In March, Tesla sold off about 10% of their Bitcoin…
Elon Musk said the reason they sold was to, “prove the liquidity of Bitcoin as an alternative to holding cash on the balance sheet…”
On the opening rant this week, Dan examines all the facts behind the surprising move…
And explains why he’s not buying Musk’s explanation…
Then on this week’s interview, Dan invites Thomas Ricketts onto the show.
Thomas is President and CIO of Evolutionary Tree Capital Management, a firm exclusively focused on innovation investing. Evolutionary Tree uses their unique investment process to differentiate between hype and real innovation that yields future growth.
Their approach has led Evolutionary Tree to find stocks like HubSpot, ServiceNow and Pinterest before they were well known.
During their conversation, Dan asks Thomas what the main difference between innovation investing and speculating really is. Thomas explains how his firm uses 8 special criteria to separate the hype from the legitimate long-term opportunities.
Thomas even gives the listeners a handful of stocks he loves in cloud computing and biotech – two industries he says are poised for massive growth over the coming decades.
Then on this week’s mailbag, one listener asks Dan how to buy “some additional insurance via buying put options…”
Another listener asks what Dan thinks about the sudden shift to ESG initiatives being parroted in many major industries.
And a final listener asks an excellent question about inflation and conventional economic wisdom.
Dan gives a thorough reply to this question and more on this week’s episode.
Thomas Ricketts, CFA
Thomas Ricketts, CFA, founder of Evolutionary Tree Capital Management, serves as Chief Investment Officer, Portfolio Manager, and Research Analyst. Over his 22-year investment career, he developed significant expertise in portfolio management, investment research, and executive management. Prior to founding Evolutionary Tree, Mr. Ricketts was a Sr. Portfolio Manager on Sands Capital's flagship Select Growth US Large-Cap Growth strategy, a $20+ billion concentrated strategy of high-quality, sustainable growth businesses. Mr. Ricketts was one of the longest-tenured investment professionals at Sands Capital. Over the years, he contributed to building and leading the research team and attracting and retaining a broad client base of institutional and high-net-worth clients. He earned his Bachelor of Science degree from the McIntire School of Commerce at the University of Virginia (1994), his Chartered Financial Analyst (CFA) designation (1997), and an Advanced Certificate for Executives from the MIT Sloan School of Management (2016-2017).
Stansberry Investor Hour Episode 204 Timestamps
1:44 – A shocking stat from Tesla… “Tesla earned more profit last quarter from selling Bitcoin than they did from selling cars…”
6:25 – “Elon Musk is a genius… but he’s not the most straight up guy in the world…”
9:34 – This week’s quote comes from Wayne Himelsein, CIO of Logica Capital… “While there’s constant talk of fat tails in markets, the irony is that extreme events don’t even require them – thin tails kill too… Tail size is nothing next to the unknowable when.”
12:15 – This week, Dan invites Thomas Ricketts onto the show. Thomas is President and CIO of Evolutionary Tree Capital Management, a firm exclusively focused on innovation investing. Evolutionary Tree uses their unique investment process to differentiate between hype and real innovation that yields future growth.
18:34 – Thomas shares some cloud computing companies that are creating huge efficiencies for businesses… “We own companies like HubSpot and ServiceNow…”
23:53 – Thomas talks about how he constructs a portfolio, “We own typically 25 to 35 holdings… it’s a conviction-weighted portfolio.”
28:28 – Thomas says having a small research team gives his firm a big advantage… and Dan challenges him, “Really?? Smaller teams would have an advantage investing in innovation? You’re going to have to tell me about that, Tom. To me, that’s a somewhat provocative statement.”
32:15 – “The cloud-first era is really beginning… We see a tremendous amount of opportunity across the broader cloud computing and SaaS space…”
37:51 – The biotech industry is really only 20-30 years old, and Thomas says we’re starting to see some incredible breakthroughs addressing diseases… “There’s a small number of companies, such as Arrowhead, that have developed technologies to modulate gene expression…”
41:29 – Dan gets Thomas to share his 8 criteria for investing in innovation…
47:02 – Dan likes the idea of innovation investing, but he still has some reservations… “I’m still just dying to address the difference between investment and speculation, because when I think of early innovation, the speculative element… you can’t get rid of it 100%…”
50:40 – Thomas shares another innovative stock his firm loves right now… “We own a company called Pinterest… They have over 450 million users… monetization’s just started to get turned on.”
53:20 – Thomas leaves the listeners with one final thought, “Innovation investing is coming into its own as its own investment style, and investors need a way to navigate and access these innovators…”
55:21 – On the mailbag this week, one listener asks Dan how to buy “some additional insurance via buying put options…” Another listener asks what Dan thinks about the sudden shift to ESG initiatives being parroted in many major industries. And a final listener asks an excellent question about inflation. Dan gives a thorough response to this question and more on this week’s episode.
Announcer: Broadcasting from the Investor Hour Studios and all around the world, you're listening to the Stansberry Investor Hour. Tune in each Thursday on iTunes, Google Play, and everywhere you find podcasts for the latest episodes of the Stansberry Investor Hour. Sign up for the free show archive at investorhour.com. Here's your host, Dan Ferris.
Dan Ferris: Hello, and welcome to the Stansberry Investor Hour. I’m your host, Dan Ferris. I'm also the editor of Extreme Value published by Stansberry Research. Today we'll talk with Thomas Ricketts from Evolutionary Tree Capital Management. Thomas is an investor who focuses solely on innovative companies. So we'll talk all about that with him. This week in the mailbag, gold, emerging markets, put option buying, and of course, everybody's favorite topic all the time, bitcoin. In my opening rant this week, Tesla's earnings call earlier this week was weird.
Let's talk about it. That and more right now, on the Stansberry Investor Hour. Tesla held its quarterly earnings call on Tuesday this week, and then on Wednesday, they put out their 10-Q, their quarterly report. There's a lot we could talk about. There's a lot to unpack here, as they like to say. But I can't help focusing on one particular aspect of this. And that is – and I got to give a hat-tip to Charley Grant here from the Wall Street Journal. That is the simple fact that [laughs] Tesla earned more profit last quarter from selling bitcoin than they did from selling cars. Of course, $1 would be more than they made from selling cars because they're still losing money doing that.
And as far as I can tell, the reason why they say they sold some of their bitcoin... It's kind of sketchy. I think I know the real reason, right? So let's back up a little bit. If you read Tesla's 10-K's and stuff, you know that they said in January they made this decision that they wanted to be more flexible, and they wanted to diversify and look for some more return in their investment portfolio and stuff. And so, they decided to put $1.5 billion into bitcoin. You know, that makes some amount of sense to me. I think they had around $20 billion in cash at the time... $19 or $20 billion. Something like that.
So they put $1.5 billion into bitcoin, and they're an innovative company, and they want to do different and better, and they're on the cutting-edge, whatever, whatever. That makes some sense to me. Then we get to this conference call earlier this week. And they say, "We sold" – they said they sold 10% of their bitcoin holding in late March. So the proceeds were... they sold $272 million worth, and they said the profit was $101 million profit from selling that amount of bitcoin. Huh. OK.
So why – we know they're long-term believers in bitcoin. They said it again on the call. Why did you do this? Like, Dave Portnoy, the guy who founded Barstool Sports... you see him on Fox News sometimes, and you see him on the Internet all the time. He's a really colorful guy. And he was listening on the conference call apparently. So he tweets. He posts this tweet on Twitter. He says, "So am I understanding this correctly? Elon Musk buys bitcoin. Then he pumps it. It goes up. Then he dumps it and makes a fortune."
And then, Musk replied, "No, no, you do not." Meaning you do not understand this correctly. I have not sold any of my bitcoin. Tesla sold 10% of its holdings essentially" – listen to this – "to prove the liquidity of bitcoin as an alternative to holding cash on the balance sheet." Huh. Is that so, Elon? So he's telling me they did a liquidity test by first putting $1.5 billion in and then waiting two months, then selling 10%? Elon, I'm calling bullshit. And here's why. Because I've done this before. I've run liquidity tests on my own portfolio. It's a common thing, you know?
You're buying some little, out-of-the-way, illiquid stock and you just want to make sure it's as liquid as it appears to be, at least, and you can trade it and get in and out of it. So you buy a little and you sell a little. I don't think I've ever done this over a period of more than about 10 or 15 minutes Right? If liquidity is there, it's there all the time. That's the point. So any random moment for buying and selling is, you know... should be good. You shouldn't have to wait. Doesn’t make any sense to me. So the point is, you do the liquidity test on a small amount of money before you commit the larger amount, right?
That's what makes sense. You do not say $1.5, "Let's put $1.5 billion in," two months later go, "You know what? Maybe we better make sure we can get out of this thing if we ever want to." I don't buy it. I don't buy it at all. It makes no sense. You know what does make sense? On the conference call, the CFO was asked about this. Zachary Kirkhorn, Tesla CFO. And he said, "When we did the sale later in March" – he made a point of saying they did the sale later in March. Blah blah blah, the kind of liquidity, etc., etc., "risk management," buzzwords, buzzwords, bullshit, bullshit. Whatever.
But he said later in March So they sold in late March. And it just so happened that little liquidity test added $101 million of profit right before the end of the quarter. Another quarter in which, though hitting record production, they still didn't make a profit selling cars. You tell me what the sale was about, right? Come on. I mean, look. Elon Musk is a genius. You know, I can't compete with his little finger. He's just brilliant. I mean, all the stuff he's done.
But he's not the most straight-up guy in the world. Like, what they did with SolarCity – I'm going to write about all this in my Friday Digest this week, in the Stansberry Digest. You know, what happened with SolarCity... to me, it was obvious. Tesla bailed Musk out of a major screwup and a major failure. Not even necessarily a screwup. Things fail, right? Major failure so that he wouldn't have to look like a big, fat failure in public. That's what it looks like to me. Because there was no reason for Tesla to buy SolarCity. The thing probably should've gone bankrupt.
And they're getting sued over it, you know? The board got sued. There was a $60 million settlement out of court over it. Anyway. The point is, these guys aren't above shenanigans financially speaking. Even though Musk is a genius and he's done all this great stuff, they're not above financial shenanigans. And when you got a company that is just... you know, they're ramping up production. I think the production grew like 74%. Which is great. They're producing at a rate of I think trailing 12 months, 600,000 vehicles approximately.
So good for them in that regard. But I don't know. It sure looks to me like they wanted to add some profit to the income statement before the end of the quarter. I really, you know – what else is it? Because the liquidity-test argument just doesn't wash at all. So when a brilliant guy says something kind of ridiculous, you go for the simple answer, right? Occam's Razor. "Don't multiply things beyond what's – don't multiply complications beyond what's necessary." That's all I have to say about that. I just think it's another example that Tesla is a major bubble all in itself.
I don't think it's... Charlie Graham pointed out, "If they continue on this track from the first quarter for the rest of the year, they're selling at 200 times earnings." You know? So even if you love them to death and they're wildly profitable, you got to ask yourself with this thing, "Might not just be a little bit overvalued?" And potentially a whole lot overvalued. OK? All right. That's all I'm going to say about that. Before we talk with Tom Ricketts, let me just do my quote of the week. It's very special. I’m kind of proud of this one because it came from Wayne Himelsein of Logica Funds.
Wayne's partner you might’ve heard of... a guy named Mark Green. Really smart guy. He's all over Twitter, and he appears on Real Vision a lot. He's got a lot of good ideas. And Wayne is his partner, and he tweets quite a bit as well. And he came out with this one sentence. I'll read you some more of the tweet, but there's one sentence in it that just floored me. And you'll recognize it as being something similar to what I've said. So I guess it's natural. But here's Wayne Himelsein of Logica Funds. He said, "While there's constant talk of fat tails in markets, the irony is that extreme events don't even require them. Thin tails kill too. Tail size is nothing next to the unknowable when."
And that's what got me. "Tail size is nothing next to the unknowable when." Well, in other words – as I've said – you don't know when any event, you know... whether it's fat tail, thin tail, whatever. Whether it's some giant fat-tail-type black-swan kind of event where you can't predict it, it's enormous, it chocks the heck out of everyone and sends the stock market into a tailspin. You don't need that, he's saying, right? Thin tail events. Just run-of-the-mill events can really hit your portfolio hard.
So when he talks about – when he says, "Tail size is nothing next to the unknowable when," I feel like he's getting the horse in front of the cart and putting things where they belong in your mind. Don't worry about tail size. Worry about the fact that you don't know when, whether it's thin or fat, whether it's a big event or a small event... you don't know when it's going to impact your portfolio, and you need to be prepared. Be prepared for the when, right? Be prepared that something could happen to lose your money.
And that's why I'm always saying don't predict, prepare. Because of the potentially huge impact – even in a thin tail event – of the unknowable when. The unknowable when. The words just echo through my head. I haven't been able to get them out of my head. And that's when I know I have a great quote of the week. Tail size is nothing next to the unknowable when," says Wayne Himelsein. Great quote. Love it. Thank you, Wayne. All right. We're going to talk with Tom Ricketts. Let's do that right now. [Music plays and stops]
As stocks soar, vaccines are rolled out and the American economy gets back on its feet, my colleague – Dr. Steve Sjuggerud – is stepping forward with a critical new prediction. In short, Steve is making a major announcement about what to do with your money today and how to navigate the inevitable Melt Down in stocks. If you have any money invested in stocks, this is can't-miss. Get all the details right now at stockmarketevent.com. Again, that's stockmarketevent.com. Don't miss it. [Music plays and stops]
Today's guest is Thomas Ricketts. Thomas Ricketts is from Evolutionary Tree Capital Management. The firm is focused on innovation investing which they believe is quite different from growth investing. We will definitely talk about that. Evolutionary Tree uses their unique investment process to differentiate between hype and real innovation that will yield future growth. Many of the companies they buy have not yet been added to large-cap growth indexes but are well on their way. Before founding Evolutionary Tree in 2017, Thomas Ricketts co-managed the Sands Capital Selector Growth Strategy with over $20 billion – with a "B" – of AUM. So having been around the block a few times, Thomas Ricketts is here with us today. Tom, welcome to the program.
Thomas Ricketts: Dan, thanks very much for having me on your show. I'm excited to discuss different topics around innovation investing and help your audience.
Dan Ferris: Sounds good. They will certainly appreciate that as will I. So I think the best way – we've interviewed quite a few folks who are in your line of work at this point. And the best way to go about this is sort of, teach us how to fish. Teach us how you fish, and then you could maybe throw a few fish our way in the second part of the program.
Thomas Ricketts: Sure.
Dan Ferris: So one thing I just feel compelled to ask, though, is you started Evolutionary Tree in 2017. And, you know, given sort of what's happened to active management over the past just call it a decade, starting up a firm that does active management is – there's some risk there, right? There are active managers kind of going out of business because so many assets are pushed into so-called passive strategies.
Thomas Ricketts: Sure.
Dan Ferris: So aside from the contrarian view – some people say, "Well, yeah. But that's pushed those other managers out of business and created an opportunity for me." Aside from the obvious contrarian thing, I mean, you're focused on innovation. There has to be more behind it than that. So why start the firm at all?
Thomas Ricketts: Yeah. That's an important question. I mean, that's an important secular trend in the industry, shifting from active to passive. And that's an important reality. But there's still opportunity to add a ton of value using an active approach. But I do think part of the reason so many managers underperform the benchmark and it is good to index, frankly, is so many managers are using the same cookie-cutter approach. You know, most growth managers do basically the same steps in their process, and they get to the same general portfolios and don't differentiate and add value. Same thing with value managers, perhaps.
So, you know, being different and differentiated is really important from... being different from the benchmark but also being different from other manages. And I think innovation-focused managers have a real opportunity to get ahead of the other approaches and add a ton of value. So I also think when you're investing in innovation – and I call it going "down the S-curve," or the industry life-cycle curve, and embracing emerging innovators – many of those emerging innovators are not represented in the major indexes.
So this is a phenomenal pool to be fishing in, to use your analogy. And it's hard to index innovation. You can't screen for it. There isn't a factor for it. You have to get out there, roll up your sleeves and do a lot of in-depth primary research to identify the important innovation and leading innovators and separate out the hype from the reality. And hopefully, we can touch upon a little bit on that. But there is a ton of opportunity to add value with an active approach. And I think an active approach is the best way to invest in innovation.
Dan Ferris: That all makes sense. And you're right. I was immediately intrigued by this hype-versus-reality thing that we read in your introduction. I mean, is there a particular trend or stock or something today that you think is hyped innovation versus, you know, an industry or stock you can point to as real innovation? Just to give us an example.
Thomas Ricketts: Yeah. Let me, if you don't mind, step back and build out this idea of hype versus kind of what I call readiness. And really, the bigger picture is you're looking for what we call investable innovation. Not every innovation out there is going to turn out to be a positive investment. There's a ton of innovation thrown at the wall. But only a minority goes on from mainstream adoption. And so for us, we really want to evaluate whether the innovation's really going to go to mainstream and move out of that kind of conceptual phase, that hype phase.
And there's really two hurdles. Any innovation going mainstream has to show technical feasibility. It's got to work and be reliable and be cost-effective. And there's a lot of exciting things out there – you know, robots and drones and AI. But they aren't always feasible for the applications that are often kind of hyped out there. In some cases, they might be. But in many cases, they're not. So technical feasibility is important. The second is business-model feasibility. Being able to generate an economic model that you can wrap around the innovation to drive recurring revenues and then scale into a very profitable business.
And that's not always the case for the early innovations. You know, think the Wright Brothers. It took them a long time and the industry a long time to get to a point where it really became an industry. So we're looking for investable innovation. I think your question was, you know, some examples. Right now, there's a lot of talk about autonomous driving and fully autonomous driving. I think we're a ways away from that. And yet, I think a lot of investors assume that autonomous driving is kind of ready in the very near term and have perhaps a portion of some value of that and discounting that in a number of companies that are leveraged to that.
We think it's going to take a lot longer for that technology to really be ready for prime time. You know, companies that we think are more in the zone of readiness that have technical and economic feasibility are some of the cloud-computing companies. We own companies like HubSpot and ServiceNow. These are companies that are doing a ton of innovation, creating efficiencies for businesses. And in HubSpot's case, helping companies automate the marketing department and manage digital marketing campaigns. We think there's a ton of growth and innovation there.
And that's being adopted in the marketplace. And I'll make one other comment and then I'll pause because I know this needs to be a conversation. But even if an innovation goes mainstream, that attracts a lot of competition. So we also spend a lot of time trying to understand, "Do these innovators have economic moats?" We call them innovation modes – "around their business."
So things like IP and patents, and scale advantages and technology advantages like network effects, lock-in, and switching costs. So, you know, companies like a HubSpot or ServiceNow demonstrate multiple layers of these innovation moats. And that allows them to capture so much of the value the innovations are creating. So taken together, those are the elements that lead to investable innovation. And we think that leads to a more risk-managed version of innovation investing.
Dan Ferris: I like the hype example. You don't even have to name the stock on that one, do you?
Thomas Ricketts: [Laughs] Although, the whole EV space and a lot of the newer SPACs that have come to market – I think there's a lot of discounting of a lot of growth. And there's probably many bubbles embedded in a number of the valuations there. I think some of the hype has come off when the stocks are pulled back. But it's a good example. We've delivered good results without owning some of those companies. Let's just say that.
Dan Ferris: Yes. Let's say that. OK. That's cool. I see what you're talking about. I just want to know a couple things about the firm really quick if that's OK. You know, what do you have under management, and how much do you have under management? And what are we talking about in terms of like the makeup of the portfolio? Do you – it sounds to me like you're trying to get in early in real innovation trends, and you've emphasized that you want to get in before they hit the growth indexes. It sounds like you are comfortable with a riskier situation, maybe, than somebody else might be. And so, how do you manage that? How many names do you have in the portfolio typically? And are you really concentrated in the top few, or how does it all work like that?
Thomas Ricketts: Sure. Sure, Dan. So you've embedded about three or four questions in there, which is great. Quite the challenge. No worries. So you led off with the questions around the firm. So, you know, we launched the firm in late 2017. We launched our first strategy, the Beagle Innovator Strategy, in 2018. We now have a three-year track record and we're very highly ranked relative to our peers in the index.
So we're proud of that. The firm manages over $200 million in assets. You mentioned earlier that in my prior firm I was a co-decision maker on a $20 billion fund. So very different in scale. But we're on a good path to continue to grow. We're bringing on a steady flow of new clients and assets. So we're very excited to be a sustainable firm built to last and we're on a good path. So I think you kind of segued into a little bit around the portfolio and portfolio construction. We are definitely leaning – we call it leaning into the future.
And I'll give a big-picture view. If you think of two companies out there in a given industry, one is a highly innovative company creating new products and services and features, and updating their business model. That's an innovative company... and then, that company's competing with other companies that are less or not innovative. Here's my question for you. Which is riskier? You know the answer. Less innovative companies in my opinion in the current economy we live in – I call it the age of innovation where every industry is undergoing digital transformation, becoming tech-enabled. The more innovative because... and we define innovation very broadly.
I'm not saying tech companies. I'm saying innovative companies combining – could be cost innovation, service innovation, digital innovation – combining innovation... those companies – I'm not saying all of them. You talked about investable innovation as an idea. But the leading innovators, the real innovators, as businesses. We can put the stock aside and come back to valuation... I would submit to you are not higher risk. I think in the age of innovation, the innovators are positioned to take more to take market share and oftentimes drive these evolutionary shifts as we call them from kind of an old way of doing things to a new way. And we can perhaps, during the discussion, hit on some examples. I think you asked about the portfolio. Do you want me to touch a little bit on the portfolio?
Dan Ferris: Yeah, if you would. I imagine it won't take long.
Thomas Ricketts: Sure. I'll keep it quick. So our strategies are concentrated best ideas portfolios. So we own typically 25 to 35 holdings. So around 30 holdings. It's a conviction-weighted portfolio. So newer weights typically start at smaller weights – 1%, 2%, or 3%. Then they graduate to larger weights as we gain more conviction and visibility. And we can own a number of holdings in kind of mid-to-high single-digit weights. Top 10 weights are around 50%.
And the weighted average growth rate – this is revenue growth rate to give you a sense of how fast they're growing – is around 30%. So these are faster-growing, secular growth-type businesses, highly innovative. They are earlier on the S-curve, but they're not too early. There is the idea of being kind of bleeding-edge. And we're trying to avoid that. We're trying to find the businesses that are really truly emerging and have passed some inflection point.
Dan Ferris: And Tom, maybe just for the sake of some of our listeners, describe the S-curve if you would.
Thomas Ricketts: Yeah. So the S-curve is kind of an academic concept. It's the idea of – in this case, for an industry – a new industry will typically grow at kind of a slow rate as the industry gets on its feet. And then eventually, the products and services are ready for mainstream adoption, you'll get pretty rapid adoption. You'll pass an inflection point, and then it kind of gets adopted much more broadly, and you have a period of time of pretty rapid growth.
So you're kind of growing slowly, then you grow more rapidly. Then you have a long period up the S-curve if you can kind of think of it graphically of growth. Then it eventually matures and kind of the curve flattens out. And then, it goes in a decline. And that kind of life cycle really happens for everything... whether it’s a new product or industry. And so, as an investor the goal would be to find the leaders in that emerging industry and capture them earlier on that S-curve and kind of ride up the growth... ride up the curve and then exit before maturity.
It's easier said than done, and there's a lot of art and science in that. But I do think innovation-focused managers that – rather than chasing growth, rather than waiting for an industry to grow at an above-average rate for five years or 10 years as many growth managers do, don't chase growth. Go to the root cause. That's the innovation. If you find an important innovation, that perhaps can get you earlier on that S-curve.
Dan Ferris: You make it sound so darn easy, Tom.
Thomas Ricketts: [Laughs] And it's not. And we all know it.
Dan Ferris: Right. Right.
Thomas Ricketts: But it can be indexed. You mentioned earlier about index. I do think innovation investing as a style is going to emerge into its own alongside the pantheon of value and growth. But it's one of the new styles I think that's just going to be much more difficult to index.
Dan Ferris: Right. Yeah. I agree. And I was going to say a second ago, I mean, given what we just said about how hard it is to figure this out, I mean, 30 holdings verges on gutsy to me. I mean, you know, you really – how many people... you must have a serious research capability.
Thomas Ricketts: Well, I love that you're pointing out about concentration and gutsy. You know, I want to give a nod to my mentor, Frank Sands Sr. who founded Sands Capital, who passed away recently. And he was a real evangelizer of the power of concentrated portfolios – the idea that done on 100 stocks or 200 stocks and diversify, focus on your truly best ideas. And those tend to be the higher-quality companies. They don't have to be riskier.
And back when I joined that firm in the mid-'90s, it was a vanguard to have a concentrated, focused, select portfolio in 25 to 30 stocks. But fast-forward to today, it's actually pretty accepted in the institutional marketplace that concentration probably is the best way to add value. It's called "high active share." It is gutsy. But to me, the way that you manage the risk around that is through your process, your team, and your investment criteria.
So perhaps we touch on a little bit of that. The team size? I don't think there's always an advantage to a large team. I think you have to have a sufficient team that has domain expertise. We have four people on our investment team. We've got a lot of domain expertise in technology and life sciences and consumer. It's really about, "How does the team work together? Are they cohesive? Do they share insights? And then, do you have the agility and nimbleness to act on your insight?" And I think boutique firms that tend to have smaller teams have an advantage, particularly for investing in innovation.
Dan Ferris: Really? Smaller team would be an advantage for investing in innovation. You're going to have to tell me about that, Tom. To me, that's a somewhat provocative statement.
Thomas Ricketts: Let me come at it from a couple angles. So a lot of firms that have very – let's say a typical very large firm that has central research, and they probably at that point have industry analysts and sector analysts and... you know, they may have a lot of people, but the way that they structure the research – and I'm not talking about my former employer. I'm just talking about the average large firm with central research – is, they have these folks that are focused on these finite industries.
And they're almost siloed. And they're also – the analysts that are in the trenches doing the work are often quite separated from the portfolio managers making the decision. So I personally don't believe that industries and sectors is the best way to organize research. I think innovation is breaking down barriers between industries. You know, take Amazon as an example. What is Amazon? It's a retailer. Is it a technology company? Is it a software company? It's all of those things. It's invading lots of different industries. How's an industry analyst going to be able to evaluate that? It's going to be tough.
So taking a more generalist approach we think has power to it. As long as you have domain expertise. Second, I mentioned the distance between analysts and the PMs – portfolio managers. I pride myself on being in the trenches. And I consider myself a research analyst first. So I'm in the trenches with the team. And so, when we're going to conferences or talking to users or talking to management, I'm there alongside them. So when we generate insights, a smaller team and a boutique firm can act on that. Whereas, at a larger firm it might take a while for an insight from an analyst to level up to a portfolio manager. This is my personal belief. I think large firms can add value and small firms can add value. I do think there's such thing as a subscale firm, but we're not that. We've got a very strong team with a lot of experience.
Dan Ferris: I see. So it's about agility.
Thomas Ricketts: I think with innovation, agility is important, you know? Think about that S-curve we talked about. You know, 20, 30 years ago an industry might play out over many, many years. And you can kind of take your time analyzing it. Today, new products and services – particularly if they're digital – can be launched and scale up. And so, there's a compression of the S-curve, and that adoption curve's steeper sometimes. So, you know, waiting for growth to play out is delayed. Waiting for an insight to kind of percolate up to a PM team is delayed. So I think agility is important.
Dan Ferris: Yeah. Intuitively, it just makes a lot of sense. Doesn't it? Let's talk about, I guess – if you have like a favorite two or three themes. We talked a little bit about the difference between hype and real innovation. You gave us the examples of HubSpot and ServiceNow. But are there a couple of innovative industries or themes that are sort of your favorite ones? The ones where you have the most capital and the most conviction.
Thomas Ricketts: Yeah. Let me hit on a couple and I won't try to spend too much time. But I think in the software space, we're clearly seeing this evolutionary shift from cloud-premise software into the cloud and software as a service. And having everyone live through COVID and working from home, the cloud-first era is really beginning. And the journey to "cloudify" your architecture in many industries and companies is earlier than most investors might understand. So we see a tremendous amount of opportunity across the broader cloud computing and SaaS space.
And it also goes beyond the well-known companies... the Salesforce.com and the Adobe's – great businesses, no doubt. But when you really dive more deeply, you see a growing number of emerging innovators that are doing equally important things. I mentioned HubSpot and Marketing Automation. I mean, they're literally helping digitize the marketing department. That's a pretty big deal. You know, there's other examples of that. We mentioned ServiceNow in the IT space as well as for customer service. You know, and cloud-based IT security's another important area – companies like Z Scaler are really driving a shift away from kind of perimeter-based IT security to cloud or network-based IT security.
I mean, we're working everywhere from different devices... so you need to change your architecture. So broadly speaking, cloud computing and Software as a Service is a hotbed of innovation and companies that potentially meet our criteria. And then, I would say on a totally separate area would be biotechnology which I think is pretty much overlooked. Not every biotech company, but I think as a broader industry it's maybe not as fully appreciated in my opinion, you know, having built out the global life science team at my former employer, I've got a lot of expertise in that space.
And I can tell you the biotech industry has been around for 25, 30-plus years. But I think it's really just getting started. I mean, there's a real Renaissance in understanding the genetic cause of a growing number of diseases. And then, the toolkit to modulate and address disease is way more powerful today than it was even 10 years ago. You can use technologies like RNAi technology to modulate gene expression via the RNA molecule. You probably hear about or have heard about gene therapy.
So there's a lot of new tools beyond just small molecule pills and monoclonal antibodies. You're got RNA-targeting tools that I just mentioned, gene therapy. Eventually, gene editing will get there. So it's just terribly exciting to look at those technologies. And we attend medical conferences like the American Society of Gene & Cell Therapy. We talk to doctors. And you look at some of the clinical data coming out, and oftentimes it's kind of in mid-stage clinical trials. But it's terribly exciting. So there's a lot of opportunity there as well.
Dan Ferris: Yeah. I've heard the same about biotech from the analyst who works with me on research that I put out. And he's personally kind of been crushing it [laughs] because he's able to find so many good deals in biotech and real innovators with real partners investing capital. So I completely agree.
Thomas Ricketts: That's great. And then, of course, a big thing that we do is this risk-managed approach. And with biotech, the way to manage risk is you focus on these platform technology companies where they're not reliant on one molecule in the pipeline. They've got a technology engine to create multiple molecules in a really deep pipeline. They should have a strong balance sheet. And all those things spread and reduce risk. So we're only focused on those types of businesses so you reduce that binary risk that everyone's worried about.
Dan Ferris: Tom, I'm going to ask you for an example there for a very specific reason, just because I think the term "platform company" – it's sort of gotten into buzzword territory for me.
Thomas Ricketts: Sure.
Dan Ferris: So it would really – I mean, I'm excited to hear what a guy like you with your experience especially, you know, in the biotech area... like, what is a real platform company, and how do you know it? How do you establish that?
Thomas Ricketts: Yeah. So platform companies are special animals. We talk about the power of evolution. And so, when companies evolve from kind of a point product to maybe having a suite of offerings to then eventually building a platform – that's the highest level of the hierarchy. That's when you really have power in your industry. It can mean different things depending on what industry you're focused on. Obviously, a platform technology in software allows that company to have an ecosystem of partners building to their platform, and it allows that company to typically kind of innovate adjacent markets as they add more to their platform, like a Salesforce with their SaaS architecture, and they started out with Salesforce automation and moved into the service cloud and a whole bunch of other clouds and then really built out an ecosystem.
That's a great example of that. So most investors, they can relate to Microsoft being a platform or a Salesforce. But I think the concept of the platform – having a technology that... it's almost like a Swiss Army knife. It allows you to do lots of different things and build a portfolio of options. In biotechnology, we typically are focused on those kinds of businesses. So I gave you an example. Arrowhead Pharmaceuticals is a leader in a technology called RNAi. RNA is the intermediate molecule between the genes and the proteins you're trying to produce. If you can modulate RNA levels, you can modulate gene expression and obviously modulate proteins. You can address disease.
Well, you know, there's just a small number of companies such as Arrowhead that have developed technologies to modulate gene expression using that RNAi technology platform. There's that word. And because it's a tool that can modulate RNA levels, thy can target many different diseases. So it allows them to really build out a pipeline of lots of different programs targeting different diseases. And to me, that feels a lot like a platform technology. It doesn’t have that ecosystem element, but that's OK. It's a technology engine that's spawning multiple opportunities. And I think that's a very special business. And I tend to find that those businesses are systematically undervalued in the market.
Dan Ferris: And it sounds, too, like your understanding of platform gives you another level of conviction. Conviction is a big topic for our listeners, by the way. That's why I return to it... because I know our listeners look at someone like you and say, "Oh, how do you get that conviction?" Because they've seen stocks go up, you know, 20 times or something. "If only I had the conviction." But it sounds like platform for you is a source of conviction.
Thomas Ricketts: The primary source of conviction for me is not one thing. It's our eight investment criteria. And so, it's a combination of things. And platform's not necessarily one. It's an expression of elements. But I would say we don't have the time on this podcast to go through our eight criteria. But it's things like, you know, an attractive industry benefiting from secular trends and innovation... targeting large markets with room for growth or finding an industry leader with a strong innovation pipeline with layers of competitive advantage. The innovation moats that we talked about.
You know, those elements – and there are eight of them – define an attractive innovative industry and the stand-out company out-innovating their competition, and then there's a nod to valuation because valuation's important. And it's not easy for an individual company to measure high on all of our investment criteria. We make it hard for a company to get into the portfolio. But if you do your research – you go to conferences, you read trade journals, you talk to institute experts, you access data, you do that hard work – gumshoe work... "scuttlebutt," as they call it – conviction is earned.
And then as you put together those puzzle pieces of insight, that together is what builds conviction. And we're looking for a very specific kind of company. There are lots of different companies out there. But there are fewer leading innovators. You know, perhaps they have platform technologies, have layers of competitive advantage. So those are rare birds, and those are the ones we're looking for.
Dan Ferris: I like what you said, "We make it hard for the company to get in our portfolio." You say no a lot, right?
Thomas Ricketts: Yes. It's a great point. There's a lot of elimination going on. I think it's the unappreciated tool of the industry, is the ability to look at an industry, size up a company, and say, "That's not worthy. That's not high enough in quality." This is something that my mentor taught me over the years. You know, quality will out. Quality will rise to the top." Quality's defined very specifically depending on what industry or innovation you're talking about.
Dan Ferris: And, Tom, actually if you want to... if you cared to take the time to do it – you don't have to, of course. But you could name those eight criteria. I realize we don't have three hours to go into each of them. But if you felt like naming them, I'm sure our listeners would love to hear them.
Thomas Ricketts: Yeah. You know, they can also go to our website, Evolutionary Tree, where we touch on our eight criteria. There's a blog and other materials. But the eight are, you know, the industry-level benefits from an evolutionary shift driven by secular trends in innovation targeting a large market with room for growth – meaning you're catching it earlier on the S-curve – there's a lot of room to penetrate and runway for growth. We're looking for attractive industry structures that are evolving down a less competitive path. I like to call them the "Opolies." And you know where I'm going with this.
Monopolies, duopolies, oligopolies, and then at the company level, it's the industry leader with the innovation pipeline, the layers of competitive advantage, strong business model, and balance sheet led by not just great management... but I think we live in an age where it goes beyond the CEO. It's about talent and culture and then, the last criterion is the stock. You don't want to overpay for the stock. You want to be thoughtful about valuation. We evaluate all of our companies based on long-term drivers as the company business scales over time.
Dan Ferris: Let's talk about that before – let's talk about valuation, and then I'm going to ask you to give us a name or two that you really like right now. Valuation has to be tough when you are evaluating the intrinsic value of a business that you hopefully have caught very early in that S-curve you described. So how in the world could you do that? I mean, do all of your companies – or are they all profitable, for example?
Thomas Ricketts: Yeah. So you're hitting on a number of elements. And maybe stepping back a little bit, if you're trying to embrace these emerging innovators, you have to allow them to innovate. Well, a part of allowing them to innovate is they're going to make investments. They're going to invest in things like research and development and sales and marketing, and they want to go global. And so, to be successful on innovation investing you have to support that. You have to take a long-term orientation and be tolerant that perhaps they suppressed earnings for a number of years.
I mean, we know that with Amazon... decade-plus of continually investing in the business, suppressing earnings. It drove investors crazy. But it was the right thing to do. So, you know, we take what we call an innovation-friendly approach to valuation. We figure out where the company is on the S-curve, what growth stage they're in. We evaluate what they're actually investing in. We think we'll get good long-term returns on that investment. Are they getting good execution and traction with those technologies or products or services?
And if they are, we're going to encourage management to continue to heavily invest in that. We think there's a tremendous amount of value creation that happens in that process. And ironically, so many investors will look at a given business and say, "Gosh. You know, the operating margins are low, or maybe they're even negative." So that's a "bad business." Well, that's silly. If they're a real, true – this is only true, by the way, for true innovators. But if they're a real innovator, they probably do the right thing. We bought HubSpot, they had very low operating margins.
But when you peeled the onion back or looked under the hood, you realized, "Oh, my goodness. They're building out an entire suite of offerings. Multiple different hubs across the marketing department. They're clearly getting traction globally." And so, this is a business where the operating margins are going to explode over time. And so, as an innovation investor, you have to be tolerant of that. The majority of the companies, our portfolios are profitable. But I like to say, "It's not the level of profitability that matters. It's the direction."
And if a company can improve their profitability... if they flip from losses to profits and then they drive up operating margins over time, that's what rewards investors. And I find a lot of investors often wait until the very last stage of a company, which we call the harvest phase where they scaled up, they've got really high margins, they look super, super attractive on those factors that everyone's screening for. And that's often in the 7th or 8th inning. That's a little late to the value-creation process.
So we do think you have to take an innovation or innovator-friendly approach to valuation. That doesn't mean we're not disciplined. We're highly, highly disciplined about focusing on companies that are investable. We talked about the two hurdles earlier. We talked about avoiding hype. We're looking for companies that meet our eight criteria. But if you generate the evidence and the insights that demonstrate that, then you want them to make those investments. And that can create a lot of value over time.
Dan Ferris: You know, Tom, to me you sound like a really thoughtful, deep, bottom-up, just fundamentally driven investor focused on innovation. And it makes me... but the nature of your targets still – I'm serious. Even with everything you've told me, I'm convinced you're a deep fundamental investor with a capital-I. And I still am dying to just ask you to address the difference between investment and speculation. Because when I think of early innovation, the speculative element is – I feel like I just can't – you can't push it out 100... you can't get rid of it 100%. We at least agree on that, right?
Thomas Ricketts: Yeah. So, you know, the word that I use is hype. But we can use speculation. We are not speculating. And I think it's really important that investors not do that. That they not say, "Oh, wow. This seems innovative, and therefore I'm going to swing for the fences and invest in it and just hope that it plays out and I do well." That's speculation. People are speculating in cryptocurrency. People are speculating in electric-vehicle SPACs. There's a ton of speculation out there, and that's risky. But that's not what we do.
We get into the trenches with our team and separate out what is speculative and conceptual and early and – to use our word – hype and avoid that and really focus our time on those innovations that are important, that are getting traction in the marketplace, have a ton of data and evidence, demonstrating that they're going mainstream. And then, hopefully, I've convinced you that we do a ton of research to figure out, "Are there real competitive advantages for the leading company that we're focused on?"
If we want to invest in a company that is not one of 20 companies doing something but they are truly the standout leader... and that also lowers risk. It's that innovation moat concept that we talked about. So we're doing lots of different things to move far away from speculation. But I agree with you in general that there's just a lot of investors out there that are embracing anything that seems innovative with a lot of "potential." But a lot of that is in the hype phase. But we've built an entire process and strategy around avoiding that.
Dan Ferris: So it sounds like I’m just not going to get you to say you're doing anything but investing with a capital "I." You said you're not speculating. For you-
Thomas Ricketts: We're definitely not speculating. And we're also true, you know, long-term investors. I mean, another kind of time element to this is your time horizon. You asked me at the beginning.
Dan Ferris: Yeah. Yeah.
Thomas Ricketts: We take a long-term time horizon. So we're not trading stocks in and out as a lot of investors do, but we're really trying to find these innovations that we think could become – could have profound impact over many, many years, maybe decades. I mean, cloud computing's something that's going to only get more and more important with the next decade. Biotech, all the technology tools we talked about. It's going to deliver profound, new treatments for a growing number of diseases. That's a multi-year opportunity. That's not speculating if you sort that out – the innovators from the non-innovators and the makers from the fakers. That's what we do.
Dan Ferris: All right. Good stuff. So I have two more questions. I have – my final question for every guest is the same. But my next question then is, is there one particular name – or even if it's like two or three that you just want to highlight – that maybe you've added recently or which has undergone a change recently? Or is there one or two or three or some amount of particular names right at this moment that you've recently got, you know, either introduced into the portfolio brand-new or maybe you've gotten more conviction about it? You know, is there one or two that come to mind right now?
Thomas Ricketts: Yeah. So I always lead off by saying, you know, any company that we talk about we're not making a recommendation. People need to do – investors need to do their own research and homework. But that said, there are companies that I think are highly innovative that meet our criteria... that we own and are worthy of discussing on a show like this. I think probably, you know – I'll use an example from today where we own a company called Pinterest. I'm sure a lot of your audience has heard of Pinterest. And the stock's down pretty significantly today.
And yet, the company delivered extremely strong results and, to me, so early in the early stages of evolving from kind of a quirky image-based database for hobbyists to really becoming a visual search engine, a visual version of Google, couple with an e-marketplace. And they're doing that because their ad and e-commerce enabling the pictures. And so, when users go on the Pinterest site, in the past they might find a picture of a dress or a lamp or something, and they want to buy it and they wouldn’t know, "Well, who makes this?"
And that frustrates users. And today, increasingly, manufacturers and retailers are uploading wholesale their catalogs. I mean, huge growth in uploaded catalogs that enable those photos to then be shoppable. They're called Shoppable or Buyable Pins. And there's this evolution happening – literally right before our eyes – and yet they reported results and gave some conservative guidance for the next quarter, and the stock's down. And yet, as a long-term investor look out over the next three, five, 10 years and you're literally witnessing this incredible franchise being built before our eyes. They have over 450 million users.
They're at the very early stages of expanding their ARPU, the revenues they get per user, per month, and per year. So monetization's just starting to get turned on. So again. We don't make recommendations, but it's an investment and a business we own in the portfolio. And through that long-term perspective and looking for "leading innovator" and seeing how the company and business model is evolving, we see tremendous opportunity.
Dan Ferris: All right. Well, thanks for that. Of course, you've taught us how to fish, and you've actually given us more than one fish. And we appreciate that. But it is time for my final question. It's the same for every guest. And it is very simply if you could leave our listener with a single thought today, what would it be?
Thomas Ricketts: It would be that innovation investing is coming into its own as its own investment style. And investors need a way to navigate and access these leading and emerging innovators. And there's really just a small group of specialists out there that are true innovation-focused managers, and Evolutionary Tree is one of them.
Dan Ferris: Oh. Nicely put. Thank you for that. That's great.
Thomas Ricketts: Absolutely. Well, thanks for the opportunity to speak to your audience. I hope your audience enjoyed our discussion. Great questions as usual.
Dan Ferris: Oh. Thanks a lot, Tom. And yeah. It sounds like your website would be a cool place to hang out and just sort of look around and...
Thomas Ricketts: Got white papers and thought pieces. There's a blog you can subscribe to. You bet.
Dan Ferris: Yeah. All right. Well, thanks for being here. Thanks for making time for us. I reply appreciate it.
Thomas Ricketts: You bet. It's an honor.
Dan Ferris: I'm pretty certain you're going to get an invitation back at some point. So maybe by then you'll be, you know, $2 billion or $20 billion AUM, huh?
Thomas Ricketts: Well, we're working towards that. But we don't want to get too big, remember.
Dan Ferris: Right.
Thomas Ricketts: We want to stay boutique.
Dan Ferris: Absolutely. Absolutely. That's not a boutique... $20 billion is not a boutique. Right. [Laughs]
Thomas Ricketts: Well, thanks for the opportunity, Dan. I really appreciate it.
Dan Ferris: You bet. You bet. Thanks.
Thomas Ricketts: Take care.
Dan Ferris: Well, that was really cool. I feel like we're on a roll here with our interviews. We're getting all these different strategies and just name-after-name-after-name to think about in a different way. And thinking of Pinterest, for example, as an evolving, visual Google is kind of an intriguing idea. That's really neat. And I didn't know they had... I didn't really know a lot about Pinterest. I didn't know they had 450 million users already. That's pretty cool. All right. Let's take a look at the mailbag. Let's do it right now. [Music plays and stops]
In the mailbag each week, you and I have an honest conversation about investing or whatever is on your mind. Just send your questions, comments, and politely worded criticisms please to [email protected] I read as many e-mails as time allows, and I respond to as many as possible. You can also call us at our listener feedback line, 800-381-2357. 800-381-2357. Tell us what's on your mind. I can't resist telling you the only call we've gotten so far [laughs] on the listener feedback line... we did get one before, and I talked about it on the show.
But since then, the second call we got was someone who had a wrong number. OK? So we've got one call and one wrong number that went on for like a minute and a half, and they thought they were talking to a clothing company in Europe somewhere. So if you feel the desire, call us 800-381-2357 and tell us what's on your mind. All right. First question's from Jim T. And Jim T. says, "Hi, Dan. Love the show. Listen each week. I am sitting on significant gains in my portfolio, and I am concerned about a major upcoming correction, slash, crash. I'm using VQ stops with the TradeSmith subscription I purchased through Stansberry."
Well, thank you for that, Jim T. He continues. "I would like to purchase some additional insurance via buying put options on some of the major indexes. You have mentioned you have done this yourself for your holdings. Can you please explain some logistics? What works best, how to choose strike prices, etc.? Any insight will be helpful to me. Thanks again to you and all that gang at Stansberry for all you do for the small investor. Jim T." Well, Jim T., my desire with this question is kind of going to disappoint the small investor a little bit. No, I'm not going to tell you what I do.
If I did this in an options trading service for Stansberry, I would certainly go down a list of criteria. But since it's what I do, I'm not going to do anything more than that. For me, it's just a matter of saying, "You know, kind of money where the mouth is. This is what I'm actually doing just in case you're curious.? It's not because I want you to imitate what I'm doing. And really, frankly, with that example of the put options if I were you... do what you want. I can't give you individual advice. But any novice investor should be careful about doing things like this because – just so you understand – when you're holding puts like that on major indexes, it's a tiny, tiny position and your expectation should be that it'll go to zero. It's an insurance policy. Just remember that.
But it is a good... you know, I’m glad you asked. And thank you for that. And I hope it wasn't too disappointing. Next is Gerard O. And Gerard O. says, "I read the annual reports of my equity investments, and this year – more than in the past – both the CEO shareholder letters and the manager's comments all contained politically correct ESG tropes about diversity, the environment, multiple stakeholders and often paragraphs about climate change, carbon dioxide emissions and global warming. What does any of that have to do with traditional ROI, ROE, and shareholder value?
I appreciate all the research you've done all the years to write Extreme Value in your weekly podcast. It is very informative. Infotainment at its best. Wish you all the best. Gerard O." Thank you for that, Gerard. I don't mind being called infotainment at its best. Not at all. I think to me, that's where human beings are the most engaged. Because let's face it. We're all emotional creatures. And if you don't entertain to some degree, you're going to put folks to sleep. So I appreciate that. As far as what you've seen – and ESG, for our listeners... that's environment, social, and governance. You know, there are ESG funds and ETFs and things.
And it's a whole category of investment based on what companies are doing the right thing environmentally or socially or in their corporate governance. To me, Gerard, this is window dressing. Because first of all, all the environmental climate, carbon dioxide, global warming – there is no climate emergency. and anybody who writes in and says otherwise, I'm not going to read your e-mail because it just tells me that you're an idiot. There's no way that... there's no climate emergency. There's real pollution I the world. Why don't we take care of that? why is there a Rhode Island-sized floating bunch of garbage in the ocean? Why do we have that? [Laughs] You know?
Maybe we ought to clean that up before predicting the weather in 100 years or 50 years or whatever it is. But anyone who's dumb enough to believe the world's going to be fried in 10 years or 12 or whatever these idiots in Congress are talking about – that's stupid. You're kidding me, you know? It's an extremely complex topic. Nobody knows anything about it. And I can say honestly to every single listener right now you know nothing about it. You don't know anything about climate. You think you do, but you don't.
So when I read all this baloney about climate and global warming, they're doing it because they think they have to, right? There's a minority of people really, really concerned about this. And so, they don't want to not address it. And things like this come and go, you know now and then. And you'll always see CEOs deal with this kind of socially conscious type of stuff. It comes and goes. I don't really care about it. Now if they start diverting lots of money that way and they're not in, say, the energy business – I mean, look. If there's money in solar panels and wind farms or whatever, fine.
If there isn't, then hopefully they'll avoid getting involved in those areas. But otherwise, to me, it's window dressing. It really is. And you mentioned like multiple stakeholders in there. Yeah. That's a buzzword. It's true, though, right? You know, a company isn't just about its shareholders. But we know this. It's always been true, right? The company exists – the employees get something out of it, and the shareholders get something out of it, and the customers [laughs] – if they don't get something out of it, you're in big trouble.
And a great example of that that we mentioned last week was Jeff Bezos' recent and final shareholder letter as CEO. He mentions all the value that they create for everybody – employees and customers and people who sell on Amazon and others. So yeah. I hear you, though. It's a good question. I'm glad you asked it. Jacob H. is next. He says, "Dan, huge fan here. I'll keep my question short." Thank you, Jacob. Thank you. [Laughs] He continues. "With all the stimulus and free money the government and the Fed is throwing around, traditional economics projects super high inflation.
So there are two potential outcomes. One, our dollars are worthless. Two, traditional economic and finance books become worthless. So which one do you think we will be using in lieu of firewood, as they are very expensive?" I assume you mean firewood – wood is very expensive. Yes. I know the world isn't so black-and-white, but you know what I mean. Jacob H., you know what I mean. I will challenge you a little bit here. Certainly, borrowing lots of money and spending it straight into the economy, I would expect that to stoke some inflationary fires.
What the Fed does, you know – the printing money and buying securities and taking income securities out of the system and sort of storing them on their balance sheet, sequestering the really – that is not inflationary. In fact, as we've discussed before that's deflationary, right? Because you're taking the income out of the system and you're replacing it with $1 of bank reserves. And it's just sitting there, and it doesn’t become inflationary. It doesn’t become the fuel for inflation unless it is lent and spent.
And indeed, if you look at – I think it's Goldman Sachs has their sort of loose money, tight money index... and it's the loosest ever. So if you're trying to borrow money for something, for some business or property or something, if you can't borrow it now, you can't borrow it. Because [laughs] the conditions according to Goldman are as loose as they've ever been. If you want to raise capital or go public or borrow money or anything like that, now is the time You know, having said that I think our dollars will become worthless one day, you know?
They're on a long-term trajectory toward worthlessness. But you have to understand that at any given moment it's hard to sell things in this world without buying dollars. There's tens of trillions of dollars floating around the world. It's 80% of the world's transaction volume and 60% of the world's foreign exchange reserves, you know? We're not going to – you're not going to knock that out easily. You're not going to destroy that easily.
So while I think inflation is higher than the CPI says it is – certainly anybody who pays rent is paying more rent, and people who earn wages feel like their wages aren't going so far – it's a real worry. A portfolio needs to be prepared for inflation. I agree. And to me, I like the traditional inflation hedges. I like gold and silver. And I even like bitcoin long term as an inflation hedge. But in the short term, the hedges and the stores of value can be just as volatile as anything. Traditional stores of value – gold, land... we've talked about art before and the brand-new one, bitcoin. I mean, that stuff in the short term is volatile as anything. So investing ain't easy.
And when you're well-diversified, your portfolio is – some part of it is always going to be not performing great. Good question, Jacob. As you can see, it opens up a lot of issues. Thank you. Ludvik H., he wrote in three times. Ludvik, your second e-mail was like so long I couldn’t read it. I'm sorry. I didn't finish it. But this one... your first one that I read has an interesting – you were asking about the company Hometown International that we discussed previously that's the company that owns one delicatessen, and it's valued at $100 million, and the people running it are... they look shady as anything.
And you said, "Hi. Just wondering. Why is a company with one store listed? Meaning listed on any kind of a trading venue. "It makes no sense for a one-shop operation to go public unless they wish to go massively big. What is the firm selling? Delicatessen gold" – I think is what you meant to say. "If the gold is below spot, I'll be more than happy to buy, not to eat. Ludvik H." Very funny. I don't think the sandwiches are made out of gold.
Obviously what's going on there is some shady kind of business, and I don’t completely know what it is. But yeah. You're right. I agree. A company with one location should not even be public. It's a strained situation. I invite anybody – Dan Mangan at CNBC has done some really good digging on this company. You should look him up and read what he's written. It's like a – it could be a movie. It could be like a financial thriller movie, I think. Thanks, Ludvik. I always read your e-mails when they're not too long. Keep them coming.
Bill H. is next. He says, "Regarding Episode 201 on April the 8th" – that was the one we interviewed Kevin Carter, the guy with the really cool emerging markets ETF. And Bill says, "I found this interview interesting and useful. I took a look at the chart for EMQQ and found that it has been tanking since mid-February. It would've been useful to ask Kevin Carter why that should be. Perhaps you could pontificate on the reason that is happening. Regards, Bill H."
Bill, I don't know. But I did compare it to other emerging market ETFs and to the Nasdaq. And they all had a little sort of bump up in February. And they're all bigger... like the Vanguard and iShares Emerging Markets ETF are larger than EMQQ. And of course, the Nasdaq is enormous, trillion – many trillions of companies in the Nasdaq. So they all had that little bump up in mid-February and then down into early March.
And as far as I can tell, EMQQ's probably is just a lot bigger because it's smaller, is all I can tell you. And it's kind of – year-to-date, it's underperforming the others. But it's really... they're all in the same basic trajectory. And if you remember, EMQQ is... Kevin was saying it's different because they're looking for, for example, like the Google of China or whatever. They're looking for the really innovative companies.
They're not just trying to do the usual emerging markets thing of like the biggest banks and insurance companies and the biggest-market-cap companies in the region and calling it good. They're doing something more. And I think because they're smaller and because they are more focused on innovative, growing companies, they probably just got some speculative bit in their teeth – investors got a speculative bit in their teeth, and it just bumped that stock up more than others. That's the best I can do for you. I hope that helps.
And finally this week, John A. John A. says, "Hi, Dan. Daniela Cambone's a great addition to Stansberry. Owning a bit of both gold and bitcoin, I watched her two-hour bitcoin-gold debate with Michael Saylor and Frank Giustra. Both seem 1,000 times smarter in finance than me and make great points." Yeah. You and me both, John. And if you want to see that debate, you can check out the video on Stansberry Research's YouTube Page.
He continues. "But there is one point that I wonder if you could comment on. Saylor made a point that bitcoin holders really believe in their side enough that he borrowed money to buy bitcoin to go all in, while gold bugs only suggest putting 10% to 15% of your assets into gold. And if gold miners, producers really believe gold would go up, they would hold as much of their gold as they could instead of selling it into the market, which would result in driving up prices. Instead, they sell all their gold and even push excess cash out through dividends... a paper-hands move. What do you think? Wouldn't it make sense for gold and silver producers to hoard their product, drive up prices and increase the value of their companies? Ever forward, John A."
No, John. I don't think it would. Look. They're in the business of digging gold out of the ground and selling it. Period. Don't get yourself tied up in knots about this. They're not hedge funds. They're not capital allocators in that sense, you know? They're not financial companies. They are gold makers. Gold finders. Gold diggers. Gold sellers. OK? So it's not a paper-hands move. There's nothing paper-hands about it. If they make enough free cashflow to issue a quarterly dividend in a sustainable way, I think that’s awesome for shareholders. That's why they own the stock.
And also, the other thing here is, look. You know, Saylor has his conviction about bitcoin, and he's saying to borrow money to go all-in. That's a big gamble. Gold companies aren't in the business of gambling. Their business is risky enough without gambling on it. Saylor is gambling on bitcoin. That kind of levering-up to go all-in is not investing. And it is not prudent behavior. I totally disagree with it. I think he's making a big mistake, and I hope he's not doing that... I hope he's only doing that with his own money and not with his company MicroStrategy's money.
Because it would be a horrible, horrible thing for shareholders. And I hope he's also not pledging his shares in MicroStrategy as collateral, because we've seen how that can work out too, right? You know, they get the margin call on their personal position, then they got to sell the daylights out of the stock to meet it or fix it... and then the stock tanks. So let's hope that everything is cool there. But, John, I don't see these two things as related. And I don't think that type of behavior is prudent. And gold companies are in the business of selling gold. Period. Good question, though. Thanks for that.
That's another mailbag, and that's another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as I did. We provide a transcript for every episode, but sometimes it can take a week or so to get it done. To find the transcripts, first, go to investorhour.com. Next, click on the title of the episode you want and scroll all the way down, then click on the word transcript and that's where it lives. If you like this episode, Send someone else a link to the podcast so we can continue to grow. Anyone you know who might enjoy the show, just tell them to check it out on their podcast app or at investorhour.com.
And do me a favor. Would you subscribe to the show on iTunes, Google Play, or wherever you listen to podcasts? And while you're there, help us grow with a rate and a review. You can also follow us on Facebook and Instagram. Our handle is @InvestorHour. Also, follow us on Twitter where our handle is @Investor_Hour. Have a guest you want me to interview? Drop me a note at [email protected] or give a call to our new feedback line, 800-381-2357. That's 800-381-2357. And tell us what's on your mind. Till next week. I’m Dan Ferris. Thanks for listening.
Announcer: Thank you for listening to this episode of the Stansberry Investor Hour. To access today's notes and receive notice of upcoming episodes, go to investorhour.com and enter your e-mail. Have a question for Dan? Send him an e-mail. [email protected] This broadcast is 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.
[End of Audio]