Episodes

[Broadcasting from Baltimore, Maryland, and all around the world. You're listening to The Stansberry Investor Hour. Music. 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 podcast. I’m your host, Dan Ferris. I’m also the editor of Extreme Value, a value-investing service published by Stansberry Research. OK folks, no guest this week. New format, right? So, no guest this week. But I do have a few things on my mind that I would like to share with you.

Now, we're getting toward the end of 2019 and we’ll likely, of course, take off for a week or something around the end of December. So, now I think is as good a time as any to think about where we've been and what we've done this year. To start to, anyway. I’ll probably do some more of this in upcoming episodes for the remainder of the year. But one thing I noticed, I went back to the first episode of 2019, Episode 83, published January 3. And I said a bunch of things.

I said, "Buy gold, of course." I've been saying that for two years. Gold started out south of $1,200 and needed up and – or I’m sorry, south of $1,300. Ended up well above $15,000 at one point and we're right around $15,000 lately. So, that worked out. Gold has worked out.

But one thing I said in that first episode, I said, "Unfortunately, if history rhymes, I think we're going to have a rough 2019 as well because, of course, the end of 2018 was pretty rough." And I said, "You know, in the end, it’s really healthy to have a correction like the one I was expecting this year because the market can't be crazy, irrational, or over-valued forever.  That’s unhealthy," I said, "because you can’t go into the market and just buy things because you think they're going to go up. That's a casino market. It's a little crazy."

And so, I said, "There has to be rational investing happening. There has to be people doing fundamental analysis and investing in companies they can hold for a long time." So, you know, not exactly a rough 2019. We had a rough patch in May. We had a little rough patch in August and now we're making new highs this week. New all-time highs in U.S. stocks, as measured by the S&P 500, of course.

You know, my bearishness is kind of not playing out. Now, one thing I did notice is that we had Jason Goepfert on the program last week. We interviewed him, and he's a very objective guy. He just looks at data, right? And he noticed that a very few stocks were leading this charge. And he said, "Very few stocks are even making new 52-week highs, let alone all-time highs." So, it's very few stocks making all-time highs and pushing the market up. That might be a bearish sign, but you're not going to hear me talking about bearish signs with the market making new highs.

My bearishness comes from valuation with the S&P 500 well above two-times sales. Historically, that’s been exorbitant. And historically, when it got anywhere near these levels, just a normal outcome is minus 50% over the next whatever it is. Whatever period of time it would take for a bear market to play out. But this ain’t no bear market and yours truly must admit that he’s been wrong. And that’s what we try to do in this program, by the way.

One of the things I started with, even before I started doing the podcast, I used to do some videos on YouTube and stuff. And one of the reasons that I want to do this stuff is because on TV, when you look at finance TV and finance media in general, the big media conglomerates, right, they present you something where it’s basically a fashion model reading a teleprompter commenting on the last tick of the market. And they're always right. They always talk about everything like they knew it all along. Market's up, well, we've been talking about that. Market's down, well, we've been talking about that.

So, it would be different then for someone like me to not do that and to keep track of things you he got right and things he got wrong too. So, that's what this exercise is about. It's kind of – it's as close to skin in the game as a media person can get, I think, because most of them, I don't think they're allowed to have too much skin in the game because they don't want to go on TV and say hey, buy Starbucks and when they're loaded up with shares, right?

So, for me, skin in the game as a podcaster, or if I ever start doing YouTube videos again, is going back and letting you know when I’m right and when I’m wrong. And the bearishness has just been wrong. Bullishness on gold has been right. But bearishness has been wrong.

And so far, one of the themes that I've hit on is that owning the best businesses in the bull market will not save you. Well, you know, that may wind up being true, but it was wrong not to own them like right up to this minute. I mean even with Facebook, you know, I was really, really cautious and highly critical of Facebook starting in 2017. And you know, I just thought that the business model was a bit troublesome, in the ways that we've all come to believe it's problematic. One of them is, simply, that social media is kind of a waste of your life. OK? And I thought well, this could be a problem.

And so, the stock, you know, it was, I think it hit like 220 something at that peak in, you know, I want to say like just mid-, just call it mid-2018 or maybe early 2019. Something like that. And then of course, it crashed. And by the end of the downturn at the end of last year, it was well below its highs. I mean it was like from two something down to like 130 something. And now it's back up around 180, 190, in that neighborhood lately. Like just under 190. So, and it's still a great business, right?

All these great businesses, they're still gushing. They're actually not horribly over-valued. And Google and Facebook and Amazon and even Apple is back. You know, the share price of that thing suffered for a while but it's back, man and making new all-time highs fairly recently here.

So, you know, chalk one up for the market. And so far, this stuff that I'm worried about, I'm still worried about it because I'm a long-term thinking person. And I’m always going to be worried about this until something happens to make me not worried about it, you know, like a bear market or something.

And Google just posted, actually, big results. It's weird. The headlines are talking about the money are losing with everything but advertising. But the advertising, the ad revenues grew 20%. I mean this company did $150 billion in the past 12 months, and the revenues are still growing at this exorbitant rate. That's unusual, man. That's really unusual. So, you know, it's still one of the greatest cash-gushing businesses ever.

Now, you may recall that once or twice in the podcast, I mentioned a report on the FANG stocks, right? Facebook, Apple, Amazon, Netflix and Google are the FAANG stocks. I mentioned a report by an Australian Investment firm called Aoris. A-O-R-I-S. And the report was about how the FAANG stocks are – you have to – it was basically, they're begging you to have an imagination and say, you know, if you look at the next 10 years of these amazing businesses, which have just produced ungodly incredible returns the last 10 years, maybe it won't work out the same. You've got to have an imagination. That's how I took the report anyway.

But you know, you can Google Aoris and find the report on their website and check it out yourself. So, part of their deal with Google is what market is kind of – what the financial press is complaining about. I mean the business is a beast. They're growing 20% a year. But part of what the market is complaining about is part of what Aoris had in that report. And it really gets down to what they call other bets in their financials. It's stuff like Waymo, the driving app. And there’s a – I forget what the business is called, but it's like they're trying to cure cancer with AbbVie, the big pharma company and look at age-related diseases. And there's other stuff in there too like TV and internet access services and video streaming, right? Other stuff. Other bets, they call it.

Well, so far in 2019, other bets did $155 million in revenues versus total Google revenues of $115 billion, with a B. Other bets, $155 million, with a M. So, it's tiny. It's a teeny little piece of the revenue. But other bets generated a $2.8 billion net loss so far this year because all they're doing is investing in something that's not making a dime. So, it just net losses as far as the eye can see. It was $2 billion at this point last year – first nine months of 2018. First nine months 2019, you know, 2.8 billion. The losses just keep coming.

And that was part of Aoris’ point in their report was that no, in order to keep the thing growing at a great rate, they're getting into these other bets, some of which they call "Moon Shots." Which, you know, most moon shots go to zero, right? They don't do anything. But every now and then, just, if you get one of them, it can make all the other ones worth having done.

And so, look, they're racking up 2.8 billion losses trying to cure cancer and do video streaming and whatever else they're doing. And video streaming is one of these crazy things that everyone is rushing into and nobody's making a dime. It's weird. And maybe Disney will make some money, right? They have a great library. But I don't know. It looks like a tough bet to me. And a lot of these things are tough bets. And we'll see how Google looks 10 years from now when they're, I'm going to say likely not growing 20% a year anymore or anything like it, and have continued to rack up losses on the moon shots.

And of course, this is a stretch because it is a cash-gushing business. But if you're a long-term investor, you've got to think this way. You can't not think this way. That's why I'm this crazy about these companies that are, obviously, wonderful businesses. OK? So, moving on.

One of the consistent themes that I've hit on from time to time, most prominently in my 2017 and 2018 presentations at our annual Las Vegas Conference, the Stansberry Conference, is that the private equity industry looks really frothy. Now, of course, I've been saying this for two years, getting into a third year of this frothiness. But I think it's really going to look crazy in the next 12 months, OK?

PE firms are still paying exorbitant prices. They're paying like 12 times enterprise value over EBITDA. EBITDA is earnings before interest, taxes, depreciation, amortization. It's just a measure of cash flow that these people use. Don't worry about it. Look it up. Google it. EBITDA.

And so, the private equity firms are paying like 12 times EBITDA on average, rather than like the mid-to-high single-digit EBITDA multiples they've historically paid. You know, six, eight, nine like that. So, and the competition, I think, over the next 12 months is just going to get crazier. They've raised $2 trillion. Private equity has raised $2 trillion that's just sitting there looking for something to buy. And if you look at Ernst & Young, the big accounting firm, does a report they call the Capital Confidence Barometer. And it just came out in the middle of this month, middle of October.

And really, basically, it says that corporate America is in bull mode as far as mergers and acquisitions are concerned. And they're not afraid of a recession. Like I don't know, what do they say, 54% of – it's like 60 C-Suite Executives that they survey when they do this thing. So, C-Suite. You know, CEO, CFO, CTO, COO, there’s other "C's" in the C-Suite but, you know, the people in charge is who they're surveying.

And more than half of them, 54%, do not expect an economic slowdown in the near-to-mid-term. They're not worried about that. 52 percent are planning to actively pursue M&A in the next 12 months. And just to give you a hint of 52%, like what does that mean? Well, like the historic high on this is 59% and that was hit earlier this year, around April of 2019 when they did the report. And the lows were like 25%, 29% back in 2012 when people were a lot less happy and a lot less, frankly, bullish.

But I notice something about this question. This report is just a bunch of questions that they ask these executives. And the question I’m talking about is do you expect your company to actively pursue M&A in the next 12 months? And 52% said yeah. And it’s right near the high of 59%. So, you know, they're not afraid. They're not expecting a downturn and they think they're going to spend some real money.

And we know private equity is loaded up to the gills with cash. So, if all you knew was these two things, you'd be kind of bullish. And we know, look, I've told you again and again, my reason for being cautious or bearish or whatever you want to call me, is not because I think I know when the market will talk. It's just because I think how much you pay for a business determines your long-term return from that business. And if we're at all-time high valuations or thereabouts, where we've been off and on over the past couple years, your returns are going to stink over the next several years. That's my thing. Expected return, based on the price that you're having today.

But if all I knew was the Ernst & Young Capital Confidence Barometer and that private equity is cashed up to the gills with 2 trillion, what would I conclude about the next 12 months, right? Well, I’d conclude that the market is probably going to go up. However, I noticed something at this report. The answer to this question, do you expect M&A activity in the next 12 months? Do you expect your company to pursue it? It dipped down to 46% in October of 2018. So, what was happening then?

Well, the market had topped out in late September and it was already starting to fall by mid-October. And of course, through the rest of the year, the market was down almost 20%. And it looks to me like these guys are sort of maybe at the beginning of a downturn, they will stop saying that they're going to pursue M&A. And they will stop saying that they don't expect a slowdown in the economy over the next 12 months, right? So, they're – I’m not saying they're a leading indicator, but their opinions tend to ride along with the market. Let’s just put it that way.

Still, if this is all I knew, I’d have to say look out. I mean the market iss up. The market iss making new highs. It’s up 21% so far, as of earlier this week. So, that's a huge year. Huge years are usually not followed by other huge 21% up years. But every now and then, things get really frothy. And what has my colleague Steve Sjuggerud been talking? Well, he has been talking about the melt-up. And there's certainly a couple conditions, private equity cashed up to the hilt and corporate executives saying yeah, we're going to do some M&A in the next 12 months, that indicate maybe Steve is right and the melt-up is coming in the next year or so.

So, you're not going to hear me say oh, buy stocks because the market is going to go up. Nor are you going to hear me say sell them all because the market is going to go down. What you will hear me say is, a lot of stocks are over-valued. Very few of them pushed the market to new highs this week. New all-time highs. And I haven't changed my old tune. Hold cash, hold gold, buy value where you find it. Buy stocks and even bonds on a one-at-a-time bottom-up basis.

And, of course, what goes along with this expectation, like it just so happens a spade of deals came out in the press this week, right? LVMH, which is Louis Vuitton Moët  Hennessy, the luxury goods company, says they want to buy Tiffany for around like 28 times trailing earnings, which actually sounds about right. It's not hugely over-valuing Tiffany, I don't think.

I mean Tiffany is an amazing business. They sell gold and silver and they put their brand name on it and they charge a huge premium over what the value of the gold and silver. So, of course, they have to make the jewelry but they do really great margins and it's a great business, OK? It's like magic. It's one of the greatest businesses ever, luxury goods in general. And Tiffany in particular. So, 28 or 30 times trailing earnings. Like that is, off the top of my head, I remember Proctor & Gamble buying Gillette, right? Another huge brand name, right, for around 28 times. And I’m pretty sure that, if my memory serves me, Budweiser was bought by AB InBev. Well, they became AB InBev. They bought Budweiser, Anheuser-Busch, for around 30 times.

And I’m pretty sure that Wrigley’s was bought for around 32 times' trailing earnings. So, you see, when I see LVMH buying Tiffany for 28 times, I'm like eh, makes sense. So, I can't get excited about that. I can't say ah, you see, the market’s frothy.

But when Google bids on Fitbit, Google has bid on Fitbit for like, I mean it's actually less than 1-time sales. But the company has negative EBITDA and I don't see how they're ever going to make a dime. Who knows what Google is thinking. This is one of their other bets, I'm sure. This will be another bet losing money in the next 12 months or so. That looks a little weird to me. But, of course, Fitbit is way down and it's not trading at a hugely froth valuation of 0.9 times sales. But negative EBITDA.

You've got to understand, negative EVITDA is like saying they ain’t nowhere near making any money on this thing. And it's Fitbit. It's these little things you put on your wrist that tell you how you've walked or something, or what your heart rate is, or whatever. I don't see how that's some great product or some great economic mote or great brand name or anything. It's just – it doesn't look like anything to me. And it sure as hell isn't – it wouldn't be like Tiffany, going out for some huge multiple. So, but it's a small deal. It's not a big deal.

Prologix, the warehouse REIT is buying another warehouse REIT for 25 times EBITDA. That sounds a little steep to me. That sounds a little end-of-the-cycle to me. But again, I just expect more of this. I expect more of it to happen over the next 12 months, not less of it.

And of course, the one thing that would change that is if the market fell. Everybody behaves differently. The stock market is a weird thing. It's the only store in the world where the goods go on sale and the customer runs out of the store. Right? And then they say we're marking prices up 20% and everybody rushes in and they can't buy enough of it. Weird.

Alright, so that's enough of that. You get the picture, right? I hope I'm giving you a clear picture. I've been wrong. The market is making new highs. There are some data points that tell me that this could go on for another year, and you can't ignore that. And I continue to be cautious but I continue also to say hey, buy value on a one-up basis. One at a time, bottom up basis, when and where you find it.

OK, so I want to sit here and tell you see, look at all this M&A that's happening. This is a sign of the top. But I can't do that. I just have to call it like I see it and so far, I’m not seeing – when I see a big deal, or a couple of big deals that look really frothy and toppy, believe me, you will be the first to hear about it. So, far, not seeing it.

The froth that we have seen is some of these kinds of weird businesses that have come public this year. I made fun of Peloton earlier this year. We made fun of WeWork and that thing never actually went public, thank goodness. I made fun of Beyond Meat a little bit because it just seems like a crazy kind of a thing to me. Beyond Meat, as you will recall, is the plant-based meat company. And we talked about this several episodes ago. They went public in April at 25 bucks and the stock was almost a 10-bagger. It was like 239, almost 240. And now it has fallen by more than half from that level, and it's still exorbitantly expensive.

Well, they posed their first quarterly profit recently but the stock fell anyway on the news. Probably just because it's so crazy expensive. Right? It would have to fall unless the profit was just billions of dollars, right? So, but something else happened with Beyond Meat that caught my eye that I wanted to talk about with you briefly. And their IPO lockup period expired on Tuesday of this week. And what does that mean?

Well, IPO lockups are agreements between the underwriter of the IPO, you know, the bank that's taking the company public, and big shareholders in the company. And the bank that's taking the company public, the underwriter says hey, don't sell your shares for six months, OK? And they say alright. Now, these agreements are not etched in stone, by the way. They can be changed. They can be waived. The underwriter can say hey, everything’s cool, OK? Everything’s cool. You don't have to – you can sell if you want.

But anyway, the lockup period expired for Beyond Meat this week. That caught my eye because of a book that I read that I mentioned I was going to read. I did read it. It's called A Demon of Our Own Design by Richard Bookstaber. And he was on the frontlines of like the internet bubble and a couple of other important periods in financial history recently. And he pointed something out that I did not know. He pointed out that most of the popular stocks that IPO’d, have very small floats. That is, when they went public, they sold like five or 10% of all the outstanding shares.

So, there was a big demand. People were really excited. There wasn’t much stock available and you know what happened next, right? The market soared. But in 1999, and early 2000, but mostly in 1999, the IPO lockups ended. So, all of a sudden, instead of just 10% of a company’s shares trading, it would have gone from like 10 to like 70, 80, 90%, like that. So, in other words, there was a supply/demand imbalance, was part of the dynamic going on at that time. And when the IPO lockup period ended, the top came pretty quickly because there was all the supply that the market was demanding for shares in internet companies.

Interesting dynamic. I highly recommend you read that book. There's a lot of other incredibly insightful, interesting stuff in there.

So, if you buy these big IPO stocks that go way up the way Beyond Meat has gone up, almost a 10-bagger at the top, you'll want to pay attention to lockup periods. And like I said, they're just agreements between the underwriter and the big shareholder. They can be changed. They can be waived. They're not etched in stone so you've got to kind of pay attention to them.

And man, this thing, Beyond Meat, it’s crazy. It IPO’d at 25.  Went to 239. Now it's 105. That's extreme volatility. And even at 105, it's trading at 38 times sales. So, it's still exorbitantly expensive, even though technically they just made a profit last quarter. You’d be hard-pressed to find any business that is worth that kind of scratch, OK? And until this one is consistently profitable, if it ever is, there's like hardly any way to figure out what it's worth anyway, let alone some exorbitant price.

So, just be careful out there, OK? I still think it's OK to say be careful out there. And it's still OK to say have plenty of cash. Hold gold. And be careful about what stocks and bonds you buy.

[Music]

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[Music]

Alright remember, the mail bag is – that's where you and I get to have a conversation. And it's like one of my favorite parts of my whole week, when you write in and tell me what's on your mind and then I get to respond and we get to talk to each other. And you write in at [email protected] with comments and questions and politely-worded criticisms. If they're not politely-worded, I'm not reading your question. I got a couple of rude ones this week and I was like well, ah, not reading it.

So, the first one I want to read is from a previous episode and it's from Karen H. And she sent a real quick message. She said, "Hi, hopefully you'll be commenting on this in the rant. Thanks." And she's just referring to the title of her e-mail which is "No Trade Fees for TD Ameritrade and Schwab." Now, of course you've heard this in the news, right? A lot of brokers now are letting you trade for free. They're not charging you a commission in your online brokerage account.

And so, the question is, how do they make money? And my answer was, the first time I dealt with this question was, well, they send your order to a market maker and they earn a spread. Right? A bid-ask spread. Right? They buy a stock for $10 and they sell it for $10.05 or something. And they do that a whole lot of times, real fast, and they make money.

But there's something else though, that it was right in front of me and I didn't even see it. But I read a couple of articles about it and was like oh, yeah, that. So, one of the big questions here, how will brokerages make money if they don't charge commissions? Well, you probably had some cash in your brokerage account, right? And you probably noticed that you get some little, tiny bit of interest paid on the amount that you're holding in cash, right? And you probably never gave it much thought before. I know I really didn't. But it's kind of a big deal.

Some of the big-name brokers, they don't pay you anywhere near what you could earn in a regular old money market fund today. In August, Barron's published a piece that said – and this is called "the sweep," right? Your sweep account because they sweep your cash into a money market or into some kind of interest-bearing thing. But it's still there. It's there for you to settle trades or write checks. It's liquid cash, but you're getting some kind of a yield on it. And they call it a sweep.

So, the sweep, according to a Barron's piece in August, the sweep yields an average of just 0.25%, according to a company called Crane Data. C-R-A-N-E. Crane Data. And that’s well below the 1.8% average at the time for retail money market funds. Now, the money market funds that I – I just Googled real quick yesterday, and you can get between 1.9, 2% right now on some money market funds. So, same ballpark but the point has not changed at all.

That’s a huge difference. The difference between 0.25% and 1.8% is enormous. If you start with $1,000 and you make 0.25% a year for 10 years, you'll make about $25, basically, after 10 years. You start with the same $1,000 and make 1.8% per year for 10 years, you'll make about $195 after 10 years. Big difference. Many times different.

So, the bottom line here is real simple. Your broker is probably investing your cash in some kind of a yield instrument and keeping the lion's share of the yield for itself. So, what do you do? Well, I saw another article in Investor’s Business Daily, also in August, that listed several brokerage firms and the yields from the default sweep account. Right? When your cash is just swept in by the broker. And it was just an astonishing range of yields. Like at the bottom end, E-Trade, the sweep yield there was 0.4%. So, your E-Trade account, according to this article as of August, and this was a seven-day yield. So, it's an annualized seven-day yield. It's 0.4% per year annualized based on the seven days that they looked at it as of August 9.

1. So, annualized 0.4% per year. That's not a lot, right? TD Ameritrade 0.6. Schwab 0.61. Right? These are the big online dudes. And the higher end was Vanguard 2.16%. Ameriprise 2.02%. Morgan Stanley 1.86. Fidelity 1.84. UBS 1.75. Merrill Lynch 1.7. Those are decent yields for cash nowadays. But if you have Schwab or TD Ameritrade or E-Trade, you're getting like a third or a fifth of that much in yield on your cash.

I mean the IBD article, they came out and said it. The brokerages can pay customers less for their money. The brokerages can lend or otherwise put the money to work at higher interest rates and keep the difference. It's like you deposit money in the bank and the bank lends out the deposit and makes a yield on it but you make diddley-squat on your deposit, right? So, look. Maybe you don't care about this. But if you're holding a lot of cash in your brokerage account, and I've told people, one of the big things I've been saying for two years. Hold cash, right? So, we should talk about this. Then you should care, if you're holding lots of cash.

You should look at each of your brokerage accounts and see what they're paying you on your cash. And here's what you do. Like I would just go to Bankrate.com or you could just Google money market yields. Current money market yields, and it’ll probably take you straight to Bankrate.com. And see what money markets are paying right now. And then take a look at your statement and see what they're paying you on your cash. And if they're not pretty darn close, do something.

Switch brokers because it kind of sucks. If you could be making 2% and they're paying you 0.4%, and let's say you're a rich guy who's waiting for the market to crack or he's waiting for a really good deal to put a lot of money into, and you got a million bucks in cash or something. That's real money that they're not paying you.

So, what I would do is look at, if your E-Trade, TD Ameritrade, Schwab and any of those big ones, just look at what they're paying you and then maybe you could look for this IBD article. It was just back in August. I mean you could just probably type Investor’s Business Daily sweep account article, or something. The point is, you probably don't even know about this. This is just not even something I normally think about and yet it could be real money if you're cashed up, OK?

So, there it is. That's the other way. When the broker says they're not charging you a commission, this is one of the ways that they can make a lot of money by not paying you on your cash. Pretty interesting. And I thank you, Karen H., for the question and you really – even just with your very short, little question you made me think about this. And then I saw those articles and I was like wow. OK, next.

We heard from Juan C. And just real quick. I found this somewhat interesting. Juan C. says, "I wanted to let you know that I think you are very courageous to speak about this Gretta girl the way you did. Given the current dictatorship of political correctness, it requires a good degree of independent thinking to say what you said. In Spain, where I live, you would get crucified for just expressing such an opinion. I fully agree with you, needless to say, Juan C."

You remember, I criticized the teenager from Europe, Gretta Thunberg, who took a boat across the ocean and she made this really mock-ish speech to the UN. And I know she’s like a 16-year-old girl. Somebody said she has Asperger’s or something or you know, is otherwise challenged in some way. And I don't want to be too critical, right, but she doesn't know what she's talking about. One reader wrote in to say it's just high school science. Of course, she knows what she's talking about. That's stupid. You're an idiot. It's not high school science at all.

Anybody who says all this climate stuff is high school science is a fricking moron and doesn't get it. And poor Gretta is just being carried along in the cultural drift and I kind of feel sorry for her at this point. But anyway, thanks, Juan C. It's actually not a big deal in this country to speak about this stuff. I mean a lot of people think I'm an idiot for saying it, but they're idiots. And I can say that and I can feel just fine about it. I won't be crucified, as you put it. Alright.

Next is from Jacob H. And Jacob H. heard me in the last podcast and I was saying, hey, Porter, for $1.7 billion, you can fire me if you want and he said that really cracked him up. I was talking about WeWork, right? Adam Neumann, the CEO who sort of ran WeWork 80% into the ground, is getting $1.7 billion. He's getting $1.7 billion just to go away. And I thought that was crazy.

But Jacob H. says, "Here is a true story regarding WeWork. I am an investment advisor located in Brooklyn, New York. A couple weeks ago, a fine young man walks into the office saying he saw the sign that we're financial advisors and he might be needing one. He went on to say that he is a 32-year-old computer programmer with a good job and about $60,000 in an IRA.

But his big windfall is coming in a few months when WeWork comes public. He was the 11^th employee at WeWork and has lots of stock options. He said that at modest predictions, his options are worth $1.2 million. And almost up to $1.6 million if things go great. And being that he isn't really knowledgeable in investing, he wants to talk to us to see if we are a good fit. After a couple of minutes of chatting, we told him that the first thing to do is short something that correlates positively with WeWork because he has all his eggs in one basket and is walking a tight rope made out of dental floss.

We explained to him what the risks are and that they are a cash burning machine. Hearing that we thrashed WeWork, he stormed out of our office saying we don't understand the company and we are obviously inept financial advisors. We are still hoping he comes back for a proper financial plan. He really might need one now. Jacob H."

Thank you, Jacob H. That e-mail requires no comment from me. Next. Jeff K. writes in. And he wrote in a while ago. He has written in a couple times about this and he says, "Mr. Ferris, I've written to you before about Iconix Brand Group. The ticker symbol is ICON. I said that Porter had told me an e-mail one that ICON has one of the best business models in the world. I also know that Steve Sjuggerud says to buy stocks when they are cheap, hated and in an uptrend. That’s why I’m writing to you.

ICON was cheap and definitely hated and now appears to be in an uptrend. But what determines an uptrend? If – and that may be a very big if, ICON is in an uptrend, then it would appear that it might be time to back up the truck and buy some stock. What do you think? I like ICON and can't understand why the stock price is so cheap. I think they are definitely turning things around and there are only approximately 12 million shares of stock. You and your associate, I can't think of his name right now." Mike Barrett. And I'll be telling you about him more in a minute, "Should check out ICON. Maybe you will like what you find and will recommend it to your readers. Maybe if you do so, it will someday end up being at the top of the Stansberry Research Hall of Fame. Sincerely, Jeff K."

Thank you for this e-mail, Jeff. I know a little bit about these businesses. I once owned shares of Cherokee Group, which is also in the same business. And what they do is, they're like royalties but they're not royalties on a gold mine or a silver mine. They own brand names on – like Cherokee was a clothing brand. And I know that Iconix own the Fieldcrest brand towels and they own candies. Remember those high-heeled shoes that wore a long time ago? Which I think they still wear them but it's kind of an old brand. And they own a whole bunch of consumer brands like that.

And the idea is that you license them to stores and they sell the brand and you get a royalty from that. And I owned Cherokee for a little while; made a little bit of money. And I told a friend about it and he made a ton more than I did. And then their one licensee that was responsible for like 90 odd percent of their revenue was Target. And they didn't renew the license and the stock crashed, now it's a shell of its former self.

Here's what I have to say about Iconix. It was little more than a financial engineering scheme. It was a crap business. Now, Porter is right about the capital efficiency of the licensing, royalty model. That is correct. But these guys sucked at it. They were terrible. In fact, you mentioned my associate, Mike Barrett. I went to Mike Barrett with Iconix not once, not twice, but three times. And three times he said to me, "Dan, I wouldn't touch this with a 10-foot pole. The underlying cash flows from the brands are not strong at all." And the whole thing was just, you lever up. You buy the brand. You borrow a bunch of money and buy these brands. And keep doing that. And the market keeps rewarding you as long as you can keep growing through M&A like that.

But they got into trouble and they were screwing around with the accounting and the stock tanked super hard because it was clear that they weren't making anywhere near as much money as they claimed they were. So, it was a disaster. I saw a long pitch, that is to say an analyst who was pitching the stock and saying that you should buy it. And his fund, I think, owned it. Like right near the top at one of the Value X meetings or someplace like that. Some conference or another, like years ago before the stock topped out and started cratering and before everybody knew that they were just a financial engineering scheme.

And another one of these companies with some of the same people split off and formed another company called Sequential Brands Group. I think Sequential Brands topped out at like $80 and now it's 40 cents. Something like that. And Iconix topped out at like – split adjusted, it topped out hundreds of dollars per share. Just put it that way. It was like hundreds of dollars split adjusted. And now, it's like two. So, from like $300 or $400 or something at the time to like $2. OK?

So, the market doesn't punish you like that unless you really screw up badly. That's why it's so cheap. And if you're buying this stock, look, I can't give you individual financial advice but I can sure as hell say, be very careful if you want to buy this stock. I don't think anybody is going to penalize me for saying that because yes, the basic business model, I absolutely agree. I bought another one of these and we made 400% in Extreme Value. It's a company called Prestige Brands Holdings. And we bought this thing during the financial crisis for like six and sold it around 40 in Extreme Value. It was like our second or third biggest winner ever.

So, great business model. We understand it well but the execution is everything and the brands are everything. You can learn something about royalties from the precious metals' royalties. One thing you learn when you look at those, is that they never change hands for a cheap price, right? Because it's worth owning a good precious metals' royalty. If you've got a really good royalty on a gold mine, everybody knows it's a good gold mine and everybody wants it and there's no way it'll ever trade hands for a cheap price.

So, the people who make money on this are companies like Franco-Nevada because their cost of capital is like negative. It's nothing. They just issue shares and buy the stuff. And they can do it. They can make money doing that but the rest of us cannot. You can't just buy them for cash and expect to make a ton of money. And levering up and borrowing, it's the same way.

And these other royalties, I've started to wonder about those in that way. I mean if the royalty – if the product is really great, why are they selling you the brand name? Why are they selling this thing at all? Right? You always need to think about who's on the other side of the transaction and why they're behaving the way they are. Why are they selling if it's so great? OK? So, by all means, do your homework on this thing. Take a look at it.

I think I've scared Mike Barrett away from it forever, although I'm going to ask him about it just to see what he says. And he's probably going to say oh man, that thing? Are you kidding? That thing sucks. I'm sure he's going to say that because I've been to him three times with it and he said no, no, and absolutely fricking no. And so, forewarned is forearmed here, my friend Jeff. So, be careful. Porter is right about the model. I think about the company, no way. Great question. Really great question.

OK, so Rob W. is next. So, Rob has a really good question and Rob is not the only one who asked this question, and I’m really glad he did because it's so obvious and I didn't even think to comment on it.

So, Rob W. says, “I greatly appreciate the time you have taken on The Stansberry Investment Hour to hammer home many of the lessons you have learned from your years in the financial world. I've managed to listen to every one over the last two and a half years, and would like nothing more than to take some time out hoping to learn a nugget or two that will help my thinking when investing in this crazy world." Amen, Rob, and thank you.

"I have just read Howard Mark's latest memo called Mysterious, in which he tries to explain and understand the effects of negative interest rates. One thing jumped out at me on page five. Many insurers" – this is a quote from page five. "Many insurers traditionally have made money primarily because they paid claims years after they collected the premiums on the policies they issued. What happens if it costs them money to hold float until claims are paid?

Porter, on many an occasion, has insisted that insurance is one business he would want his children to understand and invest in as the float provides insurers with opportunities to earn interest on this cash pile or to buy bonds with it. Berkshire Hathaway was successful partly because of this. So, my question, if interest rates do go negative in the U.S., then is it likely to make insurance companies less attractive as they will be losing money while holding the float? Could this mean insurance companies would no longer be a no-brainer investment?"

And then he asks some other questions, but that’s basically the question I want to deal with. Thank you, Rob W. So, sure, if negative rates happen in the United States it will affect every bond buyer in the bond market. They're already getting low yields, and then they will be getting negative ones. And who knows what that'll do.

Having said that, I wouldn't worry about this too much because good insurance companies, as Porter would certainly tell you, are good at two things. Underwriting, which is making money from insurance, and investing. Making money from that float we talked about that you mentioned, that Porter mentioned. So, they're really good bond investors. Really good. And they're some of the biggest and best bond investors. You know, the good insurance companies. The ones that Porter likes.

So, look, anything is possible, especially in crazy times. But the great insurance companies are going to continue to be great investors. That's not going to change, right? So, I don't worry about great insurance companies suddenly being saddled with a whole bunch of bonds that are going to lose them money.

The only thing that would make a great insurance company into a mediocre investment, in my opinion, is – besides something going wrong with the business or the management gets off their game or something, is paying too much for it. As long as you don't do that and are committed to hold for the long term, the stuff Porter says about insurance is still true, even though interest rates are low. And should they become negative, we will have to revisit this and maybe it won't be so good. But I don't think the great insurance companies are going to be so much less great even in that event.

Good question. Very good question. Alright. I think we just have one more of these, folks. This is Peter C. and he says, "Great show. I have not missed a week since you started. I would call myself a blue-collar worker that is an index investor." That's very smart, Peter, very smart. He continues, "I currently have 85% in equities, all indexed, 10% bond index and 5% cash. I am really concerned about the debt in the U.S. and the amount of money the government is spending. Can you discuss the risk of a middle American blue-collar worker that does not own bonds at all and stays in equities of great companies for the long run?" And then he says some other stuff and talks about Ray Dalio having a portfolio of 40% bonds. “"hanks again for a great show. Peter C."

Peter, listen. Don't put your money into anything you don't understand and being an indexer, if you're truly in for the long haul and you don't get scared and sell at the bottom of a bear market and you keep indexing and keep contributing, over the long-term, you should be fine. Just don't put your money into anything you don't understand. I think if you're indexing, that shows that you're saying look, I don't want to buy stocks one at a time. I don't understand it. I index, and I applaud you for that.

But no matter what anyone says, don't buy what you don't understand. If you do, you'll probably wind up selling it out at the bottom because things always drop and people get worried. And if they don't understand it they sell out. And as far as the risk of an investor who stays in equities of great companies for the long run, provided you know which companies are truly great, and don't pay too much. And truly understand what it means to hold through the downturns, yes. You will, I believe you will do well over the long term, in general. As a general rule.

The problem is, most people simply don't understand how they will feel at a market bottom and they wind up selling out at a big loss. That's my only caveat, OK? Very good question. Thank you very much.

And look folks, that's another episode of The Stansberry Investor Hour. It's my privilege to come to you every week and I want to hear from you. I love reader feedback, as you can tell from this week's episode. So, just write in with questions, comments and politely-worded criticisms. Look, I can take a criticism, OK, just be polite about it.

To [email protected]. And you can go to that same website and see every episode we've ever done. You can see a transcript of every episode we've ever done and you can put your e-mail in and get updates to let you know when the next episode comes out. It's really cool. Investorhour.com.

That's it for me this week. Thank you once again, so much. I will talk to you next week. Bye, bye.

[Music. 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 other all other financial instruments involves risks. 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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