How Porter Changed My Career

The latest on WeWork... No, it's not a typo... Why I keep writing about WeWork... Celebrating our 20th anniversary... How Porter changed my career... The 'ultimate resource'... One of the biggest lessons I've learned in the past two decades...

The WeWork saga continues...

Earlier this week, the Wall Street Journal reported that Japan-based conglomerate SoftBank would take control of embattled coworking firm WeWork.

The deal involves several parts...

The largest piece is a $5 billion loan from SoftBank to WeWork. And SoftBank will also move up a $1.5 billion investment in the company that it originally planned to make next year.

But the most interesting parts of the agreement center around how embattled WeWork co-founder and former CEO Adam Neumann will get paid.

That's not a typo.

The guy who authored WeWork's yogababble mission to "elevate the world's consciousness" but really just ran a lousy real estate model into the ground will get paid... as much as $1.7 billion.

First, SoftBank said it will buy up to $3 billion worth of employee-held shares. Under the deal, that could include up to $970 million worth of Neumann's shares. (Note that this $3 billion won't go into the company's coffers. It's a straight payout to the people who own the shares.)

Then, there's a $500 million loan – aimed at helping Neumann pay off a loan for the same amount from financial-services giant JPMorgan Chase (JPM), whose competing bailout package was turned down.

Finally, SoftBank will also pay Neumann a $185 million "consulting fee." I (Dan Ferris) can only assume this fee is compensation for his obvious pyrotechnical expertise...

Neumann certainly knows how to burn through cash with the best of them. Remember, the company lost almost $1 billion in the first half of this year alone.

All told, it's worth roughly $1.7 billion for SoftBank to get rid of Neumann. Does that mean the company thinks he would definitely destroy more than $1.7 billion in additional shareholder value if he stuck around?

According to the Journal, the company planned to cut "thousands of employees" earlier this month but couldn't afford the severance payouts. And everyone left standing must know their jobs are in jeopardy... Yet Neumann – the guy who lit the fuse – gets away with up to $1.7 billion in compensation. If only those employees were as worth getting rid of as Neumann.

Employees commenting on an internal messaging system said things like, "You've got to be kidding me," and "So we're too broke to pay employees severance, but Adam gets $200m?" Some employees have simply stopped showing up to work, according to a recent Bloomberg article.

Maybe SoftBank made a typo in the bailout documents...

In the section on Neumann, maybe the company's officials wrote "will receive $1.7 billion" instead of "will pay $1.7 billion."

Perhaps most painful of all for SoftBank is that the bailout deal now values WeWork at about $8 billion... SoftBank's total investment was nearly $11 billion before its bailout. Now, it's in for almost $20 billion. The deal gives SoftBank roughly 80% ownership in WeWork.

But maybe it's not as bad as it seems...

In January, SoftBank invested $2 billion into WeBlinkedAndItWasGone at a $47 billion valuation. The new $8 billion valuation is only 83% less than that.

It could be worse. It could be $4 billion... or $2 billion... or zero. Stay tuned.

In July, many investors eagerly awaited WeWork's initial public offering ("IPO"). Then, the company's IPO prospectus came out in August, showing the ugly financial reality of a flawed business model and the self-dealing of its founder. Now, the company is on life support.

That's the thing about a company whose job is to light money on fire. The wind shifts, and before you know it, the money has lit the company on fire.

At least WeWork never got a chance to go public...

Earlier this week, on the Stansberry Investor Hour podcast, I spoke with my good friend and SentimenTrader.com founder Jason Goepfert about the WeWork debacle. He noted that we should take heart in the fact that WeWork's IPO was called off before infecting a whole new class of stock market investors.

As it stands, the primary injured parties are the starry-eyed, overzealous venture capitalists at SoftBank... the company's Vision Fund investors, including the kingdom of Saudi Arabia, which has trusted SoftBank with investing tens of billions of dollars in recent years... and the thousands of employees who will lose their jobs. I expect to see enthusiastic interest in SoftBank's $3 billion tender offer, as those folks cash out prior to their impending job hunts.

Other money-burning companies have noticed, but they don't seem to get the point of it all...

Jill Woodworth, chief financial officer at exercise-equipment company Peloton Interactive (PTON), took part in a panel discussion at Fortune magazine's Most Powerful Women Summit in Washington, D.C., on Monday. And out loud, in a place where other people could hear her, she said...

I look at WeWork, and I have so much sympathy. When I look at how quickly the market sentiment can change and companies don't live up to expectations, it's absolutely gut-wrenching for management.

Woodworth later added, in response to a different question, "I've seen how market sentiment can shift on you, and the idea of changing your entire strategy based on a market shift is not something we want to do."

Woodworth is confusing "market sentiment" with the ticking clock of unprofitable revenue growth and investors' rapidly falling tolerance for yogababble (of which Peloton has spewed plenty, claiming to sell "happiness" to its $39-a-month subscribers).

I might be reading too much into Woodworth's comments, but it also sounded like she said Peloton wouldn't do anything different... even if investor support for its still unprofitable business shifted right out from under it.

If that's what Woodworth meant, I promise you... This won't end well for Peloton. Regular Digest readers recall the company went public last month, but it was founded in 2012.

Tick tock.

I'll keep writing about WeWork until it's gone, and probably long after that...

It's a pristine example of the nonsense that prevails when investors get excited about risky, awful businesses that light money on fire.

I've occasionally pointed out that all the best investors are more interested in negative action (what not to do) than positive action (what to buy today). It can sometimes be difficult to get that point across to subscribers who think they're paying us for stock picks.

Yes, if you're a subscriber, you're paying us at Stansberry for stock, bond, and options recommendations... But you're also paying us to have more insight than the folks on the other side of those recommendations. You're paying us to know what to avoid, too.

Enough bad news. Now, for some good news...

We're all pretty excited around here about Stansberry's 20th anniversary...

The time has flown by...

As regular Digest readers know, Porter started the company in 1999. I joined roughly a year later – in September 2000. I've been at Stansberry longer than anyone but Porter. (Stansberry Venture Technology editor Dave Lashmet was hired before me, but he took a break from Stansberry for several years before coming back to the company.)

It seems like yesterday that Porter and I were sharing an apartment in Baltimore's Bolton Hill neighborhood. It amused both of us to see the drug dealers and hookers congregating outside.

After reading Hit Makers by author Derek Thompson, it's easy to sum up my entire experience at Stansberry...

In the book, Thompson tells the story of how Impressionism – the 19th century art movement – began with seven painters' works exhibited at the Musée du Luxembourg in Paris in 1897 (Monet, Manet, Degas, Renoir, Cézanne, Pissarro, and Sisley).

Other artists painted in a similar style, some clearly as talented as the famous seven. But none of those folks became as famous as the seven artists at the Paris museum.

If you were an impressionist artist in 1897, you wanted your paintings hung in that first Musée du Luxembourg exhibition. And in my mind, if you were a newsletter editor at any time over the past two decades, you wanted Stansberry Research as your publisher.

I have no illusions that I'd have been anywhere near this successful under any other publisher...

It's also highly unlikely I could wake up every day and focus solely on where we stand in the current cycle... and more important, what I believe you should do about it as investors.

I remember an early experience that nearly caused me to quit the industry forever...

While working for another newsletter publisher in Baltimore, I had decided not to issue a new investment recommendation one month. I simply didn't find a stock that I felt was compelling enough to tell my subscribers to buy. I put the draft of the newsletter on my publisher's desk, expecting his usual edits and ideas back on my desk the next morning.

Minutes later, my publisher stood in front of me with a scowl. He asked, "Where's the new pick? You MUST have a new pick every month."

At that moment, I learned how the business really worked at the time... It was run by publishers, marketers, and copywriters who specialized in making promises they knew couldn't be kept. They never seemed to care much about the content they were selling.

Folks like me were considered "editorial" employees... and largely viewed as an afterthought. I refused to make a new pick, and somehow didn't get fired. But I was discouraged by the episode, and thought maybe I was making a mistake with my life.

Fortunately, not too long after that, Porter hired me...

Porter saw the same problems in the financial-publishing industry that I did.

But being much smarter and more entrepreneurial than I was, he went about fixing them with boundless energy and focus. I interpreted Porter's basic attitude as, "By all means, you should get excited about what you're selling. But why can't we also treat our subscribers with some respect, by providing high-quality research?"

Before Porter, copywriters and marketing experts drove the financial-newsletter industry. But thanks to his hard work, the business is now driven by real research and the ideas and insights of the people doing that research.

I doubt it'll ever go back to the other way again, thank goodness.

Stansberry is the biggest and – in my totally biased opinion, of course – the best in this business today. And it's not by accident, either.

I know this is self-serving, and I'm simply asking you to trust me... but I can honestly say Porter's success comes as no surprise. Even though he's 11 years younger than I am, I always knew – from the first time I spoke to him – that he understood business better than anyone else... especially better than our immediate superiors back then.

Most people just don't understand the markets and business the way Porter does.

If they do get it, they tend not to be as great at expressing themselves through spoken or written word as he is. Most folks let the headlines and other people's opinions influence them too much. Porter does all the work and makes up his own mind... and tends to hire folks who do that, too. That ethos has trickled into every nook and cranny at Stansberry.

In addition to letting me ride his coattails to my own modest success in this game, Porter also aided my intellectual development on financial matters in those early days...

For example, back in the 1990s, Porter studied top technology futurist George Gilder's work. I liked Gilder, too, but Porter also turned me onto another important thinker back then, someone who made a bigger impression on me in our early days in this business...

I'm talking about economist Julian Simon...

If you recognize Simon's name, it's likely because he solved the problem of airline overbooking.

Airlines don't like planes with empty seats. They want to sell out every flight. But to do that, they wind up selling more tickets than available seats on the plane. It created headaches... until Simon suggested offering passengers an incentive to take a later flight.

If you've ever been sitting in an airport waiting area and heard an airline representative announce they're giving away "$300 in air travel" or a similar incentive to anyone willing to give up their seat and take a later flight, you know what I'm talking about.

That was Simon's idea. He came up with it in the late 1970s... And it's still in use today.

Porter told me about Simon's magnum opus, a book titled The Ultimate Resource 2...

It knocked my socks off...

You see, when Porter and I met, I was writing a (now defunct) newsletter that mostly focused on mining and other natural resource stocks. The prices of natural resources rise as they become more scarce, and fall as they become more abundant.

Most folks believe they're becoming more scarce all the time...

But Porter, having studied economics in college, knew that was hogwash... In general, the supply of raw materials constantly increases, contrary to what most people believe.

Most folks just can't wrap their heads around the fact that technology can dramatically increase supply of all kinds of natural resources... keeping inflation-adjusted prices low over the long term. I didn't know it, either... until Porter explained it to me.

The thing is, the resource in the title of Simon's book isn't anything the mining industry digs out of the ground – or any other tangible product, for that matter. Simon viewed "human imagination coupled to the human spirit" as the ultimate resource. He said it would continue to make raw materials more abundant, causing prices to fall in real terms over the long run.

Simon put his money where his mouth was, too...

In the 1970s, environmental doomsayers predicted that we'd run out of various raw materials by the start of the 21st century. (A famous and subsequently discredited book called The Limits to Growth was published on this topic in 1972.)

But Simon knew better... He knew raw materials had become more abundant (and therefore cheaper) due to technological advances. He also believed the trend would continue, thanks to our relentless pursuit of progress.

In 1980, Simon made a 10-year bet with biologist and then-famous doomsayer Paul Ehrlich, author of the 1968 book, The Population Bomb.

The two men agreed on a list of representative raw materials. The bet was simple... If Ehrlich was right, prices would have to rise over the ensuing decade as the supply dried up. If Simon was right, the prices would fall as the supply increased through 1990.

Though the global population grew by 800 million from 1980 to 1990 – the largest single decade increase ever measured up to that time – the prices of all the raw materials fell... So Simon won the bet. (There's also a 2013 book about this specific situation called The Bet.)

Simon's protégé, writer and economist Stephen Moore, released a book in 2000 based on Simon's work called, It's Getting Better All The Time. The book detailed the dramatic improvements in the global standard of living that occurred throughout the 20th century.

In 2015, author Yuval Noah Harari published another book, Sapiens, that shows how our species' success stems from our ability to organize... and that we organize best and most around things that don't exist – laws, rules, nations, gods, religions, rights, and more.

Well, perhaps these things do exist, but their existence is intangible... just like the innovation and ideas Simon championed as the ultimate resource.

For investors, the implication of Simon's work and Harari's insight is powerful...

Businesses based on intangible assets employ less capital and earn higher returns than those based primarily on tangible assets.

For example, mining is a notoriously awful business. It requires huge amounts of upfront capital before you can earn a penny. The products – like gold and silver – require an army of union workers to extract and process... not to mention big, expensive machines. And because every gold mine produces the exact same thing, mining companies don't have any pricing power.

On the other hand, a software-based company like Facebook can literally be started in a dorm room, with no more upfront investment than a laptop and an ambitious student's spare time.

This is the idea of "capital efficiency" that Porter has written so much about. Longtime readers know chocolate maker Hershey (HSY) is one of his most prominent examples.

And of course, many folks know about investing legend Warren Buffett's famous transition...

Decades ago, Buffett went from buying companies with tangible assets at a discount – like his mentor, Ben Graham, did – to buying great businesses based on enduring intangible brands. The most famous example is his purchase of Coca-Cola (KO) shares in the late 1980s...

Nobody asks for caramel-colored sugar water. They ask for a Coke.

Attaching a desirable intangible to a tangible product is what most marketing is about. Coke is "always refreshing." American Express (AXP) credit cards are accepted everywhere. ("Don't leave home without it.") Even Peloton says it's really selling happiness!

Some businesses have yet to fully take advantage of the power of intangibles. Some can transition from putting large amounts of capital into tangible assets to putting less capital into intangibles, generating bigger returns than you'd ever expect...

In the October issue of my Extreme Value advisory, we found a company that's doing a "magic trick." It's turning a tangible asset into a much less capital-intensive intangible... and earning much higher cash flows and much higher returns on the smaller amount of capital its business now requires.

Imagine turning a regional water utility earning a 10% return on equity into Coca-Cola, which earns about 37% on equity today. The analogy sounds crazy, but that's simply a function of how underappreciated the power of turning tangibles into intangibles is.

If you've read Simon, Harari, or Porter's work on Hershey, you understand what I'm getting at... It all ties into the core of what helps us humans succeed at employing our hard-earned capital. What makes us human is our ability to create valuable intangibles in our lives.

It's one of the biggest lessons I've learned over the past 20 years. And as I explained earlier, I doubt I would have learned it so well if I were working anywhere else.

I hope it's like this for another 20 years... and that you're with us the whole time.

On that note, we're celebrating our 20th anniversary with you in mind...

We've spent the past few weeks putting together something special for our subscribers.

I recently flew to our headquarters in Baltimore to sit down with some of the other folks who have helped Stansberry Research grow over the past two decades.

True Wealth editor Steve Sjuggerud, who has known Porter since their days growing up in Florida, was there. Dave Lashmet and Retirement Millionaire editor Dr. David "Doc" Eifrig also joined us. So did Stansberry Portfolio Solutions portfolio manager Austin Root.

We gathered to share our favorite memories from the past two decades... and to discuss how subscribers like you have repeatedly told us about how our work impacts your lives. This rare "look behind the curtain" also came with two important announcements...

In short, these moves could forever change how you can use our research. To see what sets us apart from other publishers – and why close to 80,000 people like our work so much that they chose to receive it for life – I hope you'll take time to watch our message right now.

New 52-week highs (as of 10/24/19): Americold Realty Trust (COLD), New Oriental Education & Technology (EDU), SPDR Euro STOXX 50 Fund (FEZ), iShares U.S. Home Construction Fund (ITB), Lennar (LEN), O'Reilly Automotive (ORLY), Procter & Gamble (PG), Polymetal International (LSE: POLY), and TAL Education (TAL).

In today's mailbag, two longtime subscribers weigh in on our 20th anniversary. Have you been with us since the early days? We'd love to hear how you're doing. Drop us a line at feedback@stansberryresearch.com.

"Congrats on 20 years, Porter... I've been with you almost the entire time. I think I started in December 1999. I remember the Pirate Investor days. In fact, I still have you bookmarked as 'Pirate Investor.' Here's to 20 more years of success." – Paid-up subscriber Eric M.

"Dear Porter & staff, I just completed watching the video presentation about the 20th anniversary of Stansberry Research. While I usually just like to read transcripts (when that option is available), I'm so glad I invested the time in watching your presentation.

"It was great to get to know your friends and business associates a little better. In fact, when Dan Ferris told Dr. Eifrig 'F – U' in the spirit of jovial camaraderie in a reflective segment when discussing the scariest or most disappointed historical moment in company history, I virtually fell off my desk chair laughing. It is quite refreshing to see your associates' friendships played out in real time and space. If I may, this reminds me of a Scriptural lesson that I think is exemplified by you and your staff: 'We love because He first loved us.' – 1 John 4:19

"While I didn't think I would be investing additional money into your services at the present time, I was pleasantly surprised at the value of the services in addition to my Flex membership. While my goal over the next year or two is to become an Alliance member, this is a tool/s which will help me to achieve that goal.

"With gratitude and deep respect for your personal character and the character you've developed throughout your company." – Paid-up Stansberry Flex subscriber Robert

Good investing,

Dan Ferris
Vancouver, Washington
October 25, 2019