In this episode of The Acquirer’s Podcast Tobias chats with Dan Ferris, editor of Extreme Value, a monthly investment advisory focused on the safest stocks in the market. During the interview Dan provided some great insights into:
- Inverted DCF Is A Great Way To Value Businesses
- Maximize Your Opportunities To ‘Bump Into’ Good Investments
- How The Internet Has Changed Branding Forever
- From Deep Value To Quality Business Investing
- The One Thing You Can Control – Process, Process, Process
- What To Look For In A Great Business
- Holding Cash Provides The Best Diversification
- Missing Out On Big Winners
- The Extreme Value Newsletter
You can find out more about Tobias’ podcast here – The Acquirers Podcast. You can also listen to the podcast on your favorite podcast platforms here:
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Full Transcript
Tobias Carlisle:
All right. So, when you’re ready.
Dan Ferris:
Fire away man. I’m ready to go.
Tobias Carlisle:
Hi, I’m Tobias Carlisle. This is the Acquirers Podcast. My very special guest today is Dan Ferris. He’s the editor of Extreme Value. He’s a great value investor. We’re going to talk to him right after this.
Speaker 3:
Tobias Carlisle is the founder and principal of Acquirers Funds. For regulatory reasons, he will not discuss any of the Acquirers funds on this podcast. All opinions expressed by podcast participants are solely their own and do not reflect the opinions of Acquirers Funds or affiliates. For more information, visit acquirersfunds.com.
Tobias Carlisle:
Good day, Dan. How are you?
Dan Ferris:
Oh, very well. Nice to see you, Toby.
From Deep Value To Quality Business Investing
Tobias Carlisle:
Yeah, likewise. Good to see you again. Enjoyed chatting to you last time, the tables were turned. I really wanted to get you on the other side of the mic and find out what you thought. I’ve listened to a few of your podcasts where you’ve been on the other side, too, one of them with Meb Faber that I really enjoyed. I just wanted to get an idea of your philosophy. There’s quite a … values a very broad church. There are some guys who find themselves at the growth year end and then there are guys like me who find themselves at what I call the deeper value end. How do you kind of characterize what you do?
Dan Ferris:
I would say that I’ve made a progression probably from the deeper end more toward the growth year end over the years, but you know something? That deeper end, it’s still there for me. I still look there because I found … over the years, I found a few things that were so interesting and so cheap that I couldn’t resist them. So maybe I’m a hybrid and that original idea, which I think it really came from the special situation section of security analysis, right? That original deep value idea, that will never leave me I don’t think. But I do think that today, it’s a great idea, and it’s always been a great idea to try to find a business that’s earning a dollar now and that you think can earn $10 or $20 down the road.
Dan Ferris:
Part of the appeal to that, to me, is that I think it’s relatively easy something that you know is a great business. It’s something you can actually do. It’s a handle that you can have control of. You can say, “These are great business, these are not,” and you can really … I think an individual investor, especially, can learn that probably better than they’re going to learn a lot of other stuff individuals try to do, individuals or institutions, right? People get into these predictive strategies where they’re trying to figure out which way the market’s going to go up next and all of that. It’s too fraught with peril and it’s too much potential to be fooled by randomness.
Tobias Carlisle:
Yeah.
Dan Ferris:
I think the average, sort of naïve investor likes to look at price charts because it’s available. It’s availability bias, right? Whatever is easiest data point that’s in your face all the time, that’s the one you think is important, right? It doesn’t turn out that way in reality and you get fooled by randomness. I think what most people do when they think they’re doing technical analysis is sort of like seeing Einstein’s face in a cloud as it rolls by or something, or you see faces in the bathroom tile or something. It’s more like that than it is anything sophisticated, and I’m not saying there aren’t sophisticated people doing technical analysis. I’m saying the overwhelming majority of individuals are not really doing anything like.
Dan Ferris:
So what they should do is learn to say, “You know something? Let’s just say Microsoft is fantastic business. It just gushes cash, it doesn’t require a lot of capital. There’s over a billion people using Office, and some of them hate it but they must use it, must continue to use Office. Office is embedded in our lives, more deeply than a lot of products.” I think it’s probably always going to be a pretty darn good business and I’m pretty sure it’s going to be earning more in five or ten years than it is today. And if you can get-
***
What To Look For In A Great Business
Yeah, so is that your definition? How do you think about what’s a great business? How do you know it’s a great business?
Dan Ferris:
So it’s a subjective thing. Let’s not try to reduce it too much to a formula, but in that context-
Tobias Carlisle:
That’s what we do around here, Dan. Reduce it to a formula.
Dan Ferris:
Yeah, you reduce it all to formula. So financial markers, cash flow, what’s the value of the business? All the cash you’re ever going to take out of it for its whole life, just count it back to present, right? That’s what it’s worth. So cash flow. Excess cash flow, that ability to generate plenty of that and in a growing stream over the years, pretty important. Then there are things that leads that, so consistent margins. They can even be thin margins, like Costco. I think the net is consistently like 1.5% or something, but it’s consistent and that consistency over time, that’s the economic anomaly because in capitalism, in a market environment, profit margins are winnowed away by competition. So when it’s consistent over a long period, it’s a clue. Can be a clue, strongly.
Dan Ferris:
Good balance sheets, right? It’s just prudent. You don’t want to get into a highly levered kind of a situation that can blow up on you. In general, some companies can be good at buying back shares. Most of them stink at it. I think the benefit of what I would shareholder rewards, dividends and sharing purchases, I’m telling you this sounds really cynical, but I think one of the primary benefits is it takes money out of management’s hands, because let’s face it. Most businesses aren’t Berkshire Hathaway. There aren’t 75 things that you could potentially invest. There’s one or two and if you get too far afield, you’re probably what … Peter Lynch’s old thing, diworsification, right? You’re probably doing that with most businesses. By all means, get the cash out of their hands. I think over the long term, you find a really good compounding business, getting the cash out of your hands is even more important than getting a great deal when they buy back the stock.
Dan Ferris:
Then the final thing, I look at returns on equity, which I think is a good number for equity holders. There are other, and in general, just that return complex. ROA, ROIC. You want to consistently see those at pretty good levels, because basically that return on equity, these returns on the capital invested, it’s like a bank account. You leave money in your bank account and it compounds at the rate and you find one that does a substantial rate at all the money that stays in the business and it can be a real humdinger, what Charlie Munger might call a Lollapalooza.
Dan Ferris:
So those five markers are pretty important.
***
Inverted DCF Is A Great Way To Value Businesses
Tobias Carlisle:
How do you think about valuation? Finding those things can be … it’s not … I wouldn’t say it’s easy, but you can find those things in the market. The challenge, then, is finding them at a reasonable price, but how do you know when you’re looking at something is this a reasonable value or it it not?
Dan Ferris:
Okay. This is a big topic for me because I learned to flip this. The old way of discounting cash flow, you sit down and you project. You predict, basically. You say, “They’re probably going to do this much in year one and this much in year two, three, four, ten,” and then you put some kind of terminal value on the end of it, but you’re basically predicting the future there. That has always bothered the hell out of me, because I don’t know the future.
Tobias Carlisle:
What’s the solution?
Dan Ferris:
The solution, I believe, is … I got this from reading a book called Expectations Investing by Michael Mauboussin and Alfred Rappaport. You flip the thing on its ear and instead of predicting the future and discounting that and arriving at a value and trying to buy at a discount to that value, what you do is you plug in those inputs for the future to equal the current share price. So you’re basically asking, “What is the market saying at this share price?” And if the market is saying, “Starbucks can’t grow for another five or ten years,” I’m going to call BS on the market and I’m going to say, “I think it can,” and buy it. That was an example from the Extreme Value newsletter. We looked at that and we thought, “This is absurd. Zero growth for Starbucks is absurd,” and it turned out to be a pretty good deal, I think.
Dan Ferris:
So it’s that. It’s flipping the process around and doing the plug ins for the future cash flows and it’s really revenues, operating margins and free cash flow, operating in free cash flow. Then seeing what that says about the current share price. Sometimes it says the market is expecting a lot. Sometimes it’s all the expectations are in line with everything management is saying and everything that people expect in general and sometimes there’s pessimism built into that and that’s when we pounce.
Tobias Carlisle:
I like that. That makes a lot of sense.
Dan Ferris:
It sounds so easy, doesn’t it?
Tobias Carlisle:
Yeah. Easy to put into practice.
Dan Ferris:
Yeah. It’s not.
***
Holding Cash Provides The Best Diversification
Tobias Carlisle:
When you’re constructing your portfolio, do you give any thought to, “We’ve got a lot of exposure to this sector or this industry, we don’t want to add something else here,” or do you think if it’s a good enough business, I’m going to stick it in the portfolio?
Dan Ferris:
Two things on that. Look, if things get really dirt stinking cheap, I’ll be overweight all day long and then we’ll trim. If you’re right, you can trim on the way up and you reduce your exposure. In general, we do worry about exposures to a lot of things. Real exposure to commodity prices is one that you want to watch. Exposure to anything that … if something pops up in the news and we need to take a look at it, we will. You can do that on the fly sometimes and you’re okay. We try to think about these things as much as possible before you pull the trigger, but you can’t think of everything. You do have to worry about what you’re exposed to, but I will say this about that. I’ve learned something about the value of survival. I think a lot of people, and the basic institutional models like the 60/40 stock and bond portfolio, well I think people are optimizing too much around a Goldilocks or a really good economy and they’re not thinking about survival, they’re not thinking about their own uncle point, right? That screws you up and so to be truly diversified and really sort of worry about these exposures, I just haven’t found anything better than a big chunk of cash to diversify an equity portfolio. If you know something, man, turn me on to it.
Tobias Carlisle:
No, I don’t.
Dan Ferris:
Because I can’t find it.
Tobias Carlisle:
What’s a big chunk of cash? What’s your rough definition of that?
Dan Ferris:
I’m talking like 20%.
Tobias Carlisle:
Yeah.
Dan Ferris:
That’s a pretty solid chunk. That’ll make you feel pretty good when your equity is down 20% or 30%.
Tobias Carlisle:
So you’re trying to hold something like that through the ordinary course and then maybe when you get, like we’ve just gone through, you try to put a little bit more of that to work, pick up some of the bargains as you go through that.
Dan Ferris:
Absolutely. After a year or two to rebalance back to 20%, yeah, sounds good to me because I’m not worried about beating the market really. I know that sounds crazy. If my readers are listening, they’re going, “You’re not?” Hopefully with everything we just went through, they’ll kind of appreciate the viewpoint a little bit more. People tend to do that, but I hope they remember it five years now when the market’s back up.
Tobias Carlisle:
How do you think about concentration, diversification, things like that?
Dan Ferris:
So, well diversification for me, it’s like are you truly diversified if you have something like cash versus equity? That’s really it, but as far as the concentration, I assume you’re-
Tobias Carlisle:
Just how big is a big position?
Dan Ferris:
Yeah, so how big is a position? Okay. So for me a big position like pedal to the metal is probably 5% of the portfolio and these are things, I guess, over the years what have we … I’m trying to think of things we recommend in the newsletter because I’m a shameless plugger of my newsletter, I guess.
Tobias Carlisle:
Do it. That’s what this is for.
Dan Ferris:
So maybe we did have … I think we recommended 5% on things like Berkshire Hathaway and at one point Walmart, but not anymore, and Constellation brands and just big, big franchisee cash gushers like that with good brand names to them and what I think you people might call an economic moat, I try to stay away from that because it just like this things … well, there’s a moat so we don’t have to worry anymore. Moats are in motion all the time. Is the moat growing? Is it shrinking? Will it disappear? Those are the real questions, not is there one or isn’t there one? Is there one? Sure, okay yes, but what is it doing? Is it getting bigger or smaller?
***
Dan Ferris:
The nature of the moat, too. If you look at Facebook, this is the greatest advertising platform that’s ever been invented. You’re constantly telling the world what you’re in love with and where you are and what you’re doing and that’s the best way to sell things to people. But there’s this tobacco-like quality of social media, and I do worry about that a little bit. We saw some of that … I was worried about Facebook, and I forget when … it must have been 2017 at our annual Stansberry meeting in the fall and then the next year, I guess it was maybe that July 2018 I want to say, July 26 or so, and Facebook lost I think it was 19% or 20% in a minute because people fell really way out of love with it and the results were reflecting that. I mean, it’s done well since, but I worry about things like that.
Tobias Carlisle:
One of the … I have these thoughts about Facebook that it’s a little bit like, there’s a little bit of fashion to it in the sense that the new generation that comes through doesn’t want to be on the same platform as the olds are on which is why you see Insta … I think that’s why Facebook came about in the first instance because you had to be at one of the universities, so it was a little bit exclusive. You could get in, it’s like everybody wanted to be in. You had to get an invitation and then it grew away and then the next generation don’t want that. They know that grandma and mom and dad are on the platform so they want to be in Instagram, now it’s TikTok. It keeps on going like that a little bit. I think they can keep on buying to kind of stay there and maintain their position, but I wonder how strong it actually is, that network.
Dan Ferris:
I know, and for me, I won’t talk about you Toby, but for me, I’m like, “I’m probably an idiot for not owning it,” because it just gushes money. It gushes cash. You can’t own everything. You can’t kiss all the girls [crosstalk 00:16:52], right?
Tobias Carlisle:
As much as you might want to. I still think … when I look at something like Google, too, Google still seems to have a bigger share of the advertising market and it doesn’t seem to have quite as … doesn’t have quite the same ick factor. It’s got that … everybody’s got a Gmail account, doesn’t even think about it. Everybody’s got that connected to their YouTube account, doesn’t really even think about how much Google is really there at every stage of that process.
Dan Ferris:
Yeah. It does … that’s right. People don’t realize it. It kind of flies under the radar and not only that, but as Whitney Tillson has pointed out, the optionality in things like YouTube is incredible. YouTube is huge, huge platform. It’s like bigger than Netflix.
Tobias Carlisle:
Right. And they don’t pay for content up front. They pay for it on the backend, and not much.
Dan Ferris:
That’s right. There’s no cap ex for generating a new hit series. It’s pretty cool. So yeah, I agree. I like Google as a business better than Facebook for sure. I think Google and of the big things like no matter how you slice it, Apple’s still a one product company, right? It’s like … I think it’s in the 50’s. It used to be two thirds of the revenue. I think it’s now like fifty odd percent iPhone. iPhone’s like more than half the revenue still.
Dan Ferris:
So, oh, man, that’s tough. As that changes over time, what becomes the bigger piece of that mix? I don’t know. But yeah, Google and Amazon, too. Once you read the first Amazon shareholder letter and you look at everything he’s done, it’s like, “Wow. Nobody ever consistently does what they say they’re going to do,” and what he says he’s going to do is fantastic. Just focus on real economic value creation. Don’t worry about earnings per share. Worry about cash generation and treating customers extraordinary well, better than what other people are doing. That’s a winning formula. He’s done it.
Tobias Carlisle:
I guess that’s what happens when you get a D. Shaw guy, you get a finance guy who becomes an entrepreneur. He kind of knows that you don’t pay taxes, just recycle it all in the business, grow it really big.
Dan Ferris:
I know, and I remember in the beginning, all the value guys are screaming, “Oh, he loses money on every book he sells. He’s a hedge fund manager.” It was just like of all the strengths, we’re seeing his weaknesses, but we sure all get it now, don’t we?
Tobias Carlisle:
Yeah, I freely admit that I was one of the guys, didn’t get it until maybe five years ago and then it’s too late, right?
Dan Ferris:
Yup. Guilty. Yup.
***
Maximize Your Opportunities To ‘Bump Into’ Good Investments
Tobias Carlisle:
How are you sourcing ideas? How do you come up with your ideas? Are you running screens? Are you just sort of a little bit more open to reading something that’s an interesting business? How does that happen?
Dan Ferris:
You know, I’m supposed to come up with some really cool answer here, but the truth is, I just like to maximize the opportunities for bumping into these things. I just want to take in … these days, I want to take in as much material as I can, so I will consciously, this is the systematic part I guess, I’ll consciously go to Wall Street Journal, Financial Times, every kind of publication or website that I can and I’ll always click on … there’s usually a Company tab, Companies or Businesses or something like that. I just want to see what’s around and I’ll look on … I found this one billboard recently, I can’t even remember what the heck it’s called, but it’s like hedge fund managers talking about stuff. I’ll read any kind of a newsletter just to see what the person says. I’ll read anything at least once. It’s just a matter of maximizing opportunity to bump into something new that you haven’t heard of, plus screening.
Dan Ferris:
I love screening. I like to screenings. I do Acquirers Multiple Screens.
Tobias Carlisle:
Appreciate that.
Dan Ferris:
Yeah.
Tobias Carlisle:
What about sort of a quality type screening? Are you just, “Show me all the stuff with the highest ROI, ROIC, ROE.” Is that one of the things you look at?
Dan Ferris:
Yeah, I just want to see what comes up, because no harm no foul, right? You run a screen and you get all this stuff you haven’t seen before and one of the things I like to do every now and then is mostly I screen for really good balance sheets. That’s a part of all my screens. Every now and then I think, “Hmm, maybe I am really missing something,” so I’ll take that out and just see what comes up. I can’t honestly say … it’s been a long time since I’ve found something. I think the last time I did away with that was when I found Prestige Brands Holdings, and it was right around the crisis, right around the bottom of the crisis in March or April 2009. It was like, “Wow,” and it was five times free cash flow, and this business doesn’t … they don’t do manufacturing or even distribution. They just own the brand. It was like a royalty-
Tobias Carlisle:
That’s great.
Dan Ferris:
Yeah. Back then it looked really cool. It doesn’t look as great to me now as it did then, but I thought, “Wow. Nobody wants this thing because it’s got $300 million of debt and the market cap is like $300 million,” and it came out of private equity and people feel funny about that sometimes.
Tobias Carlisle:
What does it own? What are the Prestige brands?
Dan Ferris:
It’s stuff like wart remover, like Compound W Wart Remover, and it’s changed over the years, but back then it was Compound W Wart Remover and Murine Eye Drops and Spic N Span cleanser and another type of a cleanser and some little products like that. They reported ACVs. I can’t even remember what ACV stands for, but the idea is that a 90% ACV means this brand is available in 90% of all the places where they sell this type of product, and their ACVs were 60 and higher on everything and some 80, 90. 99, I think one of them. I think Compound W was like 99 or something at the time. I thought, “Wow. It’s Microsoft Office. You can’t avoid the thing. And it’s gushing cash. It’s a low cap ex business model. I’m all in.” And we recommended the thing and got, I think it was close to a five bagger or so out of it. Yeah, it was 400 odd percent out of it, so it worked.
Tobias Carlisle:
So it’s things … you’re looking basically … for Prestige Brands, it was like if you think of tissue, nobody calls them tissues. Everybody calls them Kleenex. It’s like almost the thing … you don’t want wart remover, you’re looking for Compound W.
Dan Ferris:
Yup.
Tobias Carlisle:
It’s the thing that’s top of mind.
Dan Ferris:
Yeah, and it’s interesting that you named Kleenex, because that’s the classic example, but it doesn’t mean that you want to own the company that makes Kleenex, because people think anything that looks like that is a Kleenex.
Tobias Carlisle:
Right.
Dan Ferris:
So it’s got to be more like Office or even Coke. Coke is still … if you think sodas are a good idea, Coke is still one that a lot of people like to drink.
Tobias Carlisle:
Well, let’s talk about Coke. Do you have an opinion on Coke, because it looks expensive last time I looked at it.
Dan Ferris:
Yeah, you know, I’m not terribly wild about it because maybe it can’t grow so much anymore and maybe these things are fantastic ideas, can be fantastic ideas for decades and then they can become mediocre ideas. The one good thing I know about Coke is that if you have any kind of a drink product, you can’t get a better distribution network to be part of than Coke, so there is a chance there that if they can acquire something, if there’s a next hot type of a beverage that I’m not seeing and Coke acquires it and shoves it through that system … drinks cannot be … it’s not virtual. It has to be delivered to me and I have to put it in my hand, but for beverages, we kind of like things like Starbucks and Constellation Brands and stuff. They’re more addictive.
Tobias Carlisle:
You ever take a look at that chart for it? It’s Monster now, but it used to be Hansen’s Natural Beverages.
Dan Ferris:
Oh sure.
Tobias Carlisle:
It’s famous for it. My mother in law had the Hansen’s Natural Beverage way back in the day, always had them there, and I went and looked at the chart one day and the chart was up 50 thousand percent or something by the time I looked at it, and I was like, “Whoa. I missed the move in that one. I don’t know why.” And of course, it proceeded to go on and it’s gone up five times or something since then. Just unbelievable return on that thing.
Dan Ferris:
Yeah, those are interesting situations because I’m convinced that maybe there are people who can find them and know how to look for them, but they … I think I’m only going to luck my way into them. I lucked my way into multi-bagger on Constellation. I lucked my way into a multi-bagger on Prestige just because I was looking for some other characteristics and the brand name and stuff, I felt like I understood all of that, the franchise and the market domination. Constellation, same thing. My problem here is who the hell holds on for 50 thousand percent?
Tobias Carlisle:
Yeah, that’s the hard thing.
Dan Ferris:
It’s really hard. Who does that?
Tobias Carlisle:
They all have big draw downs, too, to get there. There’s a pretty famous chart, I think Morgan Hasler put together. If you held Amazon, to get the big returns in Amazon it was down 90% three or four or five times. Nobody can hold on through that.
Dan Ferris:
Yeah. Yeah. I thought … was he the one who did the, “If you bought it at the top of the dot com bubble-
Tobias Carlisle:
Yeah, that’s probably right.
Dan Ferris:
So I was like, “Yeah, that deal’s great for five years or ten years.” You’re going sideways or whatever. It’s really difficult to do that.
***
Missing Out On Big Winners
Tobias Carlisle:
When you mentioned Walmart before, you said it doesn’t have … is it a change in Walmart’s business or is it the valuation that has changed your mind on Walmart? When did you like it? It was cheap maybe four years ago, I think. It was really cheap.
Dan Ferris:
Well, I liked it in, gosh, I think the first time was 2005 and I forget … I think we held into 2016 or 17 or something maybe. I forget. We held it for a long time. It was maybe even ten years. But yeah, so Walmart. I feel like the thing that I don’t understand with them is some of these capital allocation decisions, Flipkart and all this stuff. It just-
Tobias Carlisle:
Jet.
Dan Ferris:
Yeah. I don’t completely get it. I know what they’re trying to do, but it just seems so haphazard and it seems like they’re paying so much. The analogy I like here was made by a guy named Scott Galloway. It’s like billion dollar hair plugs for an old man who’s trying to get girls again. It’s not there. I’d rather have a better business model, I think, is like Dollar General. I think the dollar model is better and the idea, too, part of the idea behind owning these things and I think one of the reasons why they’re making new highs, Dollar General and Walmart lately, is that in bad times they find a lot of new customers because people who used to shop at Whole Foods can’t afford it anymore.
Tobias Carlisle:
They’re a little bit anti-fragile.
Dan Ferris:
Yes. Quite a bit, I think. So they both did the same thing, didn’t they? They started out going into the rural areas, serving the underserved customer with everyday low prices, or dollar prices, and then that model was able to expand into suburban and even urban areas now and I think Dollar General has more upside there than Walmart. Walmart, they’re so big that they’ve kind of gone around the world and experimented and had to get into and out of places like Germany and I guess South Korea. They have to do that and it’s not always going to work.
Tobias Carlisle:
Those big acquisitions are always .. they’re funny, aren’t they, because I remember distinctively when Google bought YouTube for a billion dollars and a lot of Valley guys made fun of … it was Chad and somebody else were the guys. When they come up, they looked like they were kids that bought this thing for a billion dollars and everybody said, “What? They’ve just massively overpaid there.” Clearly one of the greatest investments made over the last twenty years or so. True also with Instagram.
Dan Ferris:
Yup.
Tobias Carlisle:
Billion dollars just dropped on a website that wasn’t making any money, and wouldn’t you have loved to own Instagram by itself now? Wouldn’t you have loved to made that investment? Then you’ve got Walmart with Jet. I don’t know if that’s going to work out or not.
Dan Ferris:
Yeah, it doesn’t have the same mojo as YouTube and Instagram, does it? There’s a problem there with capital allocation, but I was an idiot. I thought Microsoft had the same problem with Nokia, which I was like, “Oh my God,” and there were a couple other ones that they made there that they paid billions and billions for and I was like, “Oh, geez.” But all they did was get rid of Steve Baller and hey, that’s all fixed. The underlying-
Tobias Carlisle:
It transitioned the business.
Dan Ferris:
Yeah. The underlying products just continued to strengthen, and they developed new ones, too. Their enterprise offering became substantial. They flew under the radar and then became substantial.
Tobias Carlisle:
It was a very popular value stock in sort of 2011, 2012, something like that. I saw quite a few pictures at Value Investing Congress and it was kind of around on the internet a little bit. It was one of the years where their revenue actually declined a little bit for the first time so you kind of had to be able to figure out, “Does this thing, can this thing start growing again,” but then of course, they turned it into a SaaS business and wow.
Dan Ferris:
Yup. Yeah. Amazing. I missed a lot of that ride.
Tobias Carlisle:
Well, it’s tough. If you’re looking at the quality of the business and you’re trying to figure out what is this thing going to look like in the future, if you’re not a little bit nervous by that revenue line taking a step back and what else are you going to look at?
Dan Ferris:
Yeah. Yeah, defining revenue will scare the bejeebers out of anybody. There are no people buying declining revenues in foxholes, or something. It’s difficult. But in that instance, we actually held on through that. We founded in ’05. That ’05, ’06 period, I went on what I call my world dominator jag where I was buying stuff like Walmart and even at the time Exxon Mobil I think was one of them and Berkshire and ADP became one of them in November ’08. There were a bunch of the bigger ones. Johnson and Johnson became one. We had AB InBev for a while because I thought, well, after a while it was hard to buy value toward the peak of the housing bubble and then not too long after it. Those were it. Those were the things I was finding that people didn’t seem to want as much around that time.
***
Tobias Carlisle:
How do you feel about now, the current market contrasted to that sort of late [inaudible 00:33:27] period, just pre … that ’06, ’07, ’08, ’09, ’10 period?
Dan Ferris:
I think I like it better now than a lot of value guys because we were down thirty odd percent. 30 … what was it? 34% in a couple of weeks or whatever and then we’ve bounced back so sharp. For me, the more important thing is that I was bearish for three years and lo and behold, it finally fell apart and I feel like we’re on the other side now and on the leading edge of that , everybody’s in love with equities. Everything just goes up and up and up. Every dip is bought. Everything’s fine. Dan’s wrong. Dan’s an idiot. Being bearish is stupid. I had real trouble buying anything at various times.
Dan Ferris:
Now, there’s a lot more uncertainty in the world and there’s a lot less certainty that everything is going to go up. Now right at this moment as we speak, of course people are becoming more optimistic because we’ve had this twenty odd percent bounce really fast, but I still like being on this side of that peak a lot better than the front end of it.
***
The Extreme Value Newsletter
Tobias Carlisle:
Are you finding more opportunities now? I’m talking after the bounce, not necessarily through the bottom of that trough.
Dan Ferris:
Sure. Yeah. I mean, we had a couple of things that they came up and we recommended one of them and now they’re not as attractive, but there are a couple more that I think are still pretty attractive. I don’t want to say what they are because we haven’t written about them yet in Extreme Value, and frankly we are … it’s like week by week how much is the market going to go up? Is this thing going to disappear too? So we’re literally … our next issue of the newsletter is due out in the second week of May, as you and I speak in the first week, or not quite the first week I guess. We’ll ride out that first week. May first lies on a Friday this year, so we’ll ride out the last week of April and right up to May first and a couple days before the deadline that we need to publish, we are going to be in decision mode that whole time and we’re probably going to write up two or three things in rough draft and pray that one of them stays cheap enough. It’s like that. It’s day by day now and I wish the environment would’ve lasted, but it didn’t.
Tobias Carlisle:
Are you publishing it’s a monthly newsletter?
Dan Ferris:
Yeah. Monthly newsletter, it comes out second Friday of every month.
Tobias Carlisle:
Do you have to recommend a new name every time or can you just update the portfolio? What do you like to do?
Dan Ferris:
I don’t … I’m actually known in Stansberry as the guy who often doesn’t recommend a stock if he doesn’t want to. It pissed readers off a lot of the time but I think they sort of get it more now.
Tobias Carlisle:
Do you publish the whole portfolio? Does the newsletter contain the portfolio? Shows what you own and kind of where you’re holding it?
Dan Ferris:
Yes, it does. It contains model portfolio on the back page. We are, to avoid regulatory problems, I can’t own the stuff I write about. We’re a pure research organization and so it’s a little difficult but what I wind up doing is to the greatest extent possible, I will own something as similar as possible to whatever I’m recommending. If there isn’t one available, I just have to skip it, but that’s how I’ve tried to do it over the years and it mostly has worked. I think it has worked out a little better for the reader, thank goodness, but that’s the best I can do to avoid being seen as [inaudible 00:37:39] type advisor.
***
Tobias Carlisle:
You’ve got one of the more interesting backgrounds in value investment. You’re a rockstar turned Spanish guitarist. Can you tell us that story?
Dan Ferris:
I was a classical guitar major in college, that’s what I studied. I have a degree in music from Towson University in Maryland. I don’t know, I just … the weird thing about it was I remember one of my roommates asking me, “Isn’t it going to be tough to make a living as a musician-
Tobias Carlisle:
Can I be a value investor?
Dan Ferris:
Yeah, that’s right. That’s right. I said, at the time … at the time, I did say, “I don’t expect to be able to do that. I just can’t live without knowing how to do this, without studying this. I can’t not do it.” And I’ve continued to do it. I put the guitar down for over a decade, I didn’t play really at all, but I picked it up in the past few years and I’m having a lot of fun with it.
Dan Ferris:
I’ve decided … I’ve played all kinds of things over the years. I’ve played musical theater orchestras, Grease and West Side Story and all kinds of stuff like that, and I played just the guitar player in the coffeehouse kind of a guy and various things and even in rock bands when I was younger in high school and stuff. Now I just want to play classical guitar because I realize not a lot of people can do that. I play some fairly sophisticated material and I’d rather differentiate than just sort of be one of the mob. But I do still play electric a little bit.
Tobias Carlisle:
How does that inform your investing, or you just use it to escape? The differentiation sounds a little familiar.
Dan Ferris:
Yeah, yeah. I’m convinced that it helps somehow, if only because my … I’m in my office. My music room is the room next door here. If only by just offering me a five minute respite from having to think about other things, because music is a very … it’s a flow activity. When you’re doing that, you’re not doing anything else. So that’s good. Maybe it is the escape, then, I would say but there’s something about it. I’m trying to learn some more Johann Sebastian Bach on the guitar. Very difficult material but wonderful stuff and there’s a complexity to it and there is a structure to it that underlies and once you … there’s so many notes that you can get lost in the forest among the trees but when you finally learn a piece you step back and that structure becomes so utterly obvious to you and truth to tell, it’s more complicated than that. You try to do the structure first and then you learn all the notes and get lost and then you relearn the structure.
Dan Ferris:
But yeah, seeing that, being able to see the forest for the trees helps. It’s another thing in life where you need to get lost in the details just as you do with every stock you buy, in my opinion. You need to go bottom up, and yet when you step back, there is a stepping back point when you must look at it from the 30 thousand foot view. There’s got to be a larger plan to what you’re doing and that’s very stimulative to me. That’s very … I love that about music in general, is that details working out a larger structure. The typical thing to think about creativity is that you got a blank canvas in front of you and you can do anything you want but the more creative perspective, the more creative situation is when you’re kind of stuck in place and you need to get out of it or you’ve got a very specific problem that needs to be solved. That’s the real creative thing.
Dan Ferris:
So learning to play the prelude from the Bach No. 4 Lute Suite in E major, that’s a very specific problem. You must play every note correctly. How are you going to do that? How are you going to work that out, because sitting there and going note by note, that’s just a non-starter, man. You’re not going to get anywhere with that, so you must have an approach. You must have a process or you will go loony shooting yourself in the head. Same thing with every stock you come across. It can’t be a one-off thing each time. You must have some kind of a process and it has to be a process that works, that you trust.
***
The One Thing You Can Control – Process, Process, Process
Dan Ferris:
I talked with James Montier about this very subject recently and he has a chapter in one of his books, process, process, process. It’s the thing you can control, right? It’s the thing you can rely on and control and lean into. Eventually the topic for investors, especially value investors the last ten years is, “How are you going to hold on when you’re down 20%, 30%?” Well, I’m going to trust the process of knowing and having conviction that XYZ is a truly great business and has excellent long term potential and the downside in the business, regardless of where the share price goes, is limited by X, Y, Z. You know, the management, the balance sheet, the model, et cetera. I’ve been tested that way with a couple of names and I’ve stayed the course and it’s worked out. I think other people would have just their losers and moved on, but I’ve stayed the course and I think it’s … it’s worked out well so far and I think it’s going to work out brilliantly, fingers crossed, over the next several years.
Tobias Carlisle:
Well, how do you know when you’ve made a mistake through a process like that? How can you tell the difference?
Dan Ferris:
Well, that is a one-off thing. You have to be very clear on what it is you’re doing. In other words, if you’re saying, “Well, this is a lousy business but it’s a net-net and I think it’s got real potential to be a mutli-bagger,” and then it goes bankrupt, well, you know.
Tobias Carlisle:
That’s a mistake.
Dan Ferris:
That’s a mistake. We know what happened there. Or it just goes sideways for twenty years because it’s a crappy business and nobody cares that it’s a net-net. But with something that’s a really … that you think is a really excellent business and will be for a long time, you have to update this. You have to be very clear on why you think it’s a great business and that’s not static. Why you think it’s a great business means what are they doing and will the continue to be able to do this, and if not, what else can be done, if anything? So you stick with something, it works for, you know, say five years or something and then there’s a change and you’ve got to be able to reassess. It’s a brand new company, effectively, at that point. I think that’s how you get the big compounders over time and I think Constellation Brands is a great example, and Prestige if a good one, too.
Dan Ferris:
We got out of Prestige because we thought, “Well, these brands aren’t as strong as they used to be, and in fact at that time I was going through a period where I realized the idea of a brand is different today than what it used to be.
***
How The Internet Has Changed Branding Forever
Tobias Carlisle:
Well, that’s good. I was going to ask you about that. Let’s talk about brands a little bit. Why do you say that?
Dan Ferris:
Well, again, it’s the difference between this static view where you say, “Well, if it’s Coca Cola, that’s it. I’m done with it. It’s a great brand forever,” and saying, “Where are they now? Where is this brand now?” And for me, like I said, the idea of a brand changed from a label slapped on a product. I think the old school idea of a brand is advertising … you establish this identity through advertising and then you take that awareness that you’ve planted in the customer’s mind and you’ve got to have a mechanism for shoving it in front of them in the grocery store and putting it on the end cap, the distribution piece. So it’s storytelling plus distribution.
Dan Ferris:
Well, what the hell does distribution mean in the age of the internet? The distribution pipe is the broadband coming in to your house, so Google makes a lot of sense now and Microsoft makes a lot of sense, and et cetera. Facebook makes sense, in that way, but maybe the Compound ward remover doesn’t because now I can got on Google or Amazon and I’m not looking for a name, am I? I’m looking for a benefit and I want that benefit to come from place that offers it for the lowest price. So all of a sudden having that name Compound W, or whatever it is, it doesn’t mean what it used to mean where you’re walking in to the store and deferring to brand so that you can be assured you’ll get the benefit.
Dan Ferris:
Well now you can scour the earth from your desktop and find the benefit at a the price you want to pay, at the lowest price, right? So to me that’s how brand has changed and it has powerful implications. I think it has implications for value investors because we talk about those deals, Instagram and stuff, and they look ridiculous by traditional metrics on the face of it, but then you think, “Well, how is this thing …” the distribution pipe is the internet and kids are already in love with it. People are already in love with it and can’t be without it on a daily, hourly basis and that has to be kind of enough for you and you have to understand how those things can be monetized.
Tobias Carlisle:
I’m glad you raised Instagram because I think that’s … one of the interesting features of Instagram is how good their ads are at targeting stuff that I like, particularly, and I’ve had this conversation with other people. They like the ads, too. You can scroll through and the process id different where previously you needed to and find the thing that you wanted and now you find the person who you trust who gives you … who just recommends these things to you that you like and that puts a lot more power in the hands of those influencers, I guess.
Dan Ferris:
It does. It does. It’s change … it’s game changing. Instead of deferring to brand as you walk through the supermarket, you’re walking through Instagram, if you will, and deferring to that individual, that influencer. Yeah.
Tobias Carlisle:
And also Instagram’s recommendation engine seems to be very good at it knows the kind of clothing, for example, that I like and it recommends this stuff to me all the time. I’m like, “That’s pretty cool.” I’ve bought stuff from Instagram.
Dan Ferris:
Yeah, and I have to say Facebook, too. Facebook and Instagram, they’re right on me. They know what I want by the hour. I spend fewer hours on both of them now than ever-
Tobias Carlisle:
I have to consciously do it for Instagram. I get a bit of an ick factor from opening up Facebook, but I definitely have to consciously do it for Instagram.
Dan Ferris:
Yeah, I hear you on Facebook. I’m hardly ever on it anymore. There’s something about it and I think maybe ick factor’s a good way to think of it. Every time I open Facebook, it’s funny. The same company owns them. Every time I open Facebook, I see Mark Zuckerberg in front of me and there’s something about the way they run this company that rankles me so I’ve-
Tobias Carlisle:
It’s almost like we overshared a little bit for some period of time and now I don’t want to go back in and see all of that stuff that I overshared, even though I haven’t been … I haven’t put anything on it for years.
Dan Ferris:
Absolutely. I’m ashamed. I don’t want to-
Tobias Carlisle:
That’s what it is.
Dan Ferris:
… go back and face it. That’s right.
Tobias Carlisle:
Where as Instagram’s a bit more passive. I don’t really feel the need to share anything on Instagram. I’m just looking at all these other people who are sharing stuff on it.
Dan Ferris:
Ditto. Yes. Totally agree.
Tobias Carlisle:
Very clever. But then I live my life on Twitter because I really love … Twitter’s a very interesting tool and I think it’s so funny that … I think that Twitter’s got a lot more potential than many of these other ones because I think that Instagram’s probably close to its potential, but Twitter seems to have just been … it seems to be terribly run. The ads that they serve me are nowhere near what I want to look at. I’m producing a lot of verbiage on that thing. They must have a pretty good idea what I’m about.
Dan Ferris:
Yeah. Yeah, they can look through my profile and read a week of tweets and be all over me but-
Tobias Carlisle:
You would think.
Dan Ferris:
… not. They’re so not. I mean, I don’t think they’ve ever tried to sell me … in my profile it says something about classical guitar or something. I’ve never seen a music product pushed at me on Twitter. Never.
Tobias Carlisle:
They’ve started doing this, and one of the other funny things is there are three different experiences. If you’re on twitter.com that’s one experience. If you use TweetDeck, that’s another different experience. And then if you use the mobile version of it, that’s a different experience again. There’s many more ads on the mobile version and they’re all stuff that I have no interest in.
Dan Ferris:
I’ve noticed, too, the difference between the mobile and just twitter.com, where I mostly am. The feed is different, but equally useless in terms of ad content.
Tobias Carlisle:
I just wonder if Elliot can do something there, Elliot and whoever the big VC firm that they’ve … I think they’ve each sunk in a billion dollars.
Dan Ferris:
Yeah, yeah, yeah, yeah. I don’t know who they are, either.
Tobias Carlisle:
One of the bigger names.
Dan Ferris:
Yeah. It’s funny, I never really seriously considered Twitter. Maybe if it gets beaten up again at some point.
Tobias Carlisle:
Yeah, it’s just hard to … it’s hard on traditional metrics, the way that I prefer to look at these things, to even kind of assess the potential of the business or the valuation. It’s just hard to get a bead on where it is, what it can do.
Dan Ferris:
Right. You know, that Buffetty kind of bond with the coupon that grows idea, it was great for Coca Cola in the day, but it doesn’t translate to Twitter.
Tobias Carlisle:
It doesn’t to Twitter. I do think it does for some … I think you can do it for Facebook. I think you can do it for Google, for Microsoft. I think you can do it for those ones. Twitter’s almost still back to being a startup or something.
Dan Ferris:
Yup. Yeah, Twitter is like … for years now, for a decade-
Tobias Carlisle:
Yeah, a decade or more, yeah.
Dan Ferris:
We’ve all been sitting here saying, “They’re going to figure this out. They’re going to do it. They’re going to monetize real … and I’m still looking at my watch and looking at the calendar and waiting.
Tobias Carlisle:
And it’s expensive. I mean, it looks … it’s optically, it’s still a big, kind of expensive thing so it needs to kind of do something. That’s why its just in no man’s land for me. It’s not cheap enough to do anything and it’s not enough to do anything either.
Dan Ferris:
Yup. It is. It’s just out there in limbo.
Tobias Carlisle:
I’ve enjoyed chatting to you, Dan. If folks want to get in contact with you, what’s the best way of doing that?
Dan Ferris:
You can find me on stansberryresearch.com. S-T-A-N-S-B-E-R-R-Y research.com. We also … I found out something recently. You can type worlddominators.com and it goes to the extreme value part of the Stansberry website. Somebody in the company ten years ago bought that name and stuck it out there. We never did anything with it. Worlddominators.com and it’ll take you right to Extreme Value on Stansberry’s website. It’s funny.
Tobias Carlisle:
We’ll throw links up to that in the notes. You’re on Twitter as well. What’s your Twitter handle?
Dan Ferris:
I’m @dferris1961 on Twitter.
Tobias Carlisle:
Very good.
Dan Ferris:
Or if you type Dan Ferris, I think that I should come up.
Tobias Carlisle:
Well, it’s been great chatting to you, Dan. Dan Ferris, editor of Extreme Value. Thank you very much.
Dan Ferris:
Thank you, Toby. Always a pleasure. Any time you want to talk, we’ll talk often I’m sure.
Tobias Carlisle:
Pleasure’s mine. Thanks, Dan.
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