In This Episode
As the selloff continues, a lot of familiar names are making history in the worst kind of way.
Facebook is on track to post its longest losing streak ever, with its third straight month in the red. And while a recent New York Times report savaging its top management won’t help any, Dan Ferris notes that value investors still like the company – if they’re willing to wait 2-5 years.
But Facebook is far from the only big name on the run.
Bitcoin’s latest crash has brought it 9% below the $5,000 mark, and Nvidia suffered a $25 billion valuation wipeout after its earnings debacle.
Even nimble options plays are having a hard time navigating the choppy markets, as optionselers.com went dark after its catastrophic loss in NatGas.
So, which selloffs are opportunities – and which are just the beginning of something far worse to come?
Dan Ferris has the same warning:
“These “best businesses” – they will not save you.”
Later on, he and Buck are joined by this week’s special guest. Whitney Tilson was the founder and Managing Partner of Kase Capital Management, which manages three value-oriented hedge funds. Whitney is also the co-founder of Value Investor Insight, an investment newsletter. He has co-authored two books, The Art of Value Investing: How the World’s Best Investors Beat the Market and More Mortgage Meltdown: 6 Ways to Profit in These Bad Times.
In weeks like this one, his advice is especially pertinent – most of all when some historical perspective is called for.
NOTES AND LINKS
To see more of Whitney Tilson’s work at Kase Learning – Click Here
To See more of Dan Ferris’ latest work in Extreme Value - Click here
2:37: Dan explains why he’s been talking about the risk of FAANG stocks and other darlings like Nvidia sliding for more than a year now. “Nothing goes up forever… It just smelled exactly like 2000.”
7:49: Buck asks about Bitcoin’s 9% crash, and Dan explains why Bitcoin will never be a safe haven.
11:05: Buck asks Dan what nervous investors who have already been frightened out of the markets should be doing now, and when they’ll know to get back in.
15:28: Gold prices may be in retreat – but that doesn’t mean gold mining companies are. Dan explains why royalty-collecting gold companies can defy just about any price trend, and why he considers one Extreme Value pick to be the best royalty company on Earth.
21:20: Now that Jim Acosta’s White House press pass has been pulled a second time, Buck asks Dan for his take on the debacle. “If it happened in my Catholic school… the nuns would have smacked the crap out of those two.”
28:40: What to make of Nvidia’s $25 billion loss in valuation after one earnings report? Dan explains why history rhymes when it comes to this favored tech stock. “It reminded me of Sun Microsystems back in the Dot.com era.”
34:00: Buck intorduces this week’s podcast guest Whitney Tilson. Whitney is the founder and one-time Managing Partner of Kase Capital Management, which manages three value-oriented hedge funds. Whitney is also the co-founder of Value Investor Insight, an investment newsletter. He has co-authored two books, The Art of Value Investing: How the World’s Best Investors Beat the Market and More Mortgage Meltdown: 6 Ways to Profit in These Bad Times.
37:19: Buck asks Whitney about the typical dumb mistake some of the smartest people make in finance. Whitney tells the story about a leveraged ploy that was supposed to enhance his returns but did the opposite. “If I had just stuck to stock picking…”
42:30: Whitney reveals how, while he was a good stock picker, he didn’t let his winners run nearly long enough – with one notable exception. Here’s what happens when you hold Berkshire Hathaway stock for nearly 20 years.
45:34: Buck asks Whitney if we’re in another bubble, and Whitney explains why he wouldn’t call it that, since there’s so much reason to believe Steve’s “Melt Up” thesis will show investors what the real bubble looks like down the road.
Announcer: Broadcasting from Baltimore, Maryland and New York City, you're listening to the Stansberry Investor Hour. Tune in each Thursday on iTunes for the latest episode of the Stansberry Investor Hour. Sign up for the free show archive at investorhour.com. Here are the hosts of your show, Buck Sexton and Porter Stansberry.
Buck Sexton: Hey, everybody, welcome back to the Stansberry Investor Hour. I am syndicated radio host Buck Sexton. I am joined with long time Stansberry member and editor of Extreme Value Mr. Dan Ferris. Dan, how you doing?
Dan Ferris: I’m doing good, Buck. How you doing today? It’s great to be here. I love doing these shows every week.
Buck Sexton: Thank you; me, too. By the way, are you a turkey cooker or a turkey eater primarily?
Dan Ferris: I would think I would come down on the eater side. I’m not a cooker.
Buck Sexton: Yeah. Other members of my family handle that. I sometimes get involved in the sides, but they never trust me with the full turkey, which is probably a smart move for them. I’m looking forward to getting down for Thanksgiving feasting, but before we can get to any holiday cheer – we need it I think, Dan – this week has just been, even from my novice investor perspective, this has been a brutal week.
Things that seemed like they were safe bets don’t feel that way anymore. Obviously, the FANG stocks have had a really bad go of it, and it does feel like right now where’s the upside? Where’s the good story? It just feels like everything is going to crap.
Dan Ferris: You know, Buck, I think you’re almost asking the wrong person because for me, the good story is I warned you. That’s the good story for me is that I’ve been talking about stocks like Facebook and Nvidia and Google and all the FANGs getting wiped out for a little over a year here, because nothing goes up forever. It just smelled exactly like 1999 or 2000 when everybody thought, all those old Amazon and Sysco and Microsoft and all these old dot com era tech names were like no-brainers, right?
You’re talking about the safe stocks are not safe. The no-brainers that nobody questions are the ones that are kind of leading the way down now: Facebook, Google, etc. I have to say, it’s not surprising at all. I came out and told people over the past year multiple times, the best businesses, and let’s get this straight, these are the best businesses, they will not save you.
They’re the ones when everyone thinks it’s a great idea, that’s when it’s a bad idea. The fact that it might be a really great cash gushing business with a wide economic moat around it and just fending off all competition easily means nothing at times like this. People just can’t wrap their heads around this idea that if everybody knows it’s a no-brainer, it’s a lousy idea.
Buck Sexton: I mean, they’ve got shares declining 21 percent for the year with Facebook. That’s a rough year. Third straight month going down.
Dan Ferris: Facebook is a particular case, though. Facebook was the one that I was sort of screaming loudest about over the past year because there’s just something about the business model that had to kind of – it had to go wrong at some point, right? You’re putting all your information out there. You’re basically volunteering for surveillance.
It came out I think in Congress, I think Zuckerberg lied, basically. He said, “We’re not collecting information. We’re not doing anything with information.” Of course, then they’re selling it to Cambridge Analytica. That sort of situation, and you with your background, I think we talked about this last week. This feels a little familiar, but that’s the story with Facebook. The business model had to sort of cave in a little bit or cause some problems at some point. I think that’s why Facebook is kind of sucking worse than the rest.
Buck Sexton: What’s going on with these other companies? How is it that they can be in this position of, I mean I think Porter would say, what, world-beaters or globally dominant companies?
Dan Ferris: The term is “world dominators” which I coined back in 2005. Yeah.
Buck Sexton: How can world dominators be getting crushed?
Dan Ferris: Yeah, that’s the point that I’ve been trying to make, and I hear the total disbelief in your voice, “How the hell can this happen?” And I promise you, you’re not alone. This is how it happens, and for me the classic example, and I hope our listeners aren’t getting tired of hearing it ‘cause I’ve probably said it three times on podcasts and I’ve said it on YouTube videos and I’ve said it in presentations and in print, but the classic example was Sysco.
Sysco at the top in 1999-2000. Everybody loved it. Nobody hated it. It was in ten of the top ten mutual funds of the time, and it was a cash-gushing wonderful business. There was no way anything could possibly go wrong with it. And of course, it peaked at $80.00, it troughed at $8.00, down roughly 90 percent, and it’s in the 40’s or 50s or something like that. It’s barely halfway back to where it was at its dot com peak.
So, and at no time along the way has it failed to be anything but a cash-gushing, growing the dividend, huge kind of pretty wonderful business, not as wonderful as it used to be, but it still gushes cash. They’ve got more money than they know what to do with, literally. That’s how it works. I don’t even know how else to explain it. That’s how it works. The world-dominating businesses that people absolutely fall freaking in love with at the top, they fall apart just like everything else.
Buck Sexton: So, can I also then ask, why is it that we’re not seeing some of the other – people like me, again learning, novice or early stage investors, which I know a lot of the audience listening to this are sophisticated investors who have been doing this for decades and can talk about this stuff like they’re reading it off of a sheet that producers have pulled for them, but I’m just wondering from my end of things, I look at this and I say, okay, why isn’t gold having a move then?
If these world dominators are faltering, people are getting scared, so what are people doing? I mean, they’re selling? Are they just keeping their money in cash? I haven’t seen a move in gold, and Bitcoin dropped 9 percent below $5,000.00. So, it feels like where’s the money gonna go?
Dan Ferris: Bitcoin isn’t like – to me, it’s just not a real asset that you can expect people to go to, and I don’t have a lot else to say about it. It doesn’t surprise me at all that there’s nothing but a move down in Bitcoin. It was hugely speculative. I think a lot of people agree the main value there is in this blockchain idea of a distributed database system, but as far as gold is concerned, gold is a special asset. All the gold that’s ever been mined, just about all of it, it’s around. It’s available. People are wearing it or storing it or holding it, and so it’s a monetary asset.
I think that you’ve seen a little bit of dollar weakness here, but you’ll have to see a lot more, I think, at least more narrative about inflation and currency troubles to see gold really move, but I think you probably will see that. Cycles matter. Gold has been out of favor for some time, and the dollar has been the king of the world for a long time. So, with stocks falling maybe U.S. assets become less attractive and it’s a pretty decent setup for gold here because the gold equities are really cheap and gold is out of favor.
So, that’s a decent long-term setup, and there has been a recent move. I think I mentioned this on a previous podcast. Gold kind of punched up. It was kinda fooling around with $1,200.00 an ounce, and it has held above that level for a few weeks now. The more kind of holds at that level, since there’s no intrinsic value to discuss with gold, you can only discuss the price. We don’t know what the intrinsic value really is because it’s just this inner kind of asset that doesn’t pay income or anything. So, the price action has been – looks supportive around just above $1,200.00 here, and I think that’s kinda good.
Buck Sexton: How would you try to coach people in terms of the philosophy that one should have right now? I’m assuming that a lot of people listening, and I’m one of them, own Amazon, own Facebook, own some of those big companies, own ETFs which by the way some of the big ETFs, Vanguard, if you’ve been invested in them this entire year and haven’t touched them, you’re now down. You’ve lost money.
So, you’re 11 months into what felt like a market where you can’t lose, and now you’ve actually gained nothing. In fact, you’re down for the year. Given that there’s this sense now of, oh wow, what comes up must come down, this isn’t actually gonna go on forever, how should people position themselves philosophically to get back in? When do you decide to go back into the market if right now you’re feeling that fear?
Dan Ferris: My answer is not gonna come straight at your question, but I think I’m gonna get there by saying you need to become a value investor. If you’re a value investor, you’re not buying stuff that the whole world wants to buy at an exorbitant valuation, which has been the case with these stocks for a few years now, the FANGs and other sort of high-flying tech names. So, if you’re talking about positioning yourself, and for me, positioning is not like a six-month thing or a one-year thing. It’s for a rest of your life kind of thing.
If you’re a value investor right now, value has had its worst period of underperformance in the last actually ten years since about 2009 overall with little green shoots along the way but overall not great. To do that now, to become a value investor at this moment means you’re not buying overvalued security. So, the real answer to your question is it’s not about getting back into the market, it’s about not buying anything that is exorbitantly valued that the whole world is in love with. That really is it.
If you’re a value investor right now you’re holding plenty of cash and you’re only buying when you think you have a sufficient margin of safety. That’s really my answer to your question. I hope that gets directly enough at what you’re asking.
Buck Sexton: No, that does. That’s a really philosophical reset in a sense from where I was going which is, “Well, when do you get back in?” You’re like, it’s not about getting back in, it’s about what are you getting into in the first place. But I would just wonder are there sectors now going into 2019, just whole areas where you’re saying as a value investor without getting into the specifics of this company at this price point, are there areas where like, this is going to be a good five-year play?
I think people are willing to hear that more now than they would otherwise, because when you’re investing money in Amazon and Facebook and it just goes up every month, which is what had been happening until recently for a few years, it’s pretty hard to convince people, well, take a long-term horizon view of this area and pick some good businesses that aren’t as you say everyone in love with. Are there some sectors that you’re already looking at where you’re saying, “Yeah, that’s something people should consider”, commodities, anything?
Dan Ferris: Yeah, so, like I said, gold got absolutely destroyed from the 2011 peak down to early 2016 trough, and we’re almost back down to that level, and so the gold equities are really cheap. So, that’s definitely one area, and mining in general. When I say gold I kind of use that as a proxy for the whole mining sector, so that includes other things, other precious metals and other non-precious metals, and there’s a whole bunch of equities in there. I think there are very few of them with really great business models. The best business models are the royalty companies.
Buck Sexton: Like Franklin Nevada, places like that?
Dan Ferris: Right. That model, and actually that company, is one of the better ones. It’s just a better piece of the revenue stream, and it requires a lot less capital and is a lot less directly exposed. Well, it’s directly exposed to price movements, but it’s not directly exposed to price movements and you’ve got $2 billion of capital stuck in a mine. You’re holding a royalty. You’re not on the hook for any expenses of the mine or any capital expenditures to expand or maintain the mine. You’re just collecting a royalty right off the top.
So, you can buy those things now, royalty companies. I would say that in Extreme Value in our model portfolio we have the very best royalty company in the world, which I’m gonna keep the name to myself for now because I don’t think my readers would like me charging them a ton of money and telling everybody what we’re doing, and I think we have another business that is kind of royalty-like that is also one of the top management teams in the world.
So, if you get those kind of revenue streams out of the mining sector, I think you can do really well over the long-term with a lot less downside. Of course, retail got crushed before the overall market started falling, and that’s been a little tougher for us. We haven’t really found a great name. I mean, I guess you could say we did disclose that we recommended Starbucks, and that’s certainly a retail organization, and I think they got kind of too cheap recently considering things like their plans to grow even more in China and just the stickiness of their customer base and the way people really like that business.
The revenue is recurring every single day. People just keep going back and keep going back, and it’s quite a wonderful business, I think. You’re talking about a good five-year play. You mentioned that a second ago. I think that’s probably Starbucks. So, there’s things to do for sure, and we’ve found other things.
Those are just a couple of examples, but there’s not a whole lot to do on the long side right now. You gotta be really picky, and that’s what we’re doing in Extreme Value. We’re trying to be really picky and just buy the stuff that’s a really good business that’s trading at a cheap price and kinda keeping our head down and trying to play it safe.
Buck Sexton: So, what do you think about Bloomberg giving $1.8 billion to Johns Hopkins, by the way?
Dan Ferris: Bloomberg. You know, mentioning Michael Bloomberg to me, it’s sort of, it tweaks me a little bit. Ever since that whole, “We’re gonna tell you how much soda you can drink” episode. I never really knew a lot about him until then. Of course, they did away with that law in _____, but the fact that he thought that was okay, he’s always rubbed me the wrong way. And when I see a billionaire throwing a big sum of money at any institution I think, oh, what is he trying to do? What is he trying to shove down our throats?
Now of course, Johns Hopkins is a wonderful school. I was raised in Baltimore. Every kid who went to Johns Hopkins it was like, “Oh boy, he’s gonna do great things” and it’s by all reports a wonderful institution. But when you mentioned Bloomberg to me it’s just kind of like, oh god, here we go. What is he doing now? That’s all I got.
Buck Sexton: I would just say that here you have this trend where people have realized that school is really expensive, meaning to get a four-year degree at a place like Johns Hopkins, these schools are $50,000.00 to $60,000.00 a year in tuition, and that’s not even including the other life expenses that one may have over those four years. So, it’s a really hefty price tag. Most of the studies that I see on this, and I’ve been interested in the notion of rethinking just basically everybody should go to college.
This has been the mantra for a while. Everybody should go get a four-year degree in Caribbean literature of the 1700s and this is the only path forward for them if they can make it happen. You’ve got over $1 trillion, I think actually it’s gotten up to $1.5 trillion in total student debt, something like that, and one of the ways that they’re trying to handle it is make schools, places like Harvard, places like Johns Hopkins that have these enormous endowments tuition-free, but only the really elite places are able to do that.
It’s great for Johns Hopkins that now they can offer no financial aid, openings to people who wanna go there, and it is an excellent school and, well, you’re not in Baltimore, but it’s in Baltimore where Stansberry HQ the mother ship is. But for other schools the issue still remains, which is, is it worth going to the number 150 school in the U.S. News and World Report list for a private college or university and running up $100,000.00 of student loan debt?
I would tell young me if I were looking at that, I would say no, I don’t think it’s worth it. I think you have to find either a good state school or essentially the dollars in, dollars out should be more of a calculation for people getting an education than particularly my generation has been led to believe.
Dan Ferris: I would tend to definitely agree. It’s funny, I would tell the younger me the exact same thing because I did incur not $100,000.00, but I did incur some student debt, and looking back on it I think that was a bad idea. And I’m lucky, my earnings kind of were pretty good after college, but I agree, I think all these kids running up all this debt is a huge mistake.
Buck Sexton: I got into media and didn’t go to business school because I did the math on what I was gonna be – coming out of government work I had no savings, nothing. I’m looking at Columbia Business School, I’m looking at Stern, I’m looking at Wharton, and those places by the time I paid it off it’s $250,000.00 to go to business school. It’s a $250,000.00 decision if you’re starting from zero taking out full loans by the time you pay them off with the interest. That’s a lot of money.
Dan Ferris: That’s a lot of money for a young guy. I mean, ugh. Yeah.
Buck Sexton: 26, 27 year sold. It’s like you’ve got a quarter of a million dollar house you gotta pay off, but oh by the way, you’re still paying rent the whole time and you don’t own a house. You don’t have an asset.
Dan Ferris: Yeah. You got nothing. I agree. It’s a bad situation.
Buck Sexton: Something people need to give a little bit more thought to. Speaking of thoughts, do you care much about the whole situation playing out in the White House with Jim Acosta? Do you follow this? Does this get on your radar, the Acosta debacle? They pulled his press pass?
Dan Ferris: Not really. I saw the original episode with him and the poor intern trying to pull the microphone out of his hand and he kind of shoved her, and he and Trump were yelling at each other. I don’t know, if I was back in grade school, I went to Catholic school, the nuns would’ve smacked the crap out of both of those two. They would’ve said -
Buck Sexton: Oh yeah, it’s theater for both sides. I always tell people this. The people who like Trump love it when he’s smacking down Acosta, and the people who like Acosta and don’t like Trump think that the more – they like to encourage him to be antagonistic and then act like he’s not being antagonistic when pressed on it, which I think is always a funny construction of the situation. It is what it is. How do you assess, though, the sentiment that we talked about at the very beginning when we’re looking at the market and how things are going and I’m sitting here like, wow, I’m losing money.
This is not fun. I liked things better when I was making money six months ago. Trump and the economy and this administration; I know that in the political world that I swim in, the president always gets more credit for it being good and more blame for it being bad than he or she at some point in the future probably should. That all said, do you think that there is a change in the assessment of how this administration is doing with all this?
Dan Ferris: You pointed to the answer. It matters a lot less than anyone thinks. In fact, Buck, I must admit, one of the big mistakes I’ve made as an investor in my life is to think that politics matters a lot more than it does, and to think that it matters much at all, because over the course of a decent long-term equity holding, you’re gonna get more than one administration. So, you better believe in the overall system and you better not have your fortunes tied to any one character who’s occupying the office at any one time.
So, I think you were right when you said they get too much credit either way, and it’s the same in the stock market. People talk about the Trump rally and that may have been a sentiment attached straight to Donald Trump, but is this the Trump fall after the Trump rally? I don’t think so, I really don’t.
Buck Sexton: What about Fed policy, by the way? As an aside, I gave a speech out in Springfield, Illinois last week to a bunch of County Republican Club. I do that sort of thing. Good times. But on the way back I actually sat in front of, and she was immediately behind me, Janet Yellen on the plane, which I thought was kinda funny. People were stopping to take selfies with her.
I didn’t realize she was really considered quite a celebrity in that way, but there were people that were taking selfies with her and they were excited to see Janet Yellen. I wonder, or I wanna ask you, the Fed rate hikes or lack thereof up to this point and going forward, how much does that really matter?
Dan Ferris: So, interest rates matter, and especially all of these things I’ve been saying for some time, the stock market doesn’t matter unless it’s at one of its extremes of valuation, an extreme low or an extreme high, and I feel generally the same way about interest rates. Of course, they got to an extreme low in the past couple years here. Zero is, well, zero actually isn’t as low as it gets. Negative sovereign yields in the European Swiss bonds and German bonds and even Japanese bonds. So, negative sovereign yields; that’s as low as it gets, right?
So, the basically turns these allegedly safe instruments into toxic waste because at some point we know cycles matter and the cycle will reverse. So, not all the time, but yeah, right now and in the past year or so and probably for another few years interest rates are gonna matter, and if they continue to rise of course, well, when they continue to drop and drop that just encourages all this speculative debt. That’s why we have all this BBB debt pilling up, and BBB of course is the lowest rating you can have before you’re rated junk.
So, you can be BBB minus and you’re still investment grade debt and you’re still okay to hold for a lot of institutional investors. Then the minute you’re BB they gotta sell it. So, we have the biggest chunk of BBB debt over a trillion of BBB debt out there right now, and the reason we have that is because interest rates matter, and people thought, “Well, if interest rates are this low, I’m gonna borrow a bunch of money and do whatever XYZ kind of speculative thing that I wouldn’t do otherwise.”
And of course eventually that unwinds, and I think we’re definitely – we’ve seen big moves with GE and PG&E with the fires out west and stuff. We’ve seen the credit markets move pretty big in response to some of these individual situations, and I think that’s probably an inkling of what we’re gonna see over the next year, two years, as the BBB unwinds and becomes junk.
Buck Sexton: Yeah, last week Deutsche Bank said that it was a dress rehearsal for the credit problems ahead.
Dan Ferris: Yeah, I mean, that was Jim Reed from Deutsche Bank. He’s not saying that the credit problems are like right around the corner next month. He thinks it’ll be another little while. I forget the timeframe that he was talking about, but yeah, I agree, dress rehearsal. It’s gonna be this ugly times a whole lot more, times 10, times 100.
Buck Sexton: So, the unwinding of the credit that you’re talking about here and the way that that’s incentivized riskier behavior, that’s gonna be some painful stuff in the market for a while.
Dan Ferris: Yeah, and nothing goes in a straight line, either. So, who knows? This could be like today, we’re down quite a bit today in the stock market and it looks very kind of capitulatory. It looks like a lot of people throwing in the towel, and there’s usually a move up after something like that.
I’m not making a prediction, I’m just saying that’s the way these things can sometimes work, and they don’t go in a straight line. But overall, yeah, overall this unwinds. It’s just a bunch of lousy investments people made because interest rates were cheap and they thought, eh, what the hell, why not? This is what happens. The unwind begins and it doesn’t stop, and it usually goes too far into the downside. So, I think the next couple years are gonna be real interesting.
Buck Sexton: And Dan, can you speak to what the heck happened with Nvidia? $25 billion in market cap wiped away after the earnings report. What happened there?
Dan Ferris: Well, for me, Nvidia was another one where history is rhyming ‘cause the thing was trading, I think it was like 12 or 14 times sales a year or so ago, and I was talking to people about Facebook and Google and Amazon and all these, and I mentioned Nvidia as well, and it reminded me of Sun Microsystems. McNeely the CEO founder of Sun Microsystems back in the dot com era, at the top he couldn’t say this, but after the bear market, after they were two years into a steep bear market he said, “Look, this thing was trading at ten times sales. What were you thinking?”
Ten times sales. If I pay you every penny of sales as a dividend and have no taxes and no expenses and no capital expenditures of any kind for ten years, that’s what it would take for you to get your money back. What are you thinking? And it was the same with Nvidia, 12, 14 times sales, whatever it was. History was rhyming. It was way, way, way too expensive and it doesn’t surprise me at all.
I don’t care how great the business is. And of course, there will always be problems. The business will never be as wonderful as they and everyone else said it was. They said, “We’re masters at managing our channel” and it turned out not to be the case.
Buck Sexton: What happened to optionssellers.com? Going dark.
Dan Ferris: I feel like you’re hitting all my pet peeves here, Buck. This is another one.
Buck Sexton: I’m trying to throw steak into the lion’s den here, man. That’s what I do.
Dan Ferris: Yeah. This is another pet peeve. Okay, so before this thing blew up, you had these little advertisements and things online for the option sellers. It was like a picture of this very wealthy-looking gray-haired gentleman with a suit on and he was saying things about, “People don’t understand there are alternatives to stocks. One of them is options. People always make the mistake of buying options, they don’t sell them. You should sell them.”
So, there’s this widespread idea in the world that you can sell options; options in the futures market, which is what blew this thing up, options in the stock market. You can sell puts, you can sell calls, and it’s income. They call it income, Buck. Now imagine this, Buck. You got a job. You’re making good money. You’re making $100,000.00 a year and you’ve had your job for two or three years, so they paid you a few hundred grand, and you think they’re gonna keep paying you ‘cause you’re doing a good job.
And you show up one day and your boss says, “Buck, something has happened with your income here and you owe us $5 million.” Well, all of a sudden you don’t feel like you have a job. You don’t feel like you had an income at all. You feel like you’ve been part of some kind of highly levered financial scheme that nobody told you could blow the hell up and destroy you, and that’s what options selling gets you.
Now look, we have people at Stansberry who actually graded this, and they’re not gonna get you in this kind of trouble. I mean, Doc Eifrig came out of Goldman Sachs. He knows more about this than anybody I’ve ever met in my life. So, they’re doing something quite a bit different and quite smarter, but these guys are just willy-nilly selling the daylights out of options and calling it income, and when you do that, you’re right until you’re disastrously wrong, just like when you buy options you’re usually wrong until you make an enormous gain. You’re on the other side of that.
That’s what happened here. These folks just got a letter one day in their email box that said, “We’re really sorry, but we were selling the daylights out of natural gas options and there was a big short squeeze” and it was a rogue wave the guy called it. Yeah, rogue waves happen pretty regularly with options sellers, don’t they? “You’re wiped out and we’re liquidating your account, and our broker is probably gonna be in touch about how much you owe them for margin calls.” What a fricking disaster. Horrible.
Buck Sexton: That’s terrifying, Dan, that that can even happen. I’m sitting here and I’ve never gone anywhere near options, but wow.
Dan Ferris: Will you ever go near options after this?
Buck Sexton: That’s a scary phone call to get. I’m a value investor in the making, Dan, no way. This week on the investor hour is Whitney Tilson. Whitney is the founder and managing partner of KASE Capital Management, which manages three value-oriented hedge funds. Whitney is also the cofounder of Value Investor Insight, an investment newsletter. He’s coauthored two books, The Art of Value Investing: How the World’s Best Investors Beat the Market, and More Mortgage Meltdown: Six Ways to Profit in These Bad Times. Whitney has written for Forbes, The Financial Times, Kiplinger’s, The Motley Fool, and TheStreet.com.
He’s a CNBC contributor, was featured in a 60 Minutes segment in December 2008 about the housing crisis that won an Emmy, and has spoken widely on value investing and behavioral finance. Last but not least, he was a speaker this year at the Stansberry Conference in Las Vegas, which was fantastic, by the way. Ladies and gentlemen, please welcome Whitney Tilson.
Whitney Tilson: Thank you for that kind introduction.
Dan Ferris: Whitney, we need to make a slight correction to that introduction, do we not?
Whitney Tilson: Yeah. I’m actually no longer managing Outside Money. I closed my funds about a year ago, and I’m now teaching investing via KASE Learning.
Dan Ferris: In fact, this is exactly why I wanted you on the program today because just for our listeners, I’ve known Whitney for a long time. I met him at one of the early, early value investor congresses that he put on starting years ago, like over a decade, and to me he’s been like one of the great voices in the value investing world, and I’ve just watched him handle all kinds of different situations including the transition out of managing money and into his new venture KASE Learning, which he’s kind of teaching people what to do, what not to do, things he wishes he’d done, things he did right, things he did wrong, which I consider an incredible service.
Nobody does this. Nobody comes out and makes a business out of basically things you did right but mistakes you’ve made, too. You talk quite a bit about that, don’t you, in KASE Learning?
Whitney Tilson: Yes, very much so. Everybody loves to come and talk about the great stock that they nailed and the great business decision they made as they built their business, but the reality of life, the reality of investing, the reality of entrepreneurship is you make plenty of mistakes along the way, and the key is not just to do smart things, but it’s equally important to avoid doing dumb things that can really set you back.
Over 20 years I have vast experience with both, but unlike pretty much everybody else who only teaches the smart things and does the victory laps, we spend an awful lot of time talking about the mistakes we made both on the investing front and on the entrepreneurial side so that the next generation of investors can stand on our shoulders and achieve even greater success but also avoid the pitfalls and the calamities and the mistakes.
Buck Sexton: Whitney, can I ask you, what’s a classic dumb thing that a smart person does in finance?
Whitney Tilson: Well, interestingly, I was just listening to Dan talk about options. I’ve been a good stock picker over the years, and if I had just stuck to stock picking I would’ve been okay, but as I became more experienced I got tempted into different things. So, I started to trade more frequently. I started to engage in short selling, and also, I started to use options. As one of my very wise friends once said to me, he said, “Whitney, options are like heroin. They feel so good, but they will kill you.”
I’m open to the idea that some guys like Doc can trade options safely, but the vast majority of people, myself included, should not go anywhere near them. They are a form of leverage of course, but very importantly, you now not only have to be right on the stock, you have to be right on the timing, and it’s super hard to just be right on the stock. To then try and also get the timing right is too difficult for myself and most people, and as Dan was telling stories about knowing people and seeing people get absolutely incinerated, not only lose all their capital but be on the hook for a lot more than they thought they could ever be on the hook for. You can get in a lot of trouble that way.
Dan Ferris: So, let’s make something clear here, folks. If you put money with Whitney and kept it there until he closed his fund, they would’ve done pretty well. He hasn’t only made mistakes. He’s actually one of the smarter value investors I know.
Whitney Tilson: We didn’t blow up for sure, and we did well for our investors over nearly 20 years, almost keeping up with a market that did quite well even with the ’08 downturn. But I will say the last years in this long bull market I should’ve been listening more to Steve Sjuggerud who correctly nailed this long bull market. Instead I was out there always seeing another ’08 around the corner.
Maybe it was so scarring living through ’08, early ’09, that I kept seeing another big hurricane coming, and so I positioned my portfolio very defensively and had a lot of cash and had a big short book, and of course that was the absolute wrong positioning over the last decade or so. Eventually I just got fatigued and frustrated as did my investors, and again, if all I had done was just stuck to stock picking. I had good stock picking the last ten years.
The problem is, is I just had this macro view, and so any time I had a winning stock, like I owned Netflix. I had a 5 percent position in Netflix, a 40-bagger ago at the bottom, six years ago, and then it ran up and then I sold it. So, every time I was sort of watering – I had a portfolio management strategy rooted in just general skepticism about this bull market that has been called picking your flowers and watering your weeds.
In other words, any time I had a winning stock it went up 25 percent or 50 percent, I’d get nervous and sell it, but the stocks that weren’t working, well, those I just had to hold on for a long period of time until they would’ve eventually work, right? But if you keep doing that, effectively you’re truncating all of your big winners, but you’re holding on to all the ones you’ve made mistakes, your losers, right? That’s a deadly portfolio management strategy.
One of the three big messages that I communicated and gave the presentation at the Alliance conference for Stansberry on October 3rd I guess it was, was you gotta let your winners run. If you really hit it on a company and it’s executing well, you gotta let your winners run, because if you can just find a few winners at decade and let those things run, that will make up for all sorts of mistakes. I didn’t let my winners run, not nearly well enough; I did for Berkshire. I let that run for 20 years but no other stock.
Dan Ferris: Wow, you let Berkshire run for 20 years? That’s a pretty nice game.
Whitney Tilson: Yeah. It’s one of my first stocks that I bought back when I started in 1999, and it was around $60,000.00 a share, and then during the peak of the internet bubble, the blow-off of the NASDAQ that went into March 10th of that would be the year 2000, so the NASDAQ was up something like 89 percent in 1999 and continued the blow-off into the first ten weeks of 2000. Things got really insane.
That was when Scott McNeely of Sun Microsystems talked about, as you correctly pointed out, the insanity of the valuation that Sun reached, that Sysco reached, that Microsoft reached, that Intel reached, and of course all the dreck, the Astroturf.com, all the crazy idiotic dot com companies. All the money was pouring out of value, so people were having to sell their Berkshire stock and was pouring into this dot com bubble in the final stages of the blowup.
So, Berkshire had been my biggest position when I launched my fund in January of 1999. It was about a 10 percent position and I was buying it between $60,000.00 and $70,000.00 for a share. It dropped down to almost $40,000.00 a share the very day the NASDAQ peaked and I made the first big call of my investing career. 15 months in my largest position had been going down and down and down and down, and I’d been writing to my investors.
I’d been writing articles publicly for The Motley Fool saying this internet thing is a bubble, listen to Warren Buffett, buy Berkshire stock, and every day, every week, every month the market was telling me I was wrong as Berkshire stock went down and down, as the dot com bubble blew up to the upside, and then it all turned on March 10th of 2000, and I happened that day to make Berkshire 30 percent of my fund. I was only managing $4 million at the time, but it was the first big bold call of my career and it paid off very quickly.
The stock was up 50 percent within a couple of months, but it took two full years almost for the internet bubble and the tech bubble to collapse. The NASDAQ ended up declining by 80 percent by the time it bottomed in I think it was October of 2001, so it was about a year and a half of complete implosion.
Buck Sexton: Are we in a bubble now, Whitney?
Whitney Tilson: I don’t think so. You had to have lived through the absolute extreme absurdity, which is what makes me think that Steve’s big call that there could be another blow-off to the upside in the market in general and the tech sector in particular, I’m open to that idea. I’m not sure I’d bet my fortune on it. In other words, we’re long into a bull market, but keep in mind back in ’99 we were 17 years into a bull market that had begun in 1982. We’re only ten years into a bull market, not even ten today.
So, there could well, and look, the economy is super healthy. Now how much of that might be stimulus, how much of that could be undone by a trade war that looks to be getting worse with China. There are definitely risk factors out there, but valuation-wise I think we’re maybe in the 80th percentile, but we’re not in the 99th percentile. That’s a bubble, right? So, valuations are high, but the fundamentals are generally pretty strong.
Obviously, rising interest rates is a headwind to valuations, and I hear what you’re saying, Dan, about there’s a lot of debt out there that’s pretty close to junk that could quickly turn to junk in a recession, but the two big bubbles in the last 20 years, the internet bubble and the housing bubble, I nailed them both. I am not today saying we’re on the verge of another calamity, time to batten down the hatches and get super defensive.
That said, I’m not pounding the table that I think there are a lot of cheap stocks out there; I’m not finding a lot. But just little sell-off; some of my favorite big cap tech stocks, I think Google and Facebook are gonna do pretty well from here with a 25 percent sell-off or more in both of those.
Dan Ferris: There you go, Buck. There’s your answer. You were asking me earlier, “Should I buy anything here?” And I think Whitney just answered your question.
Whitney Tilson: But you should have reasonable expectations. Maybe you get lucky and Steve’s prediction comes out right and you own a couple sort of smaller riskier companies and all with a small percentage of portfolio and you could do real well there if there’s sort of a blow-up, but I wouldn’t count on it. I’d just suggest having reasonable expectations.
Buck Sexton: The Facebook stock price right now is in the $130.00’s. if I were just to ask you to look out on a five-year horizon given that Facebook makes, what, $5 billion in profit a year, is the price gonna be higher? That’s kinda just in a long-term philosophical side what my curiosity is here, and you just see these as great businesses. We were talking about world dominators before, which is just a cool phrase, so I like to use it.
We’ve got these world dominators and if you’re not investing in the mortgage payment here, you don’t really care, you just wanna sit on something and you wanna sit on it for five or ten years, are some of these companies that currently look a little shaky, these big tech world dominators, are they good bets for five years from now or is that just too hard to say? I mean, I don’t know.
Whitney Tilson: Yeah, well, generally I think you have to have a multi-year horizon, particularly something like Facebook which has gotten a lot of bad publicity. They’re gonna have to invest very heavily to better monitor the site so it’s not being used for genocide in Sri Lanka and Myanmar, that it’s not being exploited by the Russians to manipulate our elections. I think they were very naïve in thinking that they could become this – I mean, when you think about Facebook with 2.2 billion users, they’re bigger than China. They’re bigger than any religion in the history of the world.
Their reach, their power is so unimaginable and unprecedented, and it’s the world’s best business model in the sense that they don’t have to pay anybody for content. They’re just connecting every human being on earth with one another. It’s a winner-take-all business, not to mention they own Instagram and What’s App, two other great businesses, and there’s opportunity to monetize there. It’s an unbelievable business, but with great power comes great responsibility, and these utopian bozos like Zuckerberg and Sandberg I think almost were still obtuse, so arrogant, and just sort of had this, “Oh, we’re doing good for the world and all.”
And when reports came to them that people were buying ads in rubles, it wasn’t like it was hidden, right? To manipulate our elections. When reports are coming out that it’s being used to commit genocide in Myanmar and they just sort of stuck their head in the sand and they went into denial and this would interfere with their profitability. And finally, they’ve come under so much pressure that they’re gonna have to clean things up, and they will be able to do that.
I think what you’re left with is for the next year this probably dead money, and that’s why nobody wants to own it, but Facebook keep in mind has only one-third the revenues of Google. It has one-sixth the revenues of Apple. So, it’s a good-sized company now, but there’s still I think plenty of room to grow. They haven’t even started to monetize the rest of the world the way they’ve been able to sell advertising in the U.S. and look, Porter Stansberry himself told me, his eyes got big and he told me, “Facebook is the greatest advertising platform ever created”, even better than Google, which is the second greatest advertising platform ever created and also a good stuck to own I think here that hasn’t come under as much taint as Facebook.
But I see an exorable trend in the world toward advertising going online. Google and Facebook are together capturing 100 percent of all incremental ad spend in the world. Right now, Facebook is monetizing about $100.00 a year. For every user they have in the U.S. and Canada they sell about $100.00 of advertising. It’s only one-third of that in Europe, and Europe has the same GDP as Canada and the U.S, right? There’s no reason Europe should be – they may never quite get to the level as U.S. and Canada, but there’s no reason it should be a third, right?
So, I think they continue to grow the number of users, they continue to improve their monetization, and look, it’s probably not a 44 percent operating margin business which is what it has been because they’re gonna have to spend a lot more money to monitor and so forth. So, maybe it’s a 35 percent operating margin business. 99.9 percent of companies would dream of having that kind of profit margin.
So, the combination of incredibly high margins and growth and just the world’s greatest business model I think means eventually all the bad publicity they’re getting, which I think is really weighing on the stock, will probably be healthy for the company long-term, and it’s a lot bigger with profits a lot higher in three to five years, and therefore the stock will be a lot higher. Keep in mind, Facebook today net of cash is trading south of 20 times earnings. In other words, it’s trading at the same multiple as the average company in the S&P 500 for the world’s greatest business.
Dan Ferris: There you go, Buck. That’s it. That’s your answer.
Buck Sexton: That was legitimately fascinating. I really enjoyed that answer.
Dan Ferris: I agree that Facebook and Google are absolutely the two greatest businesses in history, and I love when Whitney says they’re bigger than any religion, bigger than China, bigger than communism. Scott Galloway has written a wonderful book about these companies called The Four, and that was his bid out of there.
Whitney Tilson: Yeah, I highly recommend that book. Scott came and actually spoke at one of our seminars, and he hates those companies. He thinks they should be broken up. He thinks they’re way too powerful, but he owns the stocks for the same reason he holds his nose and owns the stocks because he says, “I don’t think anything can disrupt the fact, the dominance of these companies.” By the way, if there is more regulation and all, I think that almost entrenches them. Look what regulation did to Phillip Morris the tobacco company, right? It just made it impossible for new competitors.
Dan Ferris: Absolutely.
Whitney Tilson: And by the way, if you broke YouTube out of Google, I can’t imagine the valuation that would have. YouTube would be worth a couple hundred billion by itself, and it’s valued at almost nothing inside Google because they haven’t really monetized it yet. It doesn’t produce much in the way of profitability, but it is one of the most valuable properties on the planet. If you forced Facebook to spin out Instagram and What’s App, they would be worth enormous sums.
Dan Ferris: Yeah, you’d definitely wanna be holding both of those if they actually did that. This would be like the spinoff event of the century. I couldn’t imagine it.
Whitney Tilson: Have Amazon spin off Amazon web services. Think what that would trade at.
Buck Sexton: Whitney, can I ask you what your thoughts are on thinking of YouTube, and I’m really in the content, news and politics content business, and there’s so much change going on there. Some of these companies like Netflix; I mean, Amazon has obviously now a very robust and growing content creation business, not just the selling of stuff but Amazon Prime, the TV shows and all this. How do you think a company like Netflix performs going forward? What do you think of these online content creators that are spending huge sums of money, I mean billions of dollars on content creation?
Whitney Tilson: Yes. Netflix is one I’m very familiar with because I have a history there going back to 2010 when I was dumb enough to be short the stock as they were making the transition from a DVD-by-mail business to streaming, and they were giving the streaming away, and I just thought they would be squashed like a bug. How many buggy makers became successful auto manufacturers, right? They’re both four-wheel vehicles and the technology was transitioning; not very many companies.
And Netflix to its credit made that transition, but being short the stock, Reed Hastings engaged with me and we ended up having a public engagement, a very respectful engagement. When I published my short thesis, he urged me to cover my short position, but then I went out and met with him and I’ve spent a number of hours with him, and you just never, ever wanna be short a brilliant entrepreneurial visionary CEO like that, and so I covered my short, but I eventually end up going long the stock.
In many ways it’s a winner-take-all kind of business, and that’s what Reed helped me understand, which is Netflix has virtually all the subscribers, 80 percent of all streaming subscribers. I’m sort of making that number up, but virtually all are doing to Netflix because they have the best distribution and the best content and all. Then they turn around and take two-thirds of all the revenue from all the new subscribers every year and they reinvest it back into both buying and creating their own content. So, they have the best content. So, lather, rinse, repeat. It’s this incredible virtuous cycle.
Now other companies like Amazon and now Apple and do I recall Google and Facebook are all starting to make some investments and spend billions of dollars to try and create content. So, it’s a wonderful world, by the way, for content consumers. The choice of at-your-fingertips on-demand, some really fabulous content is being created, but I’d be surprised if anyone really dislodges Netflix. They were very early movers. They’ve got this incredibly powerful flywheel going, so, I would never short it.
That said, the fact that the valuation has come down from 12 times revenues to 8 times revenues. So, the stock has gotten slightly more reasonably priced, but there’s an awful lot of good news built into the stock. It’s hard for me to value Netflix because they like Amazon have pursued a strategy of foregoing current profits and just reinvesting all their cash flows back into growing the business such that they report little or no current profits. Now interestingly, go look at a chart of operating income for both Amazon and Netflix and you can see it going through a hockey stick.
In other words, the old criticism of both those companies is, oh, they don’t make any money? Their actual reported profitability is hockey-sticking upward very sharply, and I think that will continue. So, investors have correctly identified these companies over recent years that there’s an enormous embedded profitability and that it’s a very smart strategy for the companies though to not focus on current profits but to invest heavily to maximize future profits.
And so, I think both those companies are going to be long-term winners, and I do own some Amazon stock, just the valuation in Netflix has sort of kept me out of that, but I think it’s an insanely great company. But I just sort of, I can value Google and Facebook on a multiple of current cash flows, and both of them netting out cash. Maybe you wanna make some adjustments for the value of YouTube and the value of Instagram and What’s App.
In Google’s case you probably wanna net out the billions of dollars they spend every year on Waymo and these so-called other bets is how they identify it, and you’re getting to market multiple or below market multiple on an actual earnings free cash flow basis. And so, the value guy in me just sort of gets a little more comfortable with Google and Facebook, though I do own some Amazon and I think Netflix is pretty interesting.
Dan Ferris: Well, Whitney, the only FANG stock we haven’t mentioned is Apple. What do you think of that?
Whitney Tilson: You know, I’ve always sort of stayed away from Apple. It’s an insanely great company and they have a fabulous business, but at the end of the day, 62 percent of their revenues, depending on whether you’re looking at last quarter or last 12 months come from iPhone sales, and you notice just last quarter they stopped reporting their unit sales. Well, that’s because the unit sales have actually been flat to even down the past couple of years. They’ve been making up for it by raising their average price, but that’s not sustainable.
I think they’re already pushing the limits, but here’s the thing. I look out over the next ten years, and somewhere around only about a third, depending on how you count it, maybe a third to half of the adults on the planet earth have a smart phone of some sort. The vast majority who still do not have a smart phone where all the growth is gonna come is people in China, India, Sub-Saharan Africa, Latin America, getting their first smart phone, which will revolutionize their lives, right?
But when I think about, okay, what kind of phone are they gonna be getting? My parents and my sister live in Kenya for example, an emerging high growth but definitely a third world, very poor country, but not poor, poor like Somalia or something, right? So, there’s a burgeoning middle class there, everybody is getting phones, and everyone for example uses the payments; the whole country is now using electronic payments, MPACE is what it’s called.
But nobody owns iPhones ‘cause they’re way too expensive for Kenya. Everyone is getting connected with smart phones with $100.00 Android phone, and if you think about, okay, what are the apps that they’re gonna be using on the phone? Well, in most countries they’re all getting Facebook as a way to connect to other people, and then in most countries they’re using Google Maps, Gmail, obviously Google search. In other words, Google has seven different products that each have over a billion monthly average users.
So, when I think about the growth over the next ten years as another roughly 2 billion human beings get connected to the internet via smart phone, I see enormous growth for Facebook and Google all over the world at almost no cost to them. I mean, how much does it cost Google to have one person in Kenya or India get a smart phone and start using Gmail and Google search and Google Maps?
The answer is zero, but it costs Google, the incremental cost is virtually zero, yet Google can start monetizing that person almost immediately, now granted at a fairly small level, nothing like what they can sell advertising for, for subscribers in the U.S. and Canada, right? But they can start monetizing it and growing at virtually no cost. Now compare that to Apple. How many iPhones is Apple really going to be selling to people joining the middle class from poverty in Kenya and India?
The answer is virtually none. And then even to the extent that they are selling phones there, they actually have to make a phone, they have to ship it, they’ve got inventory, like they actually have to deliver a physical product. So, it’s just not nearly as good a business as Facebook and Google where they don’t have to deliver any product at all. It’s just electrons, right? In other words, Google and Facebook have businesses that are infinitely scalable to every human being on earth at virtually no cost.
So, there’s just an inherently better business model there that I think has substantially more growth potential over the next five to ten years. So, I’ve been wrong so far, by the way. I wrote an article about why I preferred Google over Apple on July 25th, and since then Apple is down 5 percent and Google is down 20 percent. So, I’ve been wrong, but I wasn’t making a short-term call.
This was a three- to ten-year call, where I think if you’re going to do tech investing you need to put on the hat of more of a growth investor, less of a value investor, and so the tech stocks that work over time are the ones that can really show growth, revenue growth in particular. Apple is now so enormous. It has double the revenues of Google, six times the revenues of Facebook. It’s so enormous. Every person on earth who wants an iPhone I think already has an iPhone, so now it’s just a replacement cycle and an upgrade cycle, and as you can see just in the past month or so there’s some evidence out there that Apple’s new phones are just not hitting sales expectations.
My wife and three daughters are a case in point where they’re just not upgrading very regularly. They have fabulous phones. Why would we pay another $1,000.00 to upgrade them to a phone that’s only 1 percent better than their existing one? So, I just don’t see where growth comes from either on pricing or on revenues, either domestically or the international growth, whereas I can see still a significant robust growth story for both Google and Facebook.
Buck Sexton: Whitney, this has been fascinating. Thank you so much for all your insight on all this stuff. We covered the FANG this week. We didn’t realize we were gonna do that.
Whitney Tilson: Yes, I wasn’t planning to talk FANG stocks with Dan. I was expecting to talk beaten down out-of-favor value stuff, but most of my portfolio is still in things like Berkshire and that kind of thing, but one of the mistakes that I teach my students is that I was too dogmatic and closed-minded as a value investor, and so things like railroads and airlines but also the entire tech sector I basically almost would never look at because I had this view that, oh, value investors don’t invest in tech.
Tech is unpredictable, whatever. I was totally wrong about that, and it wasn’t like I went and did the work and then just decided not to buy it. I didn’t even do the work because I just had these old school value investing blinders up, and I think to be a successful investor you need to have an open mind and you need to have a big toolkit.
Buck Sexton: Can we bring you back to look specifically? We’ll have you back as a guest to do specifically value investing, ‘cause I think the news cycle, which that happens on podcasts, drove the conversation this time around, but will you come back to do some value investing talk? Dan and you can really roll up the sleeves on it?
Whitney Tilson: Yep, happy to.
Buck Sexton: And where should folks go, by the way, if they wanna follow any of the work you’re doing or anything you’re putting out there?
Whitney Tilson: Sure. Our website is KASELearning.com, which is Katherine, Allison, Susan, Emily, my wife and three daughters. This is how I name my business. So, at KASELearning.com we’ve got all sorts of free materials, videos, seminars that we’ve done available to people, and then if people wanna take any of our more advanced programs we teach them periodically live, we teach them periodically via live webinar so people don’t have to travel to New York, and also just yesterday I posted and so people will start promoting it just recorded videos of some of our teaching materials available at a lower price.
We also have a conference on short selling coming up in New York on December 3rd as well if anyone is interested in really learning about short selling and hearing some short ideas from the best short sellers in the world. We’ve got that coming up as well.
Buck Sexton: All right. Whitney Tilson, everybody. Thank you so much, Whitney.
Whitney Tilson: My pleasure.
Buck Sexton: Mr. Dan Ferris, you ready for the mailbag? It’s gonna be a mailbag party this week. You good for it?
Dan Ferris: Oh, I’m ready to go, man.
Buck Sexton: All right. If people wanna write to us, [email protected] We read them all and we try to respond, even the ones that give us the sads on the inside. You know how that goes, folks. Lay it down. Bring the truth. Let’s get to it. Email number one, John J. writes, “It is refreshing to see that you recognize and admit that Amazon is involved in crony capitalism. Is big better? In today’s climate, yes, it enables crony capitalism among other ills such as dark money campaign contributions. It is anti-democracy. I believe in capitalism, but I’m repelled by its abuses.” Dan, I’ll give that one to you.
Dan Ferris: I too believe in capitalism and I’m repelled by its abuses. You know, this is not really a question, it’s a comment, and it’s impossible for me to disagree with it. Maybe somebody somewhere thinks this is okay, but it definitely is not, and it speaks to another thing. Whitney mentioned when a business sector becomes more regulated it tends to sort of entrench the largest incumbent companies. It also tends to make the smaller, less well-financed competitors, it tends to hurt them.
Buck Sexton: Big business loves big government. It’s a maxim on the politics side I can tell you, and it’s true.
Dan Ferris: Yep, and this is a facet of that, and it’s good for Amazon and people who own Amazon stock and people who work for Amazon, but is it really good for anybody else? I don’t know.
Buck Sexton: It’s one of the criticisms I’ve actually heard from some people at smaller more boutique finance organizations who are saying that Dodd Frank just imposed such a high regulatory cost that if you’re Goldman Sachs you don’t care, but if you’re small it does matter.
Dan Ferris: Yeah. Buck, a couple years ago a guy I know who founded and ran a huge bank, he told me, he said, “You’re exactly right, Dan, because I’ll tell you something, when we got to $10 billion in assets we needed another billion in assets to make the income to pay for the regulatory upgrade, and then when we hit $50 billion in assets we needed another $2 billion to pay for that because you gotta bring in more staff. It’s just a huge expense.”
So, therefore all of the banks above them who were already there, they had already dealt with it. They’re already making more money. I think it’s one of the things Trump got right is the effect of regulation on the economy.
Buck Sexton: Yep. Email number two from Steve P. “Hey, Buck, with the utmost respect I must vehemently disagree with your position and comments concerning university level athletic programs from episode 77. Contrary to what you believe, these athletic programs generate very large amounts of free cash flow. Much of it is splashed out on academia, that is new buildings, massive amounts of IT, and yes, some of it finds its way into professors’ pockets.
As a former athlete at UNC Chapel Hill basketball team, I can speak firsthand from my personal experience. As our coach Dean Smith explained to us many times, over the four years we would be at Carolina we would pay back our scholarships many times over the revenues we generated for the university, and Buck, that was a long time ago. Today’s numbers dwarf what we generated nearly 50 years ago. Regards, Steve B.”
Well, Steve, a few points of clarification, and with respect, you’re wrong, but let me explain why, and I appreciate you writing in and also the tone of your email is what we like here, right? If you disagree, that’s great. Just make the case as to why.
I said that very few programs make money. Now, you’re talking about UNC Chapel Hill in your email where you play, which by the way, very impressive. I mean, that’s one of the best athletic programs of any kind in the country and certainly on the basketball side one of the very best of all time, but there are thousands and thousands of schools across the country, and if you are not talking about a top-level program and a men’s sport by the way in that program, this is where the conversation often gets lost.
Yes, Michigan football makes money. Yes, UNC Chapel Hill makes money for the university. Do you think that the women’s volleyball team at University of Minnesota makes money? Now I know you would say, “Well Buck, that’s not that expensive, who cares?” Yes, but now extrapolate that out to dozens and dozens of sports that are under Title 9 pressure to spend every bit as much money on the women’s sports as they do the men’s sports, keep that in mind, and then look at all the D2 schools and D3 schools across the country.
What you find is that we have a culture of recruiting for the schools and spending a ton of money on these athletic programs with the idea that it makes money for the schools. That’s the general public. It’s just not true. In fact, if you go on the NCAA’s website, you’ll see that for example of football bowl subdivision schools in 2014, this is according to the NCAA, only 24 schools generated more revenue than they spent in 24.
You look at this across the board and you see that there are many, many, many schools that are losing money on their athletics program. So, it just depends on where you’re talking about and at what level, but I mean I can tell you this, Ivy League schools for example, not to focus on that, they’re not making money on their athletics programs. They are losing money on their athletics programs. So, that’s part of a much longer and larger conversation, but there you go. You got anything for me on that, Mr. Ferris?
Dan Ferris: I certainly have nothing to add. You are way ahead of me on this one.
Buck Sexton: There’s a lot of reasons as to why that is the case, but it’s interesting. Football in particular is really the minor league for the NFL, and this is why there’s such a push to try to pay students because it feels like there’s an exploitation that’s going on here, which is a whole other conversation. But all right, I guess that’s gonna be it for this episode of The Investor Hour.
If you wanna write to us, [email protected] is where you go. InvestorHour.com is the website. Mr. Dan Ferris, I want you to have a very happy Thanksgiving and to everyone listening as well. Love us or hate us, just don’t ignore us, folks. Eat lots of turkey and obviously stuffing is the supreme side, but there are others that are good as well. Dan, thank you so much for leading our charge this week. Good to talk to you. We’ll be back next week.
Dan Ferris: Yeah, Buck. Great to be here. Have a happy Thanksgiving and I can’t wait.
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