Episode 394: Gunslinging Gambler or Cautious Investor: Which One Are You?
On this week's Stansberry Investor Hour, Dan and Corey welcome Herb Greenberg back to the show. Herb started out as a financial journalist and now publishes On the Street, a newsletter that offers observations, insights, and opinions on various stocks and the broad market. Herb has spent 50 years researching and writing about the markets, and he joins the podcast to impart some of his wisdom.
Herb starts off by reintroducing himself, his opinions on market risk, and his history with long-biased research. He emphasizes that knowing yourself, your psychological makeup, and your skill set are crucial components to success. Some investors thrive under the pressure and enjoy the gambling nature of stocks, while others prefer to sleep well at night and take a more cautious, long-term approach. Either route is OK. And the same principle applies to specifics like when to sell a stock... "There's no one size fits all," Herb says. But the upside to every mistake is that you'll quickly learn more about yourself...
I think in a world of FOMO and YOLO – you know, fear of missing out and you only live once – there's that dynamic, until of course you lose money. And once you lose money, that gives you discipline.
Next, Herb discusses a recent post in his On the Street newsletter about home-furnishings company RH. Not long ago, RH's CEO made comments concerning debt that raised many red flags. This leads to a conversation about software company MicroStrategy, which has been using debt to buy bitcoin. "It's a pyramid atop a pyramid," Herb quips. He also shares his thoughts on bitcoin itself, talks about the 2021 market mania where "everyone was a bag holder," and dives into how retail and institutional investors differ in risk versus reward...
The smart ones always looked at the risk first, and then the reward. It's the retail investors that are basically looking at the reward first and ignoring the risk, because they're stumbling into it.
Finally, Herb evaluates today's market optimism and the potential for an inflection point. He notes that many garbage stocks have gone from deep in the red to in the green this year for no reason other than hype. Herb then urges investors not to get complacent with their portfolio holdings and to always consider differing opinions on stocks, in case the setup has changed since you first bought in. "You lose sight of the ones that have not been problem children." Herb rounds things out with a discussion about short selling and market inefficiencies created by passive investing. He says...
It's the stocks no one's paying attention to that still create a big inefficiency in what's perceived to be an efficient market.
Click here or on the image below to watch the video interview with Herb 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 longtime financial journalist, Herb Greenberg, editor of Herb Greenberg On the Street.
Dan Ferris: Yeah, you can go to herbgreenberg.com and find out more about him. He's a great guy. Very smart. He's had a five-decade career already and he's still going strong. He probably knows more about avoiding risks than almost anybody we've talked to on the show. So, let's not waste another split second. Let's talk with Herb Greenberg. Let's do it right now.
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Herb, welcome back to the show. It's been a while.
Herb Greenberg: Dan, I am thrilled to be here. Yes, it has been a while. Too long.
Dan Ferris: Precisely. It has been since March 21, 2022. We aired the previous episode that you did, titled: The Best Death Threat I Ever Got. Probably the best title we've ever published for the podcast. I just want you to know.
Herb Greenberg: I hope it generates some level of clickbait to get some people in before they realized what they were clicking into.
Dan Ferris: Yeah, it generated genuine interest. In fact, people really enjoyed it. But the title, who wouldn't listen to that, right?
Herb Greenberg: Yeah, all true. All true.
Dan Ferris: Yeah, crazy. So, since it has been more than two years, like two-and-a-half years or so here, let's refamiliarize our listener with you. Before I got to know anything about you, you were always, "Hey, that short seller guy," or, "That guy who does short research." But maybe you could give our listeners just a little background to remind them since it has been way too long.
Herb Greenberg: Sure. One thing I'm not is I'm not a short seller, never have been, likely never will be. But what I am is a guy who whose DNA tilts toward raising the red flag on risk. And because I think in the world, when I started really doing this aggressively − In the world of doing this, the market, as we all know, is biased on the upside and biased on all things going up and over the past 10 years-plus… Especially, I've been doing this for decades, but over the past 10 years, as the markets have shifted and the dynamics of the markets and the structure of the markets and the players in the markets have changed, there are always newbies coming in who just think that they're brilliant and they think that it's just an easy way to make money.
And for some of them, it is, because maybe they have the right instincts to trade in and out the right way. But as so many learn that there is this other side and there are people betting against them and they always don't realize the importance of understanding that risk until it's too late. And so, thankfully as I learned is that this is who I am and so, it's been what I've been doing. I've been doing some level of − when I was a journalist, even when I'm not, I've been professionally working for the past 50/51 years.
But I think that, starting in the late 1990s when I went to the San Francisco Chronicle, that's when I really honed in as a journalist and I had a column, and I was able to hone in on this whole concept of taking the other side of what most people were talking about and going down dark alleys. And I had a very good platform in the pre-Internet years, which is very important. And so, what I did is I evolved that as I've gone forward because it played truly to who I am. In fact, I worked through it on so many different places.
And in fact, I'll tell you for two years, until just very recently, I had part of my career − because I like to take career risks for better or for worse, and I like to try new things, I was at the now former, late, I should say, the now late Empire Financial Research was part of the Stansberry organization. And I went into it with great trepidation, but one thing, because of things you and I have talked off cam about, which, have to do a promotion in the way that their style of marketing works, which is everyone has a different style of marketing.
Marketing is critical I might point out, but what I learned − one thing that intrigued me about that is I was now, for the first time, when I say for the first time in my life I was going to be doing long-biased research because most of my research which has been as a journalist − journalists naturally you're sort of looking for what can go wrong, right? That's how you're wired. That's why most people are journalists. Then I had two short-biased research firms over the course of time − was it CNBC in the middle of that as the guy who was raising the red flags for a few years. So, that's what I did. But when I morphed to Empire, two years, I started doing long-biased research.
And what's very interesting, when I was doing that, all I kept thinking about was, "Oh my, when am I going to write something that one of my short-seller friends is going to hop on that's going to embarrass me?" And so, it actually − that bias and that DNA, which I know you have, is always back there when you're doing your research on something long biased, because you're trying to find out − you're trying to understand, how can you be proven wrong? It's the first thing you're going to be thinking of. What's the risk here? What am I getting wrong?
And then you can go into, "What is the reward and why is this such a good story?" In a world where there genuinely are good stories and good execution, versus, just promotion. So, I actually did that for two years. I thoroughly enjoyed that component of it most of the time because I had some great picks back at a time when the market was absolutely getting clobbered. It was really an enjoying relief to be able to do that. I used to say when I joined Empire − I used to say I didn't want to end my life as being the grumpiest guy in the graveyard.
And here I am now post-that, having tried a startup between here and there that, as they say, yada, yada, yada, and now I'm back doing what I love doing, which is writing and raising red flags, largely raising red flags, but also some green ones with my newsletter. That is sort of the short version of what could be a very long version that I don't think there's any need to go through again. Anyone could go look at my LinkedIn and they can find a good [inaudible].
Dan Ferris: OK. That's valuable though. And you make a great point. Not only is there such a thing as human nature, but there's such a thing as Corey nature and Dan nature and Herb nature. And knowing that about yourself is one of the best things you can do in life, isn't it? You can just − this is in my DNA. It's who I am. It's not going to change. I got to lean into it and just do it and be this.
Herb Greenberg: Look, it takes all types, right? It takes all types of people. And when it comes to investing, it takes all types of investors. Everybody's got a different strategy and a different approach that works for them. Some people are naturally gunslingers. They're naturally, many people who are hedge-fund managers and who are serious investors love the gambling nature of it, right? That's who they are. It works very well to them. They're wired that way. Their brains are wired that way.
But there are plenty of other people who say, "I'd rather think about something else when I'm going about my day than what's in my stock portfolio." And there are some people who prefer to be in those types of stocks as opposed to just what the headlines have you think about everything that's moving fast, fast, fast. So, I think you have to know that about yourself. And I think one of the things − for years, I couldn't invest in individual stocks because I was a journalist and for decades, I was limited to mutual funds and things that would be pre-ETFs. That's pretty much what you're limited to. And that's not the same thing as buying individual stocks.
And if I have one great regret in my life, it's that I wasn't able to. At least knowing what I know today, I'm not a good trader. And one thing I learned, I want to preface this by saying when I actually could go into it, I dove in headfirst, dove in headfirst as just trying to figure out, was I really the trader I thought I was? The answer very quickly was, "I am not, I don't have the psychological makeup to be one. I don't want to be one. It's not who I am." Am I the guy who's going to go with the most lottery tickets? Every now and then I buy a lottery ticket, every now and then I might win, but most of the stuff I'm in is pretty solid.
But what I think you do is − when I look back, I think, gosh, what I've learned, because of the mistakes I've made, and it's all because of the mistakes. And that's how you learn. I think that's how you learn how to be an investor. And if you approach it thinking, "Oh, my God, I'm going to make a mistake," I think you're not going to move forward. So, I think you have to go in and you have to identify that psychological makeup and not just psychological, just your skill set going in and know what your limits are and rise to your level of your incompetency, which is what I like to say, and take it from there.
Dan Ferris: Yeah. Yeah. Knowing yourself, know yourself. It's one of the all-time great bits of wisdom. And don't worry, Herb, we're all bad traders. Nobody's naturally a good trader. Nobody.
Herb Greenberg: But some claim they are.
Corey McLaughlin: That's for sure. I remember mine.
Herb Greenberg: I was talking to a guy − the hardest thing to do, is to know when to sell. That is what people will struggle over. How long have they been in the business? When do you sell something? And I had a call yesterday from a guy who I think is really smart. He's been around almost as long as I have, except his whole career has been as a fund manager and as an investor, and he now just reinvests his own money. (Enough money that he always likes to say he has 10 lottery tickets, and each one is $100,000, and then that's just part of his portfolio.) So, he called me because he just wanted to tell me, for some odd reason, he said, "I just want to tell you. We have these discussions about when to sell."
He asked me, "What do you do when a stock doubles?" And he said, he went through − the people he has talked to have all sorts of theories about what to do after a stock doubles. And then he went through with his theory, which is different than their theory. And, again, it works for him. But I think that was very interesting just to listen to. And I said, "You know what, I'm out walking the dog. When I have a chance to get back in and think about it, I actually want to talk to you again about it because I just want to mull it over." Because my brain isn't wired like some of these guys who can just think about it, and it just works that way − because I'm far-right brain. And as a far-right brain, you just don't absorb it the same way.
Dan Ferris: So, wait a minute, what are you telling me there? You're telling me that − I felt like I was on the cusp of an insight about selling but I didn't quite get it.
Herb Greenberg: The insight on selling. OK. No, that's good. You won't be the first guy who didn't get what I was trying to say. The cusp, what I was basically trying to say is everybody has their own approach on what works for them on how to sell. Some people are extremely disciplined, and they will tell you, as my friend does, how much money they leave on the table. And they can't look back because that's their discipline and someone else will say − and again, it's stock by stock. The situation can change, but some people have very specific disciplines. This guy's discipline is different than another very smart guy who will say − there's the typical, you'll take 50% off.
Some people say take 60% off. Some people, his viewers take 25% off at a double. My point being that there's "no one size fits all" when it comes to what you should do when it comes to the concept of when to sell a stock. It's still something many people, including I think all three of us, likely anguish over.
Dan Ferris: Absolutely. I don't think anybody knows when to sell. I don't think Warren Buffett knows when to sell. I think that's why forever is his favorite holding period because he just wants a great business that will compound over a long period of time because he knows like, I heard him tell the story of American Express one time. He did all that work. It was the salad-oil scandal, and he went to a store and just watched people use their American Express card. Everything went off without a hitch. He bought the stock. It was up 50% in a year and he sold. It was still a great business. It's been a great business ever since and remains a damn good one today.
Herb Greenberg: It's an art. You go to somebody like [Christopher Mayer] who wrote 100 Baggers, and he has his style, and his style is he keeps up on his concentrated portfolio and he makes sure nothing has changed enough to scare him out of the stock. I wouldn't say scare him out of the stock, [inaudible] position or sell stock. But guys like that are the guys I admire the most because they really have the tenacity and knowledge to stay in it over the long term, if indeed it still warrants that investment.
Corey McLaughlin: This whole conversation reminds me of just like the thing that trips a lot of people up is the difference between investing and trading. I think it's something as simple as that. It's a lot of first-timers just get wiped out on short-term moves and then think, are scarred by the stock market for a long time, or cryptos at this point. It's something I remember trying to learn in my early days, playing around with money.
Dan Ferris: Yeah, this makes me think of one of Bob Farrell's 10 rules, Bob Farrell, the 10 rules to remember. It's pretty famous if you Google it. And I forget which number it was, but it was the one where he said − it was the one that resonated the most with me. I think it was No. 6, actually, when he said "Fear and greed are greater or outweigh long-term resolve." And that's like my great mission with our listeners, with our readers, our subscribers to my newsletters and stuff is to not let that get the better of them.
Fear and greed outweigh the long-term resolve. It's really hard to be an investor, I think is where I'm headed with this. Because the difference, people think they can be a trader because somehow they think it's safer to be in the market a shorter time.
Herb Greenberg: I think that's easier said than done. And I think in a world of [fear of missing out] and [you only live once], there's that dynamic until of course you lose money. And once you lose money, that gives you discipline. I have this strong belief that in the world of the Reddit/Robinhood crowd, that there are a sliver of them − it has done a great job bringing people into the market. And as people lose money through the process and the gamification of it becomes less fun because now it became real − because it's one thing to go into a stock and say, "Oh, I can afford to…" Let's just say somebody has $1,000 and they're going to invest in the market and they say, "Oh, I can afford to lose this $1,000."
And then suddenly the $1,000 that they put into to Peloton is worth $10 or whatever the case, a $100. And they go, "Oh my gosh, this is horrible. I'm never doing this again. No more. I'm done with the stock market." But there'll always be a sliver of them that actually say, "Hey. This is really interesting." And those people will go to the next level and try to learn whether it's technicals and/or fundamentals or however they're going to do it, whatever their approach is going to be, and then they'll get more serious.
Dan Ferris: Absolutely. We have had guests on the podcast, more than one, many more than one, who will say, "Well, I got into it all during the dot-com boom and I lost a bunch of money, but I was hooked." So, then they went from thinking it was really easy to make money in the stock market to being really interested in how it works and becoming a real investor. That's absolutely true. Of course it's a small percentage.
Corey McLaughlin: Yeah. I think they were hooked by the making-money part on the way up and then they lost it, but then they felt like they could do it again at some level, to your point. Learning the technicals or whatever strategy, whatever works for you, to your point.
Herb Greenberg: I put out my ideas and again, most of them have some level of skepticism to them because I think that's very important for people to constantly have hammered down their throat, but I'm fully aware some people may take that that information, and they may do nothing with it. Some people may short those stocks if they're still shorting stocks, or they may bet against it somehow in some hedge transaction. Other people may go along with them because they think that these are silly and some of these might have big short interest and they're convinced they're playing for the short squeeze.
I'm agnostic to what somebody else does with their own money. I'm just trying to provide the information to let them know that there is risk and as simple and basically pedestrian as that may sound, it certainly gets lost in the noise, especially in recent years. And when I say recent years, I think I could have had this conversation many recent years ago, thinking it was recent years, because time flies. So, I think that's just, again, it's the steady theme in everything I do or much of what I do.
Dan Ferris: All right. So, let's get the rubber and the road together here. One of your recent posts on Substack two days ago, is really intriguing and it's got a great little graphic with it too. As I was reading RH's latest earnings call, I was stopped in my tracks when I read what the CEO said. And I'll tell you, you learned something from being with Empire for two years because that one hooked me in and then you called the post and now I've heard everything. I'm dying to know what it was.
Herb Greenberg: I was channeling my best Stansberry-esque/Empire lesson. The one I learned the most that I forget the most that you still have to be able to grab them. SEO be damned as the case may be. So, in any event, so that one was really, that one was fun. I just published this, I don't know when this is going to run, but I just published this the other day on herbgreenberg.com/s/red-flag-alert. That's my promotion for the show. Now here's what it was though. You're reading the transcript.
I was reading it because I've written about the company and I wrote about RH, the former Restoration Hardware for those who don't know, as a company that is a great example of a rational extrapolation… Because investors will come into an idea because management puts out these fantastically wild forecasts and the beauty of them is there's no way to disprove them, right? So, I wrote an original piece going through Restoration, the brilliance of Gary Friedman, the CEO, and how he has marketed the company. He built it up, rebuilt it up, blah, blah, blah. Now he's disrupting. He's doing something you never see.
He's disrupting his own disruption again. He's disrupting the company that he'd originally disrupted with a new − he had a new model, the new model worked, appeared to work, did fabulously well. The stock did phenomenally well, short sellers got buried, blah, blah, blah. And now it's not working anymore. So, he's literally disrupting it as he's trying to build out a global empire. So, reading the thing now, the company has a ton of debt, a ton of debt, and I'm reading the thing, reading the thing, hey, this is wild. This is funny.
He's very fun to read or I suspect listen to. He's just he's on a different wavelength, and I get the point. It's an answer. Someone asked a question about the company's ability to self-fund in the future and the ability to generate free cash flow and he goes, "You know, we don't view debt as debt. We view it as a currency swap." And I'm like whoa, wait, what? Wait, no.
Dan Ferris: If you're the Federal Reserve, you can view it that way, but otherwise I don't get it.
Herb Greenberg: So, I go through this and what he has written is he has written that what he really views is, he's taking his debt and he's using the debt to buy back stock. So, from his perspective − and he's the largest shareholder in the company, so he has a vested stake in how all of this does and so he's looking at this and he's buying back shares, but that's because this debt is really not, and he goes through the whole, it wasn't just a sentence. It was two or three paragraphs of him explaining why he meant this. So, I thought back and I thought look, stock buybacks, they're fine.
They work especially if they're purchased wisely and if they generally do represent the best use of money that company has, and especially if it's from cash the company has on hand, not from debt, because we all know that's a red flag. I don't think you would probably recommend a company like that if you saw it. So, I thought, "Oh, let me think about who, what's another company that's bought back a bunch of shares?" So, this company has bought back about half its shares in the past nine years, 10 years. So, I pulled up Dillard's because Dillard's is the poster child, the retailer poster child for having bought back, it has bought back 62% of its shares.
And when you put up the two charts, I have the two charts in the write-up, you see Dillard's − and I pull up debt chart. Net debt. Dillard's is straight down, Restoration Hardware is straight up. I should have just put them both on the same darn chart and just had one because it would have been a big X. And that shows you, Dillard's shows you how it's done and how it can be done in a fairly healthy way and Restoration Hardware shows you how it seems to be, how it's done if you're doing some level of what appears to be financial engineering and you're basically just saying, trust us. And so that's why I say now I've heard everything because I've never heard someone say our debt, we don't view our debt as that. It's a spin. It's a distraction in my view. It's nonsense.
Dan Ferris: It is nonsense. I love that. I will remember that forever. Our debt is not debt. It's a currency swap. Using debt to buy back stock, it's not necessarily the worst thing in the world if you're Apple or somebody maybe, I don't know but -
Herb Greenberg: If you're generating gobs of cash and if your debt is there, debt is debt. And if things don't go right, that ultimately has a way of biting you in the rear. And I think that, if an investor says, "Herb, I think Gary Friedman, the CEO, is a moneymaker. I'm going to put my money behind him. I'm going to trust him. And I think that's what − and he's going to redo it. This is going to become what he says it will become down the road."
All the power to you. That's your money and you should be able to do that. But I think people buying into it who may not understand the forest need to understand that balance sheet. No matter what they say about it, it may become an issue at some point in time. It may very well not. But again, be aware of that risk.
Dan Ferris: And that is the point, isn't it? It's not that you're saying the stocks are going to crash tomorrow. You're just going to say, this unequivocally ramps up risk whether you like it or not. And his story about it not being debt is just baloney.
Herb Greenberg: It's a great story and it's a great yarn and he has people talking about it, and I think that it's − and he says outrageous things all the time. So, you take that into consideration. But still, I think it's something that any serious investor would look at. And by the way, there are serious people who own this stock and people who believe in the strategy. And again, they're willing to deal with it because they believe he will transcend this once again, and his strategy will be borne out over time.
Dan Ferris: And it seems there always are, there's always a serious person somewhere who owns it, who you think, wow, they know what they're doing. But even those people don't get everything right. Warren Buffett hasn't gotten everything right. He's just gotten a bunch of things, enough right, to do extraordinarily well over a long period of time. This story is just everything these days, since I have my head in this story, is reminding me of Michael Saylor and MicroStrategy, right?
Borrowing lots of money and doing something with it that just seems like wow, this can't last forever, can it? And having people say it's magic too. If the debt is not dead, it's kind of like saying, oh, we're magically creating value by borrowing money and buying bitcoin.
Herb Greenberg: It's interesting. I post on Bluesky, Threads, and Twitter/X. Less on X, but still, I'm there because it's still is a referral network of sorts, and there's still good financial community there. There's still a solid financial investing community there. And so, I posted a thing on there after I saw Michael Saylor on CNBC a few weeks ago. And I said some comment, because he sounded like one of those things you were listening to and you said, "What's he saying? Come on, what are you saying?" So, I wrote something like just a throwaway line. I said, "It's a pyramid atop a pyramid." That's all I said, after just two sentences and a period.
That "pyramid atop a pyramid" resulted in nearly 800,000 views with thousands, I don't know, hundreds of thousands − it was the most reaction in 17 years of being on Twitter. I don't think anything has sparked any reaction more than that, both positive and negative, against what I wrote. Because people think, there are people, in fact − yeah, people will say MicroStrategy is a pyramid scheme. Other people say, "No, it's just a great levered bet. If you believe in bitcoin, you need to own MicroStrategy because it's a levered way to supercharge your investment." It's interesting you bring it up because that of all things stokes so much emotion because of, not just being bitcoin, but being MicroStrategy.
Dan Ferris: Oh, yeah. You criticize this on X, and you get a whole bunch of people saying, "You don't know anything about bitcoin. Why do you hate bitcoin? Why are you trashing bitcoin?" And I own bitcoin. I'm not trashing bitcoin. It's just the levered nature. Yeah. It's the levered nature of the trade. And they say, "Oh, you're getting more bitcoin per share."
Yeah, but you're paying double, right? The premium is 100% in the stock. You're paying twice as much as the bitcoin is worth. I think a lot of people don't understand risk. In other words, Herb, there are a lot of people in this world buying MicroStrategy who are in desperate need of your services. Put it that way.
Herb Greenberg: Well, yeah, but being the guy I am, being the way I look at the world, I'll sit here and say − look, I think I wrote something, or I put it on Twitter and that post, I said, "I don't have a strong opinion one way or the other about bitcoin." I've owned the GBTC, the ETF in it long time ago, I sold it when it went up. I don't personally own bitcoin because I missed that boat and whether I would have bought it, I don't know. I saw I had a great opportunity once way back and I think I would say I blew that. But again, I hadn't done the research, and I don't like to buy things that I can't understand, or I don't have the time to just make sure I'm comfortable with.
And people wrote me when I said, "I don't have an opinion on this" saying, "You're being intellectually dishonest. How can you say that? Because by virtue of saying that, that means you have an opinion." And I thought, no. I'm being intellectually honest, telling you, I really don't give a damn. It's not my focus. My focus is individual companies. It's where I put literally 90% of my time. And if I can't spend the time for myself, then it's not in my bailiwick. I'm certainly aware of it and I'll keep an eye on it, and if it collapses, maybe it'll be one of my lottery tickets in one of the ETFs.
Dan Ferris: Yeah, bitcoin is a whole topic that we could spend an hour talking about just that. But what I find really remarkable about this is the average sort of MicroStrategy kind of maxi-diamond-hands poster on X or some place is seemingly unaware that if you did this exact same thing with any other commodity, they would probably see it a little better, but it's with bitcoin, so it's magic. This is a magic way of amplifying the wonderfulness of bitcoin and it's not, it's just not.
Herb Greenberg: No, there's so many other, all the proxies… No, there's no magic in anything. We know that. And when people talk that way, you want to think -
Dan Ferris: I said, it's Eike Batista without earnings or value creation, right? Just leverage on a commodity.
Corey McLaughlin: Yeah. I had a reader write in the other day asking me what MicroStrategy actually does as a business.
Herb Greenberg: Did you write back, "They buy bitcoin?"
Dan Ferris: Yeah. They sell shares. They're in the business of selling shares and buying bitcoin, taking on debt and selling shares. And they issue these converts, and the converts are great for the arbs because the stock is hugely volatile. So, the arbs buy − the arbitragers buy the convert − and then they sell the stock when it's high and they buy it when it's low, and they're the people for whom this is brilliant, right? It's wonderful. So, they're buying low and selling high. MicroStrategy itself is selling high.
They said on October 30, they're going to sell $21 billion of debt. As of our talk here in like mid-December, they've burned through $14 billion of that already. They're doing the exact thing you should do when your stock is in the stratosphere. They're selling it as fast as they can issue new shares and there's a great appetite for it. So, they're selling high. The arbs are selling high and buying low. The diamond-hands retail guys are buying high and holding on for dear life. OK. Let's play find the bag-holder. Who's the bag-holder in that trio?
Herb Greenberg: Well, you know what we learned from 2021, which is really interesting about bag-holders, is everybody was a bag-holder. The beauty of 2021 was that the smartest of the smart thought they would outsmart everybody else. And you know what people always say, when you talk to people, you say, what do you do when such-and-such happens? Oh, don't worry. I'll get out. I'll be gone. I'm sorry, life got in the way.
So, the reality is back in 2021, the beauty of 2021, which is like the dot-com era (which is why it's compared with that so much), is every person who supposedly is at the top of the food chain of intelligence of investing was sponsoring a SPAC. Everyone was pulled in, every single − It sucked everyone in. And I think that including me − look, I made some, I lost some, but everyone was sucked in at that point because everyone you knew was involved. And I think everyone somehow in that era was a bag-holder.
Dan Ferris: Yeah. I have to agree with you on that. It got us all to some degree or another. I wasn't wiped out or anything.
Herb Greenberg: One way or the other. No. You are a human being. And when it comes to investing and speculating, because we all − I can talk, I can sit here and talk about, you do this, this, and this. But I'm no different than the next person, and every now and then you get an idea from one of your friends, or you see something, or you hear something, or you read something, and you say, "You know what, OK." But it's all about obviously sizing and what you do, and there are certain things you nibble away at, and other things, just make sure you don't hurt yourself. But you're a human being, and everybody gets sucked into that, because maybe this was the one you would have missed.
Dan Ferris: Yeah. You win some, you lose some. The best traders, the people who really are honest-to-goodness traders, including some market wizards that we have on the show… Some of them will say, "Look, I'm right 40% of the time, but I make money and I'm a market wizard." It's clearly not about never being wrong, right? It's always about sizing and risk management, etc. That's a point that… we always wind up here.
We wind up here with all the traders we talk to. We wind up here with you, Herb. We wind up in this same place, talking about the need for risk management and you can do like just about anything you want, but if you get the risk-management part right, you're OK.
Herb Greenberg: Well, the smartest investors − Look, a lot of stuff I deal with is really simple in the sense of the rationale behind it. Because the smartest folks I've dealt with in my career, whether back when I was interviewing money managers and the whole bit, the smart ones always looked at the risk first and then the reward. It's the retail investors that are basically looking at the reward first and ignoring the risk because they're stumbling into it. It's why selling a short-bias product to the retail-investing crowd is very difficult because they don't understand the concept of the insurance or the need to understand the risk, because they only want someone to tell them how to make money. And so, they need to understand that there's also a reason to avoid losing money, which of course is one of Warren Buffett's original rules.
Rule No. 1, don't lose money. Rule No. 2, don't forget rule No. 1. But to many of these folks, that's just some old guy talking, and they figured out a new way to do it because all the old people don't know anything. And then again, you know…
Corey McLaughlin: And then you become the old person who knows things and hopefully tries to tell other people what's going on.
Herb Greenberg: Corey, they will be old too, one day.
Dan Ferris: And hopefully still financially whole that day when they decide that they're old enough.
Corey McLaughlin: I'm curious, Herb, obviously you pay attention to a lot of what's going on anecdotally, data-wise and stuff, but where do you think we are in terms of people getting sucked in right now? After the election, it seems like everybody's − I wrote the other day, it seems like anything is possible at this moment and everybody believes it. What's your sense right now?
Herb Greenberg: One metric I use, I have this list, red-flag-alerts list, and I haven't updated in the past three weeks, and if I do, I know what I'm going to see. But when you see the shit goes rising, as they call them, pardon the phrase and the term, it's companies that are just generally perceived to be pretty crappy. They don't have any merits of rising and they're going straight through the roof. Historically that's been an inflection point. Now, here we are at the end of the year, where there's all sorts of shenanigans, not shenanigans, excuse me.
There's all sorts of maneuvering going on because you have the element of the pod shops on top of everything else, with those type of funds that are positioning for the end of the year, selling, trying to make sure they're not losing money. So, there's a lot going on. But, beyond that, when it comes to next year, I honestly can't give you an answer because I don't know. Because we have two elements of people. There's this guy I like to read. His name is Peter Atwater, and he has a newsletter called Financial Insyghts. And Peter's really fantastic at viewing the contrarian world.
And his view, if you look at geopolitical − and I'm using his view, not my view, because this is what he does. He just recently today was just writing about how so many American investors are just focused on the U.S. and they're not focused on the world and what's happening geopolitically with Russia and China and some other things. And I think you see these elements of potential inflection points, and I used to say times like this were inflection points because people like me, no one wants to say, listen to, because we're adding no value, because what's the point, right?
And that historically was in the beginning to the end, and then the beginning to the end of the bear would be when people thought I was a smart guy and they wanted to subscribe to my work. I do think there's some change in that. I think that inflection point has not worked quite the way it used to. And because we have this element, we want to sit here and say − some of us want to sit here and say − there's such a euphoria over what Trump may do based on everything he said he's going to do, that once he actually is in there, it's sort of like buying the rumor, sell on the news.
But again, that's why it comes down to basically, gosh, hope you know why you own and what you own and why you own it… Because that will transcend the times, some of the garbage might not. There's one company I wrote about yesterday. I called it two days ago in a column or a piece I wrote called Dash for Trash… This company SoundHound, which is SoundHound AI, has AI in the name. So, SoundHound has been the best-performing AI stock in this universe, in this cycle, excuse me, this year. And if you look at it, you go, "Huh, what, how come?"
So, those of us who've been around can look at it and say, barring their ability to come out and raise more cash with the money they have, their stock price being where it is. At some point, that game will end, and then if they raise cash, that game may end because they dilute everybody. So, you see that in this phase of the market right now, in this cycle. There are a number of names of things I watched that have literally boomeranged around and gone from the red, deep in the red, to very wildly in the green.
Dan Ferris: Since you mentioned SoundHound − I didn't know you had written at that, by the way. Within the past month, I have bought a handful of puts a ways out on SoundHound because, well, I'm not going to say because why, because it's not investment advice. Do your own homework. I'm just putting it out there because I don't want to get in trouble with the folks I work for who don't like us trading the things that we recommend. I don't recommend it. It's just something that I happen to own.
But, and in general I love, I do like the idea right now of small − we're talking about positions of tens of bips or something, small stuff in longer-dated puts out of the money on absolute garbage that has gone straight through the roof with no fundamental underpinning on the absolute ballistic ascension of some of these things. So, generally speaking, I think we're on the same page there.
Herb Greenberg: My subhead in my Dash for Trash piece was, "Why SoundHound is a poster child for this cycle's FOMO follies." That to me sort of explains it and what it's all about. I have a picture of a guy running toward, he's dashing toward a pile of trash.
Dan Ferris: There you go. Perfect.
Corey McLaughlin: You said "Shitco" before and literally there's something in the crypto world called Fartcoin right now. It's up 170% in the last month, and it's literally one of these ones that's just made up from nothing. Shows you what's possible here.
Dan Ferris: Yeah. That one. And let's not forget Peanut the Squirrel coin, which has a $1 billion market cap right now. Peanut the Squirrel was seized and euthanized by the state authorities in New York. It was a big story on the Internet for a handful of days there and they created a coin, and it's got a $1 billion market cap. A billion dollars.
Herb Greenberg: In theory, that tells you a lot about this market and the direction we're headed and the quality of some of the stuff that's making people the most money right now or at least on paper, making them the most money, assuming they trade out of it when it's up here.
Dan Ferris: Yeah, and at the same time, speaking of another Bob Farrell rule, the strongest markets are broad, the weakest ones are narrowed down to a few names… And we're narrower than we've ever been. I think it's, I look today and calculated using Bloomberg's U.S. market cap index, I got 37%. It's never been 37% for the top 10 names before. It's enormous, enormous concentration, I should say. So, by that Farrell rule, weakest market ever.
And we've got all kinds of garbage soaring out of sight at the same time. It's interesting. You won't catch me predicting downturns or predicting market action over a short period of time. I like you, Herb. We are, I believe in the same camp, and you alluded to it earlier. It's in our DNA to worry about risk, to identify, as Howard Marks might say, to understand risk, recognize risk, and control risk. And that's all we're doing, not making a prediction.
Herb Greenberg: That's all you can do. The way I look at it is there's a market for it, and there are people who want to hear it, want to see it, want to continue to understand it. And even if they are not engaged in those names, they're learning something from reading about them because it just goes into their body of knowledge for the next one or whatever else they're working on. It's fascinating that way. And I've had people come into some of these things. I write about raising a red flag and it triggers something. It's funny how investors work. It'll trigger something and they'll go dig deeper and they'll actually find a long out of the concept.
The best thing you can do when you're raising the red flag on risk is − and it's something, it happened at the short-research firm more than you'd believe… And that is, you'd write about a company and somebody would go, "I don't agree with you, but I'm going to go double up on my work." And then they said, "Oh my, you kept me from buying more." And as a result from keeping them from buying more, those people avoided an enormous loss. And that's the beauty of it.
A lot of people get complacent with their holdings, especially people in the investment community, because they have so many they're looking at and they're comfortable names that have made them money in the past. And when a change occurs, they might miss the change. And if that's the case, there's levels of risk that even they forget, not because they're overly zealous, just because everybody gets distracted by something else they're working on and you lose sight of the ones that have not been problem children over years, perhaps, then they do become problem children.
Dan Ferris: Herb, you point out an interesting thing here. And you've said this a couple times as we've spoken. Who knows how people are − when you're identifying risks, primarily as you're doing, who knows how the reader is going to interpret and ultimately use, if at all, even, your research. They could use it any number of ways, as you've pointed out, you've named some of them. And that is important because, on average, a lot of folks just like to have a ticker symbol dropped on them and be told to buy this right now and you'll be golden. But arguably that is, and you can do, we do lots of great work and we deliver ticker symbols every month in our Extreme Value newsletter.
Mike Barrett and I do a lot of work. I'm not saying you shouldn't make long bets like that or deliver actionable ideas right now. But what I am saying is that it's harder to describe how valuable what you do is in that way… But it is very, very valuable in a myriad of ways. When I tell you about one company, I've told you all about this industry, I've told you all about this company, I've told you all about what we think of the valuation, etc. And I've told you something about the risk too. But when you're primarily focused on that risk piece, you've given me something that I can − it's a tool, right? And I can use that tool. I can use a hammer to do all kinds of things. I can use a screwdriver to do all kinds of things.
And it's valuable. I think I'm talking to the listener here more than anybody. I'm just trying to convince people, be more interested in understanding and recognizing and controlling risk and read folks like Herb because that's their whole, that's his whole career, man. It's his DNA. And I believe in it deeply as a primary part of the mission of folks in our business. Be about understanding risk.
Herb Greenberg: There's often a case where people will say, "Oh, that guy's just a short seller." Not me, but they read something, they see somebody quoted, they hear something, they see something in social media. And they always say that, "Well, that person, they're a short seller, they want the stock to go down as opposed to someone who's long and wants the stock to go up." And I think that's the wrong approach because there are plenty of bad short sellers and plenty of bad long investors and promoters on both sides because everybody gets it wrong.
But if you don't stop and pause, unless you know it, some people have done so much research, they can easily point a hole in a short seller's argument or in a long's argument, but beyond that, just to dismiss somebody because they're short a stock or just to dismiss, "Oh, it's that guy Herb again." They always say, "He's a short seller. He's got that." Whenever I see a defense, when I see an activist short seller come out with a piece, and the first thing the company says is they're short the stock as if it's like some big bad thing. That short seller in the activist piece at the top of the report, it usually says, "Disclosure, we are short this stock."
So, you're basically trying to take something the short seller is telling you and they're basically saying that this guy, can't listen to him because we're the company. We know better. He's the short seller. She's the short seller. They're just trying to drive the price down so they make money, and they can cover their stock and go away. And you know what? Yeah, they probably are. That's why they're doing it. They're shorting the stock. They're publicizing their portfolio. Some of them are wrong. Some of them are overzealous, but man, some of the work is really good. So, again, ignore at your own risk.
Dan Ferris: That's right. And there is not merely like a long bias to the market action. There is definitely, I would call it sometimes an extreme bias in this sort of finance establishment against short sellers. We're getting in the way of the commissions and stuff. We're getting in the way of gathering assets. We're getting in the way here to be identifying risks and potentially selling short.
Herb Greenberg: Some countries ban short selling and let me ask you this. Let me throw this one out to you. What's the possibility in this country there's not a move, there doesn't become a move afoot to ban short selling? Look, shorts and longs make markets, right? That's what makes a market. Without the natural buyer, there's no buying cushion. But what is the possibility with Donald Trump's presidency, since we know how he likely feels about short selling that they try to pave the way for that? Not that that'll ever happen.
Dan Ferris: Not to mention the potential outcome. They banned short selling. I think it was 10 trading days, October, I want to say October 19th, don't quote me here, 2008 into November, or was it September 19th into October 8th in 2008? And what happened? Pinpoint from the day the ban started until the day after it ended, the bank stock ETF was down. It was just down, down, down. Because the market says, well, if you're banning short selling in 767 bank stocks, is what they did at that time, what does that tell you?
You've shown your hand. You've told us to sell them because you're banning short selling because they're that bad off. So, the market got wise to the ban and punished the sector. So, you can't even do the ban anyway. It doesn't help anybody. In fact, encouraging an open dialogue, that open, active dialogue that has become muted in the age of so-called passive investing, which is not really passive, in the age of mindless buying, I would say, that's an issue, right?
Herb Greenberg: And by the way, yeah. And you talk about passives, and you talk about the world we're in right now. And one thing I often like to talk about is the inefficiencies created by the passives, because it's the stocks no one's paying attention to that still create a big inefficiency in what's perceived to be an efficient market. And I think that people forget that. Because if you're looking for a long or short or whatever it is, you go where everybody else is and it's classic value investing. But that really, in this world, I believe creates great inefficiencies. And I think when you look for those data points, those mosaics that are not generally out there, especially in companies that aren't as well-covered, I do think you can find that level of opportunity again on both sides of the equation.
Dan Ferris: Yeah, I heard a guy say recently, for the coming regime, he expects no S&P 500, no bonds. And I immediately went to Bloomberg and did a screen for no S&P 500 because I thought, yeah, that's kind of what I feel like I want now. But of course, at this point with the concentration, the rest of the index is not performing so great, so there may be already some ideas in there is the point. But just starting with non-S&P 500 sounded like a good idea just as a way to start in and screen. I think it's an interesting idea.
Herb Greenberg: There's some great ideas out there of companies and just yeah, go ahead.
Dan Ferris: I was just going to say, it's time for our final question and I could do this for another hour. It's been really lively and fun with you, Herb. Our final question is the same, identical question for every guest. You did answer it before. I hope you don't remember it. It works better that way, in my opinion. And it's the same question, no matter what the guest, no matter what the topic. By all means, if you've already said the answer, you can repeat it. That's no problem. But the question is simply this, "If you could leave our listener with a single thought today, Herb, what would you like it to be?"
Herb Greenberg: I have no idea what I said last time, but I can tell you that the single thought I have is, do not ignore the risk. It's as simple as that. It's straightforward. And I can't, yeah, I can't put it any more simply than that.
Dan Ferris: All right. Do not ignore the risk. If there's a message for our time, I think you're at least in the top, you have to be in the top three perfect messages for this moment as we sit here mid-December 2024.
Herb Greenberg: Yeah.
Dan Ferris: All right, Herb. Thanks very much. It's always a pleasure to speak with you, man. And let's not wait two years to get you back.
Herb Greenberg: Dan and Corey, this has been great. I've really enjoyed it.
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Dan Ferris: It's always a pleasure to talk with Herb. Great guy. Been around. His career is five decades now, technically in its sixth decade. And so, he's learned a lot and I'm always happy to have him share it with us. He's just a fun guy to talk to, period.
Corey McLaughlin: Yeah, for sure. I feel like we could talk forever, and he could talk forever about anything, and you want to hear what he's going to say. I am very fortunate to be sitting here and just listen to the people like this who have five decades of experience over and over again. Like it's just, and then they say things that are very simple and common, and it makes me − I'm like, OK. I feel better after hearing these things, like these simple warnings and stuff that you hear all of the − and Herb was, he was on CNBC a while ago and a regular there and everything, but pointing out now, like what matters and what doesn't. A guy like that, you just hear it, and you could read his newsletter, and I think when you read it every day, you'll pick up a lot of things just by reading them.
Dan Ferris: Yeah, it'll be an education as well as specific, useful, and frequently actionable information. I agree. And I'll tell you, partner, between the two, you can say what you want about us and people in The Digest have said all kinds of things over the years. We attract a pretty good crowd, I think. Herb's a good guy and very knowledgeable. And we just, we spoke with Louis Navellier recently. Like we could go down the whole list and just back the whole year. We attract a pretty good crowd. I'm very proud of that.
And I agree. It's just a pleasure sometimes. And I'm glad that we've developed the habit of just like saying a few words and letting the guests spin their yarn. Because if you get the right guest, you get a guy like Herb, you want to just sit back and listen to him, right? It's great. I totally agree. Very lucky. All right. That's another interview and that's another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as we really 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 liked 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.
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