin as an expression of blockchain technology, so people say, “Blockchain, not Bitcoin” or “Bitcoin, not blockchain.” It’s just a silly statement. They are one and the same. The Bitcoin blockchain, Bitcoin is a use case for blockchain technology, it was the first, and blockchain technology is built upon incentive systems which revolve around cryptocurrencies as a means of securing the network. The Bitcoin blockchain is a couple things.
It is the most secure computing network in the history of computing networks. Hundreds of millions of transactions, not one fraudulent transaction in over ten years. Think about how many times you’ve had to change your Visa or Mastercard number ‘cause of fraud. Bitcoin has never had a fraudulent transaction, not ever. It also is the most powerful computing network by order of magnitude of 1,500 percent, but it’s 1,500 times more powerful than the biggest supercomputer in Switzerland.
So, it is this amazing creation in just ten years, and it took less than ten years to create $100 billion of market cap. It took IBM 40 years to reach that milestone. So, it is an extraordinary thing, and when you think about what it is at its core, it’s a network. It’s a system. It is a computing system. It is a computing platform. Its use case today is as a store of value like digital gold. Ultimately it may and is likely to also have a use case of a medium of exchange.
We just had the ten-year anniversary of Bitcoin pizza day and everybody likes to jibe the poor guy who spent 10,000 Bitcoin for two pizzas, which today would be worth $80 million, and they give him grief, and no, he deserves praise. He deserves adulation. He was a pioneer because the original Bitcoin whitepaper was all about a peer-to-peer cash exchange, and so to do the first transaction in Bitcoin was pioneering and exactly what the original whitepaper was intended to do.
Over time, people realized there was a better first use case for Bitcoin which was store of value or digital gold, but that doesn’t invalidate the fact that over time it will probably evolve to also be a medium of exchange, or perhaps a base layer protocol kind of like TCPIP which powers the internet. No one’s ever heard of it. So, lots of things we can unpack and talk about there, but Bitcoin to me is, one, incredible technology, two, an incredible investment opportunity, and three, something that I actually am quite bullish about.
Dan Ferris: Okay, so you’re talking about Bitcoin as a store of value like digital gold you said, and if we just talk about gold, real gold is very tangible, so it’s easy for as you say us old guys to understand the utter tangibility of a bar of gold or a gold coin, but Bitcoin seems so semi-tangible to me. I can’t quite wrap my head around it as a store of value. Help me out there.
Mark Yusko: It’s great. Look, gold is an amazing thing, and it’s a very improbably thing if you think about it. For 5,000 years, which is a long time, one ounce of gold has bought a fine man’s suit. That’s pretty amazing. So, it’s been a perfect store of value through the ups, through the downs, through the hyper inflations and the deflations and the disinflations, it has been a perfect store of value for 5,000 years.
Now, a number of things come up. One, why gold? Why not silver? Why not copper? The Roman solidis, which was the copper coin, was the most powerful currency in the world 2,600 years ago. Today you can buy it on the streets of Italy as a trinket for $1.00. In fact, the word “solid” comes from that, ‘cause if you had a solidis, you were a solid citizen. But copper isn’t as valuable as gold. It’s not as good a store of value.
So, why did gold become a store of value and have that use case? It’s because of faith, right? It actually doesn’t have any intrinsic value. We give it value because of faith, and we’ve deemed an ounce of it to be worth X, but that’s because really, we compare it against other mediums of exchange, whether it be dollars or REMNB or Swiss francs. So, it’s a system of money, and money is based on faith.
Now, there are some downsides to gold. One, it’s really heavy. It’s very dense. It’s hard to transport. It’s hard to secure. We have to put it in vaults and have armed guards. It’s very hard to divide. There’s one of my favorite scenes from one of my favorite movies called A Knight’s Tale and Heath Ledger wins this jousting tournament and he wins this gold calf, and he needs to pay somebody and he literally smacks the thing on the table and breaks off a leg and says, “Here, go sell it. Do whatever you do with it.”
That’s a really inexact way of splitting up gold, and if I wanted to break a gold bar it’s really hard to do, but that’s because it lives in the analog world. It lives in the physical world, and all of commerce still resides in the analog world. We still use 400-year-old technology to trade stocks. We still have paper stock certificates. Everybody says, “No, no, no, we have QCIPs.”
Well, you do have a QCIP, but a QCIP is just an alphanumeric representation of the physical piece of paper that says to DTTC, why do we still have physical pieces of paper? I don’t know. We don’t need them. We have them because the legacy systems, the seven or eight computing systems that have to talk to each other which is why it still takes two days to settle a stock trade, which is absolutely lunacy, it still takes a month to settle a bank loan, still really ridiculous. It could all happen instantaneously on a blockchain.
So, what happens is the analog world is shifting to the digital world, and digital storage of anything, whether it’s digital asset like a digital security or digital gold I think is far superior. One, it’s more portable. It’s more dense. All the gold in the world fits into an Olympic sized swimming pool, really heavy, hard to transport. All the Bitcoin in the world could fit on my cell phone.
Now I don’t have all of it in the world, I have a little bit, and I don’t put it on my cell phone because of SIM swaps, but I could put it all on my cell phone and I could transfer it across borders, and literally all of it could exist in my head ‘cause I could have my private key in my head.
So, what this technology is enabling us to do is bring us out of the analog and physical world into the digital world where I believe everything of value, every business, every stock, every bond, every commodity, every currency, everything of value in the world will eventually be digitized, and we will own things purely in digital form. We won’t have paper stock certificates. We won’t have paper mortgages and titles. We won’t have pieces of paper title for my boat trailer.
I think the title costs more than my boat trailer is worth. We won’t have that. We’ll have digital representations and we’ll use blockchain technology to exchange those digital assets over time.
So, what Bitcoin allows us to do is it allows us to have a digital native form of a medium of exchange or a store of value, and that store of value use case is so wonderful because it’s sound money. The difference between sound money and unsound money is fiat currency isn’t linked to anything. Fiat currency is based on faith, and it’s based on the government can print as much of it as they want at any time.
That’s where the word “fiat” comes from, can be created at will. In the past, all paper currencies were linked somehow to a commodity, either gold or silver or some other commodity, and so they had real value. You could exchange your green piece of paper back in the old days for so many ounces of gold or silver. In fact, the pound sterling had to do with a pound of sterling silver, hence the name.
Today, paper is paper. It has no intrinsic value. It isn’t honored by the government. If you turned your green pieces of paper into the government, they’d give you nothing for it. If you turned your red pieces of paper to the Chinese government, they’d give you nothing for it, or yellow pieces of paper in Israel they’d give you nothing for it.
So, paper is just again a medium of exchange between two parties, and what has to happen to use paper, to use fiat currency, we have to have a trusted third party. We have to have a bank, and that bank is a rent-seeking middleman that stands between you and I, so if I give my green pieces of paper to you, you have to have a bank account and I have to have a bank account.
Now what’s interesting about that is 92 percent of currency globally isn’t even pieces of paper anymore. It’s just 1’s and 0’s on a computer. So, I have to have a computer account at JP Morgan, you have to have a computer account at Bank of America, and we have to pay them a fee to transact. With blockchain using triple entry accounting, which is the genius of blockchain, you and I can exchange value directly through Bitcoin or some other cryptocurrency without a trusted third party. We don’t need rent-seeking middlemen to exchange that value, and ultimately every asset of value will be digitized, fully exchangeable, fully tradeable 24/7. Think about this, stock exchanges are closed more hours than they’re open. Banks are closed more hours than they’re open.
Now I don’t really want to trade when I’m sleeping, personally, I like sleeping, so I don’t need 24/7, but it would be nice because the rest of the world doesn’t necessarily function on U.S. time. I always love that American exceptionalism says that our banking hours are what banking hours should be. That’s not what people on the other side of the world think. They kind of like their daylight. Again, there’s a lot there of rambling ADD kind of response, but…
Dan Ferris: No, that’s okay. Just quick detail, you mentioned that triple accounting, what’s the third column? Debit, credit, and what’s the third one in blockchain, the security?
Mark Yusko: So, if you go back in time, in the early days we had single entry accounting, so they had these things called tally sticks. I would lend you money. We’d break a stick in half. We’d each carve a notch and that’s how we knew how much money you owed me. And in the 1800s, that’s the way people kept track of their money.
The UK government got massively indebted and decided to do a debt jubilee, and so they rounded up all the tally sticks and they burned them and they started over, and they adopted dual entry accounting which they took from the Medicis which had been using it since the 1400s to run the mafia so to speak, and dual entry accounting with debits on the one side, credits on the other, but it only worked if you had that trusted third party. You needed a bank to verify that debits equaled credits, and then you had auditing firms. You had this whole industry evolve around dual entry accounting, and that’s what we use to this day.
Well, if you think about it, we don’t need humans or organizations to be that trusted third party to verify the debits and the credit. We can actually have computing system, or the network be the third entry. So, one entry is your entry, second entry is my entry, and the third entry is the Bitcoin ledger which exists across thousands of nodes around the world. If you think about electronic money, electronic money tried to be created multiple times in the 1960s and ‘70s with the whole cypher punk movement, and so they finally created this thing called e-cash.
This guy named David Chaum created ECash, and the problem was if you were a really good programmer, you could actually make a digital copy of your money, and I could send you money and I could send my friend money and I could send my wife money, and nobody would know who got the original and who got the copy, and that’s called the double spend problem. There was no way to stop it because a good computer hacker could defeat somebody who was trying to enforce who had real assets versus copies.
It’s like song sharing. If I have a digital file, I could make copies of it and send it, and no one would know if they had the original or the copy. What triple entry accounting does, what the blockchain technology does, is it says, no, if Mark owns the Bitcoin and the network verifies, everyone gives a thumbs up that Mark owns the Bitcoin, and he transfers it to Dan, now everybody on the network has to say yep, thumbs up, now Dan has got the original, there are no copies, and boom, that has happened.
And we can trust math as opposed to human beings, software code as opposed to banks. When you look at the history of banking recently with manipulations of libor and fines for fraudulent accounts and billions and billions and tens of billions of dollars of fines for malfeasance, I actually like to trust software code more than people now.
Dan Ferris: Wow. Mark, I wish we had all day to have you on the program, but we’re pretty much out of time. I do want to tell everyone that they should go to MorganCreekFunds.com because if you are in love with everything you’ve just listened to, which I certainly am, Mark puts out some of the best long form writing in the financial world, and you will learn all kinds of stuff just like you just did for the past several minutes with him.
So, if I could ask you for one last final thought to leave our listener with, it sounds like it’s just “Buy Bitcoin.”
Mark Yusko: Look, one thought is long Bitcoin, short the bankers. That’s another hashtag we use on Twitter. Here’s what I would really want listeners to focus on. I believe in, again another hashtag, the value of value, and I believe that in managing our personal assets and our personal portfolios and portfolios of others as fiduciaries, we should always keep this idea of value in mind, and we should only buy things when there’s a margin of safety, meaning we should buy things below their fair value, and we should run away and sell things that are overvalued.
If we look around global assets today, we’ve had a series of bubbles created by profligate central bankers basically destroying wealth through inflation, and essentially inflation is a tax on the poor to hand to the rich, and that’s why income inequality and wealth inequality are the highest they’ve ever been since the Fed was created in 1913. It’s been a steady upward slope, and that’s because central bankers can devalue the currency at any time, and they do it under this guise of inflation is good for us. It’s not good for us. It’s a wealth tax. The reason is, the people at the top own the assets and they benefit from the currency being devalued and the price of those assets going up.
So, if you look over the last decade of QE, which has been devaluation on steroids, what’s done the best? Scarce assets, art, collectible cars, wine, real estate, anything that had leverage, and the savers have been punished because zero interest rates and negative interest rates in Europe are basically an absolute tax on savers. So, what I would say is think about your portfolio this way. Look around the world and say where do I see bubbles? I see bubbles in real estate. I see bubbles in collectible assets. I see bubbles in stocks.
Where do I see value? I see value in new technology and innovation. I see value in emerging market countries like China where assets are selling sub-ten times earnings. I see value in some other of the frontier markets, places like Argentina where it’s been a basket case for centuries, but they’ve got some good leadership today and a lot of very, very cheap assets. So, when you think about how to allocate your assets, buy things that are on sale. I say investing is the only business I know when things go on sale, people run out of the store, and the cheaper they get, the further they run.
Bitcoin to me is an example of something, it’s not as cheap as it was nine weeks ago, but it’s still really, really cheap, and over the long-term as the fundamentals improve, I think the value of that asset will only get better. Diversify your assets, and you mentioned the point I said in my Tweet about “I am Bitcoin” that it’s the most asymmetric return payout of any asset that I’ve seen really probably in my career, and I believe that.
What I mean by that is you can put a very small amount into something like Bitcoin. You can put 1, 2, 3 percent in your portfolio and the asymmetry of that hedge against a calamitous outcome of the profligacy of central bankers and massive devaluation or even hyperinflation like we’ve seen in places like Zimbabwe or Venezuela, if that were to occur in the developed world because of huge debt problems that we have, we could actually see very, very large returns to sound money like Bitcoin that could protect your assets for the long-term. So, think abut being diversified. Think about focusing on innovation, and embrace a little bit of crypto.
Dan Ferris: Well, Mark Yusko, thank you so much. That was great. I’m going to ask you right now in front of the whole world if you’ll promise to come back and see us maybe just sometime in the next 12 months or something, I don’t know.
Mark Yusko: Look, I love doing these conversations. There’s nothing more fun than talking to a well-prepared host with lots of great questions, and so I love spending time together. I’d do it any time, so happy to do it and thanks for having me on.
Dan Ferris: Thank you, Mark. I really look forward to that next conversation. Thanks a lot.
Mark Yusko: Thank you.
Dan Ferris: Okay, I hope you’re all saying “wow” right now about that interview with Mark Yusko. I love that guy. Obviously, he’s a walking encyclopedia. He’s got a brilliant mind and he’s thought a lot about the whole history of all this stuff. His latest piece is really great. And when I say long form, I say he writes really good long form stuff, I wasn’t kidding around. His fourth quarter 2018 market review and outlook is 83 pages at MorganCreekFunds.com, but it’s great.
It’s got this whole long bit about Charles Darwin. I won’t spoil it for you, and it’s really long so it’s hard to sum up, but he tells you all about Darwin and how his career got started and how he was kind of a better-than-average scientist early on, and I highly recommend it. Okay, so let’s do the mailbag right now.
Okay, ladies and gentlemen, the mailbag is extremely important to this show, you know. We really want to hear from you, and this is where we have our conversation. I want this podcast to be a conversation about investing between you the listener and me the host, and our guest, too. If you have questions for them, sometimes we can shoot them back their way and get an answer, but that’s kinda hard to do.
Anyway, look, whatever is on your mind, email us. The email address is [email protected] We really do want to hear from you.
Okay, I’ve got a couple mailbag items. The first one is from Matthew S., and Matthew S. says, “Hi, Dan. I was wondering how you view the middle ground between an experienced investor with 20 years of experience versus someone who is getting started? Personally, I can’t learn unless I have skin in the game. I have a 401K which I cannot actively manage, some real estate, and I have some money in index funds, but I also have probably more than I should, money in a portfolio that I manage actively. I make some decisions based on newsletter advice but others based on my own research.
I’ve made lots of mistakes, but I manage my risk with trailing stops and position sizing. I think I’ve improved since I started, but it won’t be easy to tell until I’ve been in for several years. I think the point you were making”, and he’s referring to last week when I was talking about circle of competence, he said, “I think the point you were making had more to do with extremely speculative behavior new people make, but it hit home when you mentioned knowing about the difference between an OTC stock versus buying on TSX.
Because I just spent a long time online and a phone call to my broker to discover that while I can buy directly on the TSX instead of OTC, they still can’t reinvest dividends for me if I buy Canadian stock. I couldn’t get a direct answer until I called and talked to my broker, though, and he probably thought I was a dummy. Working hard on expanding my circle of competence, Matthew S.”
Thank you, Matthew. A lot of stuff in there that I just wanted people to hear. I wanted people to hear that we’re all just doing this one day at a time, and I won’t comment on specific things that you should be doing, although I think trailing stops and position sizing is very wise for someone in that in-between state. I totally understand the idea of not learning about investing unless you have some skin in the game.
In fact, for the first time, well actually, I guess it’s the second time, but for the first time as a holding, as an asset allocation, I bought some Bitcoin earlier this week. I feel like now I can really start learning about it because I own it. Somehow owning it just is a little different, but I like everything I’m hearing, and I wouldn’t tell you to do anything different. It sounds like you’re in a good direction and you’re making some prudent decisions.
Number two in the mailbag, this is from Jean S. and she says, “Hi, Dan, good rant. Keeps everything in perspective. Felder” – that’s Jesse Felder, our guest last week – “Felder was an informative guest. Notice you don’t have to pull much out of your guests. They’re very forthcoming, always interesting, Jean S.” I included this because I’ve seen our guest today Mark Yusko in interviews before, and I’ve read his 80-page quarterly stuff online, so I know that all you have to do is kind of wind him up just a little bit. You just feed him a little bit of fuel and he will just go and go and go, and what comes out is like – in some ways it’s better than Warren Buffett. Buffett is always all about the business and he’s very specific, but Mark is just, he’s got this wealth of historical information, and I agree.
I like guests who you can just ask them a question, just say something, and like Mark they will just hold forth, and it’s wonderful just to sit back and listen. You are absolutely right. That’s exactly what I’m going for, Jean. Thank you for that comment.
Okay, a couple more of these real quick here. Third one is from Steve H., and I’ve seen Steve at many events over the years over a long time, many years, and I don’t hear from him so often in the podcast feedback, but he’s writing in today and he says, “Just a thought on your Bitcoin show. For tax purposes, Bitcoin is a capital asset. What that means is if I use it, I am transferring that asset to someone else in return for goods and services. It is considered a sale.
So, if I buy a pack of gum, technically I would have to track and file on the transfer of that Bitcoin. I would have a gain or loss depending on what I gave for the asset. We could buy and speculate currencies. These transactions are treated the same, however the currencies can also be used as a means of transfer, so that currency can flow freely from buyer to seller. There’s no recordkeeping or filing required.
Seems to me this is the major hurdle for cryptos. I’ve yet to hear anyone mention this. Cryptos have to be recognized as a means of transfer to have widespread adoption. Of course, this would have to come from the government, so I guess one would have to ask themselves how likely is that? I don’t know. Great show, Steve. H.”
You know, I meant to bring this up today, but listening to Mark was just so, so great, and maybe we’ll have him, and maybe I’ll shoot this to Eric Wade and I’ll shoot it to Mark and see what they say, but I agree. The only point that I would make here is that one of the things I’ve noticed, and I don’t know, Steve, if you consider yourself a libertarian or not, but it seems to me like I’ve been to these libertarian conferences and things and I’ve known a few of them over the years. They’re all way too afraid of the government, which is way too counterintuitive.
Libertarians should be saying, “Up yours.” They should be saying, “We don’t care if the government approves of this or not.” But I understand wanting to work within the law, but I’m not sure that that really will be a huge problem going forward. I think Bitcoin is so secure, it’s like the most Swiss Switzerland of all Switzerlands. It’s secret and independent, and I don’t know if that will be a problem or not. But it is a good point and it is well worth bringing up, and I’m glad you did. I hope yours truly can remember to ask the guest next time, put it that way.
One more question. It’s really long. I’m not going to read the whole thing. It’s from Al M. who is a long-time reader and a long-time correspondent here. He says, “I think discussing and comprehending the magnitude of the misinformation, the altering of economic forces due to central banks, the promotion of debt, student loans, home loans, corporate loans, credit card loans, sovereign debt, was essentially unimaginable.
All central banks in the world were attempting to force society to borrow and spend, recognizing how this fiasco compares to a more normal debt cycle is truly what good investing is all about.” And then he talks about what’s going to happen to the big bond ETFs. We’re at the end, maybe, who knows, of a 38-year bull market in bonds, and he asks, “What if the stock market drops at the same time as the bond market, which is likely if we’re in a real calamity?”
He says, “There certainly could be fear that debts won’t be paid, and then what happens when the bonds inside the ETFs don’t get a bid? They’re trying to sell bonds because people exit the ETF.” To me, this is a real issue, and I thank you, Al M. for bringing it up.
We had a guest on, we had Adam Schwartz many episodes ago talking about how his firm is short some of these bond ETFs for this exact very reason that you bring up. I agree that this time around it could get really super ugly. I think the super ugliness is probably a couple years out, but who knows? I don’t know the future, but great question and I wish I could read your entire question, but it’s just so darn long, but thank you, Al M. for that.
That’s another episode, folks, of the Stansberry Investor Hour. It is absolutely my privilege to come to you every week and talk with you and talk with our guests and ask them questions on your behalf, and I hope you’ll come back and see us next week. You can check out everything, all of our previous episodes; they all have transcripts and you can find them all at www.investorhour.com. Thanks so much. I’ll talk to you next week. Bye-bye.
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