In This Episode
Obviously you’re wondering what’s next after this week’s big market dip. And while Dan never pretends he knows for sure what’s coming, he is ready to give listeners some historical perspective.
When markets lose 2.9% in a day, people are understandably jittery. But Dan’s research shows the markets have lost more than 2.5% in a single day 287 times since 1990. You’ll be comforted to know what happened after each and every one of those crashes.
Dan then gets to the ongoing gold rally, and the fundamental case for getting gold out of dollars late in this cycle, before segueing to Trump’s new 10% tariffs, China’s currency devaluation, and the falling profits at Berkshire Hathaway.
Dan then gets to this this week’s podcast guest, the vaunted short seller Marc Cohodes.
Marc is a former General Partner of Rocker Partners/ Copper River from 1985-2009. He began his career at the Northern Trust Company in 1982 after graduating Babson College with a BS in Finance. He was the subject of a Harvard Business School Case study on his efforts to expose Mortgage Fraud at Novastar and accounting chicanery at Signet, and was named one of the “Power List: 25 movers and shakers we’re buzzing about” in 2017 by the Financial Post.
Porter Stansberry was so impressed by Marc at Jim Grant’s conference back in 2016, he turned to our company’s general manager and told him we needed this guy at one of our annual conferences.
Sure enough, Marc will be presenting alongside Dan and other Stansberry editors at the annual Stansberry Conference in Vegas, which still have a limited number of tickets available (click here to see how to claim a $500 Stansberry credit in the process).
Marc has made a career of never holding back in his blistering indictments of frauds and industry paper tigers – and we can’t wait to see what he reveals on stage this October, too.
NOTES & LINKS
- To follow Dan’s most recent work at Extreme Value, click here.
1:06: Dan gets right to addressing the stock market carnage from earlier this week. “I feel like there’s no way I can ignore that.”
7:03: Amid gold’s recent rally, Dan assesses its near-term outlook. “Gold is still a no-brainer in my opinion.”
12:40: To understand this rally, Dan says you have to understand the nature of gold. “This is not a cash generating business that has an intrinsic value based on future cash flow… it is essentially a currency.”
17:40: Dan gets into the falling profits at Berkshire Hathaway. “At some point, they may decide it’s irresponsible to keep hanging onto this much cash.”
24:21: Dan introduces Marc Cohodes, a former General Partner of Rocker Partners/ Copper River from 1985-2009. He began his career at the Northern Trust Company in 1982 after graduating Babson College with a BS in Finance. He was the subject of a Harvard Business School Case study on his efforts to expose Mortgage Fraud at Novastar and accounting chicanery at Signet, and was named one of the “Power List: 25 movers and shakers we’re buzzing about” in 2017 by the Financial Post.
28:17: Because markets have upward bias and even worthless stocks can soar, short-sellers tend to have it tough. Marc explains the rigors and unique dangers of his profession. “A lot of people in this business tend to have multiple ex-wives, but I love my existence here.”
31:36: Marc’s commented that to be a pro short seller, you have to be 90% insane. Dan asks how on earth Marc’s life ended up down this path, and Marc explains why he sees things differently, and can’t help but be different.
42:10: Marc brings up “the biggest fraud I’ve ever seen” and how the Department of Justice is investigating, even as a U.S. senator intervenes on the company’s behalf.
47:20: Marc brings up his opinion on Tesla, and why it doesn’t matter whether Musk really is a visionary or not.
48:01: In a few rare cases, Marc has gone long on some of his previous shorts. Here’s what has to change for him to get on the other side of the trade – he’s done it seven times in his career.
46:44: Matt reveals a leader in liquid biopsies. “What I think happens in the next couple of years is insurance companies say, to lower your rates, you get your genome sequenced.”
1:01:44 Dan answers a mailbag question from Ryan B., who asks about the concept of selling at a target price, and why it makes little sense to him personally.
Announcer: Broadcasting from Baltimore, Maryland and all around the world, you’re listening to the Stansberry Investor Hour. 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 another episode of the Stansberry Investor Hour. I’m your host Dan Ferris. I’m also the editor of Extreme Value, that’s a value investing service published by Stansberry Research. We have a great show lined up. Can’t wait to get to the interview guest today. Let’s get to the rant. Lots happening right now.
Give you a little peek behind the scenes here. We record this deal usually on Tuesday or Wednesday and we publish it usually on Thursday. So, as I sit here on a Tuesday, the stock market crashed just about 3% yesterday, on Monday. So, I feel like there’s no way I can ignore that. There’s no way I can just sit here and talk about mistakes investors make or a Howard Marx memo or the usual things I talk about without addressing this.
Let’s just think about this a little bit, because I know a lot of people, the market crashes 3% and they’re in their portfolio nine, 10, 20, 30 times that day, and they’re thinking they need to do something. Overwhelming majority of the time that’s a mistake, so let’s just take a step back and think about this a little bit. As I said, the market was down like 2.9% yesterday. Just call it 3%.
Between Trump’s new Chinese tariffs and China devaluing their currency, you can read all about that stuff in the newspaper, the stock market is actually about 6% below it’s July 31 all-time high close, and it’s about 6% below one week ago, the prior week’s Monday. It’s 3% one day move, 6% one week move, thereabouts. I started thinking, "Well, this doesn’t seem terribly unusual to me, but it certainly doesn’t happen all the time," and I looked at the S&P 500 closing price data on Bloomberg back to January 1 of 1990.
Now, the S&P 500 has had 247 one-day moves of more than 2.5% in either direction. That’s what I look for, more than 2.5% in either direction since January 1990. That’s about 3.5% of the time. It’s fairly rare. It’s not a regular occurrence. So, if you believe that it’s not a regular occurrence, you’re right. As for the one-week moves, the five trading session moves of more than 5%, I looked for those, five-day moves of more than 5% in either direction.
That happens roughly 2.8% of the time, so even less often. So, these aren’t regular occurrences, but obviously they’re not big numbers. I’ve been telling you that we’re within a percent or whatever of the most overvalued moment in history, so if you’re 3% or 6% below that, not a big change in things, right? It’s not a big change. It’s a big change in the value of the Chinese yuan. That thing was down around six to the dollar not too long ago, I want to say maybe three or four years ago, and now it’s seven to the dollar, boom, just like that over a few years.
It’s a pretty healthy move. It was down there pretty good last year, I want to say 6.7 or 6.8. It’s a pretty healthy move for a currency. But you know, the stock market move, it’s a small move, but it happened in a very, very short period of time, so it scares the hell out of everybody. It certainly doesn’t mean we’re in a bear market or that you should be selling stocks or anything like that. Bear market is usually defined as a 20% drop from the highs.
So, by that definition based on closing prices, we won’t be in a bear market until the S&P 500 closes below 2,420.69. That’s another 15% south of here. It’s unlikely to happen, period, though we know it must happen eventually, right? It always does eventually.
Take all this with a grain of salt. It’s not the most statistically rigorous analysis. Just trying to get a handle on this for you. As I said, stocks have not gotten much more attractive because of this move. After Monday’s close, the S&P 500 traded at about 2.1 times sales, which historically is still very expensive. The highest most expensive moment was January 2018. I think it was January 26 if I’m not mistaken at 2.36 times sales, which just eclipsed March 2000, I think it was March 31, 2000, at around I want to say 2.34 times sales.
Those are like the all-time peaks price to sales on S&P 500, and here we are 2.1. The bottom in December 24, 2018, that big bottom was 1.8 times sales. I don’t know what the average is because it’s not meaningful. If you look at a chart of price to sales it’s up and it’s down and it’s up and it’s down, and it’s hardly ever sideways for very long. An average I think would be deceptive. I wouldn’t probably start saying the stock market wasn’t overvalued until it stayed certainly below two for a while, and probably more like 1.5 or less, and below one is like fire sale, buy, buy, buy.
So, we’re not there yet. We’re 6% below the most expensive moment in history. Bargains are not coming out of the woodwork. I couldn’t help noticing a couple of things on Monday. Obviously if you read my newsletter Extreme Value or any one of a half-dozen other Stansberry newsletters, we’ve been long gold and gold stocks and they did their job on Monday. Some of them were up – one of the ones I recommended was up about 10%, and gold itself was up I think about 1.4-1.5%. It was a really nice move in gold, which makes sense.
When people are screwing with currencies, people buy gold. It makes perfect sense. Gold is still a no-brainer in my opinion. Overall, I don’t think you need – having taken all of this into account now with gold and stocks and whatever, I don’t think you need to do anything terribly differently.
As long as you maintain a long-term value-oriented perspective, you’re probably not going to make any big mistakes, and even if you’re not a value investor, we talked with Matt McCall last week and he is a long-term investor, like long, long-term investor. He rides through bear markets. He knows what he’s doing and he has a great track record. He’s got tons of triple-digit winners and tons of quadruple-digit winners, more than 1,000%, which is awesome.
And so, you maintain your long-term perspective and that gets you through a lot. Stuff like this week is noise, right? It’s nothing to a guy like that. So, whether you succeed or fail will not ever be in proportion to how active you get when the market takes a 3% one-day dump or a 6% one-week drop.
How you behave during that time actually is in direct proportion to how successful you’d be, but the right behavior is usually nothing, doing nothing, certainly nothing different. And overall, all the same stuff still applies. The more you trade, the poorer you’ll wind up. The less you trade, as long as you’re fairly conservative, long-term oriented, know how to identify a good business and not overpay, as long as you keep doing all that stuff, over the long-term you’re going to do pretty well.
None of this changes the fact that you should still avoid really risky biotechs and startups and IPOs that trade at 50 times sales when they have no profits and no intellectual property or competitive advantage of any kind that makes them special. You should still avoid risky little exploration mining stocks unless you really know what you’re doing. All the same stuff applies. The risk is in all the same places.
Of course, the main place is your behavior, thinking that you need to do something. It just feels like you need to do something. Well, guess what? You don’t! You don’t need to do anything different if you already have a strategy and a plan. The degree to which you think you needed to do something on Monday is the degree to which you probably don’t know what you’re doing and are in over your head. You’re out of your depth. You are operating outside your circle of competence.
We talked about that several episodes ago, and I’ve gotten lots of e-mails thanking me for talking about it. People are appreciative of this idea. I think it’s a very good one. Warren Buffett uses it all the time, right? Don’t go outside your circle of competence. And unfortunately, being in the stock market puts a lot of people there, OK? If you think anything is different because of what happened Monday or what happened over the past week, it may be we could be in a bear market, but we don’t know.
Taking a single week’s action like that, this happens like 3% of the time these sort of things. When they happen you’re like, oh, that happened. That happens about 3% of the time? What’s for lunch today? There’s just nothing to really discuss based on that alone.
Now, if you’re some kind of macro trader and you think knowing all about the Chinese yuan is important, that takes work. That takes time. Nobody is going to talk to you for five minutes on a podcast and you’re going to go, “Oh, Chinese yuan. I’m an expert. I’m going to go trade based on that.” No, it’s not going to happen. So, I would say don’t do anything different.
I’ve consistently recommended the same actions, so maybe I’ll repeat those one more time. I’ve consistently said for the past – really, I started getting concerned in May of 2017. It just started feeling very toppy and speculative to me at that time. The market is up. That call continues to be caution. I hesitate to say I’m completely wrong because the conditions haven’t changed much. Stocks are still really, really expensive, and the caution is still warranted in my opinion, and I didn’t say stocks are going to crash tomorrow.
I’ve never said that. I don’t say that kind of stuff. I don’t do that. I don’t make short-term predictions about market direction. I think it’s a fool’s errand. But for me, I just look at the valuations of businesses and I think do I want to own this at this price? And a lot of the time under these circumstances I wound up saying no. I’m still there. I’ve been there for two years and I’m still there.
And I’ve said hold plenty of cash, which you will wind up doing if you are selling overvalued businesses and not able to find new replacements. Buy some gold. And if you say, “Well, gold has come up.” It hit $1,475 late Monday on one chart that I saw, and then as I talk to you it’s in the $1,460s. So, it’s come up quite a bit. I’ve been talking about it since it was certainly in the $1,300s, maybe even high $1,200s. Doesn’t that mean it’s more expensive now? Well, technically speaking, yes, but you have to understand the nature of gold.
This is not a business. It’s not a cash generating business that has an intrinsic value based on all the future cash flow you’re going to get out of it. It is essentially a currency, and you put money into gold, you take it out of dollars. It’s generally been a good thing to do that late in the stock market cycle, late in the economic cycle. And gold got murdered down from the heights of 2011 to the depths of late 2015, early 2016, and it’s still closer to those depths than it is to the former heights. It’s actually about halfway between, almost halfway between, I think.
Still a good idea to own gold. I think it’s going to eventually make a new all-time high over the old all-time high of $1,900 an ounce set back in 2011. I think we’re looking at a long-term bull market in gold. I think holding gold, and I personally hold more silver bouillon than anything. Those are great ideas, and none of that has changed, and it doesn’t change necessarily with these little moves from whatever it was, say, $1,200 to $1,460 call it. That doesn’t change any.
The proposition is still the same. It’s still late in the cycle. You still want to get some money out of dollars and into gold. If you’re a trader, we’re having a totally different conversation than that. That’s a totally different conversation. There’s no valuation of gold when you’re trading it. There’s price action and momentum, totally different. I don’t care about any of those things. I care about the fundamental case for getting gold out of dollars late in the cycle, boom, period, done, that’s it.
So, that’s where I am and that’s probably where I’m going to stay for a while. Hold plenty of cash. Don’t buy garbage and don’t buy anything that’s overvalued. Buy value where and when you find it. We have another new pick this month in Extreme Value that we’re writing up and it’ll be out this Friday. That’s where we are. Don’t do anything different.
I hope that doesn’t disappoint you. I hope it actually is like lifting weights and helps you steel yourself against making portfolio mistakes, OK? Because that’s really the big thing you need to do. You don’t need to be a genius; you need to avoid stupidity. That’s what Charlie Munger has said famously, but other people have said it too because it’s very true. It’s very wise. Investing is like tennis. Professional people, they can win by being great at it, but the rest of us duffers or I don’t know what they call, hackers, people who hack around at tennis courts, just amateurs, we play a loser’s game.
The loser’s game is just don’t be stupid and don’t make mistakes, because the studies show, the Dalbar study, it’s called the QAIB study, it shows that most people, they end up worse than they started. Investing is a net loss for a lot of them. Or at least they dramatically underperform the market, so the gain isn’t worth the effort, and it’s an emotional nightmare for most people.
So, I hope this helps. That’s the rant. If you like it, don’t like it, think it’s worthless or stupid or whatever, send your politely-worded criticism to [email protected] There’s a lot new in the world. Let’s get to that right now.
There’s a lot that’s new. It feels new, doesn’t it, when the market falls 6% in a week? It just feels like a new world. So, one thing that’s new of course is that the Chinese have devalued their currency, and before that, the return of tariff man, our president, President Trump, slapped a 10% tariff on $300 billion in Chinese goods on top of $250 billion already covered by tariffs. My view on tariffs is like shooting yourself in the foot doesn’t help you run faster, so I don’t really get it, and that’s all I have to say about that.
Other things going on in the world, Berkshire Hathaway, Warren Buffett’s company; their profits fell, but they’re sitting on this record giant cash pile, $122 billion, and this is one of Buffett’s trademarks, right? They buy back shares, but they don’t pay dividends, and they just accumulate cash under the presumption that he will be able to deploy it at some future time. He’s in his 80s now. I hope he’ll be around.
I wish him well and hope he’ll be around for a long time, and I hope he will be able to deploy some of it, but if he doesn’t, at some point somewhere along the way, let’s say the thing is trading at north of two times book value or something like that, which I doubt it’s worth much more than that in terms of intrinsic value, but at some point it gets a little irresponsible to hang onto cash. I don’t think they’re there yet, but at some point, it does get that way. We’ll see what happens.
They’ve built a huge stake that’s worth about $50 billion in Apple, and it’s funny that he owns that because of all the big technology companies, that’s the one whose business kind of makes me scratch my head. I mean, two-thirds of the revenue come from the iPhone. How many iPhones can you sell before the world gets enough of you? And I understand there are other businesses. I’ve made this point before. There are other businesses, but they’re not growing fast enough, even though they may be growing quite fast, to replace if Apple lost some significant chunk of that two-thirds of revenue.
I don’t know. He’s Warren Buffett. He knows more about this stuff than I do. He must believe in that product. He must believe in the iPhone. You can’t own the stock without believing that the iPhone revenue will not cave in, and I don’t think that’s a no-brainer proposition at all. Of course, he brought back $2 billion worth of his own shares this year. That’s great. His marker goes up. First it was 10% above book value. Then it was 20% above book value. And I think it might’ve been briefly 30% above book value, but I can’t really remember that.
It doesn’t matter. He’s raised the threshold constantly, and now I think it’s like discretionary. I don’t think he’s got this limit anymore. They say, well, it’s below intrinsic value. OK, well, what’s intrinsic value? And he never tells us. He tells people how to value the company, though, which is a lot more than other people tell. He’s not doing anything irresponsible, but his goalposts have moved over time. He used to say the best way to value the overall stock market was to look at total market cap to GDP, which is way over 100% these days.
I think it’s like 130% or somewhere in that crazy neighborhood, maybe even higher. So, by that, the market is kind of expensive. It’s really expensive. But then he came out a couple years ago and said, “Well, you know, as long as interest rates are low, stocks are a good deal” which is really kind of a flabby way of looking at it. You’ll be right until you’re disastrously wrong, I think, if interest rates are your benchmark, because they move around. They float around. Central banks manipulate them.
Even if they didn’t manipulate them, cycles happen, right? So, anyway, Berkshire has been a great company. It’s an incredible bet. I think it’s like 2,000x since they took over, or 2,500x, some huge number like that. Next comes, what do I have here? I have luxury movie theater chain IPIC files chapter 11 bankruptcy. This is not a huge surprise, right?
Company filed bankruptcy in Delaware, might sell itself, and this is less than two years after its IPO. Florida-based company, chain of theaters, owes about $205 million under secured credit line. Owes $15 million to various vendors and suppliers, the trade creditors they call them, and other unsecured creditors, and they lost about $57 million last year because you can stay home and buy a big screen TV and order a pizza and you can pause the thing when you need to go to the bathroom and stuff. It’s hard to compete with that. Not a big surprise.
Here’s an interesting thought. There’s this headline from Barron's. The article suggests that Ferrari, the Ferrari company, the Ferrari stock is worth 12 times more than Tesla. Interesting comparison because Ferraris are cars that work and a lot of people like them, and Teslas are having troubles, and presumably Ferrari makes money and Tesla does not. Ferrari just went from a buy to a hold, though, according to this one Société Générale, Soc Gen analyst. He increased the price by almost 30% to $183.00 a share. They increased their target price.
I’m sorry, they must’ve gone from a hold to a buy. They increased their target price by 30%. So, they like Ferrari, they don’t like Tesla, and they’ve observed what I think is patently obvious, what I hope most people, and this is the point that I want to get to about Ferrari. Ferrari is not a car company, right? It’s a luxury goods company, so it shouldn’t trade like another car company. It should trade like a luxury goods company because that’s really what it is. They’re expensive luxury goods. You’re not buying fancy purses and jewelry here, although some jewelry is more expensive than Ferraris, I guess, a little bit of it, I guess.
The point is, I want to say something about this because you need to understand what business you’re truly in. What business is Tesla truly in? Elon Musk has been all over the map. He says, “We’re into batteries, and we’re into solar panels, and we make electric cars, and we’re changing the world.” It’s kind of airy fairy. You can’t nail him down sometimes on it.
WeWork is that way, this company that basically rents out office space. They have this very sort of idealistic sounding thing when really what they are is a company that just pays way too much for office space and thinks that losing money, doing that is a good business. But Ferrari is different. Ferrari makes money selling luxury goods, not cars, and should trade that way and maybe is worth 30% more.
Those are really the items that kind of caught my eye that I wanted to say something to you about, and right now I want to get to this interview because, man, this guy is awesome and I’m so glad he agreed to be with us this week. Finally time for our interview. I’ve been looking forward to this one. Today’s guest is Marc Cohodes. Marc is a former general partner of Rocker Partners and Copper River from 1985 to 2009. He began his career at the Northern Trust Company in 1982 after graduating Babson College with a B.S. in finance.
He’s been profiled in the books Reckless Endangerment, Selling America Short, The Most Dangerous Trade. He was the subject of a Harvard Business School case study on his efforts to expose mortgage fraud at Nova Star and accounting chicanery at Signet. He was named one of the Power List 25 movers and shakers we’re buzzing about in 2017 by the Financial Post. He resides in – oh, I don’t know this – Cotati, California where he runs Alder Lane Farm. Marc Cohodes, welcome to the program, sir. Thank you for being here.
Marc Cohodes: Thanks for having me, Dan.
Dan Ferris: So, Marc, folks who have been in your profession of managing money and making big bets and all that, I always like to ask them when did you first have an inkling that this was your destiny, that this was your vocation?
Marc Cohodes: Well, I think when I was a sophomore or junior in high school, which was about 1977, which is a long time ago, we were taking a class called the econ. It was an economics class and the teacher, a guy named Dennis Sullivan, decided to start an investment fund, raised money from parents and invest it. We didn’t know jack shit.
He picked me to run investments, and I think it was at the time when oil was moving, gold was moving, and the Chicago Midwest Options Exchange was going. CBOE was just going. We actually luckily made an awful lot of money on something called Houston Oil and Gas. I’ll never forget that one.
So, I said this is a lot of fun. This is fascinating and something I want to do. That was back when I was 16 or 17. I’m 59 now, so a lot has changed since, a lot of ups, a lot of downs. That’s what got me kicked into this whole mess.
Dan Ferris: So, high school, huh?
Marc Cohodes: Yeah, high school.
Dan Ferris: Before we talk about anymore financial stuff, I actually want to know more about how you got into this Alder Lane Farm. Why a farm?
Marc Cohodes: That’s an easy one. Back in the early 2000s, my daughter was interested in horses, and I bought a dilapidated horse farm, fixed it up, and in the mid-2000s, my ex-wife got my ex-house in Marin, California, and I took the farm and love living here, love running it. Have some chickens, have a bunch of fruit, and we have a few horses, and that’s kind of that. I couldn’t see living anywhere else. It’s very peaceful.
We’re, I don’t know, 50 miles north of San Francisco. Get into the city as much or as little as we want, and that’s kind of that. I’m not the easiest thing to live with, so that’s why a lot of people in this business tend to have ex-wives or multiple ex-wives. It is what it is, but I love my existence here.
Dan Ferris: It sounds idyllic.
Marc Cohodes: It’s lovely. I think I have 200 fruit trees. I have chickens, but I have fewer of those. The coyotes have done in a few chickens. I try to lead a balanced existence, which isn’t always easy, but that’s at least the attempt.
Dan Ferris: That seems like a good spot to attempt it. Does that farm make money? Is it a thriving operation or you don’t really care so much about that, you just like being there?
Marc Cohodes: I think what I make in my left hand I put back into the farm in the right hand, so at the end of the day I think it’s about a breakeven thing, but the place looks nice. It’s painted and the footing is good for the horses, and the chickens are happy. Being in business or being in agriculture in Northern California is very difficult. Whenever anyone bitches about the price of food or how expensive things are, try growing stuff. It’s very hard, but I don’t really make, I don’t really lose, but it’s a great place and a great place to live.
Dan Ferris: OK, so do I have this right, you stopped managing other people’s money in 2008 and have not done so since?
Marc Cohodes: Yes, that is correct. I’ve had an awful lot of opportunities to do so, but I think I’ve been quoted in some spots that when you short stocks, essentially you age in dog years. There’s not many 59-year-old short sellers around who are active in this, but there’s something clearly wrong with me that I still sort of enjoy doing this and haven’t blown off my arms or other body parts.
I’m hardest on myself, and the one thing I couldn’t stand when I was in the fund business is letting people down, disappointing them, losing people, money, and even worse, taking shit for it. I enjoy the path that I’m on and wish anyone doing this professionally, especially shorting stocks, nothing but the best.
Dan Ferris: So, since 2008 you’ve been active, though, right? You just manage your own money and not others, but you’ve been quite active during that time.
Marc Cohodes: That’s correct. I’ve been more active I would say in the last five years in that whole whatever you want to call it from 2009 to 2013-2014, call it the melt-up if you will. Things were completely un-navigable from as I saw things, but things at least now are a little more topsy-turvy where you have sort of a chance. You still don’t have much of a chance, but at least you have a sporting chance of doing OK on the short side, considering we’ve been in bull market for, what, people say 10 or 11 years, something like that?
Dan Ferris: So, I read an article where you said in order to do it, short selling you were talking about, you have to be nine-tenths insane. I guess my question from that is what has to go wrong in your life that you pursue a career as a short seller? Why that path?
Marc Cohodes: I always say you’re born with this. No one would remotely ever go to a school yet alone a good school and come out and want to do this. I used to say that short sellers are frustrated or former high school newspaper editors, which I was one, and frustrated financial reformers. It’s a combination of that, and there’s too much righteous in you where you see things that are wrong and you want to fix it. You sort of see things that others don’t.
Sadly, I can’t help myself. I see things a certain way and I try to be different, and I try to be more long or try to ignore a lot of stuff that I’m seeing, but I just can’t. There’s too much. I can’t stand when people get ripped off, especially seniors. I can’t stand seeing working class people getting ripped off in subprime, whether it’s timeshares, mortgages, car loans, get-rich-quick schemes. I just can’t stand it. I can’t stand seeing veterans being injected with horrible medicine, being used as guinea pigs.
I can’t stand seeing people made promises of things that are just fairy dust. I just can’t stand it. It just gets me going, and once you get going it’s very hard to stop. It’s very hard to shut it off. It’s very hard to shut off the outrage to what’s going on. That’s sort of a problem. I was going back-and-forth with a guy named Alex Berenson who’s written a book about marijuana, how the negative effects of it are quite bad, and 15 years ago when he was at the New York Times writing he wrote a lot about Taser and I helped him with that.
I just remember Taser used to brag that Taser saves lives, that cops instead of using guns if you use a taser it saves people’s lives, which is just complete bullshit, and the stock got destroyed at the time. You can’t put voltage into someone whether they’re on drugs or maybe unhealthy. You kill them, and I think they killed an awful lot of people.
If you need to use a gun and you need to use force that’s what a gun is for, but something in-between just puts everyone in a bad spot. I was going down memory lane on Taser with Berenson the other day. You jogged my memory on some of this stuff. I remember on my e-mail I used to have the signature thing, “Taser saves lives” because it’s just so ridiculously bizarre and insane. It doesn’t save lives, it kills people. It’s kind of a long way around the question.
Dan Ferris: No, actually you raised an interesting issue for me. It seems like this goes in cycles too where financial products purported to be safe or high quality or AAA or whatever are really toxic waste. They’re really garbage. When you say something is less lethal, I think they used to call taser less lethal, it’s more dangerous because it kills people, and you’re telling me that it doesn’t kill people. I feel like a lot of financial products are the same way. Maybe a guy like you might agree with that, no?
Marc Cohodes: Not only do I agree with it, it just goes along the line. It’s the same thing with timeshares. Timeshare companies rope people into buying these things saying how cheap it is to buy a vacation property, but when you add back in the interest expense, the maintenance fees, the various things these companies charge you, it ends up costing you far more, and the problem is you can’t sell them if you want to sell them.
It’s worse than owning a boat. I don’t own a boat, but you read and know and see anecdotal stories from talking to people and interviewing people. It’s terrible what these timeshares do when a lot of it is to seniors and taking advantage of their retirement, and it’s terrible. Payday lending. I used to be involved in this World Acceptance, which used to rip off very poor people in the Southeast who didn’t know any better, and people sign up for these loans and they just get taken to the cleaners and it’s just terrible. It’s terrible to take advantage of financially unsophisticated people.
The backside of that is when you speak out, you then become the target of what I would call trolls and all these people who need to keep these schemes and frauds and what have you going. It gets very stale. My Twitter is @AlderLaneeggs. I’m fairly active on Twitter exposing things, and I use Twitter really to get contacts. I speak out on things and there’s a lot of people who lurk and people who see what I have to say, appreciate what I have to say, and they chime in.
They direct message me or e-mail me with further information which helps the cause, but the amount of hate I get from it is incredible. I have over 5,000 people blocked because it’s ridiculous. People would rather folks like me not speak out or not be around, so I work hard to make sure that doesn’t happen. I work hard to keep moving the needle to expose some of this stuff, but it’s wide open out there. There’s a lot of it going on.
Dan Ferris: Nobody is keeping you from speaking out, that’s for sure.
Marc Cohodes: They try real hard. They have gone overtime to try to shut me up, but so far it hasn’t worked. Mentally, I was talking to my wife about it, it’s very hard. There’s a company that I was involved in, I’m still involved in, I’m not short that much now because I was on an interview with Grant Williams at Real Vision who I’m speaking with at your guys’ conference, which should be fascinating. He said, “Why don’t you just cover some of your MiMedx short and just speak out on the thing so people don’t assume that you’re after this thing for money?”
So, I took his advice. I covered I think 90-some odd percent of my position and I speak out and I keep going on MiMedx , and now people accuse me of being obsessed. So, if I’m short the stock, they say I’m doing it for money. If I’m not short the stock, they say I’m obsessed. It has nothing to do with obsession. It has to do with seeing something through, and it has to do with exposing criminal activity and wrongdoing and fraud from Medicare, VA, billing, FDA.
Dan Ferris: But Marc, there’s something a bit more for you though, isn’t there? Because haven’t you said that anybody who doesn’t take investing personally is wrong? I’ve seen some of these tweets. There’s a personal aspect for you in this.
Marc Cohodes: That’s an excellent point you make, and I bring this up all the time. Whenever someone says they don’t take it personally, I would never want a dime of my or your listeners’ money with that person. Because if you’re entrusted to manage someone’s money, let alone your own, you should take it personally. You should take it not only personally, you should take it beyond serious. I take it personally when crackpots, A, threaten to kill me.
I take it personally when a CEO of a company bribes a U.S. Senator, in this case Johnny Isakson to have the FBI come by my house with guns and tell me to quit tweeting about Mr. Petit, like Mr. Petit works for the U.S. government. I take that personally, and others should take it personally and others should be outraged. I take it personally when my friends are hassled. There’s this lack of, I don’t know, outrage out there of what’s really going on and people, I think, think that if it’s not happening to you it’s just not happening and it’s OK, but none of it’s OK.
Whether or not you believe in global warming who knows, but it’s kind of like global warming happens gradually, and your right to free speech and your right to speak out and your right to speak truth to power is just slowly eroded over time to the point where if you’re forced to shut up and you’re forced to silence you and you give up, I think the war is lost. So, yeah, I take it personally. I take it very personally.
I have a disabled son, he’s 32 and lives on the property, has his own house, but I take it personally when people threaten to kill him. I take it personally when people say, “Who’s going to take care of the kid when his father is dead?” If that’s how trolls play, they bring out the best and/or worst in me. So, that’s the downside or backside of what goes on. Your listeners are probably saying, “Why does this guy do this?” I’m not going to be doing it that much longer, but it’s just important to see things through in my mind.
Dan Ferris: I just want our listeners to know that Marc is talking about Parker Petit, the former CEO of MiMedx, one of his biggest shorts which he has called the biggest fraud he’s ever seen. It’s still the biggest fraud you’ve ever seen, MiMedx?
Marc Cohodes: By far. The guys who own the stock try to mock me on it, but I have such evidence of even ongoing fraud at MiMedx. It’s fascinating. My lawyer has all sorts of stuff I’ve been sent, tapes. Georgia is a one-way consenting state. There’s all sorts of audio recordings out there of criminal activity that’s ongoing at MiMedx as we speak, even though they’ve claimed they’ve replaced everyone. It’s something.
The thing that’s fascinating is that the SCC has been in there for quite some time. The DOJ is in there. They admit to lying to the FDA. OIG of the VA, OIG of the DOD is after them, but nothing has happened yet. Everyone thinks it’s fine because nothing has happened. Things take time, and if something doesn’t happen it’ll be a sad state of affairs because these guys have offered companies the playbook of how to commit security fraud, accounting fraud, how to pull one over on the FDA and things like that. If it’s allowed to go on, it would be quite a shame.
But I said the same thing when I was working on exposing Ensis, which is that Fentanyl drug that everyone now talks about and some of this opioid stuff. If more people were speaking out about this stuff long ago, not that the crisis would’ve been averted, averted, but it could’ve been nipped in the bud a lot sooner than it otherwise has been. That’s the sad part of it is that people say what’s in it for me, or why speak out, or if you speak out, you’ll get sued. What do you stand to gain from it?
Government is slow. It’s not your problem, things like that. It’s sad to me because society and people used to try to prevent really bad things from happening, and that’s part of the role to me of a short seller is exposing wrongdoing. I never, ever, ever have shorted a stock because it’s too high. I’m not interested in shorting Amazon or Netflix or Costco or anything that’s legitimate doing well just because it’s too high.
I don’t know what 90% of these companies even do, but these bad guys need to be stopped. They know they’re doing wrong and they hire lawyers and they hire lobbyists and they bribe politicians to shut guys like me up. Have to keep trying to make sure it doesn’t happen, but it’s a tough fight. It is a tough fight.
Dan Ferris: It sounds insane for anybody but a very, very few highly unusual, highly driven individuals.
Marc Cohodes: Exactly. I also say don’t try this at home. I don’t have Facebook. I don’t have Instagram. I’m not interested in anything like that, but on Twitter I say don’t try this at home, but I try to at least entertain some people with what’s actually going on. It’s real. It seems surreal, but it’s actually real.
Dan Ferris: So, we’ve mentioned MiMedx. I feel like you’re just more famous for that than anything else. What about Overstock? You’ve been after this guy for a long, long time and you still are, aren’t you?
Marc Cohodes: Well, I used to be short Overstock and then we smoked the peace pipe a couple years ago and I went long Overstock because I thought change was at hand. I don’t know. I bought the stock at $15. I spoke about it at Grants at $30 and I said I liked it because I thought retail was worth more, and I was excited about their blockchain and T0 initiative. The stock went to $90. Bern who I like and I respect hasn’t executed and the stock went from $90 to $10.
Now it’s back to let’s just call it $22 or something like that, but they have an inordinate amount of things going for them, but they just haven’t executed. I was on something with Hedge I a couple weeks ago and they asked me about it, I think it was $14 or $15. Someone said, “You still like Overstock?” I said, “Yeah, I like it a lot.” But if it was run by someone who’s either user-friendly or Wall Street-friendly or someone who could execute properly, the stock would be a whole lot higher.
So, the lesson to me, and I keep learning even though I’m old, is visionaries running companies, they can really only take things so far. You need people running companies who can flat out execute, which is the modern day issue with Tesla. You can say whatever you want about Musk, whether he’s a visionary or not, but he sure has not been able to execute. One day that’s going to come back and bite those guys in the butt, but who knows?
Dan Ferris: The idea of you of all people going long one of your previous shorts, I mean, have you ever done that before? That strikes me as highly unusual, as something that is probably highly unusual for you.
Marc Cohodes: So, let’s say I started doing this professionally, I started working at the Northern Trust Company in 1982. I’ve done it with Canandaigua Wine, which is now Constellation brands. I made it on both sides plenty big. I’ve done it with Data Scope short then long. We made on that very big both times. I’ve done it on Activision with Bobby Kotick, short it then long it. I’ve done it with Cree when Cindy Merrill was the CFO there. There’s quite a story there.
I made plenty on the short and the long, and Overstock. So, I think I’ve done this probably a half-dozen times over 37 years, so kind of been doing this 37 years. I’ve done it six times, six, seven times. So, yeah, it’s highly unusual.
Dan Ferris: OK, well, that’s more than I would’ve thought.
Marc Cohodes: My thing would be is if you know something pretty well and you know what’s wrong with it, you should be able to figure out what’s right with it. But a lot of these companies when they get really sick, they don’t get better. They get really sick. We used to be short toy companies and toy distributers and just can’t be yogurt and restaurant chains. By and large, most of the stuff I get involved with over time, these companies go out of business. Technology changes or management failures or things go bad and you can’t get up from failure.
Oh, I’ve done it with Casey’s General Stores too, so that’s another time. We used to be short every convenience store stock known to man when the EPA came in and said, “You guys are polluting the groundwater” and they all had huge underground tank liability, and it put a lot of them under and ended up getting to be pals with Donald Bertie who ran Casey’s, and I think the stock went 30 to six and recovered, and I think we were the second largest shareholder in Casey’s next to him. The sad part is we sold the stock at $22. Now I think same shares it’s about $160.
So, I could’ve owned the entire state of Iowa and Minnesota if we just stayed long Casey’s, but I sold it. If you know something is a short seller and you’ve done your work, you know what makes a thing stick, you should also know what can make it better. But again, I’ve been through an awful lot in life, and my mind isn’t quite what it used to be. I have more savvy because I’m older and more experienced, but I’m not what I was at 30 or 40, that’s for sure. It’s been done. I can still swing that bat if need be.
Dan Ferris: Well, I’ll tell you why I thought that was probably not something that you would’ve done. Obviously we’ve never talked before, so we don’t really know each other, and I’ve heard that to you, the jockey is kind of more important than the horse, and you look for people that you kind of don’t like or you think they’re up to something possibly criminal or at least unethical, and you even have followed them. You look at a previous company where they may have worked and saw the bad things that happened there, and then you look at the next company where they work and maybe you go short that one. That’s obviously not always the case.
Marc Cohodes: That’s for sure. Something on Canandaigua Wine, which is now a big company, it’s Constellation Brands, so back when Canandaigua used to be in the wine cooler business and the guy who ran it, a guy named Marvin Sanz, an older fellow, I thought he was great, but his son Richard Sanz was running wine cooler, and he was spending money just like a drunk. He was spending money trying to compete with Seagram’s and Gallo which was Bartles and James at the time.
I said to myself, these guys aren’t making money in this and they’re growing top line at like 70%. I said when wine cooler slows, and wine cooler will slow because it was a fad, I mean I thought that at the time and it turned out to be true, these guys are going to lose their ass, and they have debt, so it could get to be a mess. So, Canandaigua stock, and it traded on the AMEX, I don’t even know if there’s an AMEX anymore, American Stock Exchange, Canandaigua stock was 37 we were short at.
We covered the thing at 12 on bad news. Goes to nine on worse news, and I call up Marvin and I am 27 at the time, 26-27, and I call up Marvin and I say, “Marvin, your son is going to run this business into the ground, and best I can tell if you got out of wine cooler, you’d probably make $1.50 a share.” And we talked about it and he said, “You know, you’re right.” And he shuts down wine cooler. He stops spending. This is a true story. Stock is now $5.
Fidelity who was the biggest holder, portfolio manager gets fired, Neil Miller, probably because he bought the stock at $30. So, Fidelity through a broker, and again this is in the 80s, calls up and says, “We know you guys are interested in Canandaigua wine. We have 2.3 million shares for sale.” This stock used to trade 10,000 shares a day. We’re thinking, what the -?
So, I call Marvin Sanz and say, “Marvin, Neil Miller wants to sell because he’s been fired 2.3 million shares. Do you have any thoughts whatsoever?” And Marvin says, “I will buy every share myself” and I’m thinking, "Holy hell." We say, “Not so fast, we’ll take some.”
So, we bought a bunch and at the time then we owed 9.9% of it, and then Marvin bought some, and some of your guys look back at a chart of what Canandaigua has done since the late 80s to now. I think it’s up 400 or 500 times, forget percent. It’s now a huge company. Richard and I, we haven’t spoken in a while, but he ended up learning from his dad on not to spend or spend crazy and they’ve turned this thing into a billion, billion, billion-dollar enterprise. They’re Corona Beer; they’re everything in liquor right now, beer, wine, spirits. I think they’re in marijuana, the whole bit.
That’s a true story and that’s what really happened. They weren’t frauds, they were just operating things poorly, and sometimes you can hide in broad daylight and see that something is very different, or you can make a change. I guess people now would call it activism. There it was just looking at their model and saying, “If you guys stop spending, get out of this business.” Your base business is pretty good.
Marvin used to tell me the highest cost part of a bottle of wine or spirits or Mogen David or Manischewitz or whatever they sold was the glass. I mean, think about that. If you’re buying a bottle of Canandaigua product, if your highest cost is the bottle, you’re making a shit pot full of money in the stuff that’s going in the bottle in the raw material.
Really, it’s a good business if it’s run properly and they decided to run it properly. Again, I think we own stock at three, four, five, six, seven, eight, nine, and we sold it at 30, 40, 50, 60, we made a fortune, but I could’ve owned the great state of New York had we held onto it, but it’s not really my bailiwick or core competency holding on to longs for generations. That’s like my parents.
Dan Ferris: I’m just looking at a chart here in Bloomberg real quick on Constellation, which is actually the biggest winner I’ve ever had in my newsletter. The low on December – the data goes back to 1986. The low on December 30, 1988 was $0.42, and the high was $228.
Marc Cohodes: Yeah, that’s about right. That was the day of that promo. I’ve done alright for my son, and I think at the time I think I put all his money in this thing. Again, I sold it way too early, but when he was born in ’87, I think – god, it makes me feel old. He’s 32 and I’m 59 and we’re talking about Canandaigua wine, and it used to be CDG.A, and then it turned into WINE.A over the counter, and now it’s STZ, but it’s something. The late Marvin Sanz would be very proud of his boys Richard and Robert, but man oh man. You’re making me feel old with this long/short discussion.
Dan Ferris: Well, I’m 57. I know how you feel. So, we’re getting near the end of our time here, Marc. I usually like to ask someone like you who’s been around the block a few times if you could leave our listeners with one thought, what might that be today?
Marc Cohodes: I’ve said in the past and totally believe it and live by it that the average person spends more time reading a restaurant review or figuring out where they want to go for dinner than researching their stocks or mutual fund or fund or whatever they’re in. I think it’s very important for people to understand what they’re in and why they’re in it, what can go right, what can go wrong, because in my mind unless you really understand what you’re in, in this chaotic time, you can get swung around by what’s preached to you or scared to you or hyped to you on The Cartoon Network, a.k.a. CNBC.
I think it’s very important you know what you own because CNBC is the government’s infomercial on why to buy stocks and especially garbage-y things. I think it’s beyond unwatchable. I joke on my Twitter I watch roller derby reruns, The Rifleman reruns, Honeymooner reruns before I’ll watch CNBC, and too many people are sold stocks without folks having a general understanding of what and why they’re in it.
I think if you know why you’re in it, what you own, what can go right, what can go wrong, I think everyone would be much better off. Shorting stocks is a dangerous game. I recommend it to nobody, but it’s important to understand what the negative case is.
Don’t shoot the messenger of the negative case, but try to understand the message. If the message starts to reverberate as true, you’re best to get the hell out, because bad things can happen, and I don’t like seeing innocent people lose money. I enjoy criminals losing money and I enjoy bad operators losing money but not innocent people, not people who subscribe to your stuff. So, that’s probably what I’d leave people with today. Does that make sense?
Dan Ferris: Well, thank you for that, Marc, and thanks for joining us. Yeah, makes a lot of sense. I think it’s a great message.
Marc Cohodes: I look forward to seeing you in Vegas in October. That’s when that shindig is?
Dan Ferris: It sure is. You’ll see me there, absolutely.
Marc Cohodes: I’ll be there with the incomparable Grant Williams.
Dan Ferris: Yeah. I’m looking forward to that. Love Grant and I look forward to seeing what you guys come up with, and it’ll be nice to shake your hand.
Marc Cohodes: OK, man. Thanks for having me and if anyone has any scoop, I’m @AlderLaneeggs on Twitter, so that’s my venue of communication.
Dan Ferris: All right. Thanks very much, Marc. Maybe we’ll have you back again sometime.
Marc Cohodes: Look forward to it. Thanks for having me.
Dan Ferris: OK. Bye-bye. Thank you. It’s time for the mailbag. This is a very important part of the show. It’s where you and I can actually have a conversation. I say stuff to you, you write in your feedback to me, I answer back to you. It’s fun. We get to know each other a little bit. You can send any questions or comments or politely-worded criticisms to [email protected] I read every single one of them and I try to respond to as many as possible.
This week it was kind of light in the mailbag, so I only have two of them. The first one is from Brian B., and Brian B. has some nice things to say about the show. Brian B. says, “Love the Stansberry podcast ever since its first iteration with Porter. I learn something each week and usually find your guest interesting and informative.”
And then he said, “Speaking of signs of the top, this week’s guest”, and then he’s got quotes around this thing, he’s talking about Matt McCall from last week, and the quote says, “Hey, I flunked out of five colleges, blew my money on sport gambling, then blew more money on stocks in the tech bubble burst. Let me manage your money.” In other words, he’s trying to characterize our guest Matt as having said something like that. Then he says, “Nice work if you can get it, and stay out of bankruptcy court and/or jail.”
Then he goes on and says, “I do have a question concerning something I came across in the finance industry press/blogosphere. The concept of selling at a target price. I do not understand the concept of picking a specific price for a stock, then selling it once it attains that price irrespective of the company’s fundamentals or the stock’s technical performance. I do understand using stop losses or holding a stock based on one’s fundamental analysis of a company and one’s projection of how the company will perform in the future. Can you help? Cheers, Brian B.”
Two things, Brian B. First, I think you’re wrong about our guest Matt McCall. I think you’re really wrong. That guy did something unusual. He has become a serious long-term investor who knows how to hold onto a business, which is what you should do. That’s what equity is for. It’s for holding onto. You invest the capital, you hold on, and you’re buying all those future cash flows, and few people have done it as well as he has. He learned from his whatever you said, sport gambling and losing money in the tech bubble. He learned from those things and he has a pretty impressive track record. So, I think you’re completely wrong of him. Matt is not a sign off the top and he’s a good long-term investor.
Next you talk about target prices. Well, it’s different for different types of investors. The typical Wall Street guy just issues a target because the report is not so much a research report as a marketing piece. It’s just something that they use to get other kinds of business from people, and they’re always heavily, heavily long biased, which I guess makes sense, right?
We all should be, because that’s what happens over time. To a Wall Street guy what they typically do is they do some fundamental gymnastics and then they say, “It’s trading for this multiple of earnings, and we think it should be this multiple of earnings, and that’s our target price” and that’s how they establish that.
I didn’t look at the Sockgen report that I mentioned in the news today that they put out about Ferrari when they mentioned Tesla, Ferrari being 12 times more valuable than Tesla. I assume it’s that kind of a thing, so there’s that. Then there is value investors say, “Well, I think the intrinsic value of a company is X, and it’s at a 50% discount, so maybe I’ll sell it when it’s X or at a premium to X.” So, that’s another way of thinking about target price.
Another way is you said irrespective of company’s fundamentals or stock’s technical performance, I have no idea, I’ve never heard of a target price irrespective of those things. And so, the other kind of target price is technical. We think it’s going to retrace a Fibonacci move or something, whatever kind of thing they do, and hit a certain price and then we’re out. I hope that helps.
Our last one this week is from Gary S. Gary S. just has a couple comments. First, he has a quote from someone named Idra Shaw, and I didn’t look up Idra Shaw. I don’t know who that is. I need to look that up. The quote is, “A pessimist is just an optimist with extra information” which I found cute and insightful and interesting. It sounds like it belongs in Ambrose Bierce.
Then he says, “If people want smoke blown up their hoo-ha, there are actually places that will do that and for much less money than the stock market. Thanks for all you do, Dan Ferris, our virtual optometrist.”
So, I think he’s kind of calling me the optometrist, maybe he’s telling me I’m helping you see things clearer? I hope so. When you say smoke blown, in the military they used to say when someone is blowing smoke up your hoo-ha, they’re giving you a hard time. When they’re telling you good things, they’re blowing sunshine. But I’ve heard this blowing smoke thing to mean sunshine, not smoke, a few times now. So, people, they don’t say sunshine, they just say smoke instead. So, smoke and sunshine have been reversed, I don’t know. I don’t know how that happened, but thank you, Gary S. I appreciate the kudos and thank you for listening, and thank you, Bryan B. too for sending in some e-mail and being a long-time listener it said in his e-mail. So, remember [email protected]
That is another episode on the books for Stansberry Investor Hour. Check out our website. You can get all the episodes, every episode from the very beginning, and you can see show transcripts of every episode, and you can enter your e-mail address to make sure you get all the updates on every episode. So, just go to that same address, investorhour.com. It’s my privilege to come to you every week. Thank you so much for listening. I will talk to you next time. Bye-bye.
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