Episode 378: Cannabis Stocks Are Your Next Big Investment Opportunity
On this week's Stansberry Investor Hour, Dan and Corey welcome Aaron Edelheit back to the show. Aaron is the founder and CEO of private investment firm Mindset Capital. He joins the podcast to talk about his investing philosophy... the importance of relieving mental stress... and all things cannabis – from its "great replacement" of alcohol to its legalization in more and more states.
Aaron begins with a story about how he received advice from the legendary Charlie Munger on the "price of admission" of being an investor. He explains that this advice made him reflect on his own strengths and realize that he wanted to exclusively do long-term investing rather than trading. This leads to a conversation about investor psychology and mental strain. Aaron shares a few tips for relieving the anxiety surrounding investing, from turning off your phone and computer one day a week to doing hot yoga.
In my business, what investors are paying me to do... is make good decisions. That's my job – literally to make good decisions. And so, as a money manager, I've got to put myself in the best possible place both physically and mentally to make good decisions.
Next, Aaron talks a bit about his investing background, his career path, and how he finds opportunities where others aren't looking. Today, he believes the big opportunity is in cannabis stocks. He explains that certain companies in this industry are breaking out despite the lack of federal reform. Aaron also drops a non-cannabis name that he's interested in and gives an alternative perspective on value stocks...
You can make an argument [that] somebody investing in Nvidia like four years ago was a value investor... The other way that you can create value is just being like, "Hey, I understand this trend, and I understand where earnings are going, and I understand this business model."... It's this reproducible kind of model: The company gets capital, they reinvest it at very high rates of return, and there's something that people aren't seeing. That's where real value [is created].
Finally, Aaron compares today's investing landscape with that of the 1990s. He shares that there's much more financing of private companies today, which stops them from going public for longer (if at all). After, Aaron makes his case for cannabis stocks. He believes that they will eventually steal market share from drug companies and alcohol producers once more people realize the benefits and switch over...
It may be a while before the financial world is able to participate in cannabis. I may be sitting there for a while. But I have growth trends behind me, where state after state is legalizing, and people are turning to it because... "Oh I'm sleeping at night because of this," or alcoholics being like, "Well, now I have a cannabis beverage and I'm not an alcoholic anymore."
Click here or on the image below to watch the video interview with Aaron right now. For the full audio episode, click here.
(Additional past episodes are located here.)
Dan Ferris: Hello and welcome to the Stansberry Investor Hour. I'm Dan Ferris. I'm the editor of Extreme Value and The Ferris Report, both published by Stansberry Research.
Corey McLaughlin: And I'm Corey McLaughlin, Editor of the Stansberry Daily Digest. Today we talk with Aaron Edelheit, CEO and founder of Mindset Capital.
Dan Ferris: And Aaron is also the author of The Hard Break: The Case for the 24/6 Lifestyle, in which he advocates just getting completely away from your job, and your phone, and everything, at least one day a week. And I got to tell you that book did change my life. I wasn't able to do it right away, but I was eventually able to do it. And man, I got to tell you, it's so good, just the idea of getting away from whatever it is you're mostly focused on most of the time.
And we do a lot of writing. So I discovered, through Aaron's book and just my own experience, that getting away from it makes you better at it. It makes your mind fresher. And there's a certain amount of time you need to spend away from things. So I've learned a ton from Aaron. I've known him for years. I've seen him speak at multiple investment conferences over the years, and he's just a very smart, contrarian, value-oriented investor, who's had some great experiences that he spoke with us about, and I just – I can't wait for you to hear this. Talking with Aaron is always a great deal of fun. So let's do it. Let's do it right now. Let's talk with Aaron Edelheit. Aaron, welcome back to the show. Good to see you again. Thanks for being here.
Aaron Edelheit: Good to see you, Dan.
Dan Ferris: Yeah, I had to look it up. It had been so long. It's been since July 2020, so I – there's four years of stuff to talk about. The first thing I want to talk about with you, Aaron, is I knew you're coming on the show, and I know you have, like, Mindset Capital is a really good website for your business. And I went there, and the first thing I saw was this post that you had put up, in March of 2020, about calling Charlie Munger on the phone, and he called you back. In like March of 2020, the world was on fire.
Aaron Edelheit: Well, to clarify, I posted – so it's very interesting you bring that up, but so I actually did [crosstalk] –
Dan Ferris: Yeah. Okay. I see.
Aaron Edelheit: I actually didn't contact him on March of 2020. What I did is, when the world was melting down in March of 2020, I was recalling a story of when I called Charlie Munger in October of 2008, and the advice that he gave me, which is pretty incredible. Just as a background, I had an opportunity to meet him, and spend some time with him, and it was just incredibly kind and just available. And I drove with him and talked to him, and he would just tell me how I was wrong about things.
Dan Ferris: [Laughter]
Aaron Edelheit: [Laughter] Anyway, it was, it was really great. And then that was, like, three or four years earlier. And then I would just send him a box of chocolates for the holidays every year. And when October – October 2008, I'm a money manager, and I was getting killed, like the rest of the markets. I was down like 40% or something...
Dan Ferris: [Laughter] Like everybody else. Yeah.
Aaron Edelheit: And out of the blue, it was very, very scary times, the end of 2008. And I remember, I'm like, you know what? I'm just going to call Charlie Munger. I'm going to see if he wants talk. And I called his assistant, and I told that, okay, I want to – I'm Aaron Edelheit. I don't know if you remember, I spent time with him, like, a couple years ago. And I just wanted to ask him, like, for advice or how he's thinking about this. And she said, okay, well, let me see.
And then I don't know – I forget it was, like, an hour or two later, he calls up, I'm talking to Charlie Munger. And, like, 10 or 15 minutes into the conversation, he goes, "Hold on a sec," – or he goes, "Warren is on the other line. I'll call you back." Click.
Dan Ferris: Wow.
Aaron Edelheit: And I'm – I'm looking at my phone, and now looking back, you read the story, they were like, literally saving the financial world, right?
Dan Ferris: Right. Yeah.
Aaron Edelheit: Why are you talking to a schmuck like me? Go save the economy or something, save these Bank of America, our banking system. And he calls back like 30 minutes later, and what he basically told me is that the price of admission to be a really, really good, or not even great, but just to be an investor, is every now and then, the market will fall 50%. And he was recounting how it happened in his life when he was a money manager. And he's, like, that's the price of admission to being an investor, is that you're going to have panics, and you're going to have things that are really scary, and this is all part of being an investor.
And then two weeks later, got in the mail with no note, but it was from him. It was like, it had the address of Charlie Munger. And it's he had printed out the year-to-date performance of some of the best money men of all the top like hedge-fund managers. And he had highlighted ones that he had, that he respected, and they were all similar to the numbers that I was. And that's all he sent. And his message was, "You're no different than anyone else. It's happening to everybody."
And it was just this amazingly kind gesture that he did in a very, very scary time to a person he barely knew, to just be like, "Hey, this is what happens. Let me share my advice." He didn't tell me, like, "Oh, you should go buy this or that," or, "This is what I would do if I was in your situation." He was just like, and out of that is, and I'm sure we talked about this in 2020, is out of that, it was like I had a side business where I was buying foreclosed homes.
And I don't know if this gave me the confidence, but I decided to really just start leaning more into that. And then eventually that ended up being 2,500 single-family rentals. So I like to think that that was kind of like the genesis of just, hey, let's tone down the emotions. This happens regularly. It sucks. Now, what are you going to do about it? Right?
Dan Ferris: Yeah.
Aaron Edelheit: And that this is the price of what happens. And then, like at any time, stocks can fall 20%, 30%, 40%, 50%, and it's a regular feature of the stock market.
Dan Ferris: Right. It's a regular feature that drives people nuts.
Aaron Edelheit: Yeah, like every 10 year, five, 10, 20 year, you're going to have a period that is super scary, or it feels like the world is ending. And let me tell you, 2008 is about the closest that I have felt, and I think a lot of people in hindsight, because of what was happening. It was about the closest we came to, like, a Great Depression, stock market crash kind of thing. But it's just good to keep in mind.
Dan Ferris: Right. Right. Don't be surprised when it happens, because it's a regular feature. But there was a good lesson, like you had, you told basically that story in what, three or four posts or something. And then it – your point was, how can you help others today? Meaning, you know, during March 2020, when everything was melting down. So you were kind of paying it forward a little bit.
Aaron Edelheit: I was just trying to be like, share – like, look, this is a very scary thing, but let me just share this advice. And then the reality is, because of a lot of things, and we don't have to go into this, like, the market snapped back. And it was – it's just a reminder that when things are the most scary, or things are scary, is that there's actually, there can be lots of opportunity.
Corey McLaughlin: Yeah, I have to imagine that might be some of the best advice from – you could get, possibly get from anybody, but Munger, too, like, in the middle, right in the middle of the crisis, when he's on the phone with Buffett in between. Like, he's obviously, [laughter] [crosstalk] – going through all these things.
Aaron Edelheit: He was incredibly cool. He was incredibly calm, yeah, incredibly calm, just explaining, oh well, in the '70s. And he had some – if you ever go back to his old numbers, he had a couple years that were terrible. And then he bounced back, and then he actually retired. Like he, he just was like, "I'm done with it," for whatever reason. But he was just explaining this is what happens.
And what I find, what's very helpful for me is I'm a very passionate, emotional person, and so it's really, really helpful. And I actively work on, how do I stay calm and cool? And the best investors of all time are these calm, cool people. And so part of it is understanding myself, how I invest, and what I've learned is I'm a much better long-term investor, and I'm not a very good trader. And so what I try to do is put all of my passion into long-term projects, where stuff doesn't really, shouldn't really change, and so I'm not like a yo-yo, freaking out.
And then just also reminding yourself that this happens. You know, so much of investing is just knowing yourself, knowing your emotions. How do you deal when things look scary, etcetera? And so that lesson from him was just incredibly invaluable, and I think about it to this day.
Dan Ferris: Yeah, your story reminded me of Guy Spier's book The Education of a Value Investor, which came out, like 10 years ago, or something. And also a very – it was a very heartfelt, rather passionate story about his own, some of his own rough times as an investor. And it's an interesting topic because most – the overwhelming majority of the time, almost every time it comes up on the podcast here, the point is, control your emotions, or some people even say keep them out of the process, which sounds impossible to me. And then one [crosstalk] –
Aaron Edelheit: I don't think that's the right – I don't think that's the right –
Dan Ferris: Yeah, then one guy we had on the show, John Netto, said he was, he actively wanted to use his emotions, like when he was really scared, maybe that was the time to be bullish, that kind of a thing. So do you have, like, this sounds like it was just a really good little session you had with Charlie Munger. It calmed you down. It helped you out. But do you have specific ways, like you mentioned, long-term investing? Is that your primary way to sort of manage your emotions, is just to stay focused on the long term and don't worry about the short-term wiggles.
Aaron Edelheit: Yes. And that's why I've, I constantly – there will be an idea that'll pop up, and it'll be like, "Oh, that's a really interesting short-term trading opportunity." We all see like, "Oh, I bet that's a –" and then I just remind myself, well, this is not the road. And I used to in the past, when, especially around my first fund, I used to short sell a lot. And now I just don't. Because, unfortunately, because of short selling, and you could lose a lot more than 100% – more than 100% of your capital, you've got to really pay attention to your short term.
And then I see other money managers that are – and this is totally different strategy, right? This works for some people, but they'll be like, 90% or 100% long, and 50% short. And they have all this – here's my gross and net exposure and leverage. And to me, it's like, oh my god, yeah, could I probably make more money doing that? Yes. But with my emotional makeup, the stress would just – it would make me want to focus on the short term, and I want to make long-term good decisions.
I also think there's an arbitrage where everyone's point of view is so focused on what is working right now. How am I positioned? And it's so uncomfortable to be in something that isn't working right now, or why isn't – the crazy thing is like that I see, and I see it prey on people, and it preys on me. It preys on everyone, is, like, you have a thesis or an investment, or maybe your portfolio is structured a certain way. The market's going up, and you're not going up with it.
Dan Ferris: Right.
Aaron Edelheit: It destroys – people lose their mind, like the FOMO, and the – [crosstalk] just like, oh my gosh. Yeah, and I remember the first time this happened to me, when I first started managing money in 1998, I was a golden god. Like, literally, I like 1998 to 2002 I was averaged like 26%, 27% a year net returns. 2002, I think I was up, something like that. Like, 27% – the market was down, I don't know, 40% or – it was crazy, terrible year, 2002. And in 2003 came, and suddenly the market was up, and I was down a little.
I almost lost my mind. I was like, 2003, this was – yeah, I was close to 30. But I had – I didn't have the emotional maturity to be, "Well, if you're doing something different than the market, you're going to underperform sometimes." [Laughter] But I just – it was a very valuable lesson at that time. And then you just study, and you learn, and you learn from history. And you're like, oh, it's, it's okay to underperform sometimes. And it's, but it's like, one of these things that you just kind of learn.
But some of the other things that I've done, that I do, and I wrote a book about it, where every Friday night to – I'm already looking forward to it, every Friday night to Saturday night, I turn my phone and computer off.
Dan Ferris: The hard break.
Aaron Edelheit: And I do not –
Dan Ferris: I love it. Yes.
Aaron Edelheit: Yes. So I –
Dan Ferris: I'm an advocate.
Aaron Edelheit: I don't, I don't know how everyone stays connected to every single person they've ever met, every professional contact. And even if they don't respond, people can reach them, and they'll see it at every waking hour of every day. It's insane to me. And I have a whole book with all this research that shows it is.
Dan Ferris: Yeah, great book.
Aaron Edelheit: And I think that that's another way of just letting off some steam, returning, I'm just Aaron. I'm not an investor. And then I get this whole excitement again. By the end of Saturday night, I'm excited to see what's going on. And the latest thing I've been doing for almost two years, which is really great, because I had a terrible 2022, where I just – I made some mistakes. And then, if you're in small-cap or illiquid stuff, and the tide goes out, it turns out you're not wearing anything.
And what I did is I just realized I had some really good companies. I had made some mistakes, but I still really liked my core investments, but they just weren't doing well. There's not much you can do when stocks aren't doing well. And so what I started doing is regularly doing, this is my wife's insistence: hot yoga. So just in the middle of the day, I just go do hot yoga. And what I have found, and now I do it three or four times a week, is I sweat everything out.
And then somewhere, when I first started, it's like my mind is going because it's the middle of the day, and it's like I have all this stuff, and this is moving, and that. And oh my gosh. And then it slows down, or you're just you're sweating so much, and you're trying – you're at the end, you're just trying to get through it. Like your mind is good. And then I'll take a shower, go right back to work. And I just found my anxiety level and stress level so much lower. And my decision-making suddenly became so much stronger and clearer.
And since the kind of the end of 2022 till now, my funds have been on like a run. I am making much better decisions, and fewer decisions. So not jumping in, and fewer, and just focus. I find myself really, really focused and open. And the day-to-day stuff just doesn't – isn't as extreme to me. And so those are like a couple of things, but focusing on the long term, turning off. And then, most recently, hot yoga. Because in my business, what investors are paying me to do – well, they're paying me if I make money for them.
So I get presented to the problem. So first I have to make money. But what they're entrusting me to do is make good decisions. Right? That's my job is literally to make good decisions. And so, as a money manager, I've got to put myself in the best possible place, both physically and mentally, to make good decisions, to understand who I am, my strengths and my weaknesses. My mentor tells me that your greatest strength is your greatest weakness. And so, I think my great – one of my great strengths is passion and emotion. But in the short term, that would literally destroy me. I probably would be dead if I was like one of these active traders. And so those are some of the things that I'm just cognizant of as an investor.
Dan Ferris: Yeah, I've learned, I've learned the power, well, of your idea about a hard break. I've learned about that. But as a writer over the years, I've just learned the value of the time you don't spend at the keyboard, typing and writing. Things happen. Things happen between your ears that you don't know about, and you need to give them time to happen. And it sounds to me there's an element of that, and certainly in the hard break, but also in the hot yoga. You're just getting away and doing something pretty healthy in addition. And then you come back to it, and you're refreshed, and you've taken a break, and your subconscious has been working on some things, and you've relaxed. It just sounds like you're in a very – it sounds like you're in your flow, right?
Aaron Edelheit: Yeah. No, I think that's [crosstalk] – well, I've always, I've always wondered why some of – some really great invest – VC investors, or other investors, or some executives are so into surfing. And how they'll just pop out at a chance, and go surfing. And I just suddenly realized, it just hit me. I was like, oh my gosh. They can't bring their phone out there. They're out in nature. They're in a flow. They do it for an hour or two. And then they're just heading right back to the grind.
And they've just, in a weird way – the ocean is just kind of washing over you and clearing you out. And just sitting out there, and just, I think people find different ways to kind of deal with the uncertainty and the craziness of life, and investing is just, it just takes all the emotions and psychological, and just amps it up to 11. Right? Fear, greed. Fear, greed. I was explaining this to a friend. And I'm like, "All you're dealing with in the financial markets is like, 'oh my god, I'm going to make a lot of money. Oh my god, I'm going to be out in the streets.'" And it's like, fear, greed. Fear, greed. Fear, greed.
Dan Ferris: Yep.
Aaron Edelheit: And then FOMO, oh, people are making more money than me. This sucks.
Dan Ferris: Yeah.
Corey McLaughlin: Yeah.
Dan Ferris: Yeah. And then once in a blue moon, it's like, "Hey, I did it," and other people didn't. And all the emotions, it's like –
Aaron Edelheit: Yeah, it's like, oh, look at how smart I am.
Dan Ferris: Yeah, exactly. It's so the incentive, somehow, the experience of participating in financial markets, it's like all the worst buttons of human nature are pushed at some point or another.
Aaron Edelheit: And that's why Charlie Munger writes so much about psychology.
Corey McLaughlin: Yeah. Yeah.
Aaron Edelheit: That's why he writes so much about human folly and misjudgment. And what's the most fascinating thing is, when you read so many investors letters, it starts getting into philosophy and psychology. And we're all wrestling with the same stuff. And just trying to figure out, like, hey, how do I, how do I get this in my brain in the right way, and to make good decisions, or to try to guess – in a way, some of it just like almost impossible.
Corey McLaughlin: Yeah, when I first started getting into investing, I had no clue how much was – psychology was involved. Emotion. You got to learn that quickly. But hopefully.
Dan Ferris: Right.
Corey McLaughlin: But I got one question, a quick question for you: How hot is hot yoga? I've always been wondering about this. Is it like sauna level, or – what are we talking here?
Aaron Edelheit: Yeah. Yeah, I'm just – yesterday I did the one that's called "hot power fusion." And it's – at the end, I'm just, it's like I was swimming.
Corey McLaughlin: Can you just – for people that may have not been around in 2020 on this podcast, like myself, can you just kind of explain a little, briefly, your actual – that we talked about psychology and everything, like, what, what do you look at, fundamentally, when making an investment?
Aaron Edelheit: So what do I look for, like [crosstalk] –
Corey McLaughlin: [Crosstalk] With your fund, with the value fund. The value fund in particular.
Aaron Edelheit: So it's really interesting. So I had taken, so my trajectory – just really quick, as I ran an investment fund for 11 or 12 years, and as a side, started buying foreclosed homes. And then in 2011, I looked at my opportunity and said, and this is how I think about things, so it'll answer your question. And I was like, "Well, I have a $20 million small-cap value fund. I'm competing against the best and brightest in the world."
And I'm on the courthouse steps in Atlanta, Georgia, and I'm looking around, and no one's there. And so I just wound down my small-cap fund that I had done well on, and went all in, and ended up buying 2,500 homes. And then sold that company to a public REIT in 2015. Took about three and a half years. Wrote The Hard Break: The Case for the 24/6 Lifestyle, which is actually really hard, writing a book that doesn't suck. I didn't know this was going to be that hard.
And then, when March 2020 came around, I looked at it, and I love investing, and I looked at what was going on, and I was like, oh, man. And I decided I'm going to create a friends and family investment partnership. And I'm going to start writing. And I started doing it just for fun and everything – not for fun, because I thought I could make money, too. But it is fun for me, most of the time. And then what I did is, I – the thing that I'm doing now, more than just regular small-cap value, I saw a complete dislocation, which was fun to be a part of.
But what my main focus now, and how I'm investing is, basically, is, most of it is cannabis. And we can get into that. And then the main thing is, because it's federally illegal at 99.5%, 99.99% of the smartest people on the planet in the investment world are not involved, I feel like I'm standing on the courthouse steps in Atlanta, Georgia, and I'm looking around. And I'm like, I can't believe the kind of companies that I can invest in, and the opportunities, and this long-term opportunity in something that's very illiquid.
And so, kind of what – how I like to invest, or how I like to see things is, I don't like doing what other people do, and I'm looking for long-term opportunities of growth where I just don't have much competition. Because I think that there's really, really, really, really smart people out there. And then you have computers and algorithms, and now AI, and it's like, what edge exactly do I have above them? But then you also have distortions in the market and stuff.
But so, how I'm generally approaching things is, I'm looking for where other people aren't, or something's disguised, or where there's value, that for whatever reason, there's a block between investors coming in or out.
Dan Ferris: It seems like –
Aaron Edelheit: And so when I was buying foreclosed homes – who in their right mind was buying foreclosed homes in 2009, 2012? People – especially in 2010. People looked at me like I had a third eyeball. And so I run towards the fire. So, like I had launched a cannabis fund. I told you, I had a bad 2022. I had launched the cannabis fund. One of the reasons I got into cannabis is I'm a workaholic. That's one of the reasons I do the Sabbath. And so it's hard for me to turn off my brain. I suffer from bouts of insomnia.
And so, a low-dose gummy has been life-altering for me. And now just knowing I have it is kind of all I need, because I know that if it's like 1:00 a.m., 2:00 a.m., 3:00 a.m., and I'm not sleeping, I can take one. And every now and then I need to go through, like a week where I'm taking it, but it got me interested in it, and I launched a dedicated cannabis fund at the end of '21, beginning of '22, when cannabis stocks were down 50% right? And I said to myself, oh, how much further can they go down? Well, actually, apparently, another 50%.
Dan Ferris: Yes. [Laughter]
Aaron Edelheit: And so that was less than fun. But since then, one of the great things, if you invest in companies that are doing really well, or doing something really well, and generating cash flow, and really growing, like the stock price eventually will take care of itself. And so that's been very helpful recently.
Dan Ferris: Yeah, it seems like every now and then there's some noise about federal legalization in the US. And then, if you just use the MSOS ETF, M-S-O-S, just as a gauge, like, that'll pop up two or three bucks. And then we don't hear about it anymore, and it'll settle back down. And so, I just tend to look at that, and I'm kind of waiting, I'm like, I expect to look at it one day and see it – I think it's five or six bucks or something still.
I haven't looked recently, but I expect to look one day and see it's 15 bucks. Whoa. It happened. It's happening. It started. But I feel like the political momentum, it just seems to really weigh on the market for that. Am I right?
Aaron Edelheit: Yeah, well, I think part of what's – so there's a whole bunch of issues inside cannabis that make it utterly fascinating. But one of it is, is that of the investors that are in cannabis, they mainly focus on the top five companies and the MSOS Index. And everything kind of underneath that is kind of ignored, and most of the volume in the market kind of goes to those companies. And there's very little research that's gone on, very little due diligence in general, on unit level economics, or, you know...
And most of the focus that I find in cannabis is when is federal reform going to happen? Because when federal reform happens, then this big trade is going to happen. I'm going to make a lot of money in the short term. This goes back to our conversation about everyone wants to know when is it going to happen. I don't want to invest until what happens if it takes too long? I don't want to wait. Who wants to wait? And so while it is frustrating...
And one of the things I write about, and I talk about is our federal government was set up so that nothing is done. They act like lots of stuff happens and is done, but they don't – it's literally set up, so it's really hard for change to happen or anything to happen. And so we've gone on in this process of like federal reform, and cannabis is not like a top 10 issue for most people, and it's very popular across everything. And state by state are legalizing it in different ways. And the federal government is just like on a different path and time.
So for me, based on what I see in my research, etc., what I believe it's this question of when, not if. And that you just have to be patient, that there are times it's going to be disappointing, and pop, but that the direction is very clear, and it's kind of absurd that it's the schedule one, like it's the most dangerous drug in the country. It's the absurdity of cannabis is just part of it, and the history is horrifying about why it's, you know, it's federally illegal. It's just because of Richard Nixon, and him wanting to target African Americans and hippies against the Vietnam War. It's just very clear. That's not even in dispute.
Dan Ferris: No, John Ehrlichman said it out loud in public, in an interview.
Aaron Edelheit: Yeah, yeah, yeah. So it's just kind of a joke. And there's so many myths around the plan, about the process of the plan. And so what – the way, the approach I take, is what companies are focused, operationally excellent. They're showing that they're doing something different, and just following basic research and due diligence. And what I'm finding is some companies are starting to break out despite the lack of federal reform, excessive regulation, taxation.
And you just have to – it's almost to me, when I think about cannabis, is, like, you're investing in a developing country. They're shifting regulations. There's an illicit market and a gray market, and things are changing all the time, but the growth is fantastic. And so it's like, yeah, there's risks, and yeah, there's stuff, but it's very clear kind of where it should be going, and that there's lots of opportunity. And again, what I love is that no one else is doing.
And I'm happy to get into specific companies or not, but there's one, my largest investment, I'm working on an earnings model with them, with my analyst. And I suddenly stop, and I'm like, how many, how many people do you think have actually worked on an earnings model for this company? And we kind of came together, and we thought there might be four, maybe three, in the entire world, and that we were two of them. And this is a company that I believe is going to be growing at triple digits, and we'll have over a 50% EBITDA margin next year. Right?
So it's just an exceptional company that – and so, like, that's the kind of opportunity that I see. It's the equivalent of, like, hey, I'm buying a safe, suburban three-bedroom home in Atlanta for $50,000. That doesn't seem right, you know?
Dan Ferris: Yeah, that's amazing. I just want to be clear on something, like, are you solely focused on cannabis or just kind of [crosstalk] –
Aaron Edelheit: No, I have other. I have other.
Dan Ferris: You have other. Okay.
Aaron Edelheit: Well, it's I wrote about that, but, like Charlie Munger says the first rule of a fisherman is the fish where the fish are, and the second rule is to not forget the first rule. And so, what's super weird is I have this general value fund that's now mostly cannabis. And I have a dedicated cannabis fund. And what I find is, there are opportunities. And I have a wonderful long-term investment in a company called "Nelnet," which I think is probably the best successor model to Berkshire, in terms of just a phenomenal track record of growing book value.
It's a complicated story. Once you get in, it looks like a student loan company, but is actually a technology – has a bunch of technology investments. And it's out of Lincoln, Nebraska, and no one really covers it, and no one follows it. It has this phenomenal... So I have investments like that, and other things like that, but most of my investments are like, if I just offered you, like, "Hey, I think there's a company that's growing a triple digits, that has a 50% EBITDA margin. It has all these competitive advantages. And, oh yeah, you can buy it at 4 times next year's cash flow unlevered." You're going to be like, "Wait. Why are you focusing on anything else exactly?"
Dan Ferris: Yeah. Yeah.
Aaron Edelheit: That's what I see.
Dan Ferris: Yeah, that's so cool, man. Because there's the narrative that is everywhere is, value is dead. And you even see articles in various publications that talk about value being dead. But you can tell this is such a general, it's such an unwarranted generalization, and it's not the result of anyone who is doing anything like what you are, going bottom-up, one company at a time, and really trying to focus and find something. Because you can always find something.
I remember that book by Peter Cundill, right? There's Always Something to Do. There's always something out there that is gushing cash, and no one's paying attention to it, for example. So I'm very, very happy to hear that you're finding these things. What, generally speaking, are these – is your portfolio mostly under a billion market cap, or under some amount?
Aaron Edelheit: Oh yeah.
Dan Ferris: It's way under [crosstalk] –
Aaron Edelheit: Oh, yeah, it's – no, no, some of them are close, but I'm – I rarely invest in a large company. I think Nelnet has like a $3 billion market cap, but in terms of the cannabis companies, I have one that's near an $800 million market cap, but some of them that are like $150 million market cap. To me, the size doesn't matter. What matters is do you have a reproducible model or a pathway to growth? I think the problem that most value investors have is they – hey, this stock is undervalued.
I add up this value some way could be a sum of the parts. It could be it trades at a below market multiple, or, this, this, and this, and there's just no growth. Or you don't have a management team that, in any way, shape, or form, is going to realize any value or do any kind of buybacks. And what I've learned is, you're just in a value trap – it just goes nowhere.
And so, like, the difference between – like Nelnet has a dozen old conference calls, has one analyst who, in my opinion, does a terrible job, like basically understanding the company. But that doesn't matter. They don't market themselves at all. And so, you would think it's just like this value stock, the earnings aren't really going. And like stock's going to go nowhere, right?
Well, no, actually, because in March of '20 – in what, in the second quarter of 2020, in one quarter, they bought 4% of their company back. And when the stock goes down, they go to town buying their stock back. And then you – when you analyze it, they're now building up a shareholder base. They're like, oh, wow, they're taking these short-term charges. They do these securitizations, like solar financing and education. Their earnings look really low right now, but look at the cash flow. It's just pouring onto the company's balance sheet.
And look at the long-term growth and book value. And anytime the stock falls, [inaudible] just – who already owns 50 the company is buying back stock. So what I generally see is, you can have an undervalued situation, but if management isn't doing anything, or doesn't have the wherewithal to realize that value, it's just going to sit there. And then and then, or you're growing. And if you're growing, no company's going to sell at 1 times earnings, or 5 times earnings if you're growing.
Dan Ferris: That's right.
Aaron Edelheit: It's just not going to happen. And so the other way you can create value is being, and this is what, clearly, people did, you can make an argument, somebody investing in Nvidia, like four years ago as a value investor. If they understood, this isn't my level of expertise, but there are some people who very clearly understood, hey, there's some shortage. There's something where they can produce this. We're going to have this. We could have this big uplift. And if it happens, the company is going to be able to print money, and these are the different –
And I think the same, there's another value manager, who made this call on Amazon at the beginning of the cloud computing. And I just think that the other way that you can create value is just being like, "Hey, I understand this trend. I understand where earnings are going. I understand this business model." Whether it's like Walmart or Home Depot, or it's this reproducible kind of model. The company gets capital they reinvested in very high rates of return. And there's something that people aren't seeing, that's where real value, and that's what Warren Buffett and Charlie Munger actually taught Warren Buffett to see this.
Dan Ferris: Right. To recognize wealth creation and the and the potential for it to continue massively. Might be one way to sum that up. And so, and because of that, I'm glad you mentioned Warren and Charlie, because of that, a lot of people, you'll hear them say, well, "We're looking for a company with a wide moat and great management." And all these things that that we got from Warren and Charlie, which I find very interesting, because it seemed it's almost like you can't beat that out of the market, like you can still do it to a certain extent. Like you're doing it, you're just doing it with smaller-cap companies, right?
Aaron Edelheit: Yeah. But the difference with me is I'm doing it, but I'm also there's – look, if I was just doing small-cap value, I think this would be a very challenging market to build a portfolio in right now, as I'm, just being honest. I just happen to be in cannabis, where no one's participating, and there are all these barriers because institutional investors are not involved.
There's just tremendous opportunity across the board, actually, in public and private companies now. And I think the other big change from when I started in 1998 is there's just a lot more financing of private companies that used to go public, where you could do really, really well, if you just think about the companies that used to go public, that in today's market wouldn't.
Dan Ferris: Right. The point I was going to [crosstalk] –
Aaron Edelheit: And I think that's another big change, is that you just don't have really fast growing, that they're staying private longer. And so, you – to me, and this is just what I'm focusing on. It's like, I just really like it when there's just not a lot of competition.
Dan Ferris: Right.
Aaron Edelheit: And that's where I'm attracted to, and that's where I'm putting my money.
Dan Ferris: Makes sense. You know you want to be the guy in the courthouse steps, right? Nobody's there and you're picking up bargains.
Aaron Edelheit: It feels silly, right? And the crazy thing is, when I started buying in 2009, if you had priced me in 2011, I probably would have been down 50% on those homes. And if you had priced me moment to moment, I would have gone – my portfolio would have gone like this. And then one day in the summer of 2012, Colony Capital and Blackstone showed up, and prices went up 50% to 100% that day. And then they basically never looked back, and still haven't looked back, despite a lot of trouble.
And then basically the investment that I was making is there's no way that you can't take a place like Atlanta or Charlotte. I wasn't buying in any area that wasn't growing. Because I knew at some point you needed to build homes. You can't have 100,000 people on a net basis, move to Atlanta, and have homes sell 50% of construction costs. You're going to run out of homes. It can't go on for very long.
And so, when I think about how I'm investing now, especially in cannabis, is, I think we're on the cusp of 20 or 30 years where cannabis is like the great replacement, and it's just replacing things that Americans are already consuming, that are very, very toxic to them, where there could be like, for me, for Ambien, where you can't take Ambien longer than two weeks, and god forbid you ever see the side effects. It's frightening. And then, like alcohol kills 180,000 Americans every year. The CDC estimates cost about $250 billion of economic damage.
And you could see the top alcohol companies, their volumes are falling. It's because people are turning from what most people want – people are turning to cannabis. Last year, zero people died from cannabis. The previous year, zero people died from cannabis. And it goes not that it's the greatest thing in the world, and it can't be harmful to some people, and some people can't get addicted or abuse it, but if you just compare it side-by-side with alcohol, it's just it's literally no comparison in terms of the toxicity and the damage to yourself, your family, your community, the society in general.
And so that's when it – so what I'm counting on is, yeah, I have. It may be a while before the financial world is able to participate in cannabis. I may be sitting there for a while, but I have growth trends behind me, where state after state is legalizing, and people are turning to it because they're finding out their aunt, their friend, or whatever. Oh, I'm sleeping at night because of this, or I have, I'm having cancer treatment, and I'm throwing up, and having cannabis so that I can –
You know, kids being treated with epilepsy, or alcoholics being like, well, now I have a cannabis beverage, and I'm not an alcoholic anymore. And these are the stories. This is the data that's coming out. And you know, or that workers comp claims go down, wherever cannabis is legalized. And then you're just like, wait, what? How do workers comp claims – then you realize, oh, wow, Americans are consuming things to get through the day, that are really, really bad for them, and for whatever they're dealing with.
And so, I love it when you have an investment trend where there's this long tail kind of pushing you forward, and then you can just be patient, and I can be very passionate and emotional about cannabis. It's kind of great. And you're going to, it's but then also reminding myself, the federal government set up to not do anything and then, and that we're covered primarily by very elderly people who were – grew up in the war on drugs, and on things, basically what we've been told are not true, and that slowly, but surely that's changing.
Dan Ferris: Right. They're not going to live forever. So it will change.
Aaron Edelheit: Unlikely. Unlikely.
Dan Ferris: And there is great potential for – with something like cannabis, for that sort of, what you described the Colony Capital moment for some, excuse me, there's great potential for a moment where the federal government does start getting on track, or, there's somebody –
Aaron Edelheit: Well, they're working on rescheduling right now, right? They're working on the rescheduling. It's just the government takes forever. I was disappointed. They announced the hearing on December 2. It's basically up to the DA where they would take it from schedule into schedule three. And they're working on it. It just takes forever. It's government, so it takes forever. And in the meantime, you're going to have a bunch of states vote on it in November. And so it's happening. It's just painfully slow.
And at some point, you're going to wake up, and this investment opportunity won't be there because there's other people that are – have crazy low cost of capital, private-equity firms, VC firms, Fortune 500 companies, you know, big investment banks who are going to participate and invest. And it's not going to be me. But that's not my job. I don't ever have dreams to be one of them. That's not what gets me up. I like finding the diamond in the rough, or, oh, no one's over here in my little fishing hole. And I think this is, like, idyllic and amazing. And then I, one day I'd like people to come over.
Dan Ferris: Right. They'll get there, man. They'll get there. It sounds like, it just sounds like a great setup. It sounds like an ideal sort of contrarian, deep value set-up. And it's no wonder that you're focused on it. And Nelnet sounds really cool, too. So, that's [crosstalk] –
Aaron Edelheit: When you think about value investments – Nelnet's a great example. You just have to ask yourself, every time I look at an investment as a potential, I'm like, well, why – why haven't other people discovered this? It's like, with Nelnet, if you screen it and you look at it, you're like, why would I invest in a student loan company. Right?
Dan Ferris: Yeah.
Aaron Edelheit: You know? And then you'd be like, what? And then with cannabis, it's like, why aren't other people investing? And then you just realize, oh, wow, my fund is on Morgan Stanley's banned list because they think I'm a drug dealer. OK? [Laughter]
Corey McLaughlin: Is it true? Is that true? [Laughter]
Aaron Edelheit: It's 100% true. I have had people that cannot send money from their own Morgan Stanley account to my fund because I invest in cannabis. And so you just realize there are structural barriers there. You just have to ask yourself, why are investors not investing in this? What do they not see, or what – what thing do they not understand? Anything that's easily screened, anything that's easily scraped, anything that a computer can understand, or – you have no chance. You literally have no chance. And it's not, it's not confirmed or destined for the stars, that I'm going to make lots of money in cannabis. This is just my thesis, right? I'm wrong all the time.
Dan Ferris: No, the point is not that it's destined in the stars. It's that you can find a very attractive kind of deep value, many times cash-gushing, sort of situation that's off the world's radar screen, right? It's about the expectation of return. It's not about, Aaron's definitely going to be a billionaire in 10 years because he's doing this. It's not about, we don't get that certainty. But the certainty you can get is, I found an investment that ticks an amazing number of the boxes that you really want to tick, if, if you can do so at all.
That's what gets me excited. Somebody predicting that something is going to happen doesn't get me excited, but telling me that you found the situation with these characteristics, that is very exciting.
Aaron Edelheit: I agree.
Corey McLaughlin: And eventually, government will get around to doing something in Congress positive. It's not – you can't imagine things are going to go backwards at this point. It's just a matter of, I don't know. Yeah.
Aaron Edelheit: It's unlikely, and especially now that you have two presidential candidates. Trump just came out with very positive comments about the amendment in Florida, and then he's heard medical cannabis is amazing for people, and he has some of his top advisors, or all four, including Elon Musk and others, and it's – and then you have on the other side, Kamala Harris and Walz that are very clearly pro-cannabis. And Tim Walz in general has been, Minnesota is like ground zero for – especially the explosion of cannabis, low-dose beverages in Minnesota. It's literally ground zero in this country, where something like 15% or 20% of liquor store sales in Minnesota are low-dose THC beverages.
Corey McLaughlin: Yeah. No, there's a big push among younger people, like, going away from alcohol, just in general. I mean...
Aaron Edelheit: Yeah, just imagined I offered you the following drink, and you tell me, if this sounds attractive to you, right? So it relaxes you. It gives you a buzz. Food is more enjoyable. Music is more pleasurable. You sleep great at night, and you wake up with no hangover. What do you think the market demand is for a product like that, that you drink?
Dan Ferris: Yeah, right.
Aaron Edelheit: I wonder why wine sales are plunging. Oh my gosh. It's shocking to me, right?
Dan Ferris: Right. [Laughter]
Aaron Edelheit: I think one of the most underreported stories right now is what's going on in Minnesota, and several other states, of low-dose THC beverages made from hemp. And it's just an example of the kind of dynamic growth that's going on inside cannabis, no one's focused on because all the big investors, all the big investment banks, all the money is, hey, until there's some kind of federal reform, we can't touch this.
Dan Ferris: Right. Banking is an issue for the companies themselves. They're – I live in Oregon, and there's a pot shop every 10 feet, or whatever. But, and if you talk to them and stuff, they're like, yeah, everybody pays in cash. And then they wind up with that problem. What do we do with all this cash? So it would be, it would really [crosstalk] –
Aaron Edelheit: Where in Oregon are you?
Dan Ferris: I'm in Southern Oregon.
Aaron Edelheit: Are you near Medford?
Dan Ferris: Yep, I'm right near Medford.
Aaron Edelheit: Oh, my largest investment Grown Rogue, I actually think one of the best companies I've ever come across is in Medford. Yeah, you need to go visit, Dan. Absolutely amazing.
Dan Ferris: OK, that sounds like a good idea.
Corey McLaughlin: You would love the CEO, Obie Strickler.
Dan Ferris: All right, I will. I'll have to do that. I had my own little, a sort of foray into cannabis in my newsletter, and I was one of those, it's down 50%. What's the worst that could happen? And I just got completely obliterated out of those stocks. I was like, OK, well, that didn't go so well. But it's – I should, I should revisit, and maybe visiting the company that's near me would be a good way to start doing that.
Aaron Edelheit: I'll introduce you after. You'll absolutely love it. They both do indoor and outdoor, but their specialty is indoor. The CEO's office is the crappiest CEO's office I've ever been in.
Dan Ferris: That's good.
Aaron Edelheit: It's an open-air room. Yes, it's an open-air room with no doors in the grow house.
Dan Ferris: Awesome. Love it. Yeah, the bare bones are the better. That's great. I'm sorry about all the noise. I don't think I'm going to schedule any more interviews at 11:00 a.m. on a Friday, because that's when the gardeners obviously show up and start making incredible amounts of noise, that then cause the dogs to bark, if you can hear those. And then my wife's yelling at the dogs to shut up. So I hope all this noise in the background isn't –
Aaron Edelheit: Can I tell you a very funny story? When I first started out, I –basically I started out in June of '98. I had a friend that from college, started a business with his father, sold the business, called me up. I was the only moron he knew who knew anything about investing. And so after a couple months, he's like, "Yes, why don't you invest some of my money?" And I was like, okay. I moved above my parents' garage in New Hampshire. Like, literally, my dad didn't even think I had a real job. He used to cut out job, wanted, like job clippings. Like, hey, this looks good.
And I'd be like, no, I actually have a real job, trying to build something. I just don't have any money. And I remember I was – this is obviously, things are very different now, or it's totally acceptable for noise or whatever. Everyone knows we're all trying to do our best, right? I remember, I'm trying to act like I'm a big – I'm a real investor. It's like 1998. I'm calling the CFO. I'm grilling them on questions. And I'm above the garage, and my parents have a Schnauzer. And the UPS man comes up, and I'm right above the garage, comes up the garage, and knocks on the door, and our dog just goes nuts. Right?
And then my dad with much more colorful language is, "Shut the," you know. And there's just this explosion. I'm literally halfway through, like, oh, I'm this money man. I'm this real professional, an explosion of nose – of noise, explosion. Just, there's – yours is, like, distant, right?
Dan Ferris: Yeah.
Aaron Edelheit: And I looked at the phone, and I hung up, and I never called that company again.
Dan Ferris: [Laughter] Yeah. And if it was, if it was 40 years ago, I'd be mortified.
Aaron Edelheit: Yeah, how do you explain that? I was just like, yeah, yeah. couldn't explain it. There's no – I just hung up. I never called the – and that guy probably wonders to this day, I have no idea what happened.
Dan Ferris: Yeah, what happened?
Aaron Edelheit: It's like he never called me back.
Corey McLaughlin: Oh, that's what happened. OK.
Dan Ferris: Yeah. All right. Aaron, it's time for our final question. This has been a lot of fun, I have to tell you. And same final question for every guest, no matter what the topic. If you've already said the answer, feel free to repeat it. And so, the question is simply, if you could leave our listeners with a single thought today, what would that be?
Aaron Edelheit: You know, I just heard a wonderful podcast. Tim Ferris is going through his 10-year anniversary, and he's highlighting the best of his – the best of his shows, and he had this guy named Boyd Vardy, who's like a lion tracker and, like, life coach, but his family runs a safari in South Africa called "Londolozi". And I ordered his book. It's like the Lion Tracker's Guide for Life. It's really small. It's great. There's a part in the book, and also in the podcast that he mentioned, I've really been internalizing recently, that I absolutely love.
And it's what one of the, the real, the not that he isn't, but like the lion tracker, who comes from this lineage of tracking lions for hundreds, if not thousands of years. And the guy said, "I don't know where I'm going, but I know how to get there." And I just thought, oh my god, that's such a wonderful phrase for not only life, but especially for investors. And then if you just kind of think about what you're looking for, and you look for like the signs, and you track, and you're open. I never thought I'd be a cannabis investor. I never thought I would be on the courthouse steps buying foreclosed homes. I don't know you – none of us really know where things go. Did you know, Dan, you were going to be hosting podcasts?
Dan Ferris: [Laughter]
Aaron Edelheit: Right? None of us know. But I think if you look for the signs, and you stay focused, calm, that you don't know where you're going, but you may know how to get there. I just thought that was incredibly profound.
Dan Ferris: Incredibly. That's a great answer. That is a great final question answer. Love it. All right, listen. Thanks a lot, man. It's always a pleasure to talk. We should talk with you more often than every four years. I think we'll make it a point to do that.
Aaron Edelheit: That sounds great. This is, this was a lot of fun. Thanks for having me.
Dan Ferris: I also I want to get you back – you spoke at our conference one year, didn't you? Did you do that?
Aaron Edelheit: I did. I did. I did.
Dan Ferris: Yeah, I remember that. It was great. And we got to get you back on stage, too, at some point. All right, man –
Aaron Edelheit: I would love it.
Dan Ferris: – thanks very much. Yeah, you bet. Oh, everybody loves, it's a good time, Vegas. What's not to love. But listen, thanks for being here, always a pleasure. And we'll talk to you again soon.
Aaron Edelheit: Sounds great. Thank you.
Dan Ferris: I really enjoy talking with Aaron. He's always been the most wonderful, friendly, smart guy with lots of ideas. I've seen him present at all kinds of conferences, including ours that one time. And he, he's just always – he's just got a great presence. You know, he's everything you want him to be, smart, and funny and just kind of a great talker. It's always a good time when Aaron's around, and an informative good time, too. [Laughter]
Corey McLaughlin: Yes, that was my first time talking, meeting with him. And he gives me Mark Cuban vibes, a little bit.
Dan Ferris: That's interesting.
Corey McLaughlin: Especially when he was talking about his early days, and the atmosphere behind him on an important phone call. It gave me kind of that, that grassroots kind of start vibe. And then especially the kind of things that he's interested in that has been interested in, foreclosed homes, cannabis now. It's been, obviously, it's been rough, if you've been in cannabis the last few years.
Dan Ferris: Yeah.
Corey McLaughlin: But it sounds like he's got, it sounds very similar to me, to that real estate moment he was talking about in 2010, or, you know, 2011, where eventually that institutional money will get interested. Don't – can't – don't know when, but it should be coming. So, yeah, that was a fun talk. That was a – love the outlook on, kind of, on psychology, and the Sabbath.
Dan Ferris: Very good.
Corey McLaughlin: And locking away the phone and everything for a day. There's a lot to be said for that.
Dan Ferris: So, yeah, savage idea is transformational in my life. It's really a good one.
Corey McLaughlin: I've tried it before. Haven't been able to stick with it, but, you know, maybe I'll try again.
Dan Ferris: Yep, I highly recommend it to anybody. But that was, that was tons of fun. I, you know, I always can't – some people I can't wait to talk to them again soon. So I'm really looking forward to talking to him about this CEO who lives near me, apparently, who I didn't even know he was there. So now that is, that was, I didn't know what we were going to talk about. I have to admit, I know he's into cannabis investing, and I know he's a value investor, but you just never know where the conversation will go. And I just, I thought that was just tons of fun.
And it's like some people, they just give you a lesson. It's like they're giving you a little, quick MBA course in investing and we and he talked about bottom-up fundamentals, and cash flows, and the kind of businesses he looks for. And that image of wanting to be on the courthouse steps by himself picking up bargains, and then all the psychology stuff you were talking about, it's like, it's all there in his mind. He's got it all the pieces, and he expresses them very well. So that was great.
Corey McLaughlin: And we started, and we started, you started off asking him about that Charlie Munger post, which is amazing. That's just, essentially, we're passing on Charlie Munger's advice to everybody. So that was, I had never heard that story before, so. And when you're getting that kind of advice, like in the moment, like, that's a different kind, that's a different level. Like, if anybody could say anything when things are going well, but when you're talking to this guy in the middle of a financial crisis, and he's responsible for a lot of money, you can't, you can't get that anywhere else.
Dan Ferris: Yeah, priceless.
Corey McLaughlin: It's not – that's, it's super unique. So, yeah, yeah, that was awesome to hear, too.
Dan Ferris: It was. It was, man. That's another great interview. And that's another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as we absolutely truly did. We do provide a transcript for every episode. Just go to www.investorhour.com. Click on the episode you want. Scroll all the way down, click on the word "transcript", and enjoy. If you like this episode, and know anybody else who might like it, tell them to check it out on their podcast app or at investorhour.com, please.
And also do me a favor, subscribe to the show on iTunes, Google Play, or wherever you listen to podcasts. And while you're there, help us grow with a rate and a review. Follow us on Facebook and Instagram. Our handle is @investorhour. At Twitter, our handle is @investor_hour. Have a guest you want us to interview? Drop us a note at feedback@investorhour.com, or call our listener feedback line, 800-381-2357. Tell us what's on your mind and hear your voice on the show. For my co-host, Corey McLaughlin, until next week, I'm Dan Ferris. Thanks for listening.
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