On a week where markets roared back, the most expensive tuna ever was sold for $3.1 million, and the government shutdown officially became the third longest in history – and still with no end in sight – Dan Ferris number crunches some more historic milestones.
Because last week was Apple’s turn to suffer, Amazon is now the world’s largest company. Dan talks about how, once those companies both hit trillion-dollar valuations, something told him he was wrong. And while he got his readers out of Apple before the main meltdown, “I wish I had followed my gut.”
Dan then introduces this week’s guest – Shane Parrish, the founder, curator and wisdom seeker behind Farnam Street. What started as a personal, anonymous blog where Shane could explore what others have discovered about decision making, purposeful living, and how the world works, quickly blossomed into one of the fastest growing websites in the world.
With over a million page views, nearly 200,000 subscribers, consistently sold-out Re:Think workshops and over 3 million podcast downloads, Farnam Street has become the go-to resource that CEOs, athletes, professional coaches and entrepreneurs rely on to find signal in a world of noise.
From his idea to take Warren Buffett’s style of investing and apply it on a macro-level – snapping up cash-gushing small businesses and capital efficient “Mom and Pop” stores – to his revolutionary thinking on “Mental Models,” Shane is full of insights on how to change your investing results through changing your thinking.
Founder of Farnam Street
Shane Parrish is the founder, curator and wisdom seeker behind Farnam Street. What started as a personal, anonymous blog where Shane could explore what others have discovered about decision making, purposeful living, and how the world works, quickly blossomed into one of the fastest growing websites in the world.
1:13: Dan goes over the latest news in Tesla, and their third big factory built in China. But there’s a minor detail you can see if you check out an online photo of Elon Musk and the mayor of Shanghai.
7:23: How much does a $3.1 million fish have to weigh? Dan explains why it’s a classic “top of the market” kind of story, and whether we’ve really hit bottom even after the recent 20% correction.
11:25: Billionaire Eddie Lampert’s just failed in his bid to buy Sears out of bankruptcy. Dan explains what could be next for the once-great company that at one time employed one in 50 Americans.
12:54: Dan once again notes the ongoing degradation of GE bond prices across hundreds of GE bonds. “Clearly the situation is deteriorating.”
15:37: “I wish I had followed my gut on Apple,” Dan says, and explains why its trillion-dollar valuation wasn’t the terrific landmark so many investors believed it to be.
19:50: Dan explains why he’s such a fan of the book “Mastering the Market Cycle” by Howard Marx. “People feel best when the market’s highest and risk is greatest. If you want to learn how to handle this, and spot it, and how to behave when it happens, I highly, highly recommend picking up a copy.”
20:04: Dan introduces this week’s guest – Shane Parrish, the founder, curator and wisdom seeker behind Farnam Street. What started as a personal, anonymous blog where Shane could explore what others have discovered about decision making, purposeful living, and how the world works, quickly blossomed into one of the fastest growing websites in the world.
24:17: Dan asks Shane about the most prominent phrase on his website, “Finding out the best of what everyone sees,” and why Shane explains why, in this age of data overload, it’s so important to investing.
33:56: Syrus Partners, Shane’s firm, is taking Berkshire Hathaway’s playbook to a microlevel. Shane explains how that works. “There’s a whole bunch of people in cities across Canada and the U.S. that run businesses that generate between $500,000 and $5 million in earnings, and there’s not a whole lot of places to go sell those businesses.”
37:10: Some people don’t like to talk about what’s in their portfolio – but Shane is ready to get specific about some of the companies he’s snatching up, explaining how a company called Meal Line – the No. 1 meal-planning app on the app store – could be the missing link in connecting catering apps with grocery stores.
40:02: Not all of Shane’s “Mental Models” are created equally, so Dan asks Shane to reveal his favorites, and which have been the most impactful to him. Shane shares why something called “Second Order Thinking” leads to small changes that save you orders of magnitude of time down the road.
NOTES & LINKS
Announcer: Broadcasting from Baltimore, Maryland and New York City, you're listening to the Stansberry Investor Hour. Tune in each Thursday on iTunes for the latest episode of the Stansberry Investor Hour. Sign up for the free show archive at investorhour.com. Here is your host, Dan Ferris.
Dan Ferris: Hello, everyone, welcome back to another episode of the Stansberry Investor Hour. I’m your host Dan Ferris. I’m the editor of Extreme Value. That’s a value investing service published by Stansberry Research. I’ve been at Stansberry longer than anyone but Porter, man, so that’s how I got the job. Let’s before we do anything, I just wanna tell you this week’s guest I am absolutely thrilled to have him here, and I really strongly encourage you to just listen to every word of the interview because he’s a very smart, very insightful guy, and I’m just gonna leave it at that, leave a little mystery, and then we’ll get on with it.
So, the first news item I wanna get to is kind of picks up where we left off last week. Last week we had Mark Spiegel in the program and he’s kind of famous for being a Tesla short seller, okay? So, now the news on Tesla is that they broke ground in Shanghai, China on giga factory three, what they call their third big factory. It was kind of weird because minor detail, indulge me here in a minor detail, the groundbreaking did not include the actual breaking of any ground.
There’s a weird photo you can Google online, and it’s Elon Musk standing with the major of Shanghai and a couple of the executives from Tesla China, and they’re each standing in front of these LED lighted columns, and the groundbreaking consisted entirely of the lighted column kind of lighting up and glowing a little bit, and the picture looks very unimpressive. Like I say, minor detail. It just strikes me that Elon Musk would have to be the guy who said it was a groundbreaking and no ground was broken, like when he said funding was secured for a buyout of Tesla at $420.00 a share, and lo and behold, no funding, no buyout.
I don’t know. But the real point here is this, okay? Let’s take a look at giga factories one and two real quick, because giga factory three, they say they’re going to be producing Tesla Model 3’s this year in 2019 and doing so in volume. Musk says he believes they’ll be doing so in volume by 2020, right? So, this is an empty piece of ground and they’re just starting. I don’t know if they’ve actually put one piece of equipment on it yet, but the photo online in the news item that I read, it’s an empty piece of ground.
So, here’s the thing. Giga factory one, the first Tesla factory in Nevada, Clark, Nevada I think it’s near, they first kind of announced that, the Nevada officials in Tesla, they made an official announcement in September of 2014. They picked the site and they had the plans for the factory all drawn up. They held a grand opening not quite two years, almost two years later July 29, 2016.
At that point they had roughly 14 percent of the final factory size built out, so there were 21 blocks of this giga factory, like 21 pieces, and they had three of them at that point. And – wait for it – it’s not done yet. Giga factory one is expected to be completed in 2020. So, this is an ongoing and allegedly like six-year affair, and we’ll see in 2020 won’t we if that really happens.
Giga factory two is actually a solar cell factory in Buffalo, New York, and they broke ground there September 2014 and started producing solar roof tiles in August of 2017 roughly, three years later. So, three years, six years. I’m not seeing less than one year in giga factory three in Shanghai, so I don’t know how they’re gonna do that. Ultimately, they say they’re gonna produce 3,000 cars a week. The Chinese government put out something that said it’s gonna be 500,000 cars a year.
So, I don’t get how this is gonna – I think this is just another Elon Musk we’re gonna do something that is really, really difficult and impossible, and they’re gonna wind up not doing it, and that’s all there is to it, and it’s gonna look bad and it’s gonna cost a lot of money, and it’s just gonna be another kind of blot on Musk’s name and another reason why Tesla will ultimately be a terrible investment. I’ve been calling Tesla a bad idea I think since like 2014 or 2015 or something.
I was on Melissa Francis’s show on Fox Business and back then they were talking about Apple buying Tesla and it was a dumb idea, because as our guest Mark Spiegel said last week, it’s the automobile business. It’s the electric car business, right, but it’s the car business, and it’s terrible. It’s highly competitive and it’s highly capital intensive. You’ve got to spend billions of dollars or at least hundreds of millions before you produce one item and make one dollar of sales.
It’s just really, really difficult, and all the big luxury car companies are coming out with electric cars, and there’s just gonna be too much competition for Tesla. I think it’s a terrible stock, and I think Spiegel is right, you’re gonna wake up one day and the thing was $300.00 the day before, and it’ll be $150.00 or $100.00 the next day. So, that’s that. That’s Tesla.
The other thing I wanna talk about was a big 600-pound fish at an auction in Tokyo. They sell these fish in these fish markets, right? Auction in Tokyo the most expensive tuna ever sold went for $3.1 million just within the past few days here for a 600-pound fish, more than double the previous record set in I think 2013, and some fellow named Kioshi Kimura who owns a chain of sushi restaurants paid $3 million for a giant fish.
This sort of thing, these are like top of the market kind of stories, right? And I was recently considering, we’ve just had this just shy of 20 percent correction in the stock market from the September high to the December 24th low, so the next issue of Extreme Value comes out this Friday and the topic is where the heck are we right now? Because I’ve been saying for some time really earnestly and aggressively kind of since May 2017 that the market is really overvalued, and when it turns it’s gonna be bad.
So, has it turned? Is this it? Is this all there is to it? Well, I don’t know, but at right now roughly 12 or 13 percent below the September high, that was the most expensive moment in stock market history. 12 or 13 percent below that is still really expensive. I figured out a way to get the point across here. And this fish reminds me of this, the most expensive fish ever. How a fish is worth $3 million, only this fellow knows for sure, ‘cause he paid that much.
But it reminds me of the Salvatore Mundi, the painting by Leonardo Da Vinci that sold for $450 million a couple years ago, and most expensive painting in history. So, $450 million, you take 13 percent or 15 percent off of that and you’re still in the high $300 millions just say, 13, 15 percent, something like that, and I mean, it’s like Warren Buffett says, you don’t have to know somebody’s exact weight to know they’re fat, right?
Paying hundreds of millions of dollars for a painting or $3 million for a fish, it’s just a little bit crazy, and 13 percent below those numbers or 15 percent where we’ve kind of been in the market just the past several days, is 13 to 15 percent below the most expensive thing ever, and that’s where we stand. So, I thank Mr. Kimura and the folks at the Abu Dhabi Louvre who paid $450 million for the painting for furnishing these lovely example so I can tell people that stocks are still expensive.
Another thing that I’d like to mention, we have been sort of keeping track of the travails of a couple of companies: Sears. Porter has been talking about Sears for a while. I was talking about Sears starting like 2012 in the pages of Extreme Value. I was telling people to avoid it because you can’t – I said you can’t build an investment type Berkshire Hathaway type company around a retailer like that. It didn’t make sense to me.
Of course, now it’s bankrupt and the latest news is that Eddie Lampert, the chairman, his bid has failed. He put in this 11th hour bid of a few billion bucks to try to buy Sears out of bankruptcy, and it’s failed. Part of the deal was to forgive $1.3 billion of Sears’s debt held by his hedge fund, which is a very self-serving move, but let’s face it, that happens in bankruptcy. Debt is forgiven, equity is wiped out, and things change. Ownership changes.
But the bid failed, so I guess Sears is gonna be heading – this has been an ongoing thing. We’ve been in the 11th hour I think for a couple of weeks here, and I don’t know if we’re liquidating yet or not, but none of it is a big surprise. Sears was the Amazon of its day. It’s no longer anything like that. Now the Amazon of this day is Amazon, and so, Sears is struggling and probably won’t exist at all once this is over.
The other company worth mentioning that we’ve kind of been keeping track of is General Electric, right? I started talking about this a couple of months ago and I said, hey, I don’t see any big trouble in the bonds. If you go on Bloomberg, there’s like 450 GE bonds, and a lot of them were trading near par back then.
Well, if you’ve been keeping up with the podcasts, I’ve been turning and turning and turning changing my mind over time because the bond prices just deteriorate, and there’s a bunch of them in the 60s now and in the 70s and the 80s. I mean, 80s is not great, 20 percent, basically 20 to maybe 11 percent below par is not great.
So, clearly the situation is deteriorating, and now the latest thing I’m seeing is that they’re talking about selling the aviation services business, GE Capital Aviation services to Apollo Global, giant private equity firm. And the news here that I’m reading is that the potential price would be around $40 billion, but that’s the book value, so kind of a depressed valuation, which makes sense because if you look at the valuations of the primary competitors, the publicly traded ones, Air Cap Holdings and Air Lease, ticker symbols AER and AL, the valuations have collapsed. It makes sense, but it just adds insult to injury for this thing.
This stock has tanked so hard. It’s been single-digits for a while here, and now they’re talking about selling what we all thought was one of the better businesses at a depressed kind of fire sale valuation. The market popped on the news like 5 percent, but then it kind of retreated a bit. And the bonds are still looking kind of crappy, so who knows? Who knows how this works out? I initially thought, hey, this will be good value one day, but then GE is such a giant complicated thing and it’s too hard to buy. As Charlie Monger of Berkshire Hathaway would say, it goes into the “too hard” pile.
Poor Sears, poor GE. Don’t go near either one of them with a ten-foot pole. Which leads me to just a little tidbit here. Apparently, Amazon has overtaken Apple and Microsoft to become the world’s largest market cap public company. I think the market cap is around $800 billion, and Amazon and Apple both overtook a trillion in market cap. You know, I should’ve followed my gut on apple. We did exit Apple in Extreme Value at a decent price, and we were in the thing way back in 2013 when it was really super dirt cheap, and it’s done really well.
But you know, when it went over $1 trillion, it just felt like maybe we should get rid of it, but you can’t operate on feelings and nothing at that point in the valuation told us to get rid of it. We finally ended up cutting our losses. So, again this is like toppy stuff, market toppy kind of stuff, when market caps reach $1 trillion. Amazon and Apple both retreated back hard 25-30 percent, actually more than 30 percent in both cases from their 2018 highs.
If you wanna know more about what I think of all this you can read the current issue of Extreme Value because it’s all about where we are in the cycle. The whole issue is about that because that’s extremely important. To that end, I have a book recommendation. I frequently recommended reading Howard Marx’s memos. Howard Marx is one of the founders of Oak Tree Capital Management, and he’s very famous for writing these wonderful memos. He’s like a combination of Michael Lewis and Warren Buffett with these memos. They’re fantastic.
His first book, The Most Important Thing, I continue to recommend it over and over again, wonderful book, a little cheeky in the title because he tells you there’s like 18 most important things that he discusses in the book. And then the new book came out in October, it’s called Mastering the Market Cycle, and Marx is like the cycle guy. So, when you start seeing people paying $3 million for tuna and companies going for $1 trillion, this is the book you wanna read. You really wanna know more about cycles and what to expect.
It’s weird to talk about this as a value investor because value investors are bottom-up people, right? Every issue we try to find a new stock and a new business that’s very cheap based on its fundamentals and its assets and its net asset value and various things, and we kind of – the dogma in value is that you don’t pay attention much to the movements of stock prices and the movements of the overall market. I think that’s a big mistake because cycles matter, and if you don’t believe cycles matter, you go ahead and read Marx’s book and you’ll come away convinced that cycles matter.
It’s a wonderfully actually repetitive book. Each chapter lays on another layer of a similar but slightly different view on the fact that cycles matter. In this cycle, let’s face it, we are late in a long bull market that achieved the most aggressive equity valuation, equity market valuation if you used the valuation of the S&P 500, ever in history. I think it’s really important to know that, and I think you behave differently when you know that than at any other time, and most of the time I don’t care what the overall market looks like, but when it’s at extremes of valuation and yeah, you’ve heard me say this before, but it bears repeating so much because it’s kind of a soft insight.
I mean, there’s data to back it up, but you say cycles matter. It’s like, who cares, right? But they really do. It bears repeating because people feel best at the top of the cycle when risk is greatest. So, if you wanna learn how to handle this and learn how to spot it and learn how to behave when it happens, I highly, highly recommend picking up a copy of Mastering the Market Cycle by Howard Marx.
All right, everybody, it’s time for our guest, and man, I must admit, it’s gonna come through anyway so I may as well admit it, I’m a huge fan of this guy. His name is Shane Parrish. Shane is the founder, curator, and wisdom-seeker – love that title, man – behind the Farnam Street website. So, what started out as a personal anonymous blog where Shane could explore what others have discovered about things like decision-making and purposeful living and how the world works quickly blossomed into one of the fastest growing websites in the world with over a million page views, nearly 200,000 subscribers, and consistently sold out Rethink workshops and over 3 million podcast downloads.
I’ve got a serious case of podcast envy here. Farnam Street has become the go-to resource that CEOs, athletes, professional coaches, and entrepreneurs rely on to find signal in a world full of noise. Shane’s work has been featured in nearly every major publication including Forbes, Huffington Post, the Wall Street Journal, most recently the New York Times. Please welcome to the Stansberry Investor Hour Mr. Shane Parris. Shane, thank you for being here.
Shane Parrish: Thanks for that generous introduction. I don’t know if I can live up to all those accolades. I’ll do my best.
Dan Ferris: So, I have to tell you, we were talking before we started the podcast, I too am practically a Canadaphile. I know lots of folks in Vancouver and in Toronto and I’ve had just a fantastic time. I’ve learned so much. I’ve been fishing up in northern Labrador. To me, it’s a wonderful place and I love the people and for whatever that’s worth.
Shane Parrish: Well, Canada is an amazing country, so I think you got that one right.
Dan Ferris: Shane, I wanna talk about just kind of a detail, which is the name of your website. Now people know I think pretty much on the Stansberry Investor Hour that Farnam Street is where Warren Buffett lives in Omaha, but in your introduction of course, we didn’t talk about investing, and your website isn’t focused on investing. So, what’s the connection between the street where Warren Buffett lives and what you do, if that’s not a bad place to begin for you?
Shane Parrish: Yeah, definitely. I think the website got its name when I was doing my MBA and I was looking for a name for a website, and the website wasn’t intended to be public at the time, but I wasn’t learning what I wanted to learn in my MBA which was how do I think about problems better, and how do I take a more multidisciplinary approach to the world? In my MBA you’re learning read this chapter on low-cost strategy and now apply that to a problem, but the world is so multidimensional, right?
You don’t build one tool and just apply that. There’s a whole bunch of things interconnected, so you do one thing and a bunch of other things happen, and you have to think about problems holistically. So, where the name came from was I found these two guys in Omaha, Nebraska, Warren Buffett and Charlie Munger who I’m sure is familiar to all of your listeners, and that’s where I got the name from.
The original name wasn’t actually Farnam Street. Unbeknownst to most people it was 68131, which is the zip code for Berkshire Hathaway, and the reason that is, is because at the time I was working for an intelligence agency and so I didn’t wanna have this big public website. A, it was anonymous, but B, it was just for me.
The whole point of this site was to start learning about the world in a multidisciplinary way starting with cognitive biases and then evolving from there, and that’s how we get our name, and that’s the connection to investing. It’s not necessarily about investing, it’s about applied thinking, thinking about thinking.
Dan Ferris: I see. Yes. And certainly, I think both Buffett and Munger are known for that, but Munger is really the guy known for just sort of reading everything he can get his hands on in a wide variety of subject matters, and he’s the originator of this phrase that one sees pretty much almost as soon as they get on your website, “Finding out the best of what others have figured out.” What does that mean and why is it important?
Shane Parrish: Well, think about it. There’s only so many experiences. You have a finite amount of time in your life, and if you want to learn things you can learn from your experiences and there’s only so many that you’re able to have, or you can learn from other people’s experiences and I think that’s a way to supercharge your learning and go nonlinear, and that’s part of the reason that we’ve attracted a Wall Street, Silicon Valley, professional sports audience, because all those people are focused on how do I accelerate my learning?
We think about that just to get ahead, but sometimes you have to accelerate your own personal development just to stay in the same spot because the world is always evolving. So, you have to get better just to stay in the same sort of relative position that you’re in this year, and if you wanna get above that relative position, you wanna make absolute progress, then you have to still accelerate what you’re doing and you have to learn how you learn. You have to learn how to think from other people. You can’t just figure out everything yourself.
Dan Ferris: Okay, so I wanna get some of these terms out here. You said the word “nonlinear.” What does that mean? Why is that important?
Shane Parrish: Well, think about one experience and one reflection. If you have an experience a day and you reflect on that experience you can learn something every day, which is great, but you have to be the primary source for that and you’re always gonna be limited by the number of hours in a day. You’re effectively like a plumber, right? You might be well-paid and you might get really good experience and really good money, but you’re still working hourly.
You can’t do things that are asymmetric, or you can learn from other people. You can start doing more asymmetrics, right? You can learn about different domains and apply that to your domain. You can learn from the mistakes of other people, and more importantly, you can learn from the successes of other people and you can start applying that. You don’t have to experience those things; you can, but you do have to understand how we learn.
One of the ways in which we learn is we need details. We need the fluency in terms of what’s happening and how that person learns from their experience, and if you think about online media a lot of it just consuming the abstractions. It’s just consuming the rules.
That’s one of the reasons that we walk around and we really don’t know what’s going on, or we try something and we don’t know why it doesn’t work, ‘cause we’ve consumed other people’s abstractions and we haven’t actually done the work ourselves, or we haven’t asked the right questions of that person to learn when those things are likely to work and when they’re not likely to work.
I think there’s a ton of value in thinking about how we think and thinking about how we learn and thinking about how we can apply the lessons from books, how we can apply the lessons from our doctors, our neighbors, our colleagues at work, people that mentor us, people around us, people who work for us, and how do we learn from all of those people? I think if we just pretend we’re a detective and we’re like Sherlock Holmes and our mission for everybody we meet in life is just what can I learn from this person?
Dan Ferris: Right, and including persons who are no longer living and haven’t been around for possibly even centuries.
Shane Parrish: Oh, definitely. I make friends with some epic dead people all the time.
Dan Ferris: Right. Part of the experience of Farnam Street I’ll tell everyone is that Shane is an absolutely voracious reader, and for me, I fancy myself one, but I think Shane sort of outdoes most of us in that regard. Maybe I should just – actually, let me just start here. What are you reading lately and what are you learning from whoever wrote it and why is it valuable? What are you reading right now?
Shane Parrish: Right now I’m reading The Four Agreements – I just picked it up – by Don Miguel Ruiz. It’s not a traditional book that I would sort of read, but it is something that I’m interested in, and what I just finished I think yesterday was a book called Unlimited Memory and it was just learning about how we can better use memory techniques to apply not only what we’re learning, connecting it to what we already know, but how do we remember sort of like more mundane things. How do we remember 10 to 12 digits? It’s just interesting to see how the brain works, right?
That’s part of sort of this broad reading that I’m doing for something that we’re developing on how we learn, how we actually learn things, like what is the process that our brain goes through to learn things? How do we accelerate? How does knowing that process change the types of questions we ask of others and ourselves, and how does it change the reflections that we have so that we can just be more efficient at learning? Read a lot of things. I’m in the process of writing a book, so that’s also a big thing right now.
Dan Ferris: Wow. You’re writing a book? Can you give us a little idea of what’s gonna be in it?
Shane Parrish: Well, Farnam Street is publishing a book on mental models, which will be out soon. So, we’ll be publishing a five-volume series on mental models, and the whole point of that is it’s more of an encyclopedia reference series almost, the big ideas that you should’ve learned in school, big ideas that you would learn if you went to all the 101 classes in university, and more importantly, how do you apply those ideas outside of the domain in which you learn them?
We’re gonna give people historical examples of how do you apply thermodynamics to solving business problems or personal relationships, and then I also signed on for a trade book with Penguin which I’m working on right now under my own name. I don’t know if I’m allowed to give too many details on that right now, but it should be out next year.
Dan Ferris: Well, I promise you I will purchase both of them immediately and swallow them right up. You bet. So, I truly believe that people who become more familiar with your work and with the idea of learning the best of what others have found out will become better investors, especially if you’re sort of like me a generalist value-oriented investor, and frankly that’s Buffett and Munger, right? They’re generalist value investors.
If I asked you what is the most direct connection between your work and investing, because occasionally I read a bit of what you put out and occasionally you do mention that topic, what’s the most direct connection that you’ve found in years of doing this between investing and your mission in life and your work on Farnam Street?
Shane Parrish: Investing is applied decision-making in a very narrow context, right? It’s not the same as making decisions in an operating business, but it is making a capital allocation decision on behalf of an investor who could be a portfolio manager, in which case there’s a ton of leverage involved for that particular person, and it’s a great way to leverage your judgment. And so, if we can get better at that judgment and we can get better at thinking about problems and we can get better at accepting the feedback that the world gives us so we can align ourselves to it, then we can make better decisions.
So, we use this in multiple ways internally at sort of Farnam Street. I run a company called Syrus Partners and we buy other businesses. One of the things that we try to think about before we buy other businesses is we want to walk around them in a three-dimension. We really wanna understand the business and how do we acquire the mental tools that we need to understand that business?
How do we acquire the mental tools that we need to think through the problems that we face, not only from the business but from a competitive dynamic, the landscape? What’s gonna happen? How do we allocate capital? What does this business look like in five years? How does technology evolve it? We don’t have perfect answers to these questions at all, but we do wanna think about them.
What Farnam Street tries to do is just build this toolbox. You can take these tools out of your brain and you can apply them. Now, not every tool is gonna work in every situation. It worked for investors. Certainly the general thinking concepts that we have online work for all investors, but more importantly there’s other concepts that we wanna talk about, right? So, the general thinking concept is just to give you an example of some of the stuff that we talked about like the map is not the territory, right?
And this applies to investing because a map of reality is not reality. So, a balance sheet, income statement, those are not. The territory is the actual business, right? These are sort of like point in time ideas of what’s going on in the business, but they don’t represent what’s going on really at a fine grain in detail, and so you wanna understand the terrain to the extent possible because you wanna know when the train changes.
Enron is a great example, right? Everybody had access to their balance sheet, their income statement, and nobody really paid attention to what was going on in some of the footnotes, which is a bit more of the terrain of what’s happening. If you wanna take the same sort of context, a map is not the territory, and you want to apply it to something else, you could think of online dating. You read this profile about a person and then you go meet them and sometimes they line up with that profile, which is a map, and sometimes they don’t line up with that profile at all, right? So, the territory and the map are different.
That’s just one example of sort of how we can use these tools to think through problems.
Dan Ferris: And if we could, I wonder if we could get more specific? How specific are you willing to get with what you do and what you buy in Syrus Partners? I see you can go online and there’s a Syrus Partners website and you can see the general attributes that you look for.
Shane Parrish: Yeah. We’re just taking this Berkshire Hathaway thing to almost a micro level, an insignificant sort of level from a global capital perspective but a very significant level from a business perspective. We have a whole bunch of people in cities across Canada and the U.S. that run businesses that generate between $500,000.00 and $5 million a year in earnings, and there’s not a lot of places to go sell those businesses. If you spent your whole life creating that business, you wanna sell to the right partner. Berkshire Hathaway is not gonna buy you.
You’re way too small for them, but what if we could replicate that at a micro level? What if we could be a partner of choice for people? What if we could operate in a very similar way to Berkshire Hathaway and then what if we could provide people, if they want it, what if we could provide them world class branding and world class marketing and we can help them compete better? We can help the business thrive. We can help the shareholders thrive. We can help the employees keep their jobs in a world of increasing globalization and bigger companies.
How do you compete in that market? It’s tough. And so, if we can do all of that I think it’s a win for everybody. It’s a win for the local economy, it’s a win for the former owner, it’s a win for the new owner, it’s a win for all the employees, it’s a win for all the customers, and we just look at how can we make everybody win, and what does it look like when everybody wins? And can we do that over a long period of time, and can that be sustainable?
Dan Ferris: So, when you say $500,000.00 to $5 million, right away I think to myself, good heavens, you must look at 100 deals a week just to find the right one.
Shane Parrish: Well, we look at quite a few deals, quite a few businesses for sure. It’s almost a filtering problem where there’s a lot of noise and you’re just trying to find the signal and you’re trying to find the right person to partner with. So, I mean we did two deals last year to put things in perspective, and they were both pretty small deals from our point of view. We have one lined up hopefully closing by the end of February, which is a much bigger deal for us, but we’re willing to adapt to circumstances for the right people.
If they wanna sell it over time, we can facilitate that. If they wanna transition it sort of right away, we can work towards that. It depends on the business, right? A lot of these businesses don’t have all of the procedures in place that you need to sort of scale, but we can work with the former owner as we transition.
A lot of businesses won’t transfer. A lot of businesses that make between $500,000.00 and $5 million are relationship-driven. They might be dependent on one customer. Those businesses typically don’t transfer to a new owner very well, so those are sort of like easy passes for us.
Dan Ferris: I see. So, I mean on the face of it of course it sounds like kind of a no-brainer idea. It’s like why aren’t lots more people trying to do this? I was about to say some people don’t like -
Shane Parrish: It’s hard.
Dan Ferris: Yeah, it is hard. Some people don’t like to talk about what’s in their portfolio. I’d like to ask you if you’re willing to get specific, can you talk even just generically about one of the businesses you own, just to give us an idea of what your -
Shane Parrish: Well, an example of a company that we bought, another major shareholder last year, is called Meal Lime, which is the number one meal planning app on the app store. So, they help you just pick out groceries. You pick a diet, have the food that you wanna eat. You pick out recipes and it prints a grocery list for you.
The future of that business will be integration with grocery stores or integration with Instacart so it all gets delivered, but that’s an example of sort of the type of businesses. We had two exiting cofounders and we took out one of the spots for a cofounder, and it was a three-person cofounded company and Mitch, one of the cofounders, he’s staying on and running the business excellently.
Dan Ferris: Nice. I see that you’re based in Ottawa and Seattle, Syrus Partners.
Shane Parrish: Yep.
Dan Ferris: I take it that Canada and the U.S. are fair game for targets. Any other countries or just those two?
Shane Parrish: We would probably do something in Western Europe if we could find it, and possibly Great Britain, but at this point we don’t have any sort of infrastructure set up there to do that, but we do have infrastructure in Canada and the U.S. We’re always looking. The good thing about being patient and not having outside equity and not having outside capital that you have to return or get a return on is that you can just sit and wait for stuff to happen. It’ll be really interesting to see what happens over the next three to five years sort of in the market today.
Are we going towards a recession? I don’t know. Are we prepared for that? I think we’re doing everything we can to be prepared for multiple outcomes, whether the next five years look like the past five years, or the next five years look completely different. What we’re focused on is creating optionality not only for the companies that we own or own part of but also for owners looking to access. We don’t wanna have to be going to a bank looking for cash.
Dan Ferris: Right. So, I hate to jump around, but when you’re talking to Shane Parrish, you’re gonna wind up jumping around to a million different topics. I’m sure you’re used to that. One of the things I was really hoping that we could do, I hope this doesn’t seem too cheesy to you. To me, one of the things you are is like the mental model guy, all these different mental models, which is another idea that comes for me mostly from Charlie Munger was where I heard about it first.
Shane Parrish: Yeah.
Dan Ferris: So, all mental models are not created equally, and there have to be I’m gonna guess maybe as many as five or so that have kind of changed your life, like your favorites, the most impactful ones for you, and I was hoping we could talk about that.
Shane Parrish: So, just for a second, let’s back up just to define mental model so everybody has working definition of what that is. A mental model is sort of the means by which we understand the world, right? They shape what we think, how we understand. They shape the connections and opportunities that we see. But they also are the reason that we think some variables are relevant and some aren’t, and how those variables interact with each other.
So, when you talk about mental models you can talk about anything like what we talked about before which is the _____ is not the territory, it’s sort of permutations in combination, right? I think that the models that are gonna be most applicable to you, and if you Google “mental models” we should be the number one Google link. We posted 113 of them on the website and we’ve got a description and articles for almost each one. Those are the ones we’re iterating through for the books.
The point is that the models that are most useful to me and you on a day-to-day basis are probably gonna be slightly different, but where the models overlap are the general thinking tools, so the general concepts of sort of first principle thinking or second order thinking, and second order thinking is by Howard Marx. I don’t know if he coined the term or if it was Garrett Harden or somebody, but everybody can anticipate the immediate consequences of their actions, and that’s great for first order thinking, but second order thinking is thinking further ahead.
So, what does the world look like if I do this? What are the implications of that now? What are the follow-on effects? And they’re not side-effects, they’re just effects. Side-effects are things that you haven’t thought of or haven’t addressed. So, second order thinking requires us to not only consider our actions but the subsequent effects of those actions as well. Failing to consider sort of the second, third, and fourth order consequences, that just gets us in trouble and then we end up busy.
That’s the type of situation where most people are in a corporate job, you solved the immediate problem, you haven’t thought about the second, third, and fourth order consequences, and those are the problems that come back and start consuming your whole day. This is why you feel busy, why you have a lot of anxiety, and those are the problems that if you just take a little bit more time and start thinking through them you can make a slightly better decision today that are gonna save you orders of magnitude of time later.
And another way to apply sort of second order thinking not just to a decision that you’re making is like how to invest your time, right? So, ideally what you wanna do, thinking about this from a multiplayer game, is that other people are not gonna do things that are first order negative because they won’t look past the first order consequences. So, your goal is to find in your industry, your domain, your discipline, what is first order negative but second, third, fourth, and fifth order positive?
And those are the things that you wanna start investing your time in because other people are not gonna develop the skills, they’re not gonna do the work, because the first order consequences appear to be negative, and it’s not until you get to the second, third, and fourth order consequences where they’re positive.
A great example of that would be learning something new that’s gonna be applicable not tomorrow but might be applicable to your new job, your new role that you’re anticipating getting, and learning it in advance of that. That’s doing a lot of work now with very little visible payoff. So, not a lot of people are gonna do it.
That’s gonna eliminate a lot of people, but you’re gonna put yourself in a position where you can excel in more environments, the variety of environments that you thrive in or exist in are gonna be higher, it’s gonna make you a more valuable employee, and those are the type of things that become a lot more – you magnify that over 10 or 20 years and you become super valuable, super adaptable, and you start getting accelerated promotions.
You start leaving your peers behind, and nobody can figure out why because you keep doing things that don’t make sense to other people, right? You keep doing things that look like they’re first order negative so other people won’t copy them.
Dan Ferris: Yeah. Bill Gates likes to say we overestimate what we can do in year, and we underestimate what we can do in ten years, and most people as you say, they can’t even see beyond practically next week or next year let alone the next ten. So, what else? Second order thinking is a huge one and I did learn quite a bit about that from Howard Marx as well as you mentioned. What’s another one that kind of really is highly impactful?
Shane Parrish: Inversion is another one. Often, we learn about things in terms of risk. We think that there’s sort of these predefined range of outcomes and there’s no uncertainty involved. We just don’t know where we’re gonna end up when we look at a situation. So, inversion is a powerful sort of tool to improve your thinking because it helps you identify and remove obstacles, right? So, the root of inversion is invert which means to upend or turn upside-down.
So, as a thinking tool it means approaching a situation from the opposite end of the starting point. Most people tend to think forward with a problem. Here’s what we want to accomplish. How do we accomplish that? An inversion would look at the same thing and go, oh, here are all the things that we don’t want to do. If we can eliminate those things we’re gonna narrow the range of outcomes to positive outcomes.
If we can eliminate all negative outcomes, we’re guaranteed to have a positive outcome. Most of us just approach a problem one way, which is like I want that positive outcome. But if you look at it from I want the positive outcome and then you start eliminating possibilities for negative outcomes, you start getting into a much better place, and you start thinking about a problem much differently, right?
Dan Ferris: Yeah. Always invert.
Shane Parrish: Definitely.
Dan Ferris: And there are a couple of these models. I’ve got the page on your website that says 109 of them in front of me. A couple of these are about something that for me has been life-changing is what you won’t do, that which you do not do, and one of them is like Occam’s razor for example.
Shane Parrish: Yeah. Just coming back to what you won’t do, most of us sort of habitually live our lives, which means we’re not necessarily conscious of how we’re living, we’re not necessarily conscious of our principles and what we believe, and we just sort of repeat things year-over-year without deliberately evaluating what we’re doing. One of the things that we try to emphasize on Farnam Street is not only decision-making.
Life is not about always making rational decisions. Life is about a whole bunch of things, and one of the things that you need to do to live a meaningful life or what we think you need to do to live a meaningful life is to sort of live deliberately, which means live consciously. It means start to think about all the aspects of your life that go into what you’re doing and do these work for you?
Do they not work for you? Do they work for you next year? What do you wanna do more of? What do you wanna do less of? Am I happy with my relationship? Am I happy with sort of like where I’m at? If you’re not, what am I gonna do about that? I think a lot of people fall down there. They’re not happy about their job. They’re not happy about their relationship. And then they just let it go instead of doing something about it.
It’s almost like they’re expecting the results to change even though their approach, their attitude, their mindset, and the tactics and tools that they’re bringing to solve the problem don’t change. Well, I mean that’s kind of the definition of insanity, right? If it does change it’s gonna be luck. You don’t wanna bang your head on that brick wall.
You wanna think about it and be like, oh, what do I need to acquire to make my relationship better? How do I invest in my relationship with my kids, my spouse, my family? What does that look like? If I’m not willing to put in the time, why am I expecting the results to change? And if I am gonna put in the time, what does that look like? Does that mean I’m on the phone while the kids are at the park playing? Does it mean that I’m cancelling date night with my wife or my spouse because I’m busy at work?
Well, it doesn’t mean any of this. There’s no one answer that works for everybody, but there’s an answer that works for you, and living deliberately is about how do I just get more of that every year. It doesn’t have to be a zero to one change. How do I get slightly better at my relationship this year? Doesn’t have to be a huge overnight change, but it could just mean turning off the TV and connecting with my partner.
It could mean I put my phone down when I’m with my kids. And then next year, okay, maybe there’s another change that I can make or next month. But it’s evaluating what type of relationship do I have? Is this serving me? Is it serving the other people? If I were to pass away tomorrow because life is so freaking fragile, right? If I were to pass away, am I gonna regret that I didn’t do this right now? A lot of people do.
They think that they can make money today or they can do things today, and then they’ll hit 55, they hit 65 or 75, whatever they retire at, and they’ll atone for all of these, “I’m sorry I put you through whatever and I was working 24 hours a day and I wasn’t there, but now I’m there.” And they think that makes up for it, but it doesn’t make up for it at all.
There’s no window you can go up to with a whole bunch of money when you’re older and be like, “I’m so sorry, will you be my friend now?” A lot of the strategies that we live life with are mutually exclusive from relationships, and thinking backwards _____ _____ _____ _____.
Dan Ferris: I’m sorry to cut you off, but I need to interject here because you brought up something that I think about and I wonder about people I’ve known who’ve achieved great success, and as you point out at the cost of relationships, and I often wonder if it’s even possible to do both, if it’s possible to avoid that conflict and that problem.
Shane Parrish: Maybe one of the problems of holding up Warren Buffett as a hero, and Warren Buffett is one of my heroes, but he’s not the most well-rounded person. I often think about this, and I haven’t seen any sort of academic studies on it, but I think that disproportionate repeated success is not balanced success. You can’t look at four different people in four different categories and wanna be them in all categories.
Tiger Woods was the best golfer in the world, bar none, probably that the world had ever seen until he started compensating for his weaknesses which was like addressing his addictions or whatever, right? And then he went downhill. Warren Buffett was the most successful investor we’ve ever seen, widely regarded, don’t know the guy, love him, don’t know him, but widely regarded not to be the most present person with his family when they were growing up.
Living deliberately means picking what type of person you wanna be. Am I gonna give up pursuing one particular goal to balance things out, or am I gonna live in harmony? And those things change over time.
What you need to do this year if you have a kid under five is gonna be much different than what you do if you have a kid over 20 to develop a relationship with them, and the time commitment is gonna be different for those things. You need to be conscious about how those things change, and they change for you too, right? Like what you value this year might not be what you value next year. But the point is just not to live unconsciously and just repeat what you’ve been doing expecting different results because that never happens.
But also these people that we hold up as geniuses or incredibly talented or disproportionately successful, I’m not taking anything away from them because they deserve all the credit in the world, they’re often not the most balanced people, right? So, you can’t just pick and choose various aspects of them and be like, I wanna be Warren Buffett in investing and Tiger Woods in golf and Barack Obama as a family man.
This is kind of what we mentally do though because this is so available to us, and then we try to live up to these standards and we end up pulling ourselves in all these different directions, which causes stress and anxiety and we don’t tend to be happy about the person that we actually are. Rather than work on who we are and what we control and what we want out of life, ‘cause these are hard questions, right? We just pull out our iPhones and distract ourselves with a game.
Dan Ferris: Well, Shane, I hate to do this, but we’re just about out of time, and really if you let me I will keep you on the phone for five hours because there’s a lot to talk about with Shane Parrish in my opinion.
Shane Parrish: Oh, I appreciate that.
Dan Ferris: Thanks so much for being on the program. I wonder if I could get you to commit to coming back sometime?
Shane Parrish: Yeah, man, I’d love that.
Dan Ferris: That’s great. All right, well thank you very much.
Shane Parrish: Thanks.
Dan Ferris: Okay, now it’s time for the mailbag, and remember your feedback is very important to the success of the podcast here, so if you have a question or a comment or anything send us an email at [email protected]. We read them all and we try to respond to every single one, even the ones that might not be very pleasant and might be a little hurtful. Just let us know what’s on your mind, okay?
We’ve had a couple of them. We got two of them this week, and the first one is from Dana M., and Dana M. says, “Very good episode last week. Dan, you are getting better every week. This is one of the few episodes that I will listen to again. There was so much content. Keep it up.”
Dan Ferris: Thank you, Dana M. It’s much appreciated. Your encouragement is important to me, keeps me going here, and I agree. The episode with Mark Spiegel was really great, and I can understand why you wanna listen to it again.
Email two actually talks about that, too. Email two is from Douglas G and he says, “Hello, Dan. Mark Spiegel was certainly an interesting guest. His enthusiasm is infectious, and I thought he presented himself well, but the entire dialogue brings up a very important concept that was touched on repeatedly: value. Not value investing per se, but value in general. You have to know what the value of a company is before you buy it, otherwise how do you know if you’re paying a good price for it? I think that was a quote he mentioned several times. Dan, how do you value stocks? Douglas G.”
Douglas G., that is a great question. It’s actually a softball for me. I don’t know if anybody put you up to this, but it’s a great question for me, and I will tell you, we value stocks a couple of different ways in the pages of Extreme Value, the value investing letter that I write for Stansberry, and one of the ways we do it is we look at the sum of the parts. One of the companies that’s in there, and I don’t wanna name them because people pay a lot of money for Extreme Value and they probably wouldn’t like me giving everything away from free, but one of the companies in there we have consistently used the sum of the parts.
So, they have cash and securities and they have two different businesses, one of which just gushes cash flow and another of which does not generate the same kind of regular cash flows. And in fact, that second business we assigned zero value. We put a multiple what I think is a decent market multiple on the cash gushing business, and I just assess the – I keep track of the share prices of the stocks they own, and of course cash is cash.
So, you keep track of all that and you add it all up and subtract the debt, they have some debt, and just subtract all the liabilities, and then you divide it by the number of shares and then you get the value of the thing. You gotta realize that it fluctuates and you may be off a little bit in assigning a multiple to the cash flows. I guess we have 14 stocks now I think in Extreme Value here. Eight of them are valued using what we call price implied expectations.
Now, the traditional way of valuing a business is like valuing a bond. You look at the cash flows you’re gonna receive in the future, and based on when you’re gonna receive them you do a little bit of math and give them a value today, right? Because a dollar received today is worth a dollar, but a dollar received in the future is worth a little bit less. So, you add up all that and then you have the discounted cash flow value and what they call the net present value of the business.
There’s a problem with this though because you have to predict, when you do it for a business and not a bond, you have to predict the cash flow in year one, in year two, in year three, four, five, six, seven, eight, nine, ten, and you don’t really know them. It’s in the future, so you’re guessing about the future and you can be way off. So, price implied expectations just improves upon that a little bit with a really cool inversion actually that we just discussed with Shane Parrish.
What you do is instead of predicting the future, you plug in whatever future inputs you need to equal the current price, whatever growth assumptions in the revenue, whatever margin assumptions, whatever free cash flow assumptions, and you see what you need to plug in to equal the current share price. Then you look at what you just plugged in and you say, is that a pessimistic view of the potential future of this company? Is it an optimistic view? Or is it somewhere in between?
If it’s pessimistic enough you could have a really good buy on your hands. If it’s optimistic enough and the business is kind of iffy, you could have a good short sell or just something you want to avoid until it gets cheaper if it’s a decent business. And if it’s somewhere in the middle again you’re probably avoiding it, right? You’re looking for that price that kind of has a pessimistic expectation for the future baked into it, and then you wanna be able to develop a really good alternative viewpoint that is more optimistic.
So, that’s the main thing we’ve been doing. Another way we value business is we have a dry bulk shipping company, and that’s a highly, highly, highly cyclical business, highly capital intensive and therefore most capital-intensive businesses are highly cyclical. The cycle goes way up and it goes way down, and you’re up ten-fold and you’re down 99 percent. I mean, it’s just crazy.
So, at the bottom of the cycle with a business like that, you can actually look at the earnings at the top of the last cycle and figure a multiple, and this business that we’ve recommended in Extreme Value, it was like one times the earnings from the peak of the cycle. So, you’re paying for the one year of earnings when they peak and then you’re not paying for anything else, and that’s kind of a dirt-cheap price for a highly cyclical business.
And there are some other things that we have. There’s one situation where we have a company that’s loaded up to the gills with cash and has very few – it’s selling real estate properties that it owns and it has very few of them left. It’s run by one of the greatest real estate investors ever, and so we did a little exercise where we imagined what these guys could do with that amount of cash, and we realized that if they just do an okay job there’s a lot of upside in the stock at the current price, and it’s worth owning.
So, I hope that gives you a general idea – I can’t get too specific obviously, I’ll be here for three hours – in how we value businesses. I’m just really grateful for the question. Of course, if you’re interested in this type of thing, if you’re this kind of investor, if you’re a serious long-term value-oriented investor, Extreme Value might be for you and you can go check it out at ExtremeValueOffer.com.
So, that’s it. Thank you, Douglas G. Wonderful question. That concludes another episode of the Stansberry Investor Hour. Be sure to check out our recently revamped website where you can listen to all of our episodes and you can see show transcripts. We get a lot of emails about that. And where you can enter your email to make sure you get all the latest updates. Just go to the same address: www.investorhour.com.
That’s it for this week. Love us or hate us, just don’t ignore us. Thanks for listening. We’ll see you all next week.
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