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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 my old friend, Jeff Ross. Jeff is a radiologist who runs a hedge fund that has destroyed the S&P 500's returns so far this year. If that doesn't inspire you to stick around, nothing will. You want to hear this. I promise. Huge mailbag this week with two kinds of e-mails: those from people with brains and those from people without. I promise you have never heard me this pissed off before. The mailbag was too full of idiots. I've had a truly awful week. So I'm ready to unload. Plus a few truly intelligent, good questions about investing topics I know you will find interesting. And, as always, my rant. This week I'll point out a few news stories that suggest the stock market and even other types of investments have become truly insane. That and more right now on the Stansberry Investor Hour.
Okay. First, a little housekeeping and follow-up on our comments about the – my comments – our – there's no our here. It's just me [laughing] in front of the microphone. My comments about the riots and the looting and so forth that I had for you last week. It seems that the Minneapolis City Council has committed, as I read the news here, to dismantling the city's police department. We'll see if they actually go through with this. But it looks pretty serious. And I have a couple of thoughts on this.
First of all, look, this is probably how government should work. It should be a local affair. And if the duly elected folks of the Minneapolis City Council wanna dismantle the police department and the people of Minneapolis who elected them are okay with that, then that is what they ought to do. Now, if I were in Minneapolis, I would be worried about a surge in crime. Because I think those who think about it of course know that criminals could run rampant and there aren't enough cops in any city – if they really wanted to go absolutely nuts – and we've seen this with the riots and the looting and so forth that has happened in city streets, right? Sometimes the cops are just outnumbered.
So in any given city, this could – I probably shouldn't say this out loud where everybody could hear me, right? But let's face it: nobody wants the threat of the cops being called or the threat of being pulled over and given a speeding ticket or the threat – you get where I'm going with this. Just knowing they're there is really quite enough for most people to just say, "You know, I'm gonna behave." Those who would be inclined to behave poorly otherwise. Or behave carelessly on the roads and drive 90 miles an hour through a residential area. So if they go through with this, I think it's gonna be an interesting experiment to say the least. We'll see how it turns out. But I think they have every right to do this. You know, I can't really speak out against it. I mean, if I lived in Minneapolis, I'd be worried. But, you know, we'll see. We'll see how it turns out.
Now, otherwise, I wanna turn to the stock market. Because there was an article published a long time ago, August, 1929, like a month before the 1929 market started falling apart, and it was called "Everybody Ought to Be Rich," by a guy named John J. Raskob, published in the Ladies' Home Journal. You could probably just Google "Everybody Ought to Be Rich," and that article will come up; some link or reference to it will come up. And it's one of the sort of famous anecdotal markers that: hey, maybe this thing is getting outta hand.
And there was also the shoeshine boy thing, when J. P. Morgan said, "When the shoeshine boy starts giving you stock tips, maybe it's time to sell." Well, our recent guest, Jess Felder, has a 20-year-old son, and Jesse recently posted on Twitter – he said, "My 20-year-old son stationed on an airbase in Turkey just called to tell me about all the guys on the base going around bragging about how much money they've made buying $1.00 stocks on Robinhood," the investing app that allows you to buy fractional shares. But of course if you're just buying $1.00 stocks you could buy the whole thing, right? You could buy one whole share on Robinhood [laughing]. So that sort of inspired me to look around.
And I'd seen all the news stories already and I just collected a few of them. And of course some of them do refer directly to Robinhood. There's a CNBC story that says, "Robinhood traders cash in on the market comeback that billionaire investors missed." Now, that's clearly a provocative headline. I think this was probably placed by the folks of Robinhood. They probably know somebody at CNBC and had this article placed as a promotional gimmick or something.
It's says, "Millennial favorite stock-trading app Robinhood saw new investors piling into stay-at-home stocks and those most beaten down by the economic shutdown like airlines, casinos, and hotels. One 26-year-old Robinhood trader made $1,500.00 in less than 24 hours on a beaten-down airline stock while many so-called experts on Wall Street warned about buying into an overvalued stock market." Blah blah blah blah blah. And the guy's name was Godbolt, Lequon Godbolt. And he bought a call option for American Airlines that made him $200.00 also on Robinhood. There's more of these.
This guy Godbolt – he says, "I started taking it seriously about two months ago. I've been watching AAL, American Airlines, since the beginning of that time, and I felt eventually, once COVID relaxed, the markets would move up." Okay. Decent bet. Good for you. Maybe you are a bright young guy who doesn't have any money and you're gonna get going and become the next Warren Buffett starting out with the Robinhood app. But, look, let me – I'll move on. It gets worse. But there's a worthwhile conclusion to draw from this.
So, the next story is from The Wall Street Journal, and it's got a clever headline. It says, "Day Traders Buy Until it Hertz," spelled like the car rental company, Hertz, H-E-R-T-Z. And the sub-headline says: "An analyst politely reminded those buying shares of bankrupt rental car company Hertz that it is worthless." Yes. Yes, folks. When a company goes bankrupt, in 99.99 percent of the cases, the equity loses 100 percent of its value. It goes to zero and it is worthless. And stocks like Chesapeake – they've been talking about bankruptcy. I think they're gonna do it. And a bunch of other things that are absolute zeroes because they're bankrupt, including Hertz – they've soared hundreds of percent in the past week or two here. And I don't know, maybe there's a genius somewhere pushing this stuff up but I think it's a bunch of people who have no clue what they are doing buying bankrupt stocks on Robinhood and other places.
It's an insane moment. It's akin to – it's actually worse than the dot-coms in 1999. Because, look, if you bought 100 of them, some of them are now up 10,000-fold or something. If you bought 100 of 'em, one of 'em was Amazon, that would probably amortize all the other losses and make you a ton of money. So that was a reasonable speculation. I know people who do that exact same thing in mining stocks and they are super-duper-duper rich after a few decades in the markets. So that at least made some amount of sense. Piling – swarming into insolvent companies – here's another headline from Bloomberg: "Hundreds of Thousands of Tiny Buyers Swarm to Insolvency Stocks. Hertz, Whiting Petroleum, Chesapeake Energy" – there's a bunch more of 'em. The shares have surged hundreds of percent. It is truly an insane, worse-than-dot-com moment." Oy.
But it gets worse. Because it's not just stocks. Here's another journal headline: "Small Investors Are Crowdfunding Property Deals While Stuck at Home." We talked about this. We talked about Jason Goepfert, the guy from SentimenTrader, who we interviewed on the program several months ago – he watches these statistics and he noticed – he said, "The small investor is finally in the market and has not participated for much of the last decade but he's finally all in." People were stuck at home during the COVID pandemic here, during the lockdown, and they turned – they're all day traders now.
And they're doing it with real estate as well. There's this whole article about – it says: it took minutes – minutes – in early May for this company, CrowdStreet, to raise $12.5 million for a $42-million apartment project planned near the Tenleytown Metro station in Washington, DC. Minutes to raise $12.5 million. From people – the minimum investment – let's see. I wanna get this right. Well, a similar type of deal: $50 million targeting small investors. Minimum investment: $2,500.00 [laughs]. It's insane. It says there are more than 330,000 small investors who have invested in office buildings, hotels, apartments, and other properties through crowdfunding property firms.
Here's the thing. You might say, "Well, Dan, the little guy can get in on these real estate deals. That's great, isn't it?" Yes. But let me tell you something: there is absolutely no such thing as a whole bunch of no-nothings who just did something brilliant over and over again. They might get lucky. But there's this property in the world – Nassim Taleb calls it ergodicity. Apparently that's some fancy mathematical term for this. But the bottom line is: the bad trades find you, okay? You keep at it long enough, if you don't know what you're doing, the bad trades find you and wipe you out. And I am convinced that this peer-to-peer real estate stuff is just like peer-to-peer lending.
Look, investing – it's an underwriting process, whether it's stocks or bonds or real estate. You're underwriting. You're assessing risk with a view toward eliminating or mediating somehow, mitigating as much risk as possible. And I'm sorry but folks with $2,500.00 don't know – in the aggregate, they're not gonna know anything about commercial real estate. And this is not an easy time to do commercial real estate [laughing]. There's this little thing called the retail apocalypse that has wiped a bunch of it out. And there's this other little thing that you might've heard of called the [laughing] COVID-19 pandemic lockdown that has kinda changed the way a lotta people do stuff. And, sure, we'll come back from it. But a lotta commercial real estate – the equity is gonna get wiped out because of this.
Anyway, if I were writing a fiction book about bubbles I couldn't make stuff up that competes with reality. And there's this guy named David Portnoy on Twitter, and he's some sports guy. I don't know much about him but he's a sports guy. I've seen him on Fox Business News. He seems like a bright guy. But he's on Twitter every day saying he's smarter than Buffett; Buffett's an idiot; "Investing is the easiest game I've ever played." And I can't figure out if he's serious or if it's a parody. I think he's doing a parody. I'm not sure. But he's really consistent and really convincing. And all of this stuff is one massive anecdotal bit of evidence. It's the kind of stuff you hear at the top. I'm sorry. It just is.
And, look, if you say, "Well, are you saying this is the top?" You know I never do that. I never do that. What do I say? I say, "Prepare. Don't predict." I can't call tops. The last time I got bearish was May 2017. It took me three years to look like I was anything like right. So I'm not calling the top but this is exactly the kinda stuff – this is just like "Everybody Ought to Be Rich," August, 1929, John J. Raskob in Ladies' Home Journal. It's just like that. It's the shoeshine boys that told J. P. Morgan that it's over.
And, sure, stocks can go – they can get crazier and more overvalued than I ever imagine, right? But there's a lot of expensive stocks – my favorite metric for the overall stock market is price-to-sales. It is much better historically, much more closely correlated with subsequent 10 and 12-year returns than price-to-earnings. And it's just a whisker from the all-time high, which was hit just before the COVID pandemic: 2.4 times sales on the S&P 500. I think it's like 2.3 recently. So, believe it or not, even though valuation is an absolutely awful timing mechanism, it is the force of gravity in financial markets.
All right. That's all I have to say about that. Let's talk with my good friend Jeff Ross. Let's do it right now.
All right. It's time for our interview once again. We're gonna talk with my friend Jeff Ross today, which we haven't done in a little while and I like to do every so often. Dr. Jeff Ross is the founder and managing director of Vailshire Capital Management, a Registered Investment Advisor based in Colorado Springs. He is also the founder and managing director of Vailshire Partners, a long-short health care and technology-centered hedge fund. When he is not serving his clients and investing wisely, Jeff is a full-time physician radiologist and has previously obtained an MBA in finance. During his free time, Jeff loves playing guitar, tennis, and ultimate frisbee, as well as spending time with his wonderful wife of 20 years and his 3 great kids, the eldest of whom will be starting college as a freshman this fall. Jeff, welcome back.
Jeff Ross: Hey, thanks, Dan. It's great to be here.
Dan Ferris: Starting college as a freshman. So this is your first college entrant in the family, huh?
Jeff Ross: It is. It means I'm getting old officially.
Dan Ferris: You are officially old when your first goes to college.
Jeff Ross: I think so.
Dan Ferris: Let's see. Your oldest is, what, girl or boy?
Jeff Ross: A girl. Girl and two boys.
Dan Ferris: So you know what she's studying? Has she declared a major?
Jeff Ross: Well, she thinks – so far she's a biology major. And she's going down the pre-med route just like her dad.
Dan Ferris: Just like her dad. Sounds good to me.
Jeff Ross: Yeah. We'll see. We'll see if it takes.
Dan Ferris: [Laughs]. Yeah, that's right. You know, when your kids are picking a major you're terrified that they're gonna come back at you with psychology or sociology or something kinda fluky. But biology is very solid.
So, we've talked to you before. So rather than going through your origin story again, maybe we'll just pick up where we left off sort of. And it's impossible I find these days not to talk about the recent violence in the streets across the United States. Do you think that you have anything to add to that discussion?
Jeff Ross: Well, you know, not really. Nothing to add other than: this is the first time, to be totally honest with you, that I feel like I've learned a little bit. I've been listening to my friends, some of whom I haven't paid that much attention to in the past. And I have much more of a heart for the whole Black Lives Matter movement than I did in the past. And mainly because what I used to think when I would hear that slogan was – well, I was one of those people that would say, "Well, all lives matter. Why would we just focus on black lives mattering?" And I think, for my black friends, after talking to them, especially the last couple of weeks, their take on it is: "Well, that's not really the point. The point of it isn't that other lives don't matter or other people of color don't matter." It's just that they feel like they're in a system that kind of constantly suppresses them and represses them and it's very hard to just make it in this world, even if you're a good person who's trying really hard.
And so I don't know. I guess I have much more of a heart for their movement. I'm on their side this time and being a little bit more vocal about it on social media than I would have in the past. I think normally I would've just been kinda quiet about it. But this time I'm kinda – taking a stand for them on their side as well.
Dan Ferris: Yeah. So to me – if it means anything good, it means black lives matter too.
Jeff Ross: Yes.
Dan Ferris: You gotta add that word on the end to really clarify it.
Jeff Ross: Exactly.
Dan Ferris: Otherwise it's taken the wrong way a lot I think.
Jeff Ross: Yeah, I think so too. So I just think – just to add a little bit more, I just think – obviously nobody likes the looting and the thievery and all that, the violence that is going on. But I think the massive protests in all 50 states – what it really does reflect is massive pent-up frustration for just kind of years and decades of frustrated living. And so I think the rest of the US culture would do well to actually sit down and listen to what they're saying and see how we can change the system for the better.
Dan Ferris: Yeah. So I was writing a little piece about some of this and looking around at various news sources and things, and I was aware of some violence in Europe in a couple of places but not in South America, like Buenos Aires and Rio de Janeiro and in a couple of African countries. Nigeria was one of them. So it's all over the world that this –
Jeff Ross: Yeah.
Dan Ferris: It's either peaceful protest or not so peaceful. All over the world. And I feel like we're gonna look back on this moment in, I don't know, 10, 20 years and it's gonna be a bigger deal than we – I think it could wind up being a much bigger deal than we think right now.
Jeff Ross: I think so too. It doesn't feel like just sort of a passing spur-of-the-moment type deal. It seems like it's the start of something different. But we'll see.
Dan Ferris: Right. But the stock market doesn't seem to care, does it? [Laughs].
Jeff Ross: [Laughs]. The stock market is insane. It's amazing.
Dan Ferris: We had a guy on the program named Cullen Roche who – I think you know about him. I think we've both talked about him on Twitter.
Jeff Ross: Mm-hmm.
Dan Ferris: He's thinking that this winds up looking like Spanish Flu where the market was down like 25 percent real quick but then it went sideways for 3, 4 years, kind of muddling along. I don't know. I kind of think that that might happen too. But I said that in 2017 and it was wrong then and it's probably wrong now.
Jeff Ross: Well, I'll tell you, Dan, I've been writing for probably six to nine months now about what I think the 2020s are gonna be like. And what I tell my friends and my clients is: I think this decade – and we're just at the very start of it obviously – I think it's gonna be a combination of the 1960s and the 1970s. So the '60s geopolitically and with all the societal issues, things like Black Lives Matter, this kinda stuff that's gonna pop up – I think we're gonna see more and more of that. And then I think the '70s as far as for economically and also geopolitically, where we see lots of turmoil. I think we're gonna see a return, somewhere down the road, of inflation. I think stocks are actually going to be very wild and volatile. And I agree with Cullen: I think we're gonna see basically at least five years of sideways zigzagging stock market movements.
And I just think that what we had the last decade where you could do no wrong by throwing a dart and picking any stock or any index fund and all it did was went up and to the right – I think those days are probably behind us now, and stocks and bonds are gonna do very poorly, except in certain situations, and people are gonna have to start looking elsewhere. They're gonna have to start looking at alternatives to investing if they want to make money for the next five to ten years.
Dan Ferris: Yeah. You're channeling a little bit of Howard Marks. He was making that point recently. The last ten years was like kind of a one-off phenomenon. It's amazing. And all those aspects of markets and economics that just lined up perfectly – that rarely happens. And the expectation that it'll continue is probably misplaced. I agree. So let's kinda dive in. Are you buying anything lately or selling anything that you're really excited about?
Jeff Ross: Well, sure. I'm very excited – and this is gonna put me in the crazy bucket right off the start with some of your listeners, but I'm very excited about Bitcoin. I think Bitcoin – and I know you're in favor of that as well. But I think that is going to be by far the best investment of the next decade. I think that altcoins – there are many Bitcoiners who are very opposed to the alternative coins, anything that's not Bitcoin in the cryptocurrency universe. I think that, regardless of how you feel about them, they ride the coattails of Bitcoin, and they're basically a leveraged way to play Bitcoin. So I think they will also do very well, off and on.
And then I also think gold and gold stocks are going to do very well. If we get a period of stagflation, which I anticipate kind of off and on for the next decade, I think we're also gonna see a return of inflation and a return of commodities doing well. And real hard assets like farmland, real estate, those things should do well. All the while, I think most US stocks will actually not perform very well. And I think bonds – long bonds are going to be a very dangerous place to be. I would short Treasuries for the next decade if I had to choose to do one or the other.
Dan Ferris: Yeah. So it's funny because I did such a 180 on Bitcoin and crypto in general that I know what you mean. It's like: well, I'm in the crazy bucket now. I've just lost half my audience.
Jeff Ross: Yes, exactly.
Dan Ferris: But actually I find that's not the case at all. I get people asking me questions like, "Hey, can't this thing be hacked and destroyed and limited by the government?" People have just the usual concerns about any investment that you might have. But they don't say, "You're an idiot; this is worth zero." And you notice that people like Jamie Dimon – JPMorgan is setting up the crypto exchange and stuff. So he used to be a "This is a fraud; this is garbage" thing, and now his company is doing the exact opposite of what you'd expect. So I think you're right about that one.
Jeff Ross: Yeah. I think Jamie Dimon is no dummy. He's a very bright man. And he sees that there's tons of capital and interest flowing into the Bitcoin and cryptocurrency space in general. So they want their piece of it. Like good Wall Streeters, they want to get their paws in on that and they wanna start collecting fees. So they're jumping in with both feet at this point even though he had to eat a little crow for that one. But I think they'll be completely on board over the next couple of years.
Dan Ferris: But let's talk about the other thing you said, which is this idea of inflation. People have been pretty worried about this since kinda the Fed bailout ramp-up post great financial crisis in 2008 and '09, and it never materialized. And we've sort of talked about this on the podcast and decided that – some of our macro guests had set us straight by showing us: yes, they print a dollar but they take a dollar of Treasuries outta the market. So it's kind of just a swap. It doesn't come off in the market as flat-out money creation. So I guess for us to forecast inflation – and I'm kind of in that camp with you; I'm definitely long gold stocks – don't you wonder – like I wonder what has to happen. How is it gonna be different this time if the same mechanisms are in place? It's just: the Fed is ramping up its balance sheet to historic proportions, and why don't we get another ten years of what we just had?
Jeff Ross: Right. I think the way I look at it is probably a bit unconventional, but I tend to take a step back and get the 30,000-foot view of everything. And to me what's going on right now – and most people who have been watching the markets over the last decade have realized this: that all of the Fed money printing and credit creation – all of that inflation has gone into stocks and bonds. And they've created – everybody talks about: it's the everything bubble. Stocks and bonds are just massively, massively overvalued and inflated. Real estate to some extent but not like the former two.
And I think what happens though is, like everything, they reach a limit at some point. And nobody knows when that peak happens 'cause nobody rings the bell. But at some point stocks will become so ridiculously overvalued – and they basically are at all-time highs, as you know, as far as valuation goes. It's sickening how overvalued stocks are. Bonds as well. None of it really makes any sense to have bond prices so high and bond yields so low. At some point the investors will just be like, "This is insane," and there will be first a slow and then a massive movement out of stocks and bonds, and that capital will flow into, I think, commodities and hard assets at that point.
And at that point what we'll see is: instead of seeing the multiples on stocks increasing like they have for the last 12 years or so, they're gonna then start a really long cycle downwards where they're gonna go from – like right now it's normal to invest in a stock where the P/E is 60 or 100. Nobody even bats an eye anymore. Because valuations don't matter, as everybody says. But they will again. And when they do, those huge multiples are gonna go back down to normal levels. And so these grossly overvalued growth stocks are gonna have just a really bad time of it. And I think value investors will do much better.
And so in the meantime, I just see this huge tsunami, a huge tidal wave of capital flowing out of stocks and bonds into commodities, having this huge period of stagflation where we're not seeing the economy grow but prices are rising; quality of life for most people will drop. And that's why I think there's gonna be so much political and socioeconomic upheaval and things like we're already starting to see today.
I don't know if that makes any sense but that's how I view it in my mind.
Dan Ferris: Yeah. It does. It actually does. And I'm right there with you but I feel like a lot of our listeners – I know a lot of readers of our newsletters at Stansberry – they would be like Ricky Ricardo: "You got some 'splaining to do," you know? Because of what has happened. Because of what's in the rearview mirror basically. It's just too compelling, isn't it? When people just turn around and look back. And in the short term here we're 35 or more percent off the bottom of March. And long term, we're up, what, three, fourfold? I don't even know anymore in the S&P. I know it was like threefold at one point.
But anyway, we're way the hell up no matter – almost over any time frame that you care to pick. And the leaders are still like these tech stocks and FANGs and things. It's just: people can't imagine. They can't imagine it being any other way.
Jeff Ross: Exactly. And, again, to me, this is just like the late '60s. And I obviously wasn't around then. I think you're a bit older than me so you were just a kid maybe when this was going on. But the end of the '60s where they had – what was it? – the Nifty Fifty. You could do no wrong. You bought 'em and you held it and you didn't worry because all they did was went up? I think we're seeing exactly the same concept with these FANG stocks. And what happened from the late '60s to the early '80s is the stock market went nowhere. It zigzagged until everybody hated stocks by the early '80s. And then, as we know, that's what started the next huge epic bull run. But it was a horrible time to invest for about 15 years in stocks.
Dan Ferris: Right. And, you know, there was also – it wasn't just Nifty Fifty, which would be like blue-chip stocks or something today. It was also – Powertron Ultrasonics is a typical name that people throw around. Because there was a tech bubble too in that time frame. So, yeah, I like the way you're thinking. Because I've been reading books about the Great Depression, basically the period 1929 to 1945. And now you make me want to sort of bone up on my go-go '60s literature. Did you ever read that book by John Brooks? I think it's called The Go-Go Years. It's about that period.
Jeff Ross: I did not.
Dan Ferris: Oh. Hey, with the way you're thinking, you need to check that out. I'm serious. It's got all the big players and all the big trends. And the way you're thinking, you'll love it.
Jeff Ross: It'll help my confirmation bias.
Dan Ferris: It will. I was thinking the exact same thing [laughing]. It'll be confirmation bias city. I'm the same way. I don't know. Maybe we should talk about that. Because I'm the exact same way. I know about confirmation bias. I know about it. I know that when I get an idea in my head, my brain naturally wants to run around looking for confirmation. But, you know, a good scientific thinker looks for refutation, looks for falsification. And I do some of that. But mostly I get an idea in my head and I start confirming it. Do you as a – I mean, you're a trained scientist. You're a physician. Do you have any mechanism in your investment process for falsifying your ideas, like a scientist would?
Jeff Ross: Sure. Yeah. Looking, trying to punch holes in my theories. Absolutely. I try to do that. But, like you, I'm also a human so I wanna be liked and I want people to accept my ideas. And when I'm on social media touting anything, I love it when people like and retweet what I say. And if they do that I think they're smart like me [laughs]. And if they disagree, well, they're dumb. And if they say too much about it I'll probably mute 'em or block 'em or something. So, yeah, we definitely create these echo chambers where we feel good about ourselves.
I would say the best thing I've learned as an investor, especially since starting Vailshire back in 2013, is to not make any investment decisions based on what I feel. I think by far the best investors of all time have a systematic approach to what they do. And so they have a system that tells them when to buy, and that's usually when – that's the last thing you wanna do is you wanna buy 'cause it actually makes you physically ill to hit the buy button. But that's when you should be buying 'cause of your system. You know? And you know that too. So when things get to be at their lowest, their best valuations, you couldn't look bleaker. But that's exactly when you wanna be putting new money to work.
And then the same thing for selling obviously in a mania. You wanna have a system that says, "Okay, this is getting silly; it's time to sell and take profits." But most people – they wanna jump in at that point. So the best thing I've had, and what I do for my clients and in my hedge fund, is I just have a system that tells me what to do and I just basically sit on my hands and do nothing until the system triggers something. And then that's when I make my moves.
Dan Ferris: You sound like a stone-cold, die-hard quant by that description.
Jeff Ross: I kind of am. I've morphed from a value investor into kind of a quant investor. And it's been good for me, to be honest. I still in my heart love value investing and love value investors. But in order for me to do well and to do well for my clients, I've become more of a quant.
Dan Ferris: Yeah. So what does that – how much nuts and bolts – we don't want you to give away your secret sauce. But how much nuts and bolts can you give us to just sorta give us an idea of what you're doing? I mean, if you're quantitative, do you have some massive software program that scours the world for price action? Or what do you do?
Jeff Ross: Well, I guess without getting too much into the weeds here, what I do is I follow macroeconomic signals, which already loses a lot of value investors. But I do. I really believe that most asset prices move based on what the underlying economic conditions are of a country and what inflation is doing. And then how the central banks respond to that. All of those things work in kind of an ever-changing kind of a sine-wave flow of movement. It's like a big dance. And as they move, different assets do well or do poorly. And so I try to stay ahead of the trends and what's happening, and I'll position my fund and my clients' accounts based on those indicators.
So basically what's an example of that? What we've been dealing with in this quarter is huge deflation and a massive deceleration in economic growth. And when you have those conditions, those are times of generally market fear for people. So back in February I started getting all of my clients out of stocks even though they were still climbing to all-time highs. But that's because the underlying fundamentals were just completely eroding. And so when that happens, people tend to get fearful; they quickly sell their stocks at any price, and they generally find haven assets – like the US dollar is the primary one. They tend to go to Treasuries. They go to gold. And you know all this stuff too. But when those kind of conditions _____, you can actually see that stuff is coming generally before the general public does and position yourself accordingly.
Now I'll tell you just today was the announcement that the jobs report kind of surprised to the upside. Largely to the upside. And so I think what we're gonna see now is basically a regime shift out of this fearful kind of deflationary, low-economic-growth segment that we've been in and we're gonna move into more of a: "Well, I guess there is hope for the economy and there's hope for inflation." And so then you can position yourself accordingly with assets that do well in those circumstances.
Dan Ferris: Sounds very sophisticated, Jeff. Very sophisticated. And you're right: you lose all the value investors right at the beginning there [laughs].
Jeff Ross: Right. Exactly. Now, I'll tell you though: in my hedge fund, I actually have stocks though that I hold for the long term, and that I do basically old-fashioned, Warren-Buffett-style. I have ten stocks that I will go to bat for, I'll die on the streets for, because I believe in their future. And if they happen to get thumped and go down 10, 20, 30, 40 percent, I'll be buying a ton of it, and then I'll just sit and hold it forever – is my plan. And so I still do some of that stuff within the fund as well.
Dan Ferris: Can you part with one of those names for us or no?
Jeff Ross: Yeah, sure. One of them – let's see. What should I pick for you guys? Shopify. Shopify is massively overvalued but it's been massively overvalued since it was born and jumped on the stock market years ago. I think the CEO, Tobi Lutke, is just a superstar. I think he's gonna be around for decades and he's basically the next Jeff Bezos. They are doing for small businesses what all small businesses need: they're basically giving them an online presence and helping them to compete in the new e-commerce world. It fits my criteria.
So things I look for in stocks, just to give away a little secret sauce – I have a little acronym I came up with myself called FILS – F-I-L-S. So what I love in stocks are ones that are founder-led, that're innovative, that are long-term value creators – that's the L. And then S is stakeholder-friendly. So none of that has anything to do with valuation at all. It's all subjective. Except for the founder-led. But those companies, in my experience, especially over the last ten years – they just kill it over the long run. And they're basically the most innovative companies that're changing the world for the better. And those are the kinda companies that me, philosophically, I can get behind. So even if the market is crashing and it looks like the world is ending, I still think that these companies are gonna be around and they're gonna make the world a better place. So I'll put more capital into them if they crash.
Dan Ferris: Wow. That's really interesting to me. Because I just sort of pegged you as a quant and then I feel like you just told me that – because the risk control in a portfolio like that is totally – it's subjective. It's Jeff's judgment about what's a fantastic business with a great future. It's not quantitative, it doesn't seem like, to me.
Jeff Ross: Exactly. So that part is – yeah. I definitely have my portfolio divided up into different styles. Which makes it interesting.
Dan Ferris: Yeah.
Jeff Ross: To give you a practical example, when I have these – so I have large positions in several of these stocks, These FILS stocks that I really like. When I see market conditions deteriorating like they did back in February, what I do then is I hedge strongly. So I'll short the S&P or I'll short the Nasdaq or buy puts or something like that to protect those positions, and basically go net neutral on my equity exposure. But that just gives me the ability to hang on even through the tough times to those kinda stocks.
Dan Ferris: I mean, you sound like the sort of classic evil genius who's got his hands in all these little things [laughs]. You're doing so many things. It's like – I don't know. I just picture a guy in his laboratory with lots of beakers bubbling over, getting ready to take over the world. It's a lot to take in for us. I just want you to know that.
Jeff Ross: Yeah. That's probably not a bad analogy. I'm kind of like a mad scientist when I'm running my fund.
Dan Ferris: Yeah. It's cool though. I mean, you've done pretty well year to date, right? Which is no easy feat.
Jeff Ross: Yeah. As of yesterday I was beating the S&P by 25 percent. I think I'm up 22 percent on the year while the market was down 3 percent. So, you know, knock on wood.
Dan Ferris: Well, that's not shabby.
Jeff Ross: That's not too shabby. And I'll tell you what, Dan: I deserve to have a good decade. Being a long/short fund during the longest bull market in history is really a terrible place to be. Hedge funds – they get no respect. And shorting of the market while all it does is go up and to the right – it's terrible. I hate it. So I've had many years of underperformance. But I just really feel like this is the decade that my fund and funds like my fund are gonna do extremely well and they're gonna reassert their value for investors.
Dan Ferris: So, the evil genius decade is upon us.
Jeff Ross: I think so. I really think so.
Dan Ferris: The schizophrenic evil genius who has all these different strategies working is gonna shine like nobody's business for the next ten years. I think you're right and I think you are set up pretty well. Between your view on these businesses long-term that's kind of a subjective, un-quantitative thing on the one hand, and your view about gold and Bitcoin on the other, I mean, if you don't nail the hell outta the next decade, I mean, I can't imagine who will. But, again, confirmation bias there. I'm doing some of the same things [laughs].
So, with the hedge fund, I'm curious – I know a lot of folks like you, they'll have these small funds and maybe managing family money and things are going okay; they're still in business. Do you have an idea of where this is going for you? I tried to manage money some years ago and I found the process really frustrating because it was – it was actually a great time to buy stocks in 2008 period. But of course that's when nobody wants to give you money. And I thought, "This is crazy. This is insane. People will be pouring money at me when I don't want it." So it soured me – not only _____ – but it soured me even as a long-term proposition. How has it been going for you and where do you think it's headed? Do you think your fund's gonna get a whole lot bigger and you're gonna have a really huge company in ten years or what? What do you think?
Jeff Ross: Yeah. That's a great question. I have a couple thoughts on that. First is that I'm a terrible salesman. I love what I do. I love investing. Most of all, I just genuinely love helping people invest wisely. I feel like I've been given a talent at doing this. Kinda like doctoring. I just wanna use these skills I have to help people to do well. Because I see a lot of fear out there. A lot of people make honestly just really dumb decisions. They buy when they should be selling and they sell when they should be buying and they just buy dumb stuff. And I think I have kind of an advantage because I'm so interested in all of this and have a lot of – I've paid a ton of money over the last couple of decades for really good research so I can see what's going on. Before you see it printed in The Wall Street Journal, I knew about it a week before that kinda stuff. Not like insider information but just what's going on with the economy and things like that that help me make better investment decisions.
So that's that. I also want Vailshire to never get so big that it loses its boutique feel. I really like taking care of my clients personally. I actually manage each account individually. I don't have it all set up so that you just push the button once and everybody's account buys whatever stock. I actually go through each client account on a weekly basis just to make sure it's doing what I want it to be doing and it's according to their wishes. So I enjoy that very much.
I would obviously like to be managing more money. Mostly for the reason that I would love to be able to make a dent or make an impact on companies. And so I would love it if my hedge fund – if investing in a company would mean that it would be a meaningful investment for a business. So if I really believe in some company like a microcap or a small cap, I would love to put ten percent of Vailshire into that and have that be a meaningful boost to that company, to its future and to its outlook. So that to me is exciting.
And then, finally, I'm doing two things: I'm a doctor and I'm running my hedge fund as well. It gets tiring, to be honest. I would love to just be doing Vailshire on a full basis. I'm really thankful for my work as a physician. But it's pretty tough managing two careers and still being around my family and things. So I would love it for Vailshire to grow big enough that I could do that on a full-time basis. But who knows? I used to really push for that and now I'm just kinda taking it a day at a time. And that might happen in five years or it might never happen. We'll see. We'll see what happens.
Dan Ferris: I see. It sounds like you have a lot more energy than I do.
Jeff Ross: [Laughs].
Dan Ferris: I think that's one thing.
Jeff Ross: We'll see. Some days I do. Some days I don't. I'm having a ton of fun though. I think that's the main thing. I really enjoy doing what I do. And so none of it feels like work to me. It's a lotta fun.
Dan Ferris: That's great. Not feeling like work – anything that feels like work is, ooh, boy – not feeling like work is something I can get behind. So, we're actually kind of coming to the end of our time, which feels like – I feel like we've been talking for five minutes. I think that's the way it goes with you and I.
Jeff Ross: Me too. Right.
Dan Ferris: So you know what I do at the end of all my interviews. If you could leave our listener with one thought, even if it's something you've already covered today, what might that be today?
Jeff Ross: Well, I knew you were gonna ask this and I had a couple things written down. So I'm gonna pick one that we haven't talked about at all, just to leave it – 'cause I was just thinking about that this morning: about the fact that right now, as we're talking, the stock market is ripping higher. Because the jobs report was sort of surprise to the upside. But for anybody who's kind of looking at what is really going on with the economy, I think it's hard to disagree that we're not really hurting right now as an economy. And it feels weird that stocks are doing so well.
And I was thinking of an analogy, and to me this is – and medical people will appreciate this. But it feels like a patient with terminal cancer who goes and spends $1 million at a plastic surgeon's office to look as pretty as possible with only a month or two to live. And that's what I feel like the stock market is doing right now. I think it's being completely puffed up and inflated superficially by all the things that the Treasury and the Federal Reserve are doing. But the fundamentals are horrendous. So if there are individual investors, do-it-yourself investors out there, I would just say I would be very cautious. I think things are very dicey right now. And the faster the market goes up for the next week or month, I just think we're due for another big fall.
And, like I said, I think a zigzag sideways market over the next five to ten years is what you should expect and not be surprised by. So be careful about going all in in stocks today, even if you do well for the next couple of days or weeks. We're probably gonna have downside coming.
Dan Ferris: Yeah. I think I'm right there with you too. Thank you for that. And thanks for calling in and talking with us. I'm absolutely certain that I will ask you to do so again in the probably relatively near future.
Jeff Ross: Well, thanks, Dan. I really love being on with you. It's really fun to talk about life and the economy and stocks and everything else.
Dan Ferris: All right, Jeff. We will talk to you soon then. Stay safe out there.
Jeff Ross: Thanks, Dan. Take care.
Dan Ferris: All right. Always good to talk to Jeff. He just impressed me some years ago. I met him at the VALUEx Vail Conference, which unfortunately is not happening this year. It happens every summer in Vail, Colorado. Things being what they are. It was funny because it's a value forum where we all put a value idea up on the screen and defend it, and Jeff had these stocks that were all like super high valuation but they were in his bailiwick, right? They were technology and mostly health care stocks. And he really excels at that. He really does. So it's great to talk to him, great to hear what he's thinking, and he's obviously into a whole lot of other things besides technology and health care. He's too smart for me. So I feel kinda blessed to have him as a friend. And I hope you find his comments of great value. Yeah. Let's look at the mailbag.
In the mailbag each week, you and I get to have an honest conversation about investing. Or whatever is on your mind. Just send your questions, comments, and politely-worded criticisms – politely-worded criticisms; I'm gonna say it twice this week and you'll soon find out why – to [email protected] I read every word of every e-mail you send me and I respond to as many as possible.
This week I've had a bad week. I lost my little dog earlier this week. She was 13 years old. This week there were too many e-mails that were just ridiculous; I can't not react to them. Wayne S – he says, "I must allocate time sparingly to accomplish selected objectives. A full hour is beyond the importance of gaining another's opinion on a subject I've researched quite well and formed my own opinion." He continues, "Factual information welcome; opinions not so much. Wayne S."
Wayne, I have been doing this since 1997. Not podcasts, but I have been doing this thing that I do in print or in podcast and other places. Every single time I've ever done it, it's been about my opinion. My job is my opinion. And if you say that you don't wanna gain another's opinion on something you can research quite well yourself, guess what? Investing is not rocket science. Everybody can do it themselves. It's not that hard.
The next idiot is named Charlie. And I'm not gonna read his whole e-mail because he may not be a good English speaker, which is fine. That's cool. But he says – I'll just read a few of his sentences. He says, "The death of Mr. Floyd" – we talked about this – "The death of Mr. Floyd and many others is the reason for the looting. The blame for killing is all Americans' fault. Looting is the fault of all Americans, and first of all it's only stuff covered by insurance. Charlie."
Charlie, this is stupid. There is no excuse for the initiation of violence under any circumstances. Looting is the fault of the looters. Vandalism is the fault of the vandal. Arson is the fault of the arsonist. You get where I'm going? Criminal activity is the fault of the criminal in all times and places all the time always. If you're stealing a loaf of bread 'cause your kids are starving, we can talk. But people running through the streets stealing iPhones and bashing windows and murdering people – no, it's not the fault of the police or all Americans. All Americans? You're gonna blame me, a twit? You're kidding me with this. And this wasn't the only one. I'm cherry-picking the idiots this week. There were a bunch of 'em. Oy. Next one.
David G. He says, "There are not riots in the streets. So disingenuous. It turns my stomach. Each additional attempt to assuage your inner guilt of supporting the great leader diminishes you more and more. If you no longer support the ideals of equality and the Declaration, and more, importantly, the Constitution, just say so."
David G, you're a twit. This is ridiculous! There are riots in the streets! Do you have internet access or do you not have internet access up there in the sticks? [Beginning to speak with a Southern accent.] Just let me know. We can see if we can help you out. But you wrote me an e-mail. You must ride into town. You ride into town to write your e-mails, don't you?
Oy yoi yoi. There are riots in the streets, in case you don't have TV or internet. So if it turns your stomach, it ain't my fault. And inner guilt of supporting our great leader? Have you not been paying attention? I don't care: Republican or Democrat, they're all idiots. I think anybody who thinks that Donald Trump is so much better or worse than Barack Obama, George Bush, Clinton, Ford, Reagan, Carter – all of 'em – they're all the same. It's ridiculous. I don't support the great leader, you idiot. I never said I did.
It says, "If you no longer support the ideals of equality and the Declaration" – now you're on my turf 'cause I know more about this than you do, obviously. Our revolution was not the French Revolution, the fraternité, égalité. No, no, no, no, no, no, no, no. Ours was for equality under the law. And, yes, we were flawed because people who owned slaves were talking about equality under the law. But when it comes down to it, the Declaration of Independence and the Constitution – these are pieces of paper. They're glorious documents. I think they're massive achievements. But what matter is not ideas and what's written on paper; what matters is the behavior that you can trust in your fellow citizens. And we cannot trust some of our fellow citizens not to bash the windows in and murder people and steal stuff! And it is not the fault of the guy who killed George Floyd. It's not the fault of the police.
Another guy named Tim wrote in. Tim, I'm sorry I couldn't get to your e-mail. Very thoughtful. He pointed out: why does everything have to be all black and white, all one way or the other these days? Why can't we say, "Yeah, the police are mostly good; some of 'em are bad"? "The protests are peaceful and perhaps justified. But some of them have turned violent and they're bad." Why can't we be just a little bit nuanced? Oy.
Our first e-mail from someone with a brain this week is from Brendan K. He says, "How can a few thousand 20-to-30-something-year-olds with a couple hundred bucks and a Robinhood account cause a melt-up exactly? While I agree with your guest's premise, or the narrative primarily, however, the idea that these young adults can cause markets to jump 40 percent from their lows sounds a bit naïve to me, don't you think? Hope you're doing well. Brendan K."
Thank you, Brendan. I agree. The point is not that they caused it or that their money is pushing stocks up. Although I have to say: these bankrupt companies – you know, the bankrupt companies, when the stock goes to a few pennies, the market cap is so small that these people actually can push it up 100 percent. But that's a limited example. Overall you're right I believe. It's not that they're causing it. It's that, like I was saying in my opening rant today, it's kind of a sign-of-the-top anecdotal type of a thing, okay? Good question though. And you're on your toes asking that question.
The next one is from Brian D. Brian says, "Dan, I look forward to your podcast each and every week. Your commentary and guests are invaluable. Keep up the great work." Thanks, Brian. He says, "I have a question related to the Senate bill passed in May that could delist Chinese companies from US exchanges. If the House passes the bill to delist these companies, what happens to my holdings? Would they move to over-the-counter or possibly be worthless? At what point does it make sense to take money off the table due to inherent risk? The situation is making me nervous with all the anti-China sentiment out there. Sincerely, Brian D."
Brian, I can't tell you exactly what'll happen. But if you're holding them when they're delisted, you can't sell them in the United States. You might not even be able to sell them in the OTC market 'cause this is such a crazy rule, we don't know how it's gonna flush out if it actually happens. My guess is they won't pass it, but who knows? You would have to transfer your holdings to an account somewhere, some crazy wild place that lets you trade China stocks like, you know, Canada – woo! – where you could then sell them. You just wouldn't be able to sell them on a US exchange anymore if you were still holding. That's all I got for you.
But would you see a lotta money rush out of them? I think it's logical to assume that because we know that a lot of institutions have rules – they have rules against all kinds of stuff like foreign-owned stocks. But if they're willing to buy the Chinese stocks in the first place, they obviously don't have that rule. But they might have a rule against OTC stocks, something that's not exchange listed They might be restricted only to exchange-listed names is another way to say that. So you may have a problem there. You may be right. If they pass that, some money might flow outta those names.
I think money elsewhere in the world will find them. 'Cause there's a lotta great businesses. I hate to admit it, but there are some good businesses over in China [laughs]. I hate to admit it just because it's still a communist country and I don't like communism.
Brian Z writes in. He says, "Love the podcast. Appreciate your perspectives and the incredibly smart and diverse guests you have on the podcast, as well as the challenging yet neutral questions you ask." Challenging yet neutral. That's interesting, Brian.
Brian says, "I have a macro question for you. I'm a millennial and I've been following the market for probably close to ten years but have really only started to become an investor recently." And then he says, "I keep hearing that the bond market is a better economic predictor than the stock market or any other asset class for that matter but I haven't had a good explanation as to the theory behind this phenomenon. You mentioned it in a recent podcast. It seems more important than ever now with the disconnect between the stock market and the real economy. Can you elaborate why the bond market is generally considered a leading economic indicator?"
I don't know if it is a leading indicator. Maybe it is. But – indicators that lead economic developments. I tend not to know what those are though: leading and lagging indicators. That's just not my thing. I don't know if it's really worth that much. But what I said was: if you want to become a good macro investor, start by focusing on the bond market. That's what I said. And that is simply because that's where the big macro policy movements that governments and central banks make – that's where they show up first. Okay? That's it. That's all I got for you on that.
Let's see. Another guy wrote in about this but I didn't put his e-mail in the queue here. And he was asking about how to do this, how to track the bond market. So what you do is – the big currencies are, of course, the US dollar, the Japanese yen, and the euro. Those are the big reserve currencies in the world. So what you wanna do is: if you're a beginning macro investor, you wanna get to know the sovereign and corporate debt markets – start with the sovereign debt markets – of US-denominated debt, and there are many foreign countries that owe US-dollar debt. That's a big problem in the day. And same with euros and yen, right? So you wanna get to know all about the state of the US dollar, yen, and euro-denominated debt markets, starting with the sovereign debt markets and then moving into the corporate debt markets. That's the way to begin. I'm just gonna put it to you that way.
Moving on, Ludwig H writes in and says, "I'm not with you on Bitcoin. I don't trust the system but I'm very bullish on the blockchain technology." Okay. Time out, Ludwig. You can't separate Bitcoin and blockchain. I find this statement a bit of a non sequitur. I don't see how you can say you don't trust the system but you do trust blockchain technology. I'm not sure exactly what that means in fact, since the two are absolutely, inextricably bound up together. You know?
And then he says, "What do you think about gold bonds?" Honestly, I don't know what you're referring to. When I type in "gold bonds" to any search engine, it just brings up that Gold Bond powder [laughing] that you can buy. I don't know what you mean by that. You're gonna have to be a little more specific.
And he finishes up: "What is the worst that now could happen to society and the world? We are leaving lockdown. We are in a situation that it's almost impossible to fire civil servants, which makes society look even worse. Keep doing the great work. Best regards, Ludwig H." Not sure where you're headed with those final comments. But the worst that could happen is more rioting in the streets, a hot war with China, who knows? There's a lot worse that could happen and I'm afraid some of it might.
Chester B says, "Hey, Dan, loyal listener here. You mentioned what old English money did to preserve what their wealth and art was mentioned." Actually, old European money. A third, a third, and a third: land, gold, and art. And Chester B says, "Scott Lynn is the CEO of Masterworks.io. It's the first of its kind, creating a tradable platform for pieces of art. It's a crazy concept I invested into. I own a piece of Monet and Cecily Brown. I had to use the tradable platform to see how it works and was pleasantly surprised. Chester B."
Thanks, Chester. Never heard of it. I'm just passing it on for our listeners' perusal. But it sounds interesting. Syran M says, "Loving the podcast. You have a growing fan base here in Ireland. I would love to hear your take on the dragon portfolio or similar styles of portfolio construction using volatility/tail risk as an asset class. Could retail investors do this with VIX ETFs or similar instruments? Many thanks, Syran M."
I don't like VIX ETFs. I think they're garbage. I think they're just built to blow up. And I would say: if you wanna worry about voyage, for most retail investors, you shouldn't mess with any of this complicated stuff. Just hold plenty of cash, gold, buy a little Bitcoin, done. Done deal. Done.
Richard L writes in. He was one of a couple of people who wrote in who are medical professionals who said that my demonstration of saying "I can't breathe" while not breathing was wrong. And, you know what? You guys are obviously right. You're medical professionals and you know. And then Richard corrects me. He says that he looked at the video of George Floyd and this guy Chauvin, this cop who killed him, and he said, "Chauvin shifted his knee and that's when he completely cut off George Floyd's airway, and then he couldn't talk and he couldn't breathe and that was it." But I don't know.
The point about not breathing – when people say they can't breathe, it's not because they feel just fine and they want you to leave them alone. It's because they can't breathe, you know? Or they're having trouble breathing or you're constricting their air flow somehow. So at least give me a little bit of credit for that. The guy died of asphyxiation and said he couldn't breathe. I'm just saying, okay? But I appreciate the clarity and I appreciate that professionals like you, Richard, are writing in to school me on this and get it technically correct.
Last e-mail is from Norman B. He says two words, which I really needed to hear this week. "Great. Thanks." Thank you, Norman. Thank you, everybody. That's another episode of the Stansberry Investor Hour. Hope you enjoyed it as much as I did. Do me a favor: 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 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 wanna hear me interview? Drop us a note: [email protected]
Till next week, I'm Dan Ferris. Thanks for listening.
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