In This Episode
In a week where Tesla’s $75/share price tear made history, Dan dissects the craziness of the headlines we’re seeing.
Dan then provides research and historical perspective on growth darlings versus value investments before getting to this week’s interview.
This episode’s interview is with Harris Kupperman, founder of the hedge fund Praetorian Capital, here to discuss two of his highest-conviction investing ideas today.
We think you’ll find his theory that “equities are all risk” to be a valuable contrarian view to common schools of thoughts endorsing “safe stocks.”
What it comes down to, Harris says, is that every single stock purchase you make should have the ability to multiply your money – no 8% a year winners.
“To me, 30% a year upside doesn’t even go into the “interesting” category,” he tells us. “I need stuff that can double in at least the next year, and preferably 3-5 bagger in the next few years.”
NOTES & LINKS
- To follow Dan’s most recent work at Extreme Value, click here.
1:21: Dan gets to Tesla’s monstrous run past $550/share earlier this week. “It’s the highest market cap achieved, in history, by any American car company.”
6:58: With money-losers like Tesla and General Motors commanding the news cycles these days, Dan pulls up research showing that value stocks beat out growth stocks as superior long-term bets.
12:37: Everyone thinks finding the next iPhone or ecommerce king is the key to life-changing profits. But Dan explains how in this era of “unbridled optimism” you have to get other things right, too.
24:09: Dan introduces Harris Kupperman, founder of Praetorian Capital, a hedge fund using microtrends guide stock selection, and the chair and CEO of the Mongolian Growth Group
28:02: We think of owning shares of stocks like Hershey or McDonald’s as being more real than cryptos or high-flying tech stocks. But Harris explains how, when you own securities, “really, you don’t own anything.”
35:08: Harris shares his thinking on Saas (streaming and software solutions” companies), a market forecast to total $241 billion by 2021.
31:13: Harris outlines his criteria for finding stocks that can go up 3x-5x in the next few years.
49:30: Harris explains the biggest red flag in evaluating currency markets: “If good news doesn’t move it – bad news definitely will.”
1:13:23: Mike S. writes in with a question about the uncertainty Trump brings to markets – could a President Biden possibly be better for them?
Recorded voice: Broadcasting from Baltimore, Maryland and all around the world, you're listening to the Stansberry Investor Hour. [Music playing] Tune in each Thursday on iTunes for the latest episodes of the Stansberry Investor Hour. Sign up for the free show archive at investorhour.com. Here is your host, Dan Ferris.
Dan Ferris: Hello, and welcome to the Stansberry Investor Hour. I’m your host, Dan Ferris. I'm also the editor of Extreme Value published by Stansberry Research. Okay. Our interview this week is really good. It's with a really smart, really successful investor name Harris Kupperman. Get ready to take some notes, because he's going to discuss his two – or two of – his highest-conviction ideas right now. And you'll want to hear what he has to say about them. I know you're really going to like hearing about that.
But before we get to that, I do have a few thoughts to share. And my first thought to share is about Tesla. Because I haven't talked about it in a while. And I don't know if you noticed, but the stock hit 500 dollars on Monday. You remember the – I think the last time I talked about Tesla, I was saying, "Oh. I agree with my friend Whitney Tilson. Man, he says that thing is going below $100 this year." And that was months ago. That was last year.
And of course, it went below $200 and turned around and started rising, and now it's $500. And he's written about this. He's acknowledged it, and in December he's like, "Whoa. Whoa. Whoa. Don't short this now, because it's ripping and it's in danger of melting up." And he's been right about that so far. So it's got a market cap – Tesla's got a market cap of like over $90 billion. I think it's around $93 or $94 billion now...more than Ford and GM combined. One report that I saw said it's the highest market cap ever achieved in history by any American car company. Meanwhile another report I just saw said Tesla sold 19,000 cars last week, and the American auto makers sold more than 600,000.
So look. The problem with Tesla right now is not that it's guaranteed to go to zero or that it's a fraud or anything like that. It's that the stock market is now saying Tesla is more valuable than Ford and GM combined – meaning the stock market says it'll produce more excess-cash profits over the long term than those two companies combined. And you know what? That could even be true. But don't you think it's a little presumptuous of the stock market to treat it like it's guaranteed to happen with, you know...producing less than 20,000 cars in a week when the other two are making like 600,000? It's gotten way, way ahead of itself. Even if everything turns out perfectly, it's still way, way ahead of itself.
And of course, this is what we mean when we say Tesla is drastically over-valued. You don't have to claim that Tesla's at zero or that it's a fraud or anything like that. All you have to do is know what the current valuation means when you compare it to the U.S. automakers just like I did. On that basis alone, there's no way a good, smart investor can own this thing right now. I'm sorry. You can say, "Well you've been wrong, wrong, wrong all day long." Okay. You're right. But you have to explain to me how this thing is worth this much. And the only way you can do that is by looking out into the future and saying, "Many wonderful things are virtually guaranteed to come true."
And they better come true, because you're paying for all of them right now. Right? So the stock has doubled in the last three months. And another company, I noticed was up – like, General Electric is up like 40% during that time. Tesla and GE – you know what they are? They're the two most valuable money-losing public companies right now. According to a Wall Street Journal piece, "The percentage of listed companies losing money over the last 12 months is over 40% right now." Forty-percent of all the listed companies lost money over the last 12 months – the highest non-recession level since basically the Dot-Com Boom. Late-1990's. And it's even worse for IPO's.
So the proportion, the percentage of money-losing IPO's hit 8% last year: the same level it hit in 2000 at the peak of the Dot-Com Bubble. And I realize people are listening to me right now, and they're going to say, "Money-losing IPO's? You mean 19% of all the IPO's actually made money? Where are these companies that are making money? Where are these IPO's making money?" Because you never hear about them. They don't make the news, because they're not sexy and exciting and going to change the world, I guess. You know? They're just like little banks and things. You know? But to me – to me – this looks like an accumulation of mis-allocated capital. That's just my gut reaction. You know, maybe you know somebody who has studied this phenomenon and has all the statistics and disagrees. But that's what it looks like to me. It's typical of big bull markets that after they get going for a while, people become more tolerant of risky situations.
And certainly investing in a money-losing company with no history at all – right, an IPO – is pretty risky. And there are more of those around now than at any time since the Dot-Com peak. So, you know, be careful. At the opposite end of the spectrum, of course, are value stocks. There he goes again. Here he goes again on the value stocks. So research affiliates is a research firm co-founded by Rob Arnot – one of the smarter financial analysts of the last few decades. Research affiliates came out with two different reports in the past couple of months showing... one of them says, quote, "The current underperformance of value stocks relative to growth stocks has exceeded most in emerging markets all previous drawdowns." And yes, the appeal of stocks like Tesla is that they'll grow so much. That's what's being discounted in the price.
So overall, though, Research Affiliates found that value is the superior long-term bet. I mean, it's the ugly bet right now – but it's long term, it does better. They said, quote, "Historically, value stocks around the globe tend to win more often than they lose, beating growth over five-year rolling intervals approximately 55% of the time, rising to 70% over rolling 10-year intervals." Those quotes are from a paper titled Standing alone Against the Crowd. Abandon Value Now? And that was published in November. Another paper by the same firm, Research Affiliates, was published just within the last several days here. It's just dated January 2020. It doesn’t have a specific date. It's called Reports of Values, Death May Be Greatly Exaggerated. This one makes two points that I found pretty interesting. It made several points, and it's fairly technical.
But the two things I found interesting. First is that value has – as I said many times, including right now, value has become drastically cheaper than growth. Right? The slower-growing but, you know, still mostly profitable businesses have become cheaper than the much faster-growing and some unprofitable businesses today. But the paper notes, "Both growth and value are expensive relative to past norms." So I've pointed out many times – like I said, value stocks are cheaper than growth. But if you look at basically any value ETF, you'll probably see something that's up like 200% in the last several years and the growth ETF's are up 300%. Right? So there's the outperformance. But it doesn't mean that the value stocks haven't risen. You know, the earnings haven't risen that much. So the stocks are more expensive – in both cases, right?
So the RA paper's just pointing out that they both have gotten more expensive versus historical valuations. I don't want to make it seem like, "Oh, value's the dirt-cheapest thing in the world right now." Although there are some little pockets here and there. But you have to find them. Okay? So that's the first thing, is that they've both risen. Value and growth have both risen over the past several years. It's just a relative assessment. And the second thing is – and this is a quote from that second paper: "Since 2007, well-over 100% of the shortfall of value relative to growth is due to value becoming relatively cheaper. In the most recent 12-year period, the revaluation component appears to be the key to understanding why growth stocks outperform value stocks." End quote.
So he's describing what I talked about with Tesla a moment ago. Remember I said the market is discounting that Tesla will generate more cash profits over the long term than Ford and GM combined? Even though it has no track record of consistent profitability and both Ford and GM do. If Tesla just fails to perform spectacularly in terms of revenue and profit growth, you'll probably lose money paying these prices no matter how high it goes in the meantime. So even if it hits 1,000 tomorrow, you know, you'll probably lose money on it – unless it performs spectacularly well over the very long term. You know, in terms of the business performance. Right? The revenue and the profits. You remember those, right? It's more than just the share price. That's just common sense and basic arithmetic. Right?
And what did the RA paper I quote just now say? It said revaluation was the biggest component in underperformance of value versus growth over the last 12 years." In other words, investors right now, they just very much want to pay up today for growth in these exciting companies that they see in the future. They see them growing fast right now, they see them growing fast in the recent past. They're excited about the technology, and they just pay up. They're getting all excited about it, 'cause they think they're going to make a ton of money. A ton more, okay, than they've already made.
And by contrast, they're unwilling to pay up for profits earned today in less exciting, slower-growing but still profitable businesses. Right? The value stocks. And you can think – I think of growth stocks like negative-yielding bonds, actually. Right? The bonds become negative yielding. You know, they're guaranteed losers because they cost more than the principle and all of the interest payments. Right? So the price you pay is more than all your guaranteed to get back out of it. Well, just substitute earnings and earnings growth for interest payments, and that's what stocks like Tesla and even some profitable companies look like to me today.
So we're in this period now – I think kind of officially, if you will – of unbridled optimism. You know, it's kind of fun. Because I think we can all probably get excited about new technologies to some degree. I still think having an iPhone means I'm cool. And I look at this thing every now and then, and I think, "Wow. This little phone, it's way more powerful than desktop computers and those giant, early computers that took up a whole room." You know, in fairly recent history. It's pretty exciting, right? But as an investor, you have to get other things right – not just which technology will be more-widely adopted in, you know, five or 10 years or whatever. You have to not pay so much for the earnings of a company that you're still going to lose even though the company may succeed. Right?
It's just like that negative-yielding bond. Those people are going to get all of their interest payments. They're going to get paid back their principle. They just paid so much for it that they're guaranteed to lose. Same thing. Ask anybody who bought Cisco in March of 2000 and is still holding it today. Right? They're still showing a loss – 20-years later, they're still showing a loss. And this difference in investors – well almost 20 years. Okay? I'm two months ahead of myself here. But you get the – you get the point. And this difference in investors excitement and optimism, really, for some stocks versus others... it's a different effect than if there were a big difference in profitability between the growth and value. You understand what I'm saying?
They're just paying more because they like them better for, you could say, irrational reasons rather than being kind of strictly rational and saying, "Well, this is a better bet relative to the price and the value. So, you know, I should be buying this other, cheaper thing." No, that's all out the window now. So in other words, if I read this RA paper correctly – Research Affiliates paper – they're saying that the difference in performance between growth and value stocks last 12 years, it's not because value companies are less profitable. They weren't. At least, not enough to explain the huge underperformance.
So what you're looking at today is, I would say, pretty typical investor behavior laid in a bull market. They're all excited about the money they've made, "Whee." Or maybe they're jealous of the money their friends have made, and they want to get in on it. Now there's a little side issuer here. Right? When I say investors, I don't necessarily mean individuals like you and me. By now, it's pretty widely reported that institutions move markets today – not the mom and pops day trading like back in the Dot-Com era.
But to me, that doesn’t mean anything. Institutions are just groups of people. And if individuals behave poorly near market tops, groups of people behave like suicidal maniacs high on speed. I mean, I would say groups of people in such situations behave worse than individuals, because they're in this hive; this hive of peer pressure all around them. And they're always, you know, gauging their performance relative to some index or other. And man. When the index starts doing poorly, they'll start selling too. So when the bull market cracks this time around – whenever that is – I think the bear market is going to be so bad... and who knows, maybe so long. But not necessarily – but so bad that people will start to wonder if the stock market isn't permanently broken.
And you could say, "I know that somebody just started typing a question, "Dan. Isn't it permanently broken today because stocks are so over-valued?" Well, yeah. But nobody's going to say that. You know, the people who say that are people like me who've been wrong for three years. Okay? So they won't start saying that until a whole bunch of people look at their 401k's and go, "Oh, God. Now I'm going to call it a 101k." Remember, they called them 201k's back in 2009. So look. That's all I have to say about that. Stocks... a bunch of stocks have ripped. I mean, I just looked at a bunch of charts in like Uber and, what, maybe Peloton and a couple others. But I just looked at a bunch of money-losers that have done – oh, Beyond Meat. That was the one. It's ripped. I mean, it's just ripped. It was like $70-something. Now it's $120-something.
And who knows why? Maybe there's a short covering. I don't know. But it sure seems like people are falling back in love with these money losers. Not all of them. Not all of them. But a few of them; that they're just, you know, super excited. People are still excited about meat substitutes. There's a lot of commercials on TV. There's a Hooters commercial now where all these Hooters girls, you know, in their – you know, that outfit is like underwear. So these girls come on the screen in their underwear eating like chicken wings or chicken nuggets or something, and it's like fake meat. You know? It's plant-based stuff. So that idea's still exciting. So who cares if it's losing money hand-over-fist? It's exciting. And so, let's just get back into it and buy. Right? Because Tesla was way the heck down, and it turned around and took off like a rocket.
And so, maybe Beyond Meat is doing that now too. Who knows? But we know that it's got nothing whatsoever to do with profitability. Right? That was the theme I just kind of weaved through my ranting and raving today. Let's do one more little tidbit before we talk with Harris Kupperman. I found a couple of neat little surveys... Look. I don't vouch for the statistical method on these things. But I find [that] they're interesting. One of them is in The Economist. That should be pretty good, right? They published a list of 28 countries based on how many books were published per 1 million of population. And this is as of 2016. Okay? So it's a few years old.
So can you guess the No. 1 country? The No. 1 country that has published the most books per 1 million of population. What do you think that would be? Turns out, it's Japan with more than 10,000 titles per 1 million population published in 2016. No. 2 is China, and No. 3 is South Korea – both right around 7,500 books per 1 million. No. 4 through 17, all European countries. No. 4 is Denmark with about 4,000 books per million. And I said No. 4 through 17 were European countries. No. 18? You guess this one? Yeah. The United States – 1,000 titles. So China...or I'm sorry. Japan publishes 10 times as many books per 1 million population as we do. And the list went to No. 28. There were 28 of them. Almost all the rest were European countries. Two Latin-American countries. Argentina, No. 23 and Columbia, No. 27.
So what does all this mean – that Asia and European countries publish more books per million of population than the United States? You know, technically speaking – I guess, or maybe it doesn’t mean anything – but I can't help thinking of those studies that we hear of. You know, every couple of years in the news, you hear a study that Asian and European countries are scoring a lot higher on math tests. They do a lot better on math than the United States. And this sure makes it seem like, you know, they're reading a lot more books. And in fact, there was actually – there was another study that I want to just talk about really quick. And this one was: which countries actually read the most, as opposed to publish the most.
And it looks really similar – except the No. 1 country, they were doing hours per week of reading per person. And the No. 1 country was India with 10 hours per week. Then Thailand, China, Philippines, Egypt, Czech Republic, Sweden, France, Hungary, Saudi Arabia, Hong Kong, Poland, Venezuela, South Africa, Australia, Indonesia...the United States is No. 22 – cutting to the chase. And there's all these other countries in between. So that was more varied than the publishing list, because we had Saudi Arabia, Egypt, Hong Kong... Well, Hong Kong's an Asian country. South Africa is in there, Australia – so a little different. But the point is, you know, it isn't the United States up high on the list. On either list. And my point is like, I don't even care what they're reading. I don't care if they're reading like, you know, just a bunch of romance novels or whatever.
Because I just feel like reading is a superior way to take things in. It's more active. You have to reach out with your mind and grab a hold of it and comprehend it; whereas when you're watching television or looking at some video on the Internet or something, you're passive. You're just sitting there, and it's kind of washing over you. And people say... you know, I always chuckle a little bit when people say, "I only watch educational programs on TV. I watch National Geographic." And I watch those, too. But it's entertainment. It really is. It's passive. It's entertainment. It's not learning. It's not actively studying and grasping and learning something valuable. So it looks to me like a whole bunch of other countries are filled with people who are spending more time actively learning and reaching out and grasping things, and in the United States we are trying to impeach a President who doesn’t appear to have done anything impeachably – you know, impeachable.
And we are worried about what bathrooms people are using and all kinds of other stupid stuff. And, you know, we're obsessed with – I don't know. It strikes me just the way we think about things in the year 2020. You know, we're all worried about gender and race. We're hyper-obsessed with gender and race. We seem to be, anyway. I realize that this is just what, you know, the news represents. And we all live our lives a little differently than what they represent. But still. It's on peoples' minds. And out West, you get into a conversation at a party or something and people jump right down your throat on this stuff. But the obsession with race and gender and all this... you know what it reminds me of? It reminds me of these TV shows that my wife watches – and that I watch with her sometimes – about these people who volunteer to go to jail.
And in jail, everything is based on, you know, the white guy and the black guy and the Latin guy and the white girl – and they're all split up by gender, of course. The girls are in a different jail than the guys. And I just feel like our whole society feels – it's like we all think we're in prison and we're afraid of getting shanked. You know? So we can't – we got to be careful about who we talk to and who we offend. It's weird. And I don't know. I just think we're obsessed with the wrong stuff. I think we should be – I think we should read more. We should publish more books. We should be more like India and China and Japan and these other countries and publish more books and, you know, learn more valuable stuff.
Anyway. You get the point. Maybe I'm wrong. Write into [email protected] and tell me I'm wrong. But okay. Let's do away with that. Let's finish up with that, and let's just talk with Harris Kupperman right now. This is going to be interesting. I promise you. Our guest is Harris Kupperman. And Harris Kupperman is the founder of Praetorian Capital, a hedge fund focused on using micro-trends to guide stock selection. Harris is also the Chief Adventurer at adventuresandcapitalism.com – a Website that details his investments and travels. Additionally, Harris is the Chairman and CEO of publicly-traded Mongolia Growth Group. Please welcome, ladies and gentlemen, Mr. Harris Kupperman. Harris, welcome to the show.
Harris Kupperman: Hey. Thanks, Dan. Happy to be on.
Dan Ferris: So the first thing I ask almost everybody – especially folks in your profession – is, how old were you when you knew that you were going to be a professional investor?
Harris Kupperman: That's a good question, actually. You know, I started trading stocks – I was in boarding school at Phillips Andover. And I started trading stocks my senior year instead of going to class, and I almost failed out of class. But I wasn't really making any money at it. It was really, I guess, a year or two later when I started actually making decent money at the investing side, that I realized that was the future for me. I remember actually, I had this – my father's a doctor. And I came to him my Sophomore year of college and said, "I think I should drop out of school and focus on this full-time." And he told me, you know, "Why would you do something stupid like that?" And I said, "well I'm making more money than you, and you did 15 years of college." It kind of makes sense, right?
Dan Ferris: Yeah. That makes a lot of sense.
Harris Kupperman: Yeah. You know, I was in my fraternity house and all my friends were, you know, doing odd jobs or selling weed to each other. And I was just trading stocks, and I was making more than all of them combined. It just seemed obvious.
Dan Ferris: Well that's a hell of a comeback for your kid to say something like that. What'd your father say?
Harris Kupperman: He said my mom's going to kill me if I drop out. I got to finish. But he let me do night school instead. Beause, I mean, the markets are open during the day. So I basically invested during the day, and then at night I went to night school. And he let me take whatever career path I wanted in terms of degree. So I became a history major, because I found it interesting.
Dan Ferris: That's a pretty good story. So your father had no comeback, because you're making more money than he is. So he puts it off on your mom and says she's really going to be pissed about all of...
Harris Kupperman: Yeah. Yeah. He said she's going to kill me.
Dan Ferris: Classic dad stuff.
Harris Kupperman: Pretty much. So I finished my degree. I got a bunch of B's and C's. But I made it through to the end. And yeah. Now I have a degree in college for whatever that's worth.
Dan Ferris: Yeah. That's actually a pretty good story as they go. Some people are just like, "Well I didn't know what I wanted to do after college, and I got a job as an analyst. But that one's pretty good. So I've been on your Website, and there's a comment – like, you know, I know you've done other things that we'll talk about. But there's a comment that is...it's just like stuck in my mind. And I hope you don't mind if we just get straight to that, because-
Harris Kupperman: Yeah. Sure.
Dan Ferris: It said, "Equities are all risk." The sentence jumped off the page at me. I was like, "Equities are all risk. Nobody comes out and tells you that." I think I know what you mean by it, but tell us what you mean by it. I think this is really valuable for the listener to hear this.
Harris Kupperman: Well I don't remember exactly what the context was. But I've said that before. But, you know, equity is...yeah, you can have a company that's a billion-dollar company. It can go "poof" the next day. You never really know what's under the hood there. Because management teams lie. You can have fraud. You can have scandals – pretty much anything can happen. You have governments that can just change the rules on you. When you own an equity, you don't really own anything. You own kind of the collective hopes and dreams of other people on those shares. You know? It's not like owning something that's real like, you know, a gold coin or something.
Dan Ferris: You know, it's funny. Because there are a lot of value investors out there who will say the exact opposite of what you just said. They'll say, "You own a piece of a business with this. It's not like owning something crazy and worthless like a gold coin." Which I find very interesting. Right? I mean, it's true.
Harris Kupperman: Yeah. Look. You own a piece of a business. You have to think of it that way. Like, I don't think of these things as stock charts or ticker symbols. I think of owning part of a business. Because often times, I'm going to be there for more than a month, I'm probably going to be there for a few quarters to a few years. And so, you've got to treat it like a business. It's a living, breathing thing. But I've done this for 20 years now, and I've seen companies that I thought were just phenomenal companies disappear very fast. And I've seen companies that I thought were about to disappear become great companies. It's very kind of ephemeral, and you have to treat it as such.
Dan Ferris: Right. And actually, let me put that comment in context. You have a piece that you Posted March 2010 called What Does Cheap Really Mean? And that sentence was, "Remember. Equities are all risk." And then you said, "Don't take on that risk unless you have the chance of earning enough to make it worthwhile." And then, I think later on you said, you know, "You want things that can turn into a multi-bagger with, you know, relatively little downside" – that asymmetry that you're always talking about. So that was the context of that.
Harris Kupperman: Okay. Yeah. That helps a bit. And I think that actually is a very good point. And that's the bigger point I'd make, even than the, "Equities are all risk," side. Too often, I see guys come into an equity and they say, "You know, this thing's trading at 10. I think it's worth 13." And, you know, if you wait long enough – just normal market volatility – probably gets you your 13 eventually. But you might get a zero along the way. And if you're going to take the risk of buying something that really could go to zero – and all equities can go to zero – you really have to be guaranteed that you're going to make a few times your money if you get it right. You know, I always look at the downside of every position I own.
And I want to know if this balance shoots straight, if the debts turned out and all this other stuff that people care about to the downside. But really the way you protect your portfolio is the few winners each winner that you have. You know? If you have a company that goes up two, three, four times and it's a big piece of your book, you can have mistakes and it just won't really matter. And it's those winners that actually hedge your portfolio, in a way. And this year's a perfect example of that for me. And I feel like not enough people look for the upside. They kind of say this thing has 20-30% upside. And to me, that doesn’t even go into the interesting category. I need stuff that could, you know, at least double in the next year and preferably three to five-bagger in the next three years.
Dan Ferris: In equities, 20- to 30% is noise. Right?
Harris Kupperman: Exactly. It's just noise. And I see too many people get stuck in that trap of looking at noise and missing the bigger picture; which is, "How do you find something that's going to go up five times?"
Dan Ferris: Yeah. I'm looking for those things too. I don't always find them, but I think we found a couple of them that have kind of limited downside. And you mentioned – I think it was in some other place on your Website... you mentioned looking out – you were like – you said something like, "Look out five years. Everybody has an idea about what the earnings are going to be over the next year and maybe even the year after that. But nobody's really looking out five years to see if this thing can really grow enough to make you that multi-bagger return." Which I thought was a great point. Because you're right. That's what everybody's doing. Everybody's saying, "What's going to happen on the next earning's call," or, "What's going to happen next quarter?"
Harris Kupperman: Right.
Dan Ferris: It all seems a little silly.
Harris Kupperman: I mean, I think a lot of the guys listening to this podcast are the type of people who manage their own money personally. You know, if you can be running a mutual fund or a hedge fund, you have to think about what happens tomorrow. Because your performance is, you know, driving your marketing which is then driving your inflows and outflows. So all you care about is next month and net earnings release. But if you're a guy sitting at home and trying to make good returns yourself... I mean, next quarter, who knows? I have friends. They're doing all sorts of options trade, and they're analyzing things. And they're sitting there at these analyst conferences trying to read the body language of the CFO to figure out if they beat or miss by a penny. It's kind of stupid, because there's a lot – one, it's really hard to do. Even if you told me a company would beat or miss, I don’t know if the stock's going to go up or down. You know? Two, you have a lot of people positioned that are really, really smart doing this.
And you think where these guys don't have any edge, they have no edge out a year or two. Because if they're wrong the next quarter, they have no capital in two years. So they can't even think out that long. I mean, that's where the opportunities are for guys like me when I run a fund. But I think out a few years. But guys sitting at home with their own personal accounts, you got to think out a few years. The stuff that's, you know, near term – the next couple weeks, the next couple months – that's pretty well hedged out in our doubts. You have to look out further where guys aren't playing.
Dan Ferris: Yeah. And for our listener, this is like classic value investor thinking. Right? It's time arbitrage. You know, everything that's in a stock is what people think over the next year or two. Nobody is looking out farther than that. And you're right. People are mostly looking out like... The people I talk to, they're looking out next week. You know what I'm saying?
Harris Kupperman: Yeah. Yeah.
Dan Ferris: They're looking at charts and, you know... Like you say, reading body language and doing all kinds of crazy things like looking out next week. So looking out five years – if you have the discipline to really do that, over time it has to be – or at least contribute mightily – to a competitive advantage if you're any kind of a decent analyst. Right?
Harris Kupperman: Absolutely. And as time frames keep compressing... I mean, you don't even have to look out five years. You can look out a year or two. And especially in the sort of companies I focus on, which are companies that are at some sort of inflection. You know, you don't have to know exactly when it inflects. You just have to know that an inflection is coming. And you have to be positioned where a lot of other guys are saying, "That's dead money for six more months." And they're going to miss it, because the stock starts trading up in three months."
Dan Ferris: You have an example of what you just described. You have a position in Altisource Portfolio Solutions?
Harris Kupperman: Okay. Yeah.
Dan Ferris: Isn't that... aren't you waiting for that to inflect – and you're still waiting, right?
Harris Kupperman: Yeah. I'm still waiting. It's one of my largest positions. I think I'm buying a SaaS company at three times earnings. You basically have three businesses there. One is shrinking, but rapidly. Two are growing quite rapidly. And so, people look at this and they say, "This is an asset-light sort of provider with a very heavy software component" – which is a great business, but it's shrinking. But what's going to happen, I believe, sometime in 2020... probably Q2. Maybe it's Q3 or Q4 – is that the growing piece of the business is going to catch up in terms of the growth rate, to the piece that's declining. Think of it as two curves. One's going down, one's going up. And they're going to cross eventually.
And when they cross, this stops being a shrinking company and becomes a growing company. Even though there is a component that is still shrinking. And suddenly, you get a growth multiple. So it stops being three times earnings and goes to – let's call it 20 times earnings. And so, you know, you can look at this and say, "We're probably going to make five to seven times our money when the market revalues it." And it'll probably take a few quarters of growth to get revalued. And you have a free lottery ticket look at the fact that it's a play on housing defaults picking up. If you're bearish in the economy – which I am – and if you think defaults pick up in housing, mortgages, then these guys could potentially make many times their current earnings. Which, you know, gets you 30 to 50 times upside.
If you look at what happened in 2009, the last housing cycle, this stock appreciated 30 times – 30 times. Which is one of those life changing sort of things whether you're running your own money or a fund like I am. And better, it hedges all your long positions. Because in an economic crisis, your longs will probably go down. But your Altisource is going to more than make up for it. And that's that asymmetry I'm talking about. And while I wait, the company's going to keep buying back a few percent of the company each quarter. They've been about 2- to 4% of the company each quarter for the past few years.
Dan Ferris: So what is it about this business that is going to thrive in an economically bad environment? What do they do that is going to be done a lot more when things are bad?
Harris Kupperman: So they do, it's called, a default mortgage servicer. But what they mainly do is property preservation. So think of it when you default on your mortgage. At some point, the person who owns the mortgage has to start taking steps to preserve the value of the property. So there's a whole conveyor belt if you think of it. But it starts with them calling the owner up, "Hey, you going to pay the mortgage?" Then they call again. Then there's a nasty letter. Then they start evictions.
And at that point, these guys step in. Because you have a property that still needs to be maintained and serviced. So they can do property inspections. They can do – make sure that there's no squatters. They're going to maintain the property in terms of mowing the lawn, fixing the roof, protecting the pool, staging it for sale – all of that's a not very high-margin business. But when you have a huge route density, it's a very profitable business. And it's the reason that there's very few of these companies in the United States.
And Altisource is probably the second largest. But that business grows dramatically as mortgages start going delinquent. Then you have another business, which is called Hubzu, where companies that own mortgages – mortgage servicers – start liquidating the properties. So it's kind of like eBay, but it's eBay for a defaulted property. You know, their only competitor is auction.com. It's basically a United States duopoly. And this is really the profitable side. If you think of it as a conveyor belt, it starts with them maintaining the property and preserving the property. And it ends with them getting the opportunity to have an auction and sale of the property. And that action of sale is very, very lucrative. That's two years after the property's defaulted.
But as the number of sales of defaulted property increase, Altisource earnings will increase quite dramatically. If you look at the company... you know, they're going to do about $100 million this year of cashflow in 2020. And that's adjusted cashflow, because there's some one-timing stuff. But if you look at what happened in, say, '12, '13, '14 they did about $400 million. So if you think these guys can cover half of that gap, maybe, and they get to call it $250 million and you put a 20-multiple on it, you have a company worth $5 billion. And today, we're sitting here at $300 million. And once again. This is that sort of asymmetry I'm looking at where I don't see much downside because of, you know, the valuation of the company. But I can see a whole lot on the upside.
Dan Ferris: Wow. That sounds really compelling as you describe it. That's really cool.
Harris Kupperman: Let's hope it works.
Dan Ferris: Yeah. Fingers crossed. One place where you and I are very much on the same page is in shipping stocks – especially kind of from right now onward, I would say. And you own like a basket of them, do you not?
Harris Kupperman: Want to talk about some shipping?
Dan Ferris: Yeah. Let's talk about some shipping, because I think this is something that I want people to hear about right now. I think right now is a really interesting moment for this idea.
Harris Kupperman: Yes. Absolutely. Just some background. I've been following the shipping sector for almost my entire career. One of my earliest wins ever was a company called Frontline. It still exists. And I remember buying this in maybe 2002, 2003. I don't remember the exact date. But I just remember that about a year-and-a-half after I purchased the shares, my quarterly dividend was more than the price I paid for the shares. And I made about 50 times my money. Fifty.
And after you have something like that happen to you, you never forget about it. So there's another company called OMI. I think it was a 15-bagger in 18 months. The thing about shipping that you need to remember is that it's a terrible industry. It's one of the worst industries ever created. It's net-destructive of capital. But once every decade or two is a positive cycle. And on the upcycle, you get to make between 10 and 50 times your money. There hasn't been an upcycle where you didn’t get these multi-multi-baggers. And that's because you have all the operative leverage of operating your ship, and also the financial leverage on top of that operating leverage.
And it leads to huge, huge returns. You know, we're looking at a lot of companies today where we think it's trading for less than their cashflow next year. And you have very good visibility on the cashflow, because they're booking charters in January that don't finalize until middle of Q2. And you can look at a freight-forward market and see that Q3 and 4 look quite robust as well. I think if shipping really is the supply and demand situation – which makes it so great to analyze – you're really just looking at, "What is the supply of vessels? What is the demand for vessels in terms of ton-miles?"
And you're looking for mismatches. And right now, there's a large mismatch in tankers. What's really happening is, if you look at trade flows across the world, you're seeing more and more oil coming from further away. And what I mean by that is, most of the growth is coming from Asia and India, and most of the... growth in demand. And most of the growth in supply is coming from the U.S. Gulf. It's coming from Brazil. It's coming from Guyana and West Africa.
So the new supply is coming from further away – which means that to move the same barrel, you need one-and-a-half or two times the number of ton-miles. That's the miles that cargo has to go – which basically means you need more vessels to move this cargo. At the same time, you've had very low ordering just because... big picture, starting in about 2007 and '08, a lot of vessels were ordered because you had excess profits. These vessels were delivered 2010, '11, '12 and they just wrecked the market. And guys kept ordering. I don't know why they kept ordering, but they did. It was partly a function of QE, where – and it's partly a function of a lot of these shipyards that were built in China just going out and saying, "Hey, guys. Look. We want to keep these jobs. We'll build a vessel. We'll finance a vessel. Just give us the order."
So you had a bunch of guys literally saying, "Oh, cool. You know, zero-percent financing or 1%- financing? We'll just order five and see what happens." You know, no money down. "Let's just do it." And the end result is that you have this glut that's really bankrupted the entire sector for the past decade. You can look at a lot of these charts. They're all down 99%. A lot of them didn't even make it to the other side. And when you have a sector that goes bankrupt... they finally stopped ordering. You had a lot of scrapping in the last two years. And then finally, you have something called IMO 2020. And for listeners, IMO 2020 says that starting January 1 of this year, 2020, all fuel needs to be below 0.5% sulfur content unless you install a scrubber.
So what's that's done is, it's made low-sulfur fuel a lot more expensive. It's 3 to 400-a-ton more expensive than the low-sulfur fuel... Sorry, than the high-sulfur fuel. The low-sulfur fuel is much more expensive, which makes it much more expensive to operate a vessel. Which means that older vessels that are less fuel-efficient are getting scrapped. Younger vessels are mostly getting scrubbers, which gives huge economic advantages. So it's going to lead to more scrapping, and it's just going to lead to more disruption. Disruption's good for shipping, and it'll finally – Trump must be long on a basket of shipping stocks, because shipping is a play on geopolitical instability. And, you know, pretty much every night he tweets something and my shipping stocks go up.
Dan Ferris: Harris, you made an interesting comment early in that explanation that reminded me of something Warren Buffett used to say about airlines. You said the shipping industry is net-destructive of capital.
Harris Kupperman: Yeah.
Dan Ferris: It makes you wonder why it's still around.
Harris Kupperman: Well it's needed. And the thing is that people keep investing in it because the upcycle is just so good. You know? The idea that you could have a, you know, VLC that you're funding it with a few million of equity, and it's making you a few million U.S. a week in profits... I mean, having 100% returns on equity on a weekly basis. You know? It's the sort of thing that investors just dream of. And yes. It might only be an 18-month window. But, you know, you can make so much money that it doesn’t really matter. And that's why people keep coming in. It's like gambling in a lot of ways. You know, people know they're probably going to lose money, but there's always a winner every few years. I mean, you have a jackpot winner almost every week in Vegas. That's what makes people keep coming back.
And that's the same with shipping. The really good thing about being in equity order is, you don't have to buy vessels and sit there and lose a few thousands dollars a day every day, you know, 365-a -ear times how many vessels you have. You can just sit and wait for the great setups. And, you know, right now it's in tankers. Two years ago, it was in LNG. Before that, it was in Bulkers. You can watch this sector and see where the setups are and really do quite well. And I think shipping is one of the greatest sectors for investors – especially guys like me that are looking to capture inflections that have multi-baggers.
Dan Ferris: Yeah. I feel similarly about mining. Different industry, but it's got some of the same dynamics and some of the same ability to get, you know, huge multi-baggers out of tiny, little names that you'd never want to own most of the time. But sometimes, you can find that moment and that limited downside and the cycle picks up. And, "Whoo," you got a multi-bagger in a couple of years. And you're right. Like, it makes your life as an investor. Which you sort of alluded to this earlier when you were talking about a single year, you get a couple triple-digit winners and it doesn’t matter if you lost on some other ones. I think that's true, like, over a lifetime. Like over a lifetime, you look back and your whole fortune is made by like, you know, a handful of winners even though you might've picked 500 stocks in your life. Which is really kind of weird. I mean, at least that's my experience so far. I'm almost 60, and that's the way it's been for me.
Harris Kupperman: Yeah. That's been my experience, too, I would say. Each year, there's that one stock or maybe it's two stocks that makes my year. And a lot of times, you'll be in the same stock for two or three years. So it's going to make, you know, two or three of your years. And it's those really big winners. And I think the mistake most people make is, they cut their winners too soon and they kind of stay with their losers. I run a very concentrated book. I'm 6 to 12 names, usually about 8 names on average.
And so, I'm playing 10% or bigger. And you have to have those winners, and you have to just let them do what they're going to do. You know, I own a tanker stock called Scorpio Tankers. It's my largest position. It's at $39 today. I bought it at $17 in January. I wrote it on my blog a couple times, actually, because I was so passionate about it – much like I'm passionate about Altisource. And that's at $39 today, and I think it's going to go up quite a lot from here. I mean, there's a pretty good chance they earn more than $39 a share in cashflow this year. You know? It's just like, it's not going to trade at one-times if they do that.
Dan Ferris: Wow. Yeah. Yeah. It's $39 now, $39 in cashflow. That'd be nice. Wow. Make me want to run out and buy it. There's another position that... there's another position that you talked about on your Website. And it's interesting to me, because every now and then I talk to a guy like you who is a value investor who's got some macro ideas working. And you have some ideas about the dollar – which I think you said you stopped out of your short-dollar position.
Harris Kupperman: Yeah. I did.
Dan Ferris: Why do you think the dollar will fall in value?
Harris Kupperman: Well let's look at it at a few levels. At the starting level, anything that's good that's happened for the dollar in the past three years has happened. Whether it's, you know, repatriation of capital or it's fund flows...'cause every single human on this Earth has to own Apple and Amazon. Whether it's, you know, faster growth rates, whether it's interest-rate differentials across U.S. Treasuries versus, you know, the Euro zone or Japan – I mean, I can give you a list of 20 of these things. But anything that's good has happened, and the dollar's gone nowhere. And I'm a trader first and a fundamentalist, in terms of investing and valuation, second. And when the trade says all this good news that's happening and you see no price action, then something's wrong.
Because if good news doesn’t move it, bad news definitely will. And in the very, very big picture I see that as being a setup that doesn’t seem attractive. You know, looking further ahead I kind of see that a lot of other countries – Europe, which is a huge contrarian play to be long to Euro – I think they're closer to doing a fiscal stimulus than we are. They've taken monetary as far as it goes. You know, we have over 100 basis points of room on the monetary side, which isn't dollar-bullish. You know, I just think you're going to see more things happen that are dollar-bearish. And I know everyone has this view that the dollar goes up when you have a shortage of dollars and a financial crisis. But we just had the Knot QE, and it's kind of proven that if it's a shortage of dollars, they're going to fix that.
And you have Trump sitting out there that doesn’t want a strong dollar. And so, I just don't think you have much upside on the dollar, and potentially you have a lot of downside on the dollar. and that's kind of how I look at it conceptually. You know, of course it hasn't worked...it hasn't not worked, really. I mean, the Euro's been at a two-cent range for the better part of nine months now. You know, Canadian dollar's in like a two-and-a-half-cent range. It's kind of nowhere, which also kind of gives you the impression that – making reversal, and it's a long, drawn-out reversal. But usually when price action stops, it starts going the other way.
Dan Ferris: I see. And the position that you talked about with short DXY, the basket of currencies against the dollar...but do you view long gold as the equivalent of short dollar?
Harris Kupperman: Yeah. Absolutely. You know, long gold is the only currency that doesn’t have a essential banker. It's the obvious one you want to play. The problem with long gold is a bit more volatile. So you play it a little smaller. But no. I think long gold is obviously the way to play this. And I own some gold. And I think everyone should own some gold, for that matter. But I think it's also some currencies like – I think Canadian dollar's going to be just fine. I think Russian rubles are going to do phenomenal. You know, I think there are some of these currency's out there that you can play. And I think you can play them in size and feel safe. But yeah. Yeah. Gold, obviously.
Dan Ferris: Yeah. Russian ruble sounds gutsy to me.
Harris Kupperman: Look at the chart. It's been working. Of all the currency basket I put on, that's the one that did the best. Plus it paid me the best carry.
Dan Ferris: I mean, yeah. I'm not a currency guy. So just the words Russian ruble just scare the crap out of me is all I'm saying.
Harris Kupperman: Yeah. And I don't blame you. But that's why it's worked so well. Look. I'm not a currency guy either, but I travel a lot. My wife and I just got back from Portugal last week. We travel, I don't know, a half dozen countries a year. We try to spend a week or two in each of them. And I've done amazingly well in currencies over the years. Not because I look at economics, statistics. Not because I look at charts. I really just go there and say, "Does this feel cheap? Is the hotel cheap? Is it cheap to get a dinner at a nice restaurant? You know, is a beer or a bottle of wine cheap?" And if you buy currencies of cheap countries, as long as they don't speak Spanish you do really well. And the first rule of currency is never own the currency of a Spanish-speaking country. So as long as you avoid that one pitfall, you're going to do just fine.
Dan Ferris: And I just want to say in this era of political correctness that I love Spanish-speaking people and countries. Just don't like the currencies.
Harris Kupperman: My wife's Mexican, so she always reminds me that in her lifetime the currency has never had an up day. And she's pretty much accurate about that.
Dan Ferris: Wow. That's awesome. I mean, if you're on the right side of it, I guess it's awesome. Not if you're in Mexico.
Harris Kupperman: Actually it's not been bad for Mexico either. They always have a cheap currency, and they do a lot of trade with America. There's a structural reason for it.
Dan Ferris: I see. Yeah. Well that makes sense too. So you've been all over the world, it sounds like. Five, six countries a year for...what, how many years?
Harris Kupperman: My whole life. I travel a lot. I find that you learn a lot when you travel. And I think the biggest mistake a lot of portfolio managers make is, they feel like they have to be in front of the computer, quote-unquote, "If something happens." Look. Last night, something almost happened. The market went crazy. If you had made a decision, you probably made the wrong decision. Because the situation's fluid and stuff's going to happen tomorrow and the next day until it's all sorted out with Iran. Like, "Why would you want to be in front of your computer?" Like, I want to know that I own the right stocks, and I want to be away learning something and find that next stock.
And I want to be, you know, not feeling compelled emotionally to change my mind on something because of some piece of news. And the worst that you could do is talk yourself out of a great stock just because, you know, Trump tweeted something or Iran did something or you heard something from some other guy that's commenting on something. You just have to be positioned and positioned correctly. And it's not that much you need to do day-to-day in the market. And I think the guys who do the most often have the worst returns. And besides. Travel's fun.
Dan Ferris: Boy. What you just said there is a huge point, especially for our listeners, and I know a lot of the readers of our Stansberry newsletters. They're just too active. They're way too active. And you made the point earlier when we talked about how there's just too many smarter people with a lot more information doing these short-term trades anyway. So you can't get an edge. And sitting there in front of your computer trying to get these short-term trades to work is just...it's like financial suicide for the majority of individual investors.
Harris Kupperman: Right.
Dan Ferris: So yeah. Travel, read, get away from your computer.
Harris Kupperman: Learn, meet people. You know, I don't know if I'm every going to invest in Portugal. But I now have some friends there. If there's a good opportunity, I know who to call. I know what to do. And if they see something, they'll hopefully flag it. You know, a lot of what I've done in my entire career is because people have reached out to me and said, "Hey, Kuppee. You should really look at this thing. I own a bunch, and it's interesting." You know? My biggest winner percent-wise this year – it's been a triple for me – is a company called Stage Stores. And I just had a friend reach out to me, and he's like, "Hey, Kuppee. I was short this thing, and I saw the press release. I covered, and it went long. You should look at it." And the stocks at three-and-a-half, and today it's at nine. And the whole move happened in six weeks. I mean, it's almost a triple in six weeks. Like, you don't get a lot of those in your career. And I think it might go up a lot more.
Dan Ferris: You still holding?
Harris Kupperman: Yeah. I'm actually meeting management next week at ICR. So I'll have a much better view on what's going to happen. But, you know, it's the people you know that lead you to the great opportunities. And I've spent a lot more of my time just meeting interesting people and trying to learn industries.
Dan Ferris: So I just – while you were talking, I brought up a chart of Stage Stores. the 52-week range is $0.55 to $9.25. Yikes. That's a move-and-a-half.
Harris Kupperman: As we said earlier. You only need one or two of these every year, and you're going to have a very good year. And I've had. Good year on Stage Stores. Yeah. But it kind of goes back to my strategy, also, of I'm not trying to find somebody at 10 that's going to 12. I'm looking for something that has dynamic upside and has inflection potential, and that can really do something interesting to the upside. So you need to be investing at inflection or potential inflection.
Dan Ferris: I mean, all of this kind of makes me wonder. You know, is there a process? Are you just looking – it sounds to me like you're looking at all these small names kind of one at a time, bottom-up, looking for just limited downside, inflection points...I mean, what does a stock – is there a general rule that you can apply...is there something you can tell us that says, "Yeah. Stocks with X, Y, Z traits, that tends to be an inflection point." I mean, is there any kind of a general rule for this stuff? Cause it sounds very one-off to me.
Harris Kupperman: Well, there is a general rule. You start by looking at sectors that are inflecting. By that, I mean – people talk about global macro and all that. All that to say, I do global micro. You know? Global macro is currencies and interest rates. And there's too many smart people there. I don't have any strong edge. But then, you go drill down one, two layers down you have what's called global micro. You know, there's not a lot of smart guys looking at shipping.
So I have edge there. And some of the other sectors I'm looking at, there's not a lot of guys there. And so, you can watch – you can see it inflect. You can see it start getting better, and you can jump on the train. And you want to jump on a train in motion. You don't want to be sitting there telling the market when you think it's going to bottom. The market will tell you. And so, I have this huge list of sectors I'm tracking. They tend to be, you know, commodity, cyclical, company-specific. You know, for instance, Altisource. I mean, you can look at this and say, "It's a software company." But I look at it and say, "It's default mortgage servicing. It's been a 10-year bear market, where for 10 years in a row we've had less defaults than the year before." And then in Q1 this year for the first time year over year, you had an increase of defaults. It's the first uptick that says, "Let's start looking at this."
Because a trend in motion is starting to go the other direction. I think Q4 will also be year-over-year. So you have two out of four quarters showing year-over-year increases in something. So you're looking at a micro-trend, which is defaults – mortgage defaults in the United States. You're seeing this trend is starting to reverse, "Let's go figure out who benefits." And you can look at this in lost of cases. You can also look at trends in motion that are already in motion that are strong trends, like 5G for instance. We know that it's going to be one of the biggest infrastructure cycles in the history of the world. You know?
You want to have exposure to a trend like that. You know, you don't have to be all that smart to know that this'll be a lot of money moving around. So you can have your, you know, true-micro – which is U.S. mortgages – or you can have your very, very visible micro-trend, which is 5G. but you need to be investing with the trends and need to be finding companies that benefit from these trends. And that's the first step. Then you go and look for individual companies. And, you know, it's kind of why I prefer Scorpio, say, to any other one of the tankers. There are specific reasons. You know, in particular they have more scrubbers than most people. I also like product tankers, for instance, than dirty tankers.
But you have to first find a trend. And you can't just go looking through cheap companies that scan on, you know, price-to-book or price-to-cashflow. Cause that's all backwards in looking at information. And there's supercomputers run by guys like, you know – what's it called, Medallion and some of these other guys – that really...you know, Ren Tech. They see this stuff, and their computers are smarter than I am. And they'll figure this stuff out. You're not going to have any edge there. Your only edge is looking forward, because computers don't see inflections. Computers don't have that sort of data to look forward yet. In 10 years, they will. But they don't yet.
Dan Ferris: In 10 years, they will? They will be able to look forward?
Harris Kupperman: I think so. I don't know. I'll probably be obsolete at some point. But when you think of a computer...okay. So much of the US stock market's run by quants that have really detailed computer modeling. And it's really smart, these computers. But the computers are only as good as the data that's put in. So for instance, take shipping. There's never been an IMO 2020 before. So the computer doesn't have that in its data set. So the computer doesn't see it coming. It's kind of why you see short interests keep building in a lot of these tanker stocks.
The computer, looking at its back test data over the last decade, says, "Every time you have a short-term spike in charter rates, short the stock, it makes money." So the computer's doing exactly what the computer's programmed to do when the computer really should be buying the hell out of it right now. Cause there's a sea change with this IMO 2020. I think you can see that in lots of other, you know, micro-sectors where the computers just don't have the data yet cause it's the first one of whatever it is to happen.
Dan Ferris: Interesting. Very interesting to me. I totally agree. You know, all that price-to-book stuff that folks like Tweedy Browne and others used to do a long time ago...it's just too easy to do on a computer. And now what I've taken to doing is, I just don't screen anymore. I don't use stock screeners anymore. Because like you say, all the data that's a fact is in the past. So they can't tell me anything about the future. So now what I do is, I just go through the list – literally, the list of public companies trading on Nasdaq and NYSE. And, you know, usually within a given market cap level where I think I can get some kind of an edge – like, I'm not going to have an edge on Apple. Right?
Harris Kupperman: No.
Dan Ferris: And you look at them one at a time, and you look at industries one at a time like you're saying. At least, that's where I am these days.
Harris Kupperman: I agree completely.
Dan Ferris: And that's how I found a bunch of winners in the past.
Harris Kupperman: You know, the Tweedy Browne model of cheap price to book, over time you probably would make good money. The problem is, then, if you don't have a catalyst, you're money's sitting there waiting. You need to have a catalyst on everything you're doing. You need to have a secular...you need to have some sort of tailwind that says, "This cheap stock will not be a keep next year because X, Y, Z is going to happen that inflects the business." It's all about finding potential inflections. Sometimes things don't inflect. But if you don’t have your catalyst and your inflection, then what do you have really?
Dan Ferris: Waiting is what you have.
Harris Kupperman: Yeah. Exactly. Which is why a lot of these value guys earn respectable high-single-digit, low-double-digit returns. But you really want to be out there doing better than that.
Dan Ferris: Otherwise why do it? That's right. Yeah. so we're getting near the end of our time here, and I do have this question that I ask everybody that I interview. And by the way. I just want to say thank you, too, for doing this. Because I love your website, adventuresandcapitalism.com. I hope that our listeners will go there and check it out and learn more about you and your ideas – which I think are very good. But if I could ask you, Harris...just if there's one thought that you could leave our listener with – if I said, "Okay. You can leave our listener with one thought. You get one thought only," what might that be?
Harris Kupperman: Well that's a tough one. On the investing side?
Dan Ferris: You know something? The last guy asked me the same question. I said, "Anything." It can be about investing or not. One thought to leave our listener with on anything.
Harris Kupperman: I would say, leave what you're doing right now, go book a flight somewhere that you've always wanted to go. Take your best friend, take your wife and just go do it for two weeks. You know, I literally had some great Portuguese food in Miami three days before Christmas. And the next morning, I booked a flight to Portugal, 'cause I said, "Let's do it." And I don’t think enough people leave their little bubbles. And whether that's your, you know, echo chamber on Twitter or Facebook or your friends circle – and look at other people's perspectives.
Cause everyone has a perspective, and everyone's perspective needs to be listened to and appreciated. You might disagree with them. But if you don't know their perspective, how do you disagree with them. And so, I would say just go out there and go do something interesting and go meet new people that think differently. And don't just tell them they're wrong. And, you know, you never know what you learn when you're doing something different. And you're never going to learn anything singing your own hum.
Dan Ferris: Wow. That was awesome. Thank you for that. I hope people take you up on it. I want to take you up on it. I want to run downstairs to my wife and say, "Let's go to some other country we haven't been to right now."
Harris Kupperman: Just do it. Just do it. I had a...I mean, I'd say most of the vacations I've taken haven't been these long, premeditated, "Oh, I'm going to go here." Like, sometimes you'll have a wedding somewhere and will spend two weeks after. But I'd say the vast majority of the time, I'll just be sitting at my desk and I had a bad investment or I'm fully invested and I have nothing to do, and I'll just ask my wife where she'd want to go that she hasn't been. And that night, we'll leave. And it's just great, because you get to be in a different place and learn something new. And the best investments usually come in – and again, we're in the investment business – come from meeting someone who changes your view about something.
Dan Ferris: I totally agree with you. None of my biggest winners came from, you know, stock screen sitting in front of my computer. That's a great point.
Harris Kupperman: No.
Dan Ferris: So ultimately, your one thought is about investing among many other even more important things. And I thank you for it. All right, Harris. That's the end of our time. And again. Thanks so much. Love your work, love your ideas and I hope that we can get you back in here sometime. How about that?
Harris Kupperman: Yeah.
Dan Ferris: That sound good?
Harris Kupperman: Absolutely happy to chat anytime. And for readers, as you mentioned, Adventures and Capitalism is my blog. You can sign up for updates. I won't spam you. I write once or twice a week or maybe no times in the week if I’m traveling. And I write about stock picks and my views of the world. So, yeah. I appreciate you having me on. Thank you.
Dan Ferris: You bet. All right. We will talk to you again hopefully sooner rather than later. Thanks so much. Bye-bye for now.
Harris Kupperman: OK. Bye-bye.
Dan Ferris: All right. That was a lot of fun. I love that guy, love his ideas, and I know you probably love all the concrete stock ideas that you heard. But, you know, if you go on his website he'll tell you, "Don't just buy it cause I mentioned it," kind of a thing. You know, do your homework. Make sure you understand the situation. Because I think some of his positions – you know, they're more volatile than normal cause they're smaller-cap names than most of the stuff that we write about and certainly in my letter Extreme Value or in a lot of Stansberry products.
So, you know, with that...yeah. Really, really great conversation. And let's take a look and see what's in the mail bag. It's time for the mail bag. The mail bag is where you and I get to have a conversation every week. And that really – to me, this is almost like the heart of the show. Because this is where you and I get to address each other like adults and ask frank questions and comment back-and-forth and have a real conversation. The purpose of this podcast is to make us all better investors.
And I think we get some great stuff from people like Harris, and hopefully I find some good stuff in the news when I start out the show with my little rants and stuff. But, you know, this is where you and I really kind of put the rubber on the road. So write into [email protected] with any comments, questions, or politely-worded criticisms. And I will read every single one, and I'll read as many of them here on the air as I can and address your concerns. But write in. [email protected] Lately the feedback has been good, and I really want you to keep it up.
First one is by Eric H. And Eric H. Says, "Dan, you've shared lots of metrics of how the stock market is at all-time high's recently. One metric I've read about is the cyclically-adjusted price earnings CAPE ratio that measures corporate earnings over a 10-year period. That ratio is also at all-time highs, which is concerning. However, when counterargument is that up until now the 10-year period in the CAPE includes one of the biggest recessions in history – thereby suppressing the earnings in the denominator of the ratio – once the '09 is outside of the 10-year window, historical earnings will rise and the CAPE will naturally fall back to more normal levels. Curious to hear your thoughts on using CAPE to measure stock market valuations. On a somewhat related note, I've heard you say that you don't put much emphasis on a stock's PE ratio. As a value investor, how do you ignore this ratio? Aren't the company's earnings one of the most important factors when determining the value of a stock? It seems like a growth-oriented investor would be more inclined to ignore current earnings."
Thank you for sharing your thoughts. I love the show and never miss an episode, Eric H." Thanks, Eric. Two issues. CAPE is not a big deal. It's been 10 years already. AND so, we're back to like 2010 or something right now. And the big drawdown was in the fourth quarter of 2008 in S&P 500 earnings. So, you know, we're really outside of that. And I think the recession continued into...I think it was actually over in 2009.
So we're beyond that now, and it's still really expensive. But besides that, CAPE isn't that great to me. I think John Hussmann over at hussmanfunds.com has done this work, and he's better than CAPE – which is done by Robert Schiller, a guy at Harvard. And Hussmann has found five measures that do a much better job historically and correlate much more negatively with subsequent performance of the S&P 500. So what that means is, when you use Hussmann's measurements – when they go way up, the stock market performs poorly for 10, 12 years after that...worse than in relation to CAPE.
So CAPE isn't my favorite thing. I don’t really pay much attention to it. I like what Hussmann does better. As far as PE ratio, it's the E that's the problem – that I have a problem with. Because E is gap earnings. And you usually have to do – you usually have to do a fair amount of work to get at a better earnings number. And what we really want is after-tax, after-cap-X cash flow. Right? We want real cash earnings, excess cash earnings generated by the business. That's how you value a business – by the excess cash you can pull out of it during its life. That's why I ignore PE. Because headline PE ratios have all kinds of noise in them that I don't care about. Good question, though. "Dan. I was just wondering where your wife got the periodic jar from. It would be a great gift for my dad. Thanks, Kim M."
Kim, she's talking about – I said my favorite Christmas present was this periodic table of elements that actually has little pieces of every element – all the gases, all the radioactive stuff, everything. and it's by a company called Engineered Labs Photoshop, LLC. I think you can just Google that, and away you go. Next one is from Abid S. And Abid says – he's basically taking issue...I was talking about the assassination of this guy Soleimani, and Trump droned the guy and they killed him near the Baghdad airport. And he was a big terrorist guy or whatever. And I said, "We shouldn’t go around the world whacking hornet's nests, because it'll come back to bite us." And, you know, doing this stuff is why people are angry at us in the first place.
And I said, "You know, these people believe in martyrdom." And Abid is writing in to kind of correct me and set me straight. He says, "There are two main branches of Islam – Sunni and Shia, sometimes pronounced Shiite. Being a Shia Muslim doesn't automatically classify an individual as an extremist." It doesn’t automatically classify that individual as an extremist. OK. Got it. "It is a term used to categorize Muslims into two large sub-groups based on their beliefs regarding a successor after Prophet Muhammad's death. As an example, Abid says, "I'm a Shia Muslim and definitely am not an extremist and do not value martyrdom." So I just wanted to read that so that you know that I'm – you know, this guy is setting me straight here. But I still think that the extreme folks represented by that Soleimani character – you know, that they do value it. They do now see him as a martyr.
So I got the big picture wrong, but I think the small picture is right. The next one is from Mike S. He says, "Forgive me for this 'political'" – in quotes – "comment." He says, "It's an axiom that markets hate uncertainty. I can't think of anyone who contributes more to uncertainty than the current President." And then, he goes on to explain why he thinks that. He said, "Wouldn't it be better if someone like Biden got elected? He would be much more predictable and not unfriendly to Wall Street. Your thoughts? Mike S."
OK, Mike. I hear what you're saying, but my personal viewpoint is that it doesn't matter who gets elected. In fact, I'll go one step further. I think anybody who thinks that Donald Trump is so terribly different, better or worse, than Obama and Obama's so different than the other guy – Bush, and Bush than Clinton, and Clinton than the other...Bush, Reagan, Carter, Ford – all the rest of them all the way back. If you think one of these people is very different from another, I think that's a mistake. And I don’t think it matters. That's my personal viewpoint. I used to – it took me a while to sort of figure this out...if I'm right at all.
But that's what I think. So no. I don't think it would be great if Biden got elected. I don't think it would be great if Trump gets elected or great if Biden – I don’t think it matters. Thomas Y writes in, and he says, "On the great gob of money that was pulled out of equity mutual funds in ETF's last year, is it possible that what's actually happening is a steady stream of Baby Boomers like me are rolling past the magic 59-and-a-half-year mark and withdrawing funds form the limited ETF choices and their 401k's and re-targeting these funds directly into the market like me?"
Well, Thomas Y, yeah. I think that's possible. I don't know what – I don't know what exactly they're doing. But I just know that it seems like a lot of folks are not...the participation among individuals isn't as heavy as I would've thought. Last one, folks. This is from a guy named S. That's his name – S. And he says, "Hi, Dan Ferris." And he's talking about my comments about Soleimani and that we shouldn't go around whacking hornet's nests. And he said, "I would like to know your solution to stop all these bully terrorist leaders we have in the world and not hurt their feelings, as you suggest." I never suggested anything about hurting their feelings.
So you're misrepresenting me right away. Then he continues. "You know, doesn’t the problem with most of these terrorist-run countries...that the people living in these countries don't do anything to stand for these bullying tactics that started years ago? Should have done something then." Anyway. It continues in the same vein. And the idea is that I'm wrong about this, because these people are terrorists and they're bullies and we need to take them out. Well you and I genuinely have a chicken-egg problem here. Don't we? Because it's probably difficult to pinpoint the moment at which I could say, "See? We're running around the world doing bad stuff, and these people hate us for it." And it's probably difficult for you to pinpoint the moment when you could say, "See? They're doing bad things to us. So we have to go kill them." One thing I do know is that the Middle East is halfway around the world.
And the founders of our country were pretty clear when they thought, "You know, maybe we shouldn't ought to go around getting ourselves involved in other people's business and other people's wars and other people's problems." And I think this idea that we do need to go around the world getting involved in other people's business is a mistake. I'll just leave it at that, because I don't want to get into it. I don’t want to get all political. I'm just saying that we kill this guy, and then maybe he does something to us, and maybe...it's like even if it's half as bad as 9/11 – we don't want that, right? That would be a big, fat, hairy, ugly surprise.
And people would die, and it would just be bad in a number of ways – including, of course, the stock market would hate it. So that's part of the point, is that you're setting yourself up later. That's what I don't like. I'm not saying you don't have a point. You know, I'm not saying they're good people. They're not good people. Right? They think that, you know, murdering a certain type of person – going out and murdering whatever they call us, infidels or something – is good. Well I don't think it's good, and I think it's objectively wrong to do that. But the United States runs around the world doing this kind of stuff too.
So people think we're terrorists. Some people think we're the terrorists. And whether or not that's right or wrong, I don't care. I just want to know the state of things. You know? I'm not pronouncing moral...I'm not picking sides. Isn't that the way today? Everybody's picking sides. "Are you liberal or are you conservative? Are you Republican or are you Democrat?" You know? And that's just not the way life really, truly works. And when you're trying to shove the beautiful round peg of life into the square hole of picking sides, you screw up and you create problems. That's my point. Okay. That's it. That's another episode of the Stansberry Investor Hour. It's my privilege to come to you this week and every week. And by all means, whatever you have to say, write into [email protected] and say it.
And go to that same website, investorhour.com, and you can see a transcript of every show we've ever done. And you can listen to every show we've ever done. And you can put your e-mail in and get an update – an e-mail that tells you about every show we're ever going to do. Everything all in one place. Very nice. But what you really want to do is go to the iTunes store. Subscribe to the program, subscribe to Stansberry Investor Hour, and give us a like. This will make the show better. More people will listen, it'll bump us up in the rankings and we'll get lots more cool feedback like all the stuff that I read today. That was a lot of feedback. I love it. Keep it coming. OK? So that's it for this week. Thanks so much. I will talk to you next time. Bye-bye for now.
Recorded voice: Thank you for listening to 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 at [email protected] This broadcast is provided for entertainment purposes only and should not be considered personalized investment advice. Trading stocks and all other financial instruments involves risk. You should not make any investment decision based solely on what you hear. Stansberry Investor Hour is produced by Stansberry Research and is copyrighted by the Stansberry Radio Network.
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